The Supreme Court of Ohio recently held that defective construction is not an “occurrence” covered under a commercial general liability policy. The decision clarifies an issue on which lower appellate courts had been split, but the court’s broad ruling was not without dissent.
The case, Westfield Insurance Company v. Custom Agri Systems, Inc., 2012 Ohio 4712, arose from a dispute regarding the alleged faulty construction of a steel grain bin. The contractor turned to its insurer to defend and indemnify the claim but the insurer refused, arguing that defective construction was not an occurrence that triggered coverage under the CGL policy. The insurer also argued that even if the faulty workmanship was an occurrence, the policy’s contractual liability exclusion precluded coverage.
Courts generally agree that a CGL policy will cover collateral damage caused by defective construction but they are split on whether defective construction itself, as was the issue in this case, is an occurrence implicating coverage. The Ohio Supreme Court was asked to clarify the split among the state’s lower courts, and was presented with two questions: first, whether defective construction constitutes property damage caused by an occurrence; and second, whether a contractual liability exclusion precludes such claims.
Addressing the first question, the Ohio Supreme Court held that defective construction does not constitute an occurrence. Insurance coverage is guided by the principle of fortuity and does not cover losses that are expected or intended. This principle is expressed in insurance policies’ requirement that damage be caused by an occurrence, which most policies, including the CGL policy at issue here, define as an accident. The threshold question in any coverage dispute is whether the act constituted an occurrence. Here, the Ohio Supreme Court was not convinced that defective workmanship is the kind of fortuitous act or event that satisfies the definition.
The Court reasoned 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.” Custom Agri Sys., 2012 Ohio 4712, at ¶ 10. Relying on the majority view in Ohio and a decision from the Arkansas Supreme Court, the Court determined that the key issue was whether the contractor controlled the process leading to the damages and whether the damages were anticipated. The Court concluded that “defective workmanship standing alone—resulting in damages only to the work product itself—is not an occurrence under a CGL policy.” Id. at ¶ 18. For the court, whether defective construction constituted an occurrence turned on the nature of the damage and it held that faulty performance is not an accident, does not constitute an occurrence envisioned by the policy, and therefore is not covered.
Because the Court determined that defective construction is not an occurrence, it did not address the contractual liability exclusion, finding the second question moot.
The breadth of the majority’s opinion worried Justice Pfeifer, the lone dissenting justice. Justice Pfeifer thought the majority’s ruling that defective workmanship can never be an occurrence was an “overbroad generalization” and “forecloses too many other potential cases.” Custom Agri Sys., 2012 Ohio 4712 (Pfeifer, J. dissenting).
Presenting a more logical analysis of the policy as a whole, Justice Pfeifer argued that defective construction could constitute an occurrence. “The key question is whether defective workmanship can be considered accidental.” Id. at ¶ 28. While the majority opinion focused on the nature of the damage, Justice Pfeifer thought such an analysis was immaterial to the question of whether defective construction is an occurrence. Instead, Justice Pfeifer looked simply to whether the damage was an accident or was intended, and stated, “I would hold that the initial grant of coverage would apply in certain instances of defective workmanship, those in which the damage was not intentional.” Id. Justice Pfeifer further reasoned that whether the damage is to the work itself or to collateral property, “both types of damage are caused by the same thing—negligent or defective work. One type of damage is no more accidental than the other. The basis for the distinction is not found in the definition of occurrence but by application of the [standard exclusions] found in a commercial general liability insurance policy.” Id. at ¶ 33.
For Justice Pfeifer the operative language within the policy was the contractual liability exclusion, not the definition of the term “occurrence.” Analyzing the policy as a whole, Justice Pfeifer suggested that the initial grant of coverage in a CGL policy for “occurrences” includes defective workmanship, but standard “business risk” exclusions are inserted into the policy to limit that coverage. Indeed, in this case, the trial court found that the contractual liability exclusion was such a “business risk” exclusion that barred coverage for the faulty workmanship. Where the majority of the Ohio Supreme Court broadly suggested that CGL policies are not intended to insure “business risks,” and attributed the limitation to the definition of “occurrence,” the district court and the dissent suggested that the policy’s exclusions were the provisions responsible for excluding coverage for such business risks. In Justice Pfeifer’s view, it would be logically inconsistent to conflate the analysis of what constitutes an “occurrence” with the analysis of the policy’s exclusions.
All the justices agreed there should be no coverage; it was their reasoning that differed. The majority of the Supreme Court was comfortable with establishing a broad and general rule that defective construction is not an occurrence under a CGL policy. The trial court and the dissenting justice from the Ohio Supreme Court preferred a narrower and more measured approach to the issue, viewing the contractual liability exclusion as the operative language.
In either case, the majority’s decision is now the law in Ohio: defective construction is not property damage caused by an occurrence and will not be covered by a CGL policy. But the issue remains unsettled among courts in some other states. Construction firms, general contractors and subcontractors should be aware of the limits of their CGL policies. While collateral property damage caused by faulty workmanship will generally be covered, coverage for defective workmanship itself may be limited by the scope of initial coverage or by specific policy exclusions.