Ohio Supreme Court Rules Subcontractor’s Faulty Workmanship Is Not a Covered “Occurrence”

The Ohio Supreme Court has ruled a commercial general liability (“CGL”) policy does not afford coverage to an insured general contractor for property damage caused by a subcontractor’s faulty work. Ohio N. Univ. v. Charles Constr. Servs., Inc., Slip Opinion No. 2018-Ohio-4057. The decision is significant because its effect is to preclude coverage not only for faulty workmanship, but also for damage that results from a contractor’s faulty workmanship.

Ohio Northern University hired Charles Construction Services, Inc. to build an Inn and Conference Center. Charles Construction performed all work either itself or through subcontractors.  After the work was completed, the University discovered the Inn had sustained extensive water damage from hidden leaks allegedly caused by the defective work of Charles Construction and its subcontractors.  Cincinnati Insurance Company (“CIC”) issued a CGL policy to Charles Construction.

In a prior Ohio Supreme Court decision, Westfield Ins. Co. v. Custom Agri Systems, Inc., 2012-Ohio-4712, the Court held that a contractor’s faulty workmanship does not constitute an occurrence. That case involved the building of a steel bin, which was allegedly defective.  The Court extended the Custom Agri holding to claims against an insured contractor arising out of the allegedly defective work of its subcontractor. The Court determined that an insurer is not required to defend a CGL policyholder against a suit by a property owner arising from a subcontractor’s faulty workmanship, because a subcontractor’s faulty workmanship is not fortuitous.

The Court referred to the exclusion for property damage to the insured’s work (“your work”), and the exception to the exclusion where the damaged work or the work out of which the damage arises is performed by a subcontractor. Since the Court determined under the facts of the claim there was no “occurrence” in the first place, issues arising out of the exclusion and subcontractor exception thereto are not reached.

In reaching its decision, the Court referenced caselaw from other states, which found that consequential damage arising from faulty workmanship to be a covered occurrence. However, the Court declined to adopt the reasoning underlying decisions of other jurisdictions in such cases.

There are significant insurance coverage implications that arise from the Court’s decision.  The University presented claims that could be classified both as faulty workmanship and resulting interior water damage. Since the Court determined these facts did not give rise to covered “occurrence,” this means not only is there no coverage to repair the subcontractor’s defective work, there is likewise no coverage for damage that results from such faulty work.

If you have any questions about this decision or its implications, please feel free to contact our Law Firm.

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