Property damage caused by a subcontractor’s faulty work does not meet the definition of an “occurrence” under the CGL insurance policy because faulty work is not fortuitous. This Ohio Supreme Court decision differs from the coverage determinations of the courts of numerous other states that find coverage to exist under the subcontractor exception to the “your work” exclusion of the CGL policy. There was no question that extensive water damage from hidden leaks allegedly caused by defective construction work by subcontractors was discovered after work had been completed. While repairing the water damage, it was also discovered that there were serious structural defects which the project owner, Ohio Northern University, estimated would require repair costs of approximately $6 million.
When the university filed suit against its construction contractor, the CGL carrier issued a reservation of rights letter and subsequently filed suit asking a court to grant it declaratory judgment that it owed no duty to defend the contractor. On the final appeal it was held that no duty to defend was owed because there could be no covered claim under the policy for damages arising out of the alleged faulty work of the subcontractor. Ohio Northern University v. Charles Construction Services, 2018 WL 496159 (Ohio 2018).
The CGL policy in question provided the following exclusion for “property damage” to “your work,” which includes an exception to the exclusion when a subcontractor performs the work.
This insurance does not apply to:
* * *
1. Damage to Your Work:
“Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.”
“This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”
The court quoted from a number of Ohio case precedents for the proposition that “the general principle underlying CGL policies is that they are not intended to protect business owners from ordinary business risks.” “Courts generally concluded that the policies are intended to insure the risks of an insured causing damage to other persons and their property, but that the policies are not intended to insure the risks of an insured causing damage to the insured’s own work.” The court stated:
“In other words, the policies do not insure an insured’s work itself; rather, the policies generally insure consequential risks that stem from the insured’s work.” Custom Agri at ¶ 10, quoting Heile at 353, 736 N.E.2d 566.
[A] CGL policy is not intended to insure business risks that are the normal, frequent, or predictable consequences of doing business and which businesses can control and manage. * * * A CGL policy does not insure the insured’s work itself; rather, it insures consequential damages that stem from that work. * * * As a result, a CGL policy may provide coverage for claims arising out of tort, breaches of contract, and statutory liabilities as long as the requisite accidental occurrence and property damage are present.
Reviewing the facts of this particular case, the court stated that if the subcontractor’s faulty work was “fortuitous,” then the “Products-Completed Operations Hazard provision in conjunction with the exception to the “Your Work” exclusion when a subcontractor performs the work, would required coverage. But the court found that the faulty work was not fortuitous. It was, in the opinion of the court, not an “occurrence” and not an “accident.” It was just an ordinary “business risk” that is a “normal, frequent or predictable consequence of doing business that the insured can manage.”
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 21, No. 2 (Feb 2019).
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