The Ohio Supreme Court resolved a long standing issue this past week regarding whether defective construction/workmanship claims constitute an “occurrence” under Commercial General Liability (“CGL”) policies. In Westfield Ins. Co. v. Custom Agri. Systems, Inc., _Ohio St.3d_, 2012-Ohio-4712, the Ohio Supreme Court answered a certified question from the Sixth Circuit Court of Appeals with a resounding “No.” As a result, there is no longer any doubt that CGL insurance policies do not provide coverage for property damages to the insured’s work.
Historically, when contractors or other insureds performed substandard work and were sued, the contractors sought defense and indemnity coverage under its CGL policy. CGL policies typically provide coverage for an “occurrence.” Most policies define an “occurrence” as an “accident.” Courts have struggled with whether an insured’s defective work product qualifies as an “occurrence” or “accident”. Some courts have held that defective work product qualifies as an “occurrence” but coverage is excluded pursuant to the various business risk exclusions in the policy. The Ohio Supreme Court, however, has now clarified this uncertainty and held that defective work product does not qualify as an “occurrence.” Therefore, CGL policies do not provide coverage for property damage claims to defective work product and the exclusions are irrelevant.
When analyzing this issue, the Court considered that the underwriting intent for a CGL policy is to provide coverage for an accident or unanticipated, consequential damages. Id. at ¶ 13. According to the Court’s reasoning, property damage to the contractor’s work is neither accidental nor unanticipated since a contractor controls the process leading to the damages. Thus, property damages to an insured’s defective work are not an “occurrence.”
It is important to note that the only damages alleged in Westfield, were for property damage to a defectively constructed grain bin. Consequential damages that occur as a result of defective workmanship may still constitute an “occurrence” under a CGL policy. We anticipate issues will still arise regarding what damages are covered by a CGL policy, including how a court distinguishes between the contractor’s work itself and consequential damages.
Should you have a question regarding this case, construction claim liabilities or general insurance coverage, please do not hesitate to contact any of our Insurance Coverage / Bad Faith Practice Group Members.