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Do You Think Claims for Defective Work are Covered by Your Insurance?

Posted on December 09, 2015

For contractors, defective work claims are an unfortunate fact of life, particularly when they are caused by a subcontractor’s bad work.  One of the first questions that may arise is whether the contractor’s commercial general liability (CGL) carrier has a duty to defend and ultimately indemnify the contractor when the Project Owner makes a claim.  The Supreme Court of Ohio recently held that defective construction itself is not an “occurrence” covered under a CGL policy, but consequential damages flowing from the defective work can be a covered “occurrence.”

The case, Westfield Insurance Company v. Custom Agri Systems, Inc., 133 Ohio St.3d 476, stemmed from a dispute over the alleged faulty construction of a steel grain bin.  The contractor, Custom Agri Systems, turned to its insurer, Westfield, to defend and indemnify the claim, but Westfield refused, arguing that defective construction was not an “occurrence” that triggered coverage under the CGL policy.  The Supreme Court of Ohio was asked to clarify the split among Ohio’s lower courts and was presented with the question of whether defective construction constitutes “property damage” caused by an “occurrence,” which triggers coverage.

The Court held that defective construction is not an “occurrence.”  The Court reasoned that insurance coverage is guided by the principle of fortuity and does not apply to losses that are expected or intended.  Therefore, most CGL policies, including the one at issue in Westfield, define an “occurrence” as an accident.  The Court further stated that a CGL policy is not intended to protect against “business risks” and is not designed to “insure the insured’s work itself; rather, it insures consequential damages that stem from that work.”

The Custom Agri case can be compared with the recent Florida federal case of Pavarini Construction Co. Inc., et al. v. Ace American Insurance Co., 14-cv-20524.  In that case, the court ruled that Ace American Insurance owed $23 million in indemnification to its insured, Pavarini, for repairs Pavarini made to fix damage resulting from defective subcontractor work at a Miami high-rise condominium.  The court held that coverage was required because the repairs addressed ongoing consequential damage to non-defective property.  The court reasoned that even though the policy did not provide coverage for the repair of the defective subcontractor work itself, it did require coverage for the repair of unforeseen consequential damage caused by the defective work to an otherwise non-defective completed property.  Specifically, the building’s defective structural support work allegedly resulted in excessive movement of building components, which in turn caused stucco debonding and cracking on walls and beams, which in turn led to water intrusion.

Similar logic regarding coverage for consequential damage was followed by a New Jersey appellate court in the recent case of Cypress Point Condominium Association, Inc. v. Adria Towers, L.L.C., 441 N.J. Super. 369 (2015).  In that case, Adria Towers’ subcontractors failed to properly install the roof, gutters, windows, doors, and other components in the complex, and Cypress Point asserted that this faulty workmanship caused consequential damages to common areas and unit owners’ property.  The court held that the consequential damages flowing from the subcontractors’ defective work in fact met the policies’ definition of “property damage,” and further held that the damage was an “occurrence” under the policies.  The court stated that it could not reasonably be argued that the subcontractors expected or intended for their faulty workmanship to cause the property damage. This case is currently on appeal to the Supreme Court of New Jersey, which has agreed to review the case.

As demonstrated above, the legal trend developing in Ohio and elsewhere across the country is that defective work itself is not covered under CGL policies, while unforeseen consequential damage resulting from that defective work can be in many cases.  When a claim is made against you involving allegations of defective construction, you need to be prepared for the fact that while the bulk of the claim may not be covered, certain discrete components of it might be.  At the very least, if you can trigger potential coverage under your policy, your insurance company may at least owe you a defense, which will help pay to fight the claim even if the insurance won’t pay damages if you lose that fight.  However, Contractors need to always understand that defective work itself remains a business risk that generally cannot be transferred to an insurance policy. For questions regarding insurance coverage matters or any other aspect of Ohio construction law, please contact Todd Harpst or the other attorneys at at Harpst Ross, Ltd. – Business Lawyers for the Construction Industry®, at (330) 983-9971 or

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