Ohio Supreme Court holds that general contractor’s CGL insurer is not obligated to defend suit alleging subcontractor’s faulty workmanship.

The Ohio Supreme Court has revisited, affirmed and applied its earlier decision in Westfield Ins. Co. v. Custom Agri Systems, Inc. 133 Ohio St.3d 476, holding that an “insurer is not required to defend a commercial-general-liability policyholder against [a] suit by [a] property owner, because subcontractor faulty workmanship is not fortuitous.” Ohio Northern University (ONU) contracted with Charles Construction to build an inn and conference center. After the work was completed, ONU discovered extensive water damage as a result of leaks, believed to be caused by poor workmanship performed by a subcontractor. ONU sued Charles Construction, and Charles Construction tendered its defense to its CGL insurer, Cincinnati Insurance Company (CIC). CIC intervened and argued that it was not obligated to defend or indemnify Charles Construction because the claims did not arise out of an occurrence as defined by the policy. The trial court ruled in CIC’s favor based on the Ohio Supreme Court decision in Westfield v. Custom Agri, finding no occurrence when the claim is based on alleged faulty workmanship. Charles Construction and ONU appealed, and the 3^rd District Court of Appeals took a narrower view, acknowledging that Westfield v. Custom Agri is good law, but finding that the trial court failed to address products and completed operations coverage and the subcontractor’s work exception to the work product exclusion. CIC appealed to the Ohio Supreme Court, which reinstated the trial court decision, finding no coverage because there was no occurrence. The court reasoned that faulty workmanship, even by a subcontractor, is a business risk and, therefore, is not accidental, not fortuitous, and does not arise out of an occurrence. “There is no question that the damage to the inn was ‘property damage’ that was discovered after work was completed. But without an ‘occurrence,’ as defined in the CGL policy, there is no coverage for any property damage.” The court rejected the argument that the products and completed operations coverage was an additional coverage for which an additional premium was paid and that it was intended to cover claims such as these.

The case has raised a great deal of consternation in the construction industry and among their independent insurance agents. Many agents had long thought that CGL policies with products and completed operations coverage would protect a general contractor from claims based on a subcontractor’s faulty workmanship. The addition of the subcontractor exception to the work product exclusion led many agents to believe that these types of claims would be covered. Based on this decision, these claims are not covered. Agents and contractors are reevaluating their options to determine what they can do to obtain coverage for these risks.

^{Case Law Alerts, 2nd Quarter, April 2019}

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