In recent years, courts in several states have held that a general contractor's commercial general liability ("CGL") insurance policy may provide coverage for damage caused by a subcontractor's defective construction work. The Ohio Supreme Court is considering a case which may decide whether Ohio joins that trend.
CGL insurance generally protects insureds from risks that arise from losses resulting from chance or accident. One application of CGL insurance is for certain types of property damage resulting from an "occurrence".
Since 2012, Ohio has followed the rule that a CGL policy would not cover damage caused by a contractor to the contractor's own work. Westfield Ins. Co. v. Custom Agri. Sys., Inc., 133 Ohio St. 3d 476, 979, N.E.2d 269 (2012) ("Custom Agri."). The underlying rationale for the Custom Agri decision is that a contractor controls the way that it performs its own work. CGL insurance does not assure that a contractor will perform its own work correctly. If the contractor does not perform its own work correctly, that is an error within its own control, and therefore not an insurable event.
Now, the Ohio Supreme Court is considering whether a general contractor's CGL policy may provide coverage for damage caused by a subcontractor's defective work. The Ohio Supreme Court will decide whether to affirm or overturn Ohio Northern University v. Charles Construction Services, Inc., 77 N.E.3d 538 (Ohio Ct. App. 2017) ("ONU"), an Ohio Court of Appeals decision holding that CGL coverage may exist for property damage caused by faulty work performed by the subcontractor of an insured general contractor.
A key distinction between the Custom Agri. and the ONU cases is that in ONU the insurance coverage is sought for damage caused by a subcontractor’s allegedly defective work, not work performed by the insured general contractor. Insofar as a subcontractor directly performed the work, the insured general contractor was not able to control the manner of the work in the same way as if it had performed the work itself. This distinction makes the damage caused by the defective construction more similar to an unintended accident. It is outside the control of the insured general contractor, and therefore more likely coverable by the general contractor’s CGL policy.
If the Ohio Supreme Court affirms the ONU decision, Ohio will join several other state courts that have interpreted a general contractor’s CGL insurance as affording coverage for damage caused by subcontractor construction defects. Increased insurance coverage would be good news for owners that may need funds to repair damage caused by defective subcontractor work. Of course, in the fluid and ever-changing insurance world, insurers may respond by excluding coverage through a more specific exclusion or other means.