On Oct. 9, 2018, the Ohio Supreme Court denied insurance coverage under a Commercial General Liability ("CGL") policy for a contract's defective work. The Court reasoned that "property damage caused by a subcontractor’s faulty work is not an 'occurrence' under a CGL policy because it cannot be deemed fortuitous."
Since 2012, Ohio has followed the rule that a CGL policy would not cover damage caused by a contractor to the contractor’s own work. In this new decision, the Ohio Supreme Court expanded the rule such that a general contractor’s CGL policy will not cover damage caused by a subcontractor to any of the general contractor’s work.
Commercial General Liability insurance is intended to protect insureds from risk that arises from losses experienced as the operation of chance or accident. "CGL policies are not intended to protect owners from ordinary 'business risks' that are normal, frequent, or predictable consequences of doing business that the insured can manage."
Control and management are key factors when analyzing whether property damage is an "occurrence" under a CGL policy. A contractor controls the way that it performs its work and can therefore manage its risk. It is not "fortuitous" that subcontractor work was not correctly performed; instead the work was performed under the control of the contractor or subcontractor. CGL insurance does not assure that a contractor or subcontractor will perform its work correctly. If the contractor or its subcontractor does not perform the work correctly, that is an error within their control, and damages to the work from not being performed correctly are therefore not an insurable event.
The Ohio Supreme Court acknowledged that its reasoning is contrary to recent decisions of other courts holding that damage from defective subcontractor work could be an occurrence under a CGL policy. However, the Ohio Supreme Court held that under the policy at issue, and in light of its prior holdings, the plain language of the insurance policy required that an "occurrence" be fortuitous and unexpected to be covered under a CGL policy.
The Ohio Supreme Court invited the Ohio General Assembly to craft a legislative solution if it wanted to provide insurance coverage under a CGL for property damage arising out of a subcontractor’s defective work. For example, the Ohio General Assembly could legislatively define that the term "occurrence" in a CGL policy would apply to property damage resulting from faulty workmanship.
With the Ohio Supreme Court's decision, Ohio owners likely will re-emphasize that contractors need to show a proven record of building projects without defects. Owners should consider requiring (in addition to CGL insurance) a performance bond to provide an additional method for recovery in a scenario in which insurance may not cover a contractor’s defective work.
The case is Ohio N. Univ. v. Charles Constr. Servs., Inc., Slip Opinion No. 2018-Ohio-4057 (Oct. 9, 2018).