November 19, 2018

November 16, 2018

Subscribe to Latest Legal News and Analysis

Construction One-Minute Read: “OH No!” Buckeye State’s Supreme Court Nixes Insurance for Subcontractors’ Defective Work

In an opinion released on October 9, 2018, the Supreme Court of Ohio held that a general contractor’s commercial general liability insurance did not cover the defective work of either that contractor or its subcontractors. Ohio Northern University v. Charles Construction Services, Inc., No. 2017-0514 (2018).

Breaking with an emerging national trend extending commercial general liability (CGL) insurance coverage to construction defects, the Supreme Court of Ohio reversed an intermediate appellate court’s interpretation of policy language. Per the Supreme Court of Ohio’s opinion, CGL insurance is not intended to cover defects.

The facts before the court were familiar to any general contractor: An owner hired a contractor to build a building, and the contractor obtained CGL insurance and hired subcontractors to complete the task. The project having been completed, the contractor closed it out, demobilized, and handed the building over to the owner. Three years after the owner hired the contractor, defective work by the contractor and its subcontractors allegedly led to water leaks and property damage. Further investigation uncovered structural defects, all of which required repairs in excess of $6 million. The owner sued the contractor for breach of contract and for other claims related to the damage.

The contractor tendered the claim to its CGL insurer, citing its products and completed operations endorsement. The insurer denied coverage and filed a separate lawsuit asking the court to confirm the denial.

After the dispute made its way to the Supreme Court of Ohio, the court sided with the insurer and denied coverage. The court reasoned that the insurance policy was basically a contract and therefore should be interpreted according to contract-law principles. The contract said in its plain language that coverage would only be in place in the case of an “occurrence” which the policy defined as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.” An accident, the court noted, is something that is “‘unexpected, as well as unintended.’” Faulty workmanship claims therefore are generally not covered, except for their consequential damages, “because they are not fortuitous.”

The Supreme Court of Ohio had previously held that a contractor’s faulty work was not an “occurrence”; now it has extended that holding to the faulty work of subcontractors. Faulty workmanship, the court found, is a business risk and therefore not covered. (Derivative damages are covered, however.)

The court’s reasoning was based on its prior holding that CGL policies are not intended to protect owners from ordinary “business risks” that are “normal, frequent or predictable consequences of doing business that the insured can manage.” In other words, these risks are better dealt with in the project contract’s language and reflected in the price the contractor charges the owner.

The Supreme Court of Ohio admitted that its ruling runs counter to the current trend across the country that expands CGL coverage to faulty workmanship by contractors and their subcontractors.

© 2018, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.

TRENDING LEGAL ANALYSIS


About this Author

Eric Berg, Construction Attorney, Ogletree Deakins Law Firm
Of Counsel

Eric A. Berg focuses his practice on construction law, in both litigation and transactional work. Eric has represented developers, international corporations, contractors, subcontractors, construction managers and designers on diverse projects, from Freedom Tower in New York to Willis Tower in Chicago, from dredging the Mississippi River to building casinos in Las Vegas, from Silicon Valley tech hubs to Willy Wonka's Chocolate Factory.

Prior to joining Ogletree, for three years Eric was Deputy General Counsel at Great Lakes Dredge & Dock, in Oak Brook, Illinois, and General...

312-558-1424