The Ohio Supreme Court bucked the modern trend by finding that there was no coverage under CGL policy's the subcontractor's exception for faulty workmanship claimed against the insured. Ohio N. Univ. v. Charles Constr. Servs. 2018 Ohio LEXIS 2375 (Ohio Oct. 9, 2018).
The University contracted with Charles Construction Services, Inc. to build a new luxury hotel and conference center on campus. After work was completed, the University discovered extensive water damage from hidden leaks that it believed were caused by the defective work of Charles Construction and its subcontractors. Repairs were made at the cost of $6 million.
The University sued Charles Construction for breach of contract and other claims related to the damage. Charles Construction answered and filed third-party complaints against its subcontractors. Charles Construction tendered to its insurer, Cincinnati Insurance Company (CIC), seeking a defense. CIC agreed to defend under a reservation of rights. CIC intervened in the lawsuit and sought a declaratory judgment that it did not have a duty to defend or indemnify. CIC then filed a motion for summary judgment.
CIC relied upon a prior decision from the Ohio Supreme Court, Westfield Ins. Co. v Custom Agri. Sys., Inc., 979 N.E. 2d 269 (Ohio 2012), which held that property damage caused by a contractor's own faulty work was not accidental and therefore not covered. The issue currently before the court was whether the general contractor's policy covered claims for property damage caused by a subcontractor's faulty work.
The trial court found in favor of CIC. The court of appeals reversed, noting that Custom Argi. had not addressed issues raised by the policy's products-completed operations hazard coverage or subcontractor specific policy terms.
Those provisions can be summarized as follows. The policy excluded property damage to:
(6) That particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.
Paragraph (6) of this exclusion does not apply to "property damage" included in the "products-completed operations hazard."
The policy defined "products-completed operations hazard" as including,
"property damage" occurring away from premises you own or rent and arising out of . . . "your work" except:
. . .
(2) Work that has not yet been completed or abandoned.
Despite these provisions, a subcontractor's faulty work did not meet the definition of an "occurrence" because it was not based upon fortuity. The insuring agreement agreed to pay for property damage under certain circumstances. But the damage must be due to an "occurrence." There was no question that the water-related damage was "property damage" and was discovered after the work had been completed. But unless there was an "occurrence," the products-operations completed hazard provision and subcontractor exception had no effect, despite the fact that Charles Construction had paid additional money for it.
The court was aware that is reasoning was at odds with recent decisions of other courts. But the language requiring that "property damage" be caused by an "occurrence" remained a constant in the policies. Under the court's precedence, faulty workmanship was not an occurrence as defined in CGL policies.
The court therefore reverted to reasoning used before changes to the standard CGL policy in 1986, finding that inadvertent faulty workmanship could never be fortuitous or an accident. The CGL policy was altered in 1986 to provide coverage for certain kinds of property damage caused by inadvertent faulty work. The exclusions were modified to narrow the scope of coverage that was provided when property damage was caused by faulty workmanship. The subcontractor exception was intended to provide coverage for a general contractor when property damage was caused by the faulty work of a subcontractor. This was particularly the case when the property damage occurred after the general contractor had completed the project and the damage was to something other where the allegedly defective work was done. This history was neither addressed nor reconciled by the Ohio Supreme Court's decision.
