“Occurrence,” though a simple word at first glance, is the focus of many insurance coverage disputes. A term of art in insurance contracts, the issue of what constitutes an “occurrence” is often hotly contested because it can help determine whether coverage under that policy exists. “Occurrence” is often defined as an accident, including continuous or repeated exposure to substantially the same harmful conditions. But to determine what constitutes an “occurrence” in a specific factual context, it is important to examine both the particular state law governing the insurance policy and the language of the insurance policy. In some states such as Ohio, the courts have held that a defective construction or workmanship claim is not a claim for “property damage” caused by an “occurrence” and is not covered under a CGL policy.

Ohio – No Coverage for Defective Work

An October 2012 decision by the Ohio Supreme Court, Westfield Ins. Co. v. Custom Agri Sys., Inc., __ N.E.2d ____ (Ohio 2012) (“Westfield”) clearly places that state in the “no coverage” camp. In Westfield, the general contractor Younglove Construction, LLC (“Younglove”) contracted with PSD Development, LLC (“PSD”) for the construction of a feed-manufacturing plant. When PSD withheld payment from Younglove, the contractor sued PSD in federal district court seeking damages for breach of contract. In its answer, PSD alleged that it had sustained damages as a result of defects in a steel grain bin, which was constructed by Younglove’s subcontractor, Custom Agri Systems, Inc. (“Agri”). Younglove then asserted third-party claims against Agri for contribution and indemnity, which were based under two general theories: defective construction and consequential damages resulting from the defective construction. Agri turned to its CGL carrier, Westfield Insurance Company, to defend and indemnify it.

Westfield moved for summary judgment, arguing that claims for defective construction and consequential damages resulting from defective construction did not seek compensation for “property damage” caused by an “occurrence” and were therefore not covered under the CGL policy. In the alternative, Westfield argued that even if the claims for property damage were caused by an “occurrence,” they were removed from coverage by a policy exclusion.

In considering Westfield’s motion, the federal district court assumed that Westfield’s CGL policy covered Agri’s defective construction but that an exclusion in the CGL policy removed it from coverage. Consequently, the district court granted Westfield’s motion for summary judgment. The ruling was appealed to the U.S. Court of Appeals for the Sixth Circuit. Finding no controlling precedent under Ohio law, the Sixth Circuit certified two questions to the Ohio Supreme Court. 

  1. Are claims for defective construction/workmanship brought by a property owner claims for “property damage” caused by an “occurrence” under a CGL policy?
  2. If such claims are considered “property damage” caused by an “occurrence,” does the contractual liability exclusion in the CGL policy preclude coverage for such claims?

The Ohio Ruling

In a split decision, the Ohio Supreme Court answered the first question and ruled that a claim of damage due to defective construction/workmanship was not an “occurrence.” In reaching that conclusion, the court evaluated both lower court rulings in Ohio, certain decisions in other states, and the terms of Westfield’s insurance policy. The majority decision stated that its research revealed that CGL policies were not intended to protect business owners against every risk of operating a business. In particular, CGL policies were not intended to insure “business risk,” which are risks that are normal, frequent, or predictable consequences of doing business, and which business management can and should control or manage. According to the majority, it was a widely accepted principle that a defective construction and workmanship claim is not covered by CGL policies.

The Ohio Supreme Court then addressed whether the CGL policy issued by Westfield provided Agri coverage for its alleged defective construction of and workmanship on the steel grain bin. Specifically, the court had to decide whether the alleged defective construction and workmanship on the steel grain bin constituted “property damage” caused by an “occurrence.” In the court’s opinion, the CGL policy issued to Agri by Westfield provided coverage for “property damage” caused by an “occurrence.” “Occurrence” was defined in the policy as “an accident, including continuous or repeated exposure to substantially the same harmful conditions.” “Property damage” was defined as “physical injury to tangible property, including all resulting loss of use of that property . . . or loss of use of tangible property that is not physically injured.”

To the majority, insurance coverage is bottomed on the concept of fortuity. Truly accidental property damage generally is covered because such claims and risks fit within the statistical abstract. Conversely, faulty workmanship claims generally are not covered, except for consequential damages, because they are not fortuitous. In short, contractors’ business risks are not covered by insurance, but derivative damages are. The key issues were whether the contractor controlled the process leading to the damages and whether the damages were anticipated. Because a claim of defective construction or workmanship was not an accident and constituted a business risk for the subcontractor, the Ohio Supreme Court held that the defective construction or workmanship claims against Agri were not covered by Westfield’s CGL policy. A strongly worded dissent questioned the logic of the majority hold.

Comment – Do Your Homework

The majority holding in Westfield shows that, under the current interpretation of Ohio law, claims for defective construction or workmanship are not claims for “property damage” caused by an “occurrence” and are typically not covered under a CGL policy. In other states, such as South Carolina, that state’s Supreme Court has recently reached a different conclusion and overruled one of the cases cited by the Ohio Supreme Court. Crossman Communities of North Carolina, Inc. v. Harleysville Mutual Ins. Co., 7717 S.E.2d 589 (2011).

Given that the interpretation of coverage under the same or similar language in a CGL policy may vary from state to state, anyone considering work in a new state needs to determine how that state’s courts answer the coverage question and also evaluate the specific CGL policy to determine whether it contains a choice of law provision and exclusions that might affect coverage. These questions need to be answered at the time of contracting, not after a problem is discovered.

Even if it appears that CGL coverage is available, owners, contractors, and subcontractors need to recognize that an insurer may assert a coverage challenge at any time. Consequently, the parties to the project should also consider whether to require performance bonds that address the obligation to correct defective workmanship, as well as any long term warranty obligations.