The Ohio Supreme Court has held that claims for the cost to repair an insured’s own defective work are not covered because they “are not claims for ‘property damage’ caused by an ‘occurrence’ under a [CGL] policy.” See Westfield Ins. Co. v. Custom Agri Sys., Inc., 2012-Ohio-4712. In its decision, however, the Court approved of prior Ohio case law which held that consequential damages arising from a policyholder’s defective work generally are covered by CGL policies. Since Custom Agri, insurance practitioners and courts in Ohio have generally agreed that:
- Repair and replacement of a policyholder’s own defective work is not “property damage caused by an occurrence” and is not covered by standard CGL policies; and,
- Consequential damages to property other than the policyholder’s work is “property damage caused by an occurrence” and may be covered by a standard CGL policy depending upon the applicability of the policy’s exclusions and conditions.
Importantly, the Custom Agri Court did not address whether a typical CGL policy would provide coverage for the repair or replacement of defective work performed by the policyholder’s subcontractors. A recent decision from one of Ohio’s appellate courts suggests that defective work performed by a policyholder’s subcontractors may be covered, regardless of whether the subcontractor’s work caused any consequential damages.
In 2008, Ohio Northern University contracted with Charles Construction Services (CCS) to construct a hotel and conference center. Ohio Northern Univ. v. Charles Constr. Servs., Inc., 2017-Ohio-258 (3rd Dist.). CCS retained several subcontractors to complete the work. After construction was completed, Ohio Northern discovered significant water intrusion and related damages, as well as serious structural defects, and brought suit against CCS.
CCS tendered the claim to its insurer, Cincinnati Insurance Company, which argued that it had no obligation to defend or indemnify CCS. Cincinnati contended that, under Custom Agri, property damages arising from defective work could neverconstitute an occurrence, regardless of who performed the work. In response, CCS argued that Custom Agri was inapplicable because almost all of the work at issue had been performed by subcontractors, not by CCS, and because CCS had purchased products-completed operations coverage which applied to the defective construction claims arising from the work of its subcontractors.
The trial court granted summary judgment to Cincinnati, but the Third District Court of Appeals reversed. In finding in favor of CCS, the appellate court analyzed the “Damage to Your Property” and “Damage to Your Work” exclusions, which expressly preserved coverage for damaged work or damages arising from faulty work if (1) the work was performed by a subcontractor, and (2) the damage occurred after construction was completed. The appellate court correctly noted that if it were to adopt Cincinnati’s interpretation of the policy, it would render these provisions meaningless. The court found that, at a minimum, the provisions created an ambiguity that must be resolved in favor of the policyholder. Thus, the appellate court held that Cincinnati had a duty to defend and indemnify CCS.
Interestingly, though not analyzed by the appellate court, even if the work at issue had been performed by CCS and not its subcontractors, the damages alleged by Ohio Northern would have required that Cincinnati defend CCS and indemnify at least a portion of any award against it. This is because Ohio Northern asserted claims not only for the repair and replacement of defective work, but also for consequential damages arising from such work. As noted above, the Supreme Court in Custom Agri cited with approval prior lower court opinions, which held that CGL policies cover such claims for consequential damages. Insurers and policyholders in Ohio continue to test the scope of the Ohio Supreme Court’s decision in Custom Agri. 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.