By: Scyld Anderson, Sam Pipino, and Ike Westfall - Isaac Wiles
The liability insurance landscape for builders is changing, and things are getting tougher. On October 9, 2018, the Supreme Court of Ohio doubled down on a prior ruling that commercial general liability insurance policies (CGLs) do not cover defective construction. This time, it was in connection with a general contractor who did not self-perform any work, but who only used subcontractors.
The high court made its ruling in Ohio Northern University v. Charles Construction. Charles Construction (“Charles”) was the general contractor for the construction of a luxury hotel owned by Ohio Northern University (“ONU”). The work was performed by subcontractors. A couple of years after completion, moisture damage from water intrusion was discovered.
Charles was insured under a CGL. Like most CGLs, it contained a “your work” exclusion. Under that exclusion, for example, if a contractor were to incorrectly install a light switch, which caused the building to burn down, the contractor’s liability insurance would pay to repair all the fire damage, except for damage to the light switch. The light switch is the insured’s work, and the damage to everything else is called “resulting damage.”
In the CGL issued to Charles, the “your work” exclusion contained an exception for work performed by subcontractors. In other words, the exclusion to coverage does not apply to work performed by subcontractors. The exception restores coverage for damage to work performed by subcontractors, as opposed to work self-performed by the general contractor.
The high court’s decision is based on the CGL’s “insuring agreement.” An “insuring agreement” is the part of a CGL that obligates the insurer to pay for property damage caused by an “occurrence” for which the insured is legally obligated to pay. The word “occurrence” is defined to mean an “accident.” Only after the insuring agreement is triggered, are exclusions considered.
Here, the high court never made it past the insuring agreement to reach the exclusions. Instead, it held that defective work is not an “accident” or “occurrence” of the type intended to be covered by CGLs, because it is not “fortuitous.” Instead, the risk that construction will be defective is a business risk that is within the control of the contractor.
This line of reasoning became the law in Ohio in 2012, under a case called Custom Agri Systems v. Westfield. In that case, there was no resulting damage. Rather, the only allegation was defective construction, which allegedly would have reduced the useful life of the structure. By contrast, in ONU v. Charles, there was damage to one subcontractor’s work due to defective work performed by another subcontractor, in the form of moisture damage from water intrusion. The high court did not address why, if faulty work is not an “occurrence,” the policy contains a “your work” exclusion, with or without an exception for work performed by subcontractors.
What are the take-aways? Owners might consider getting a warranty bond from their general contractors, if such bonds are available. Contractors should pay close attention before agreeing to broad insurance requirements contained in their contracts. Although CGLs might cover bodily injury sustained by third-parties, it is increasingly doubtful that they cover problems with the structures. Contractors should be sure to submit written requests for information to the design team when there is uncertainty, and get change orders in writing. As always, general contractors should hire quality craftsmen, and the trades should faithfully follow applicable plans, specs, manufacturer’s instructions, and industry best practices.
Messrs. Anderson, Pipino, and Westfall are partners with the law firm of Isaac Wiles Burkholder and Teetor. Their practice areas include construction defect litigation and insurance.