States are split as to whether faulty workmanship constitutes an “occurrence.” A majority holds that defective workmanship, standing alone, is not an “occurrence,” whereas the minority finds that faulty workmanship is an “occurrence.” Under the majority view, it’s an “occurrence” only if something other than the insured’s own work product sustains physical injury. Last week, Ohio officially joined the majority.
In Westfield Ins. Co. v. Custom Agri Sys., Inc., the Supreme Court of Ohio, answering a question certified by the Sixth Circuit, determined 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.
The coverage dispute in Westfield arose when a general contractor brought suit for payment against the owner of the plant who had contracted with the general contractor for the construction of a feed manufacturing plant. The plant owner then filed a counterclaim for defective construction of a steel bin that had been built by a subcontractor. The general contractor, in turn, brought suit against the subcontractor, alleging defective construction and consequential damages resulting from the defective construction. The subcontractor tendered its defense to its general liability insurer, Westfield. Westfield intervened in order to obtain a declaratory judgment declaring that it had no duty to defend under the terms of its CGL policy with the subcontractor. Westfield argued that none of the “property damage” was caused by an “occurrence” and therefore, none of the claims were covered under the CGL policy.
The coverage litigation proceeded to federal court and was appealed to the Sixth Circuit, which certified two questions to the Supreme Court of Ohio: (1) whether defective construction or workmanship constitutes an “occurrence” within the meaning of a CGL policy, and (2) if such claims are considered “property damage” caused by an “occurrence,” does the contractual liability exclusion in the CGL policy preclude coverage for claims for defective construction or workmanship. (The Court’s holding on the first certified question rendered the second certified question moot.) The Court cited a leading insurance law journal and decisions of Ohio’s appellate courts to support its 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.
The court went on to examine case law from other states to inform its decision, noting that “it is a widely accepted principle that such claims are not covered by CGL policies, [but] our inquiry cannot and must not end there.” The court stated that it was required to determine whether the alleged defective construction and workmanship constitutes “property damage” caused by an “occurrence.”
On this issue, the court’s analysis began by examining the CGL’s definition of “occurrence” which is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The court explained that although “accident” is not defined in the policy, the “fortuity principle” is inherent in the plain meaning of “accident,” and concluded:
[C]laims 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. The majority view is that claims of defective construction or workmanship are not claims for “property damage” caused by an “occurrence” under a CGL policy.
The consequences of decisions like Westfield are far-reaching, and courts across the country continue to grapple with whether a construction defect is an “occurrence” under a CGL policy. Stay tuned for developments in this continually changing area.