On October 9th, 2018, the Ohio Supreme Court issued a Decision in Ohio N. Univ. v. Charles Constr. Servs., Inc., that exposes contractors to significant potential uninsured claims. To the extent any corrective action is taken following this Decision, it could be some time in the making. If and when any corrective action occurs, it will likely be prospective and may not apply to completed projects. This leaves general contractors, subcontractors, project owners, and lenders exposed to uninsured (and potentially uninsurable at the moment) liability.
For decades, insurers and insureds alike (as well as project owners) understood the risks and liabilities associated with construction projects and what insurance coverage was available. Although most Commercial General Liability policies exclude “your work” (faulty workmanship of the insured), the exclusion includes an exception for work that is completed on the insured’s behalf by a subcontractor. Based on the exception to the exclusion for subcontractors, project owners, general contractors, subcontractors, and insurance companies provided certain defined insurance coverage for the poor workmanship of a subcontractor. While not all liability policies contained an exception for subcontractor’s poor workmanship, many did.
Contrary to established precedent in a vast majority of federal and state courts and cited treatises, the Supreme Court held that the exception to the exclusion is immaterial because property damage is only covered if it is caused by an “occurrence,” which is defined as “an accident” and is “fortuitous.” According to the Court, poor workmanship is neither an accident nor fortuitous so it cannot be covered in the first place; thus, the exception to the exclusion is effectively a nullity. Consequently, poor workmanship of a subcontractor is not a covered loss.
The potential solution, at this time, appears to be twofold. First, insurance companies can re-draft their policies to expressly include poor workmanship of a sub in their definition of “occurrence” or include endorsements that provide such coverage. Presumably, this will include an associated adjustment to the premiums paid by the insured. Second, the Ohio Legislature could enact a statute that requires insurers to include poor workmanship of a subcontractor in the definition of “occurrence”. This would then require insurance policies be re-written and premiums adjusted accordingly. However, neither of those solutions is likely to be imminent.
This exposure is likely to impact project owners as well. If a general contractor is not insured for certain risks, then it may eventually create an exposure to a project owner. Lenders who provide financing may want to know how the risk is being addressed by the parties as well. To that end, construction contracts may need to be reviewed and amended to account for the new potential risk exposure. Project costs may increase to account for increased risk of liability for which insurance coverage is no longer available. Overall, this Decision may have a significant impact across the construction industry.
Matt Brown is a Partner in the litigation group at Carlile Patchen & Murphy LLP and is an Ohio State Bar Association (OSBA) Certified Specialist in insurance coverage law.
To schedule a conference with Matt to discuss your insurance coverage concerns in more detail, call 614-228-6135.