Defective Workmanship Claims Not Covered by General Commercial Liability Policy Coverage for ‘Property Damage Caused by an Occurrence’
The Supreme Court of Ohio ruled today that claims brought by a property owner against a contractor for alleged defective construction or workmanship are not claims insured under the provision in a commercial general liability (CGL) policy that provides coverage for “property damage” caused by a covered “occurrence.”
The 6-1 decision, authored by Chief Justice Maureen O’Connor, was in response to a certified question of state law submitted to the court by the U.S. Sixth Circuit Court of Appeals.
The case involved a dispute between the Westfield Insurance Company and a contractor, Custom Agri Systems, which purchased a (CGL) policy from Westfield.
After working as a subcontractor on the construction of a feed-manufacturing plant in Sandusky, Custom became involved in a federal lawsuit filed by the general contractor against the plant owner when the owner withheld payment for the project based on alleged defective construction and workmanship. The owner filed counterclaims against the general contractor. One of those claims asserted that a steel grain bin constructed by Custom that had been installed in the plant was defective, and that the owner had suffered financial losses arising from its loss of use of the defective bin. The general contractor filed a third-party complaint against Custom seeking participation and indemnity (help with legal defense and contribution by Custom to any damage award the court might make to the owner based on its counterclaims).
Custom filed a claim under its CGL policy with Westfield asking the insurance company to provide legal defense and indemnify Custom for potential damages that might be awarded against it in the lawsuit. Westfield sought a judgment by the district court declaring that Westfield had no duty to defend or indemnify Custom under its CGL policy, because that policy did not provide coverage for claims against a policyholder based on defective workmanship. Custom opposed Westfield’s motion, arguing that the losses claimed by the plant owner because of the defective bin were insured under a provision in Westfield’s policy that covered “property damage caused by an occurrence.” Both parties filed motions for summary judgment.
Finding that there were no state court decisions that analyzed “property damage” language in a CGL policy in the context of a defective construction claim, the district court assumed that Custom’s policy covered defective construction, and went on to find that an exclusion in the Westfield policy for claims arising from contract-based liability removed such claims from coverage. Based on that finding, the district court granted summary judgment in favor of Westfield.
Custom appealed the district court’s ruling to the U.S. Sixth Circuit. In the absence of any controlling state court decisions addressing the legal question at issue, the court of appeals stayed its proceedings and asked the Supreme Court of Ohio to answer two certified questions of state law: (1) Are claims of defective construction/workmanship brought by a property owner claims for “property damage” caused by an “occurrence” under a commercial general liability policy? (2) If such claims are considered “property damage” caused by an “occurrence,” does the contractual liability exclusion in the commercial general liability policy preclude coverage for claims for defective construction/workmanship?
Writing for the majority in today’s decision, Chief Justice O’Connor cited a leading insurance law journal and decisions of Ohio’s First and Eleventh District Courts of Appeals as supporting the proposition that: “CGL policies are not intended to protect business owners against every risk of operating a business. In particular, [these] policies ... are not intended to insure ‘business risks.’ ... Courts generally conclude that the policies are intended to insure the risks of an insured causing damage to other persons and their property, but that the policies are not intended to insure the risks of an insured causing damage to the insured’s own work. ... In other words, the policies do not insure an insured’s work itself; rather, the policies generally insure consequential risks that stem from the insured’s work.”
“Here, all of the claims against which Westfield is being asked to defend and indemnify Custom relate to Custom’s work itself, i.e., the alleged defective construction of and workmanship on the steel grain bin. Although it is a widely accepted principle that such claims are not covered by CGL policies, our inquiry cannot and must not end there. ... Specifically, we must decide whether Custom’s alleged defective construction of and workmanship on the steel grain bin constitute property damage caused by an ‘occurrence.’
“In the CGL policy here, the word ‘occurrence’ is defined as ‘an accident, including continuous or repeated exposure to substantially the same general harmful conditions.’ The word ‘accident,’ however, is not defined in the CGL policy. Therefore, ‘accident’ must be given its “natural and commonly accepted meaning. ... We have defined ‘accidental’ as ‘unexpected, as well as unintended.’ ... the Eleventh District has held: ‘Insurance coverage is bottomed on the concept of fortuity. Applying this rule in the construction context, truly accidental property damage generally is covered because such claims and risks fit within the statistical abstract. Conversely, faulty workmanship claims generally are not covered, except for their consequential damages, because they are not fortuitous. In short, contractors’ “business risks” are not covered by insurance, but derivative damages are.’”
“We agree that claims for faulty workmanship, such as the one in the present case, are not fortuitous in the context of a CGL policy like the one here. In keeping with the spirit of fortuity that is fundamental to insurance coverage, we hold that the CGL policy does not provide coverage to Custom for its alleged defective construction of and workmanship on the steel grain bin. Our holding is consistent with the majority of Ohio courts that have denied coverage for this type of claim.”
“We answer the first certified state-law question in the negative and hold that claims of defective construction or workmanship brought by a property owner are not claims for ‘property damage’ caused by an ‘occurrence’ under a commercial general liability policy. We do not reach the second certified state-law question, as it is unnecessary to do so.”
Chief Justice O’Connor’s opinion was joined by Justices Evelyn Lundberg Stratton, Judith Ann Lanzinger, Robert R. Cupp and Yvette McGee Brown. Justice Terrence O’Donnell concurred in judgment only.
Justice Paul E. Pfeifer dissented, stating that in his view the court could and should have limited its decision to answering the second and narrower certified question posed by the Sixth Circuit, by determining whether any coverage for the defective construction claims asserted against Custom, if such coverage existed, would be rendered void by a separate policy exclusion for contract-based liability claims.
By answering the first question instead, Pfeifer wrote, “(t)he majority holding is too broad for the facts of this case. Determining that defective workmanship cannot result in a covered occurrence under a CGL policy forecloses too many other potential cases. ... Under the policy at issue, the insurance covers ‘“property damage” ... caused by an “occurrence” that takes place in the “coverage territory.”’ The policy defines an ‘occurrence’ as ‘an accident, including continuous or repeated exposure to substantially the same general harmful conditions.’ The key question is whether defective workmanship can be considered accidental. Given this court’s definition of ‘accidental,’ I would hold that the initial grant of coverage would apply in certain instances of defective workmanship, those in which the damage was not intentional.”
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2011-1486. Westfield Ins. Co. v. Custom Agri Sys., Inc., Slip Opinion No. 2012-Ohio-4712.
Certified Questions of State Law, United States Court of Appeals for the Sixth Circuit, No. 11-3213. Certified questions answered. See opinion.
O’Connor, C.J., and Lundberg Stratton, Lanzinger, Cupp, and McGee Brown, JJ., concur.
O’Donnell, J., concurs in judgment only.
Pfeifer, J., dissents.
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