What is covered under a contractor’s CGL policy?
Most in the construction industry have at least a passing knowledge of the Ohio Supreme Court’s 2012 decision in Westfield Ins. Co. v. Custom Agri Systems, Inc., 2012-Ohio-4712. There, the court held “that claims 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 [(CGL)] policy.”
Even in light of that decision, which is widely regarded as representing the minority view around the country, most are left wondering what it means for them and exactly what damages, if any, are ever covered by a CGL policy. On Jan. 23, 2017, an Ohio appellate court clarified that issue for at least one specific instance. This recent decision should provide guidance going forward, and may lead to another appeal to the Ohio Supreme Court on whether defective subcontractor performance constitutes an occurrence that triggers coverage under a general contractor’s CGL policy.
In Ohio Northern University v. Charles Construction Services, Inc., 2017-Ohio-258 (3d Dist.), ONU hired CCS to serve as the general contractor for construction of a new hotel and conference center on campus. As is typical for construction contracts, CCS named ONU as an additional insured under its CGL policy for purposes of the project. CCS also purchased a “products-completed operations” endorsement for the policy. After construction was complete, ONU discovered water intrusion and moisture damage, and during the investigation of the cause of that water damage, ONU discovered further damage that ultimately required the removal and replacement of wood sheathing, rim joists, and the brick and masonry façade.
ONU ultimately brought claims against CCS, and CCS brought third-party claims against the subcontractors that actually performed the work that caused the damages. CCS’s insurer, Cincinnati Insurance Company (CIC) intervened in the case and asked the court to declare that under the holding of Custom Agri, CIC’s policy did not provide coverage for the damages that ONU had suffered. Specifically, CIC argued that what ONU had suffered was not “property damage” caused by an “occurrence” under the policy CIC had issued (which included identical provisions to those the Ohio Supreme Court relied on in Custom Agri), and therefore, there was no coverage for ONU’s damages. CIC argued that Custom Agri stands for the expansive proposition that all claims for defective workmanship, regardless of who performed it, are barred from coverage under a CGL policy because such claims can never constitute an occurrence.
Conversely, ONU and CCS argued that the “products-completed operations hazard” included in CIC’s policy, as well as applicable exceptions to exclusions in that policy, provided coverage for ONU’s damages. They argued that Custom Agri did not address what constitutes an “occurrence” under a “products-completed operations” endorsement when an owner alleges claims of “property damage” caused by the defective workmanship of the insured’s subcontractors.
The trial court agreed with CIC, held that Custom Agri controlled this situation, and entered judgment in favor of CIC—finding no coverage for ONU’s damages along with no duty to defend. ONU and CCS appealed.
The Third Appellate District Court reversed. The court first noted that “an exclusion in an insurance policy will be interpreted as applying only to that which is clearly intended to be excluded.” The court held that the use of a present tense verb in an exclusion meant that the exclusion only applied to faulty workmanship during construction. Here, it was undisputed that the claims arose after construction once ONU’s hotel was complete.
The court also held that “the products-completed operations coverage applies when: (1) the project was completed at the time the claim arose and; (2) the claim involved ‘property damage’ caused by work performed on the insured’s behalf by a subcontractor—which are the precise allegations underlying ONU’s claims against CCS.”
Based upon its own review of decisions from other states, the court specifically found that “there is a legitimate ambiguity in the specific language of this insurance policy as to whether the parties’ intended to contract for coverage involving ‘property damage’ caused by the defective workmanship of CCS’s subcontractors arising after the project is complete.” Ohio law requires that such ambiguities be strictly construed against the insurer and liberally in favor of the insured.
Ultimately, the court held that despite the language of the exclusions, there was coverage under the products-completed operations endorsement, and therefore, ONU’s damages were covered by the CGL policy.
This decision raises a question about the validity of the Custom Agri decision and an appeal of this case would bring this question squarely back in front of the Ohio Supreme Court in the near future. The construction and insurance industries will be watching any potential appeal very closely as it impacts virtually any construction project undertaken in the state of Ohio.
This decision also reminds all parties involved of the complex nature of insurance policies as well as their exceptions, exclusions, and additional coverage options. It is vital that all parties— insurers, owners, contractors, and subcontractors—carefully review all relevant insurance policies as well as contractual requirements for such policies before entering into any construction contract. Owners, contractors and subcontractors would be well advised to seek clarification on these issues from their legal counsel or insurance agents.