Faulty subcontractor work not an “occurrence” triggering insurer’s duty to defend

The Supreme Court of Ohio, applying Ohio law, reversed the judgment of the court of appeals and reinstated the judgment of the trial court.  The Supreme Court of Ohio found no duty to defend in a suit brought by a property owner due to faulty work done by a subcontractor, because faulty subcontractor work is not fortuitous and does not meet the definition of an “occurrence” under a CGL policy.

The Supreme Court of Ohio concluded that its 2012 decision in Westfield Insurance v. Custom Agri. Systems, which found that property damage caused by the contractor’s own faulty work does not involve an accidental “occurrence” giving rise to an insurer’s duty to defend, applied in equal force to property damage caused by a subcontractor’s faulty work.

The underlying lawsuit stemmed from defective work done by a subcontractor on a luxury hotel and conference center at Ohio Northern University (“ONU”).  In 2008, ONU hired Charles Construction Services, Inc. to oversee the construction of the $8 million luxury hotel and conference center on campus.  To fulfill the terms of the contract with ONU, Charles Construction obtained a CGL policy with Cincinnati Insurance Co. (“CIC”).  In 2011, after the work was completed, ONU discovered extensive water damage and other damage to the building and estimated its repair costs at $6 million.

ONU proceeded to sue Charles Construction for breach of contract, and Charles Construction filed third-party complaints against several of its subcontractors.  CIC agreed to defend Charles Construction in the litigation while reserving its right to argue that the policy did not cover ONU’s claim.  CIC later obtained a trial court decision freeing it from any duty to defend Charles Construction.  In 2017, an Ohio appellate court reversed the lower court’s decision holding that while Custom Agri remains good law as applied to construction defects caused by the insured’s own work, the policy at issue remained ambiguous as to whether it covers claims for property damage caused by faulty subcontractors’ work.  CIC appealed to the Supreme Court of Ohio.

Using the plain and ordinary meaning of the language in the policy, the Ohio Supreme Court found the policy language to be clear – namely, the terms requiring “property damage” to be caused by an “occurrence.”  It further explained that a subcontractor’s faulty work does not meet the definition of an “occurrence” because it is not fortuitous.  The Ohio Supreme Court concluded that ruling in favor of Charles Construction would contravene the purpose of the CGL policy by effectively granting the general contractor insurance for a foreseeable risk.  Therefore, CIC was not required to defend Charles Construction against ONU’s lawsuit or indemnify Charles Construction for any damages.  Ohio N. Univ. v. Charles Constr. Servs., Inc., Slip Opinion No. 2018-Ohio-4057 (Oct. 9, 2018).