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The Supreme Court of Ohio recently issued a decision that bucked the dominant trend among U.S. courts when it comes to CGL coverage for construction defects.  In Ohio Northern University v. Charles Construction Services, Inc. — N.E.3d —-, 2018 WL 4926159 (Ohio Oct. 9, 2018), the court held that there was no duty to defend under a general contractor’s CGL policy because faulty workmanship by its subcontractor was not an “occurrence,” going against the established majority positon.  Acknowledging the contrary law from its sister courts, the Supreme Court of Ohio nevertheless found that under a plain language reading an “occurrence” requires fortuity, while faulty workmanship is an expected business risk.

The Ohio Northern University decision may be considered surprising by some given judicial trends, especially over the past decade. The availability and extent of insurance coverage for a contractors’ completed work has been a hot-button issue in the construction industry for some time. The debate intensified with the housing boom in the early 2000s and resultant proliferation of construction defect claims.  Early on in the occurrence debate, the general view held by many was that construction defects are essentially uninsurable business risks. More recently, there have been increasing decisions finding that defective workmanship can constitute an accident in the first instance, reasoning, for example, that if the negligent workmanship was unintentional from the insured’s point of view, there could be an “occurrence.”[1]  Earlier this year, the Tenth Circuit even described the state of the law as “near unanimity” by state supreme courts that “construction defects can constitute occurrences and contractors have coverage  under CGL policies for at least the unexpected damage caused by defective workmanship done by subcontractors.”[2]

The Tenth Circuit’s decision, Black & Veatch Corp. v. Aspen Ins. (Uk) Ltd, 882 F.3d 952 (10th Cir. 2018) [3], addressed whether a global engineering, consulting and construction company had insurance coverage for loss incurred as the result of its subcontractor’s installation of damaged equipment at various power plants. The policy was subject to the law of New York, a jurisdiction with a number of lower appellate and federal decisions taking a “no occurrence” position but with no pronouncement on the issue from the state’s highest court. Black & Veatch found that the claimed damages were an “occurrence because they were accidental and harmed a third party’s property.”[4] The court also pointed to the existence of the so-called subcontractor exception in the policy, which gives back coverage for excluded “Damage to Your Work’ under the 1986 ISO form as long as the work was performed by a subcontractor on the insured’s behalf. The court noted that if the damages at issue were not an occurrence, the subcontractor exception would be “mere surplusage,” in violation of basic principles of contract interpretation.[5]  In other words, the exception could give back coverage only if it existed in the first place under the insuring agreement.  Contrary New York law was furthermore distinguished on the ground that it either concerned different, earlier  CGL policy language and/or did not address the subcontractor exception issue.

In Ohio Northern, however, the Supreme Court of Ohio stated that it must look to the “plain and ordinary meaning” of the policy before it, “regardless of any trend in the law.”[6] That policy, as do CGL forms generally, defined the term “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” According to the court, faulty workmanship does not have the requisite fortuity to constitute an “occurrence,” and if there is no “occurrence” in the first place, the products completed operations coverage and subcontractor-specific provisions, like the subcontractor exception, do not come into play.  Citing its prior decision in Westfield Insurance Co. v. Custom Agri Systems, Inc., 979 N.E.2d 269 (Ohio 2012), which found no occurrence under a subcontractor’s CGL policy, the court reiterated that “the general principle underlying CGL policies is that they are not intended to protect business owners from ordinary business risks” and that “claims for faulty workmanship … are not fortuitous in the context of a CGL policy.”[7]

The Ohio Northern case demonstrates that some “no occurrence” jurisdictions continue to stand firm. For carriers and their insureds, the potentially divergent views across the U.S. may mean continued uncertainty on coverage for construction defect claims, particularly for builders and developers with nationwide operations.  An American Bar Association article reports that so-called Kvaerner endorsements (named after a “no occurrence” case by the Supreme  Court of Pennsylvania [8]) are being crafted to address the issue. [9] These endorsements can take the approach of stating that faulty workmanship by a subcontractor gives rise to an occurrence,[10] or allow the insured to choose the law of a different state for occurrence issues under so-called “most favorable state” endorsements. As has been pointed out, however, new policy language can often make for new disputes and these newer endorsements have yet to be tested by the courts.

[1] Capstone Bldg. Corp. v. Am. Motorists Ins. Co., 308 Conn. 760, 775 (2013) (“Insurance policies … are designed to cover foreseeable risk, including negligent acts.”)

[2]  Black & Veatch Corp. v. Aspen Ins. (UK) Ltd, 882 F.3d 952, 956 (10th Cir. 2018) (citing Christopher C. French, Revisiting Construction Defects as “Occurrences” Under CGL Insurance Policies, 19 U. Pa. J. Bus. L. 101, 122-23 (2016)). Another commentator argues his point more plainly. Taking a pro-occurrence stance, he insists that because insurance policies are purchased precisely to cover damages arising from negligence “[t]o advocate that a negligent contractor is unworthy of coverage is nuttier than an Almond Joy.” James Duffy O’Connor, What Every Court Should Know About Insurance Coverage for Defective Construction, 5 No. 1 Journal of the American College of Construction Lawyers 1 (2016).

[3] Cert. denied sub nom. Aspen Ins. (UK) Ltd. v. Black & Veatch Corp., 139 S. Ct. 151 (2018).

[4] 882 F.3d at 956.

[5] Id. at 964.

[6] 2018 WL 4926159, at ¶32.

[7] Id. at ¶¶ 14, 27.

[8] Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888 (2006).

[9] See Eric Hermanson, Anthony L. Miscioscia, New Kvaerner Endorsements Revive the “Occurrence” Debate-but Will They Work?, Brief, Summer 2018, American Bar Association.

[10] For example:

[N]otwithstanding any contrary law or decision, for purposes of coverage and the definition of “occurrence” under this policy, “property damage” in the form of physical damage to “your work” or arising out of it or any part of it and included in the “completed operations hazard” shall be deemed to be caused by an “occurrence” if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

Eric Hermanson, Anthony L. Miscioscia, New Kvaerner Endorsements Revive the “Occurrence” Debate-but Will They Work?, Brief, Summer 2018, p. 43, American Bar Association.