The Ohio Court of Appeals determined that the CGL policy was ambiguous as to whether a subcontractor's faulty workmanship was an "occurrence." Ohio N. Univ. v. Charles Constr. Serv., 2017 Ohio App. LEXIS 258 (Ohio Ct. App. Jan. 23, 2017).
In 2007, Ohio Northern University (ONU) entered a contract with Charles Construction Services, Inc. (CCS) to construct a hotel on the campus. In 2011, the building was completed, but ONU found water intrusion and moisture damage in the interior. When remediating the water damage, ONU found additional, serious structural defects.
ONU sued CCS, alleging breach of contract, breach of express warranty, and negligent misrepresentation. CCS filed a third-party action against many of its subcontractors. Cincinnati Insurance Company (CIC) intervened and filed a cross-claim for a declaratory judgment that it had no duty to provide coverage to CCS. CIC and ONU filed cross motions for summary judgment.
CIC argued that Westfield Ins. Co. v. Custom Agri Systems, Inc., 133 Ohio St. 3d 476, controlled. Custom Agri held that claims of defective construction brought by a property owner were not claims for "property damage" caused by an 'occurrence". ONU claimed that CCS did little of the construction work itself. Rather, CCS's subcontractors performed much of the work and were responsible for the alleged property damage. ONU argued that the "products-completed operations hazard," as well as exceptions to exclusions in the policy, provided coverage for its claims against CCS. Further, the facts in Custom Agri were distinguishable.
The trial court granted CIC's motion, however, and overruled ONU's motion. The "products-completed operations" coverage and related exclusions and exceptions did not expand coverage for "property damage" in the absence of an "occurrence."
On appeal, ONU and CCS argued that CCS purchased additional "products-completed operations" coverage, which expressly contemplated coverage for ONU's claims against CCS. In Custom Agri,the court limited its discussion to determine whether an insured's own defective workmanship constituted an "occurrence." Here, by contrast, ONU's claims against CCS involved allegations of "property damage" caused by the defective work of CCS's subcontractors that arose after the project was completed.
Exclusion j (5) excluded coverage for property damage to "that particular part of real property on which you or any contractors or subcontractors are working . . . on your behalf are performing operations, if the 'property damage' arises out of those operations." This exclusion was stated in the present tense and clearly applied to work in progress. Faulty workmanship during construction was the responsibility of the insured. Here, however, ONU's claims arose after construction was complete. Therefore, exclusion j (5) did not apply.
Under exclusion j (6), there was no coverage for "property damage" to "that particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." However, an exception to exclusion j (6) restored coverage if the "property damage" was included in the "products-completed operations hazard." The "products-completed operations" coverage applied 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.
Finally, exclusion L barred coverage for "property damage" to "your work" "arising out of it or any part of it and included in the 'products-completed operations hazard.'" An exception to the exclusion, however, restored coverage under the "products-completed operations hazard" for work done by a subcontractor or if the subcontractor's work itself was damaged.
Thus, according to the specific exceptions to exclusion j (6) and exclusion (L), the "products-completed operations" coverage applied here because: (1) the declaration pages and premium audits issued by CIC to CCS indicated that specific, additional premium payments were made for the "products completed" coverage; and (2) construction on the hotel was complete when ONU's claims against CCS arose.
CIC argued that the Custom Agri case established that all property damage arising form defective workmanship - regardless of who performed it - could as a matter of law never constitute an occurrence. The court rejected this argument. If "property damage" arising after the project was completed, which was caused by the defective workmanship of the insured's subcontractor could never constitute an "occurrence," the additional and specifically bargained for provision in the policy would be rendered meaningless.
Therefore, the policy provisions contemplated coverage. At the very minimum, there was an ambiguity as to whether the parties intended for "property damage" caused by a subcontractor's faulty workmanship would constitute an "occurrence" or, notwithstanding the definition of an "occurrence," to be independently covered via the insertion of specific exceptions to general exclusions within the policy.
