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Ohio Appellate Court Calls Into Question Long-Standing Law Regarding Insurance Coverage For Construction Defects


Posted on March 30, 2017

Nearly two years ago, this blog discussed the applicability of insurance coverage in the context of construction defect claims, in light of a decision from the Delaware Superior Court of New Castle County in Westfield Insurance Co. Inc. v. Miranda & Hardt Contracting and Building Services LLC, N14C-06-214.  In Miranda & Hardt, the Court concluded that Westfield Insurance had properly denied coverage to its insured, opining, “An allegation of defective workmanship does not constitute an ‘occurrence’ for which the policy grants coverage or triggers plaintiff’s duty to defend or indemnify defendant in the underlying lawsuit.” The Court further clarified that “an occurrence requires an accidental or unexpected event,” and poor construction did not qualify as such an event.

For several years, Ohio Courts have followed a similar analysis, which was adopted by the Ohio Supreme Court in Westfield Ins. Co. v. Custom Agri Systems, Inc. (2012), 133 Ohio St. 3d 476, 482, 979 N.E.2d 269.  In Custom Agri Systems, the Court held “that claims of defective construction or workmanship brought by a property owner are not claims for ‘property damage’ caused by an ‘occurrence’ under a commercial general liability policy.”

The Court further opined, “Courts generally conclude that commercial general liability 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…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.”

Earlier this year, however, a decision from Ohio’s Third District Court of Appeals called into question the reach of the Custom Agri Systems decision.  In Ohio N. Univ. v. Charles Constr. Servs., 3d Dist. Hancock No. 5-16-01, 2017-Ohio-258, Ohio Northern University (“ONU”) contracted with Charles Construction Services, Inc. (“CCS”) to build a hotel at ONU’s campus.  After CCS completed construction in 2011, ONU 2011, discovered evidence of water intrusion and moisture damage to the hotel.  In remediating this damage, ONU also discovered a number of structural defects.  ONU sued CCS, and CCS filed third-party claims against its subcontractors.

CCS’s insurer, Cincinnati Insurance Company (“Cincinnati”) filed a motion for summary judgment asking the trial court to determine it had no obligation to defend CCS, relying upon Custom Agri Systems.  The trial court granted Cincinnati’s motion based on Custom Agri Systems, and holding “the CGL issued in this case does not provide coverage because the subcontractors’ alleged defective workmanship is not an ‘occurrence.’”

On appeal, ONU argued that its claims involved damages arising after the conclusion of construction and were for property damage resulting from defective workmanship of CCS’s subcontractors, not the defective work itself. ONU also contend that, “CCS purchased additional ‘products-completed operations’ coverage as an add-on to its commercial general liability policy, which expressly contemplates and provides coverage for ONU’s claims against CCS.”  Products-completed operations insurance covers liability incurred by a contractor for property damage or that happens once contracted operations have ceased.

The Third District Court reversed, holding that “products-completed operations” coverage applied because the project had been completed at the time the claim arose and the claim involved “property damage” caused by work performed by CCS’s subcontractors. The Court concluded that “there is a legitimate ambiguity in the specific language of this insurance policy as to whether the parties’ intended to contract for coverage involving ‘property damage’ caused by the defective workmanship of CCS’s subcontractors arising after the project is complete” and, because Ohio law requires that such ambiguities be strictly construed against the insurer and liberally in favor of the insured, the trial court erred in granting Cincinnati summary judgment.

The provisions and language of insurance policies, especially in the context of construction claims, can be incredibly complicated and difficult to follow. Insurance companies often use such confusion to deny coverage to those who might be entitled to it. In such situations, dealing with insurance companies is something that can and should, be handled by experienced legal counsel.  For questions regarding insurance coverage in the construction context of construction claims, or any other aspect of Ohio construction or business law, please contact the attorneys at Harpst Ross, Ltd.Business Lawyers for the Construction Industry®, at (330) 983-9971.

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