General liability policies are routinely purchased by developers, construction managers, and subcontractors to protect themselves from third-party claims for bodily injury or property damage arising from their work at a construction site. Until recently, Ohio policyholders had a good argument that defective construction, if it was accidently caused, was covered by the typical general liability policy. In 2012, however, the Ohio Supreme Court significantly narrowed the scope of coverage for construction defects, and Ohio policyholders should be aware of the impact of this decision.
The Ohio Supreme Court’s Decision
Recognizing a conflict among the appellate courts regarding the issue, in late 2012, the Ohio Supreme Court held that “[c]laims of defective construction or workmanship brought by a property owner are not claims for ‘property damage’ caused by an ‘occurrence’ under a commercial general liability policy.” Westfield Ins. Co. v. Custom Agri Sys., Inc., 2012-Ohio-4712 (“Custom Agri”). Although this broadly worded syllabus at first blush appears to preclude commercial general liability coverage for all defective construction or faulty workmanship claims under Ohio law, a closer review of the facts of the case and the rationale employed by the Ohio Supreme Court reveals that its decision was not so sweeping. Rather, the Ohio Supreme Court adopted the rule that construction defects are covered “occurrences” within the meaning of commercial general liability (“CGL”) policies, but only to the extent that property other than the policyholder’s own work is damaged.
Construction Defect Claims Are Covered Under Certain Circumstances
Courts in Ohio appear to agree that where the injured third-party asserts damages that can be categorized as “collateral or consequential,” such cases present claims for covered occurrences under CGL policies. It is critical for a construction-industry policyholder to carefully examine the nature of the damage asserted by a third-party plaintiff. To the extent the plaintiff is asserting damage solely for defective work, such damage may not be covered. To the extent that the plaintiff is asserting damage to other property arising from defective work, such claims constitute “occurrences” under the policy and are covered unless otherwise excluded by the policy’s terms.
In a recent case, Cincinnati Ins. Cos. v. Motorists Mut. Ins. Co., Medina Cty. No. 13CA0016-M, 2014-Ohio-3864, paragraph 4 (9th Dist.), the court made this distinction clear. The insured, an electrician, allegedly installed faulty wiring, which caused a fire outside the policy period. The insurer argued that it was not required to defend the policyholder because there were no allegations of a covered “occurrence” within the policy period. The court acknowledged that the faulty workmanship itself could not constitute an occurrence. But, the Court held that the allegations were broad enough that they arguably or potentially alleged the existence of an occurrence within the policy period. In fact, there was testimony that the wiring for one light in the house caused damage to the wood around it—lowering its ignition temperature—every time it was switched on. This physical damage, which was the consequence of faulty workmanship, could constitute a covered “occurrence,” the court concluded. It was possible that this damage was of a continuous nature, ultimately causing the fire – meaning that the insurer owed a duty to defend the policyholder against the claims arising out of the fire, even though the fire occurred outside the policy period.
What Does This Mean For Ohio Policyholders?
Damages arising from construction defects can be significant, and many contractors still expect them to be covered by CGL policies. Policyholders can protect themselves by doing the following:
- Owners or general contractors should consider requiring a performance bond from downstream contractors in an amount that will protect them if there is defective workmanship;
- In the event of a claim, the policyholder should recognize that not all defective construction claims are barred, and carefully analyze whether the defective workmanship caused damage to property other than the policyholder’s own work; and
- The policyholder should analyze the potential applicability of any policy exclusions.
As in any case involving complex coverage analysis, policyholders should consider retaining experienced coverage counsel to assist in the claim process so as to best position their claim for coverage.