Saturday, November 10, 2018

Ohio Supreme Court: Subcontractor Defective Work Not an "Occurence"

The Ohio Supreme Court, in Ohio Northern University v. Charles Construction et al. Slip Op. No. 2018-Ohio-4057, recently issued a decision impacting insurers and contractors in that state.  This Ohio outcome could eventually be adopted by courts or legislatures in other states.  In Ohio Northern, the Court held that defective work by a subcontractor is not within the meaning of an “occurrence” entitling a contractor to coverage under its commercial general liability policy.   By so deciding, the Court’s analysis ultimately ended at the issue of coverage, and did not reach the question of whether the policy’s “your work” exclusion was avoided by an exception under the Products-Completed-Operations-Hazard (PCOH) endorsement.  

The underlying facts involved the construction of a hotel and conference center.  After the project was completed, water leaks caused millions of dollars of damage.  The cause of the water infiltration was believed to be from the subcontractor’s defective work.  The owner filed suit against the contractor.  In turn the contractor submitted the claim to its insurer.   The insurer intervened and filed for declaratory judgment claiming that it had no obligation to defend or indemnify the contractor.  The trial court agreed, the appeals court reversed, and then the Ohio Supreme Court sided with the insurer.
The crux of Ohio Northern expanded the holding of a 2012 case, Westfield v. Custom Agri Systems, 979 N.E. 2d 269 (Ohio 2012).  In that earlier decision, the Court observed that a CGL policy provides coverage for property damage and personal injury caused by an occurrence, but held that a contractor’s own defective work was not an “occurrence.”  Applying that same analysis here, the Court again focused on the plain language of the definition of “occurrence” under the policy: “An accident, including continuous or repeated exposure to substantially the same generally harmful conditions.”  The undefined word, “accident,” the Court said necessarily meant “fortuitous” and that a subcontractor’s defective work is not fortuitous. Rather the defective work is a known business risk that the contractor can control and manage.  In sum, although the water leaks caused property damage and the damage was discovered after the project was complete (which would trigger the PCOH), the prerequisite linchpin was an “occurrence” and that element was missing.
The Court acknowledged that other jurisdictions have gone the opposite direction from its conclusion about subcontractor defective work not being fortuitous.  It also noted that after a similar decision in Arkansas, that state legislature stepped in to pass a statute requiring any CGL policy sold in that state to include “faulty workmanship” within the definition of occurrence.  For Ohio contractors, beyond waiting for the Ohio general assembly to possibly consider new piece of legislation, they may wish to contact their brokers and explore options for defective work endorsements.  Contractors outside of Ohio may want to consider the same to stay ahead of any future decisions in their states.

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Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island.

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