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Daily Court Reporter - News Insurance policy does not cover defective work that damaged university’s luxury hotel


Insurance policy does not cover defective work that damaged university’s luxury hotel

Dan Trevas, Supreme Court of Ohio

The faulty work of subcontractors at an Ohio Northern University luxury hotel and conference center is not covered by the insurance policy purchased by the general contractor, and the insurance company does not have to pay any portion of the estimated $6 million in damages, the Ohio Supreme Court ruled recently.

The Supreme Court ruled that a commercial general liability (CGL) policy, even with additional coverage pertaining to subcontractors, does not cover faulty work. Writing for the Court majority, Justice Judith L. French stated the policy covers an “occurrence,” which means an accident, and faulty work is not an accident. Instead, the chances that a subcontractor’s work might be faulty is a “business risk,” and the insurance policy did not cover those, the opinion concluded.

The decision reversed a Third District Court of Appeals ruling that required Cincinnati Insurance Co. to cover Charles Construction Services for the construction of The University Inn and Conference Center at Ohio Northern in Ada, which was completed in September 2011. Shortly after opening, the university discovered extensive water damage.

Justices Terrence O’Donnell, Patrick F. Fischer, R. Patrick DeWine, and Mary DeGenaro joined Justice French’s opinion. Chief Justice Maureen O’Connor and Justice Sharon L. Kennedy concurred in judgment only.

Contractor Purchases Coverage

In 2008, Ohio Northern contracted with Charles Construction to build. The University Inn for an estimated $8 million. Charles Construction promised to do all the work itself or through subcontractors, and the agreement required the contractor to maintain a CGL policy. That policy was required to include “products-completed operations hazard” (PCOH) coverage, which covers damages “arising out of completed operations,” and has terms that specifically apply to the work performed by subcontractors.

Charles Construction purchased the CGL policy with the PCOH coverage from Cincinnati Insurance, which had a maximum payout of $2 million each for both the CGL and the PCOH. After the inn was completed, the university discovered hidden water leaks it believed was caused by Charles Construction’s and the subcontractors’ work. The university also discovered other serious structural defects and spent about $6 million to repair them.

University Sues for Damages

In 2012, Ohio Northern filed a lawsuit against Charles Construction in Hancock County Common Pleas Court for breach of contract and other claims related to the inn’s damages. Charles Construction moved to add several of its subcontractors to the lawsuit.

The contractor filed a claim with Cincinnati Insurance and sought to have the insurance company provide its legal defense as well as pay out any damages awarded to the university. Cincinnati Insurance stated it would defend the contractor, but reserved the right to argue that the CGL policy did not cover Ohio Northern’s claim.

In 2015, the trial court ruled that Cincinnati Insurance did not have to defend the contractor or pay for the damages. The university and contractor appealed to the Third District, which reversed the trial court’s ruling. Cincinnati Insurance appealed to the Supreme Court, which agreed to hear the case.

Coverage Issue Raised Before

In 2012, the Ohio Supreme Court ruled in Westfield Ins. Co. v. Custom Agri Sys., Inc. that an insurance claim filed by a contractor under a CGL policy for property damages caused by its own faulty workmanship is not an “occurrence” that is covered by the policy. Today’s opinion stated the issue is nearly identical to the 2012 case except that it questions whether the CGL policy covers damage caused by the subcontractor’s work.

Charles Construction and Ohio Northern argued the Custom Agri decision did not apply because contractors have become aware of the risk of discovering damage by subcontractors and have adjusted coverage to compensate for it. The contractor stated it purchased the PCOH coverage at the direction of Ohio Northern to protect against the prospect of faulty work.

Justice French explained the general principle of the CGL policy is to protect against unintended risks of damage, but the policies do not protect business owners from “ordinary business risks.”

Court Examines Policy Language

The Court stated that it must interpret an insurance contract from the words contained in the policy. The opinion noted that in Custom Agri the Court defined “accidental” as unexpected as well as unintended. As in the Custom Agri case, the policy Charles Construction had from Cincinnati Insurance defined “occurrence” as an accident.

The Court further explained an accident has the key element of being “fortuitous,” meaning occurring by chance, not by design. Examining Custom Agri and other authorities regarding business insurance, the Court found that, in general, faulty workmanship is not covered by a CGL policy because the damages are not fortuitous. The opinion stated faulty workmanship by subcontractors is a business risk because the contractor controls the process and can anticipate damage if subcontractor work is done incorrectly.

The opinion stated the construction industry has added the PCOH policies to guard against subcontractor damage; however, to trigger the coverage for damages, an “occurrence” must happen.

“Again, there is no question that the water-related damage to the inn was ‘property damage’ and was discovered after work had been completed. But unless there was an ‘occurrence,’ the PCOH and subcontractor language has no effect, despite the fact that Charles Construction had paid additional money for it,” the Court stated.

Court Explains Reasoning

The opinion noted that the Court’s reasoning “contrasts with recent decisions in other courts,” which found the faulty work of subcontractors to be “occurrences.” The Court stated that regardless of any trend in law, it must look at the plain and ordinary meaning of the words in the Charles Construction CGL policy, which does not expressly state that faulty workmanship by subcontractors is an “occurrence.”

The Court explained that the Custom Agri decision adopted the reasoning of a 2008 Arkansas Supreme Court decision, which found a contractor’s obligation to repair or replace a subcontractor’s work was not unexpected and did not trigger CGL coverage.

Today’s opinion noted that after the Arkansas Supreme Court decision, Arkansas’ legislature changed the law and required that any CGL policy sold in the state must define “occurrence” to include property damage by faulty workmanship.

“If it were so inclined, the Ohio General Assembly could take similar action in response to our opinion today,” the Court stated.

2017-0514. Ohio N. Univ. v. Charles Constr. Servs., Inc., Slip Opinion No. 2018-Ohio-4057.

The opinion can be found online at:

Please note: Opinion summaries are prepared by the Office of Public Information for the general public and news media. Opinion summaries are not prepared for every opinion, but only for noteworthy cases. Opinion summaries are not to be considered as official headnotes or syllabi of court opinions. The full text of this and other court opinions are available online.

About the Supreme Court of Ohio

The Supreme Court is established by Article IV, Section 1 of the Ohio Constitution. Article IV, Section 2 of the Constitution sets the size of the Court and outlines its jurisdiction. Article IV, Section 5 of the Constitution grants rule making and other authority to the Court.

The Supreme Court is the court of last resort in Ohio. Most of its cases are appeals from the 12 district courts of appeals. The Court may grant leave to appeal felony cases from the courts of appeals and may direct a court of appeals to certify its record in any civil or misdemeanor case that the Court finds to be "of public or great general interest."

The Supreme Court also has appellate jurisdiction in cases involving questions arising under the Ohio or United States Constitutions, cases originating in the courts of appeals, and cases in which there have been conflicting opinions on the same question from two or more courts of appeals. The Supreme Court hears all cases in which the death penalty has been imposed. These cases currently include both appeals from courts of appeals affirming imposition of the death penalty by a trial court and, for capital crimes committed on or after Jan. 1, 1995, appeals taken directly from the trial courts. Finally, the Supreme Court's appellate jurisdiction extends to review of the actions of certain administrative agencies, including the Public Utilities Commission.

The Supreme Court has original jurisdiction to issue extraordinary writs. These include writs of habeas corpus (inquiring into the cause of an allegedly unlawful imprisonment or deprivation of custody), writs of mandamus (ordering a public official to perform a required act), writs of procedendo (compelling a lower court to proceed to judgment in a case), writs of prohibition (ordering a lower court to stop abusing or usurping judicial functions), and writs of quo warranto (issued against a person or corporation for usurpation, misuse, or abuse of public office or corporate office or franchise).

The Constitution grants the Supreme Court exclusive authority to regulate admission to the practice of law, the discipline of attorneys admitted to practice, and all other matters relating to the practice of law. In connection with this grant of authority, the Supreme Court has promulgated the Supreme Court Rules for the Government of the Bar of Ohio. These rules address, among other things, admission to practice, attorney discipline, attorney registration, continuing legal education, and unauthorized practice of law.

The Constitution also gives the Supreme Court authority to prescribe rules governing practice and procedure in all courts of the state and to exercise general superintendence over all state courts. Procedural rules promulgated by the Supreme Court become effective unless both houses of the General Assembly adopt a concurrent resolution of disapproval. Rules of superintendence over state courts set minimum standards for court administration. Unlike procedural rules, rules of superintendence do not have to be submitted to the General Assembly to become effective.

In connection with all of the rules for which it has responsibility, the Supreme Court generally solicits public comment before adopting new rules or amendments in final form. The Court first publishes its rules and amendments in proposed form. These proposals appear in both the Ohio State Bar Association Reports and the Ohio Official Advance Sheets and indicate the period open for comment and the staff member to whom comments should be directed. The Court reviews all comments submitted before it decides whether to adopt or amend a rule.

Pursuant to the Constitution, the Chief Justice or a Justice designated by the Chief Justice is responsible for ruling on the disqualification of appellate and common pleas court judges. The procedure for obtaining review of a claim of disqualification against an appellate or common pleas judge is commenced by the filing of an affidavit of disqualification with the Clerk of the Supreme Court. The Revised Code contains specific requirements governing the filing of affidavits of disqualification.

Article IV, Section 2 of the Constitution sets the size of the Court at seven -- a Chief Justice and six Justices, who are elected to six-year terms on a nonpartisan ballot. Two Justices are chosen at the general election in even-numbered years. In the year when the Chief Justice runs, voters pick three members of the Court.

A person must be an attorney with at least six years experience in the practice of law to be elected or appointed to the Supreme Court. Appointments are made by the Governor for vacancies that may occur between elections.

Date Published: October 24, 2018


Supreme Court of Ohio


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