Source: https://www.zelle.com/news-publications-621.html
Timestamp: 2019-04-26 00:56:21+00:00

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The Supreme Court of Ohio recently weighed in on the ongoing debate over whether a subcontractor’s faulty workmanship can be an “occurrence” under a commercial general liability policy in Ohio Northern University v. Charles Construction Services Inc. While it appeared that the prevailing trend had courts more inclined to find that faulty workmanship performed by a subcontractor can be an occurrence under a CGL policy, Ohio’s highest court came to a different conclusion in Charles Construction. The court itself recognized that it was bucking the recent trend, but concluded that it must apply the plain and ordinary meaning of the language used in the policy.
In Charles Construction, Ohio Northern University sued contractor Charles Construction for damage caused by leaks and other structural defects that ONU alleged were caused by Charles Construction’s defective work on an $8 million dollar project to build a new luxury hotel and conference center on ONU’s campus. Charles Construction, in turn, filed third-party claims against a number of its subcontractors and tendered the ONU suit to Cincinnati Insurance Company, who had issued it a CGL policy for the project. The CIC policy contained a products-completed operations hazard, or PCOH, clause and terms that related specifically to work performed by subcontractors. CIC intervened in the action and sought a declaratory judgment that it was not required to defend or indemnify Charles Construction in connection with the ONU suit.
The trial court granted judgment in favor of CIC, relying on the Supreme Court of Ohio’s earlier opinion in Westfield Insurance Co. v. Custom Agri Systems Inc., in which the court had held that a contractor’s own faulty workmanship was not an occurrence under a CGL policy. On appeal, the Third District Court of Appeals reversed the judgment in favor of CIC, distinguishing Custom Agri on the basis that in that case, the court had not addressed PCOH coverage or subcontractor-specific terms. However, the Ohio Supreme Court found that the intermediate appellate court had interpreted Custom Agri too narrowly and affirmed the trial court’s grant of summary judgment in the insurer’s favor.
In Charles Construction, the Ohio Supreme Court acknowledged that it had not specifically addressed the PCOH language or the subcontractor-specific terms in Custom Agri. However, although the Charles Construction court analyzed that additional language, its focus remained on the policy’s initial coverage grant and whether the subcontractor’s faulty workmanship constituted an “occurrence.” The court once again emphasized that claims for faulty workmanship are not fortuitous in the context of a CGL policy and therefore cannot be an “occurrence.” It extended that holding to claims arising out of a subcontractor’s faulty workmanship.
In explaining its holding in conjunction with the PCOH and subcontractor-specific coverages, the court reasoned that those coverages would only come into play if the subcontractor’s faulty work were fortuitous. While the court recognized that its holding was in contrast to several recent opinions finding that a subcontractor’s faulty workmanship could be an “occurrence,” it concluded it was constrained by the plain meaning of the policy language before it.
Interestingly, the court closed by noting that in Custom Agri, it adopted the reasoning of the Arkansas Supreme Court in Essex Ins. Co. v. Holder, and that subsequent to that court’s ruling, the Arkansas legislature enacted a statute that required CGL policies issued in Arkansas to define “occurrence” to include faulty workmanship. In doing so, the Charles Construction court invited the Ohio legislature to take similar action if it deemed it necessary. This may indicate that the court thought that the ongoing debate about whether CGL policies should cover faulty workmanship was better left to the legislature for resolution.
In Black & Veatch Corp. v. Aspen Insurance (UK) Ltd., the Tenth Circuit Court of Appeals concluded that the New York Court of Appeals would consider damage caused by a subcontractor to be an “occurrence.” In reaching that conclusion, the court reviewed the history of CGL policies and determined that since 1986 the standard form CGL policy has covered: (1) damage to completed projects when the damage was caused by a subcontractor’s faulty work and (2) damage to ongoing work when the faulty workmanship damages property other than “the particular part” on which the contractor or subcontractor was working. The Tenth Circuit determined that New York law defined an “accident” as “unexpected and unintentional.” The court then concluded that Black & Veatch did not expect or intend that its subcontractors would cause damage to the project. The court supported its conclusion by noting that to hold otherwise would have made several policy provisions meaningless in violation of New York rules of contract interpretation which prohibit adopting an interpretation of a contract that renders a provision surplusage. Interestingly, some of the provisions that the court indicated would be rendered meaningless, such as the products completed operation hazard and exceptions for damage caused by a subcontractor, were provisions considered and rejected by the Charles Construction court when it concluded that a subcontractor’s faulty workmanship was not an occurrence.
Three other courts that addressed this issue in 2018 agreed with the Charles Construction court and found that damages from faulty workmanship did not constitute an “occurrence.” In Martin/Elias Properties LLC v. Acuity, the Supreme Court of Kentucky held that a subcontractor’s faulty workmanship resulting in damage to the project was not an “occurrence” because the faulty workmanship was not fortuitous. In reaching this holding, the court determined that while the subcontractor may not have expected the damage, the damage resulted from the purposeful action taken by the subcontractor. The court rejected the argument that the damage to the project beyond the area being worked on by the subcontractor should be covered. The court reasoned that the subcontractor had both intent and control of its work when its work caused damage to the entire project.
In Lenick Construction Inc. v. Selective Way Insurance Co., the Third Circuit Court of Appeals held that consequential damages beyond the insured’s work would not be considered an “occurrence.” In Lenick, the insured argued that the Pennsylvania Supreme Court’s decision in Kvaerner Metals Division of Kvaerner U.S. Inc. v. Commercial Union Insurance Co. was limited to circumstances where the faulty workmanship damaged only the work product itself and not where damage to other work was alleged. The Third Circuit noted it had held in a prior case that damages that are a reasonably foreseeable result of the faulty workmanship are not covered even if the damages occurred outside the work being done by the insured. Because the Supreme Court of Pennsylvania had not offered a contrary opinion since that decision, the Lenick court was bound to apply that conclusion in the current matter.
Based on Charles Construction and the other decisions rendered in 2018, it remains clear there is still no unanimity as to whether faulty workmanship can constitute an “occurrence” under a standard CGL policy. With the amount of litigation surrounding construction defects likely to increase following the building boom in the early 2000’s, it is reasonable to assume that this issue will continue to arise. Unfortunately, given the divergent conclusions reached by courts in the various jurisdictions, there remains no clear guidance as to how the issue ultimately will be resolved. While some state legislatures have attempted to resolve this issue, those efforts to date do not appear to have had much impact. As always, when faced with this issue it will be important to understand the particular facts surrounding the loss, the relevant policy language, and most importantly, the current state of the case law in any jurisdiction in which the dispute may be litigated.
Jonathan R. MacBride is a partner with Zelle LLP in Philadelphia.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firms, their clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 2018 WL 4926159 (OH Oct. 9, 2018).
 Id. at *1 (citing Westfield Ins. Co. v. Custom Agri Systems, Inc. 979 N.E.2d 269 (Ohio 2012)). In Custom Agri, the general contractor had joined Custom Agri to a lawsuit that involved claims that Custom Agri’s work was defective. 979 N.E. 2d at 270. Custom Agri sought coverage from Westfield who intervened and moved for summary judgment on its obligation to defend and indemnify Custom Agri. Id. On appeal to the Sixth Circuit Court of Appeals, the Court certified the question of whether claims for defective/faulty workmanship brought by a property owner are an “occurrence” under a CGL policy to the Supreme Court of Ohio. Id.
 2018 WL 4926159 at *2.
 Id. However, the court did not provide any examples of how the faulty work could be fortuitous given its analysis.
 Id. at *7 (citing Ark.Code.Ann. 23-79-155(a)(2)).
 See Colo. Rev. Stat. Ann. § 13-20-808 (2010); S.C. Code Ann. § 38-61-70 (2011).
 J-McDaniel Const. Co. v. Mid-Continent Cas. Co., 761 F.3d 916, 918 (8th Cir. 2014), as corrected (Aug. 4, 2014)(declined to apply §23-79-155 retroactively because Arkansas has a presumption against retroactivity); Harleysville Mut. Ins. Co. v. State, 736 S.E.2d 651, 659 (S.C. 2012)(found retroactive wording in §38-61-70 unconstitutional); Colorado Pool Sys., Inc. v. Scottsdale Ins. Co., 317 P.3d 1262, 1269 (Co. 2012)(found § 13-20-808 was intended to apply retroactively, but Colorado constitution prohibits laws from applying retroactively; But see D.R. Horton, Inc.-Denver v. Mountain States Mut. Cas. Co., 69 F. Supp. 3d 1179, 1193 (D. Colo. 2014)(without referencing Colorado Pool, court applied statute retroactively in finding a duty to defend).
 882 F. 3d 952 (10th Cir. 2018).
 544 S.W.3d 639, 643 (Ky. 2018)(affirming that the court’s test for what constituted an “accident” in Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69 (Ky. 2010) was the proper test to apply and not the test previously set forth in Bituminous Cas. Corp. v. Kenway Contracting Inc., 240 S.W.3d 633 (Ky. 2007).
 Id. The dissent noted that the majority’s analysis would make it virtually impossible for an accident to occur and that a better result would have been to simply apply the exclusionary language in the policy that excluded damage to the part of the project being worked on by the contractor and the costs to repair any damaged property. Id. at 645. The dissent argued the majority opinion went too far and made it significantly harder for injured parties to recover.
 552 S.W.3d 726, 731 (Mo. App. W.D. 2018).
 737 Fed.Appx. 92, 95 (3rd Cir. 2018).
 908 A.2d 888 (Pa. 2006).
 Id. (citing Specialty Surfaces International v. Continental Casualty, 609 F.3d 223 (3d Cir. 2010).

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