The faulty work of subcontractors at an Ohio Northern University luxury hotel and conference center is not covered by the insurance policy purchased by the general contractor, and the insurance company does not have to pay any portion of the estimated $6 million in damages, the Ohio Supreme Court ruled today.

The Supreme Court ruled that a commercial general liability (CGL) policy, even with additional coverage pertaining to subcontractors, does not cover faulty work. Writing for the Court majority, Justice Judith L. French stated the policy covers an “occurrence,” which means an accident, and faulty work is not an accident. Instead, the chances that a subcontractor’s work might be faulty is a “business risk,” and the insurance policy did not cover those, the opinion concluded.

The decision reversed a Third District Court of Appeals ruling that required Cincinnati Insurance Co. to cover Charles Construction Services for the construction of The University Inn and Conference Center at Ohio Northern in Ada, which was completed in September 2011. Shortly after opening, the university discovered extensive water damage.

Justices Terrence O’Donnell, Patrick F. Fischer, R. Patrick DeWine, and Mary DeGenaro joined Justice French’s opinion. Chief Justice Maureen O’Connor and Justice Sharon L. Kennedy concurred in judgment only.

Contractor Purchases Coverage
In 2008, Ohio Northern contracted with Charles Construction to build. The University Inn for an estimated $8 million. Charles Construction promised to do all the work itself or through subcontractors, and the agreement required the contractor to maintain a CGL policy. That policy was required to include “products-completed operations hazard” (PCOH) coverage, which covers damages “arising out of completed operations,” and has terms that specifically apply to the work performed by subcontractors.

Charles Construction purchased the CGL policy with the PCOH coverage from Cincinnati Insurance, which had a maximum payout of $2 million each for both the CGL and the PCOH. After the inn was completed, the university discovered hidden water leaks it believed was caused by Charles Construction’s and the subcontractors’ work. The university also discovered other serious structural defects and spent about $6 million to repair them.

University Sues for Damages
In 2012, Ohio Northern filed a lawsuit against Charles Construction in Hancock County Common Pleas Court for breach of contract and other claims related to the inn’s damages. Charles Construction moved to add several of its subcontractors to the lawsuit.

The contractor filed a claim with Cincinnati Insurance and sought to have the insurance company provide its legal defense as well as pay out any damages awarded to the university. Cincinnati Insurance stated it would defend the contractor, but reserved the right to argue that the CGL policy did not cover Ohio Northern’s claim.

In 2015, the trial court ruled that Cincinnati Insurance did not have to defend the contractor or pay for the damages. The university and contractor appealed to the Third District, which reversed the trial court’s ruling. Cincinnati Insurance appealed to the Supreme Court, which agreed to hear the case.

Coverage Issue Raised Before
In 2012, the Ohio Supreme Court ruled in Westfield Ins. Co. v. Custom Agri Sys., Inc. that an insurance claim filed by a contractor under a CGL policy for property damages caused by its own faulty workmanship is not an “occurrence” that is covered by the policy. Today’s opinion stated the issue is nearly identical to the 2012 case except that it questions whether the CGL policy covers damage caused by the subcontractor’s work.

Charles Construction and Ohio Northern argued the Custom Agri decision did not apply because contractors have become aware of the risk of discovering damage by subcontractors and have adjusted coverage to compensate for it. The contractor stated it purchased the PCOH coverage at the direction of Ohio Northern to protect against the prospect of faulty work.

Justice French explained the general principle of the CGL policy is to protect against unintended risks of damage, but the policies do not protect business owners from “ordinary business risks.”

Court Examines Policy Language
The Court stated that it must interpret an insurance contract from the words contained in the policy. The opinion noted that in Custom Agri the Court defined “accidental” as unexpected as well as unintended. As in the Custom Agri case, the policy Charles Construction had from Cincinnati Insurance defined “occurrence” as an accident.

The Court further explained an accident has the key element of being “fortuitous,” meaning occurring by chance, not by design. Examining Custom Agri and other authorities regarding business insurance, the Court found that, in general, faulty workmanship is not covered by a CGL policy because the damages are not fortuitous. The opinion stated faulty workmanship by subcontractors is a business risk because the contractor controls the process and can anticipate damage if subcontractor work is done incorrectly.

The opinion stated the construction industry has added the PCOH policies to guard against subcontractor damage; however, to trigger the coverage for damages, an “occurrence” must happen.

“Again, there is no question that the water-related damage to the inn was ‘property damage’ and was discovered after work had been completed. But unless there was an ‘occurrence,’ the PCOH and subcontractor language has no effect, despite the fact that Charles Construction had paid additional money for it,” the Court stated.

Court Explains Reasoning
The opinion noted that the Court’s reasoning “contrasts with recent decisions in other courts,” which found the faulty work of subcontractors to be “occurrences.” The Court stated that regardless of any trend in law, it must look at the plain and ordinary meaning of the words in the Charles Construction CGL policy, which does not expressly state that faulty workmanship by subcontractors is an “occurrence.”

The Court explained that the Custom Agri decision adopted the reasoning of a 2008 Arkansas Supreme Court decision, which found a contractor’s obligation to repair or replace a subcontractor’s work was not unexpected and did not trigger CGL coverage.

Today’s opinion noted that after the Arkansas Supreme Court decision, Arkansas’ legislature changed the law and required that any CGL policy sold in the state must define “occurrence” to include property damage by faulty workmanship.

“If it were so inclined, the Ohio General Assembly could take similar action in response to our opinion today,” the Court stated.

2017-0514. Ohio N. Univ. v. Charles Constr. Servs., Inc., Slip Opinion No. 2018-Ohio-4057.

View oral argument video of this case.

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