By: Geoffrey Bryce
In October 2018, the Ohio Supreme Court finally determined whether a subcontractor’s defective work could be considered an “occurrence” for triggering coverage under an upstream contractor’s CGL policy. In Ohio Northern University v. Charles Construction Services (2018-Ohio-4057, 2018 Ohio LEXIS 2375, 2018 WL 4926159), the court ruled that a general contractor’s CGL policy did not cover property damage caused by a subcontractor’s defective work. The court so found notwithstanding the policy’s products-completed operations hazard (“PCOH”) clause or other subcontractor-specific terms potentially indicating the parties’ intention for the policy to provide coverage.
This ruling was not a huge surprise: six years earlier, the Ohio Supreme Court ruled similarly in Westfield Insurance Co. v. Custom Agri Systems, Inc. (133 Ohio St.3d 476, 2012-Ohio-4712, 972 N.E.2d 269), that claims filed against a subcontractor alleging defective construction and workmanship—by the subcontractor—were not covered under the subcontractor’s CGL policy. In both instances, the court adopted a definition of “occurrence” that rejected a view of the subcontractor’s faulty work as “fortuitous” and thus “accidental.”
Even while acknowledging that its ruling was at odds with recent decisions in other jurisdictions, the court in Ohio Northern held tight to its simplistic approach: “property damage caused by a subcontractor’s faulty work is not an “occurrence” under a CGL policy because it cannot be deemed fortuitous. Hence, the insurer is not required to defend the CGL policy holder against suit by the property owner or indemnify the insured against any damage caused by the insured’s subcontractor.” (2018 Ohio LEXIS 2375, at *3)
Because the court refused to view defective subcontractor workmanship as “accidental” or unexpected, the court would not even consider whether the policy’s PCOH clause suggested the parties’ intention for the policy to cover damages, noting: “[i]f the subcontractor’s faulty work were fortuitous, the PCOH and subcontractor-specific terms would require coverage. But….[h]ere, we cannot say that that the subcontractor’s faulty work was fortuitous.” (Id. At *29)
In other words, the general contractor’s argument regarding the applicability of the PCOH clause died on the vine when the court chose to focus exclusively on the “occurrence” definition and refused a more holistic approach that might consider the policy, its exclusions and its exceptions to exclusions.
The takeaway of Ohio Northern is that CGL policies issued in Ohio will not likely provide coverage for damages caused by faulty subcontractor work. Insurers have received a strong message that they do not need to provide a defense for suits involving claims of faulty subcontractor work. This places Ohio-based owners, contractors and subcontractors, and those who hire the same, in a vulnerable position: they risk exposure to liability for which they have no insurance coverage. The best way to address this risk of liability is to seek policy endorsements that, for instance, define “occurrence” as including defective workmanship. Other endorsements of such terms as “property damage” and “your work” can be crafted to broaden the scope of the policy. In sum, Ohio policy holders and those involved in the Ohio construction industry will want to be proactive and alert to the gap in coverage created by Ohio Northern.