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CLIENT ALERT: Ohio Supreme Court Rules that a Subcontractor's Construction Defects are Not a Covered "Occurrence" Under a CGL Policy

Although a growing number of states have held that CGL policies provide coverage for damages caused by the defective work of subcontractors, the Ohio Supreme Court has refused to join the national trend. In Ohio N. Univ. v. Charles Constr. Servs., Inc., 2018-Ohio-4057, the Ohio Supreme Court recently ruled that a subcontractor’s faulty workmanship is not a covered “occurrence” under a typical CGL policy.

Defective workmanship claims by contractors are frequently challenged by insurers on the grounds that the cost of repairs to defective work is not “property damage” resulting from a covered “occurrence.” Ohio construction companies who relied on their commercial general liability (CGL) policies to cover claims of defective workmanship were forced to reevaluate their exposure after the Ohio Supreme Court’s 2012 decision in Westfield Insurance Company v. Custom Agri Systems, Inc., 133 Ohio St.3d 476, 2012-Ohio-4712. Westfield presented the question of whether claims of defective construction and workmanship are covered claims for “property damage” caused by an “occurrence” under a CGL policy. Responding in the negative, the Ohio Supreme Court held that a CGL policy does not provide coverage to a contractor for its alleged defective workmanship on a project when the underlying defect giving rise to the damages in question is not accidental. An important concept underscored by the Court’s opinion in Westfield was that a CGL policy does not insure a contractor’s work itself; rather, it only covers the consequential risks that stem from that work. While a CGL may still cover these consequential risks, Westfield clarified that covered risks must result from an accidental “occurrence” and not from defective construction or workmanship that is within a contractor’s control. 

In Ohio N. Univ. v. Charles Constr. Servs, Inc., 2017-Ohio-258, the Third Appellate District reversed and remanded a judgment of a trial court which had relied on Westfield to deny coverage for defective workmanship performed by a subcontractor. The Court looked to specific exclusionary language to analyze the policy as a whole and disagreed with the insurer’s position that Westfield stood “for the expansive proposition that all claims for defective workmanship, regardless of who performed it, are barred from coverage under a CGL Policy because such claims can never constitute an ‘occurrence.’”  The Court proceeded to analyze the entire policy, including the various coverage exclusions, to determine if any applied to eliminate coverage for an “occurrence” of defective work. The Court found that the “Your Work” exclusion expressly precluded coverage for “property damage” to work or operations performed by a contractor or on the contractor’s behalf. However, although the “Your Work” exclusion appeared to exclude coverage for all  defective workmanship on its face, the Court noted that the exclusion contained an exception stating that the exclusion would not apply if the damages arose out of work performed on the contractor’s behalf by a subcontractor. Therefore, the Third Appellate District reasoned that this “subcontractor exception” to the “Your Work” exclusion could be applied to provide coverage under a CGL policy for the cost of repairs to defective work performed by a subcontractor.

The Ohio Supreme Court has now rejected this analysis by the Third Appellate District and reaffirmed its prior holding in Westfield that defective work does not constitute an “occurrence” under a CGL policy. This is true now even where policy language, such as the “subcontractor exception” to the “Your Work” exclusion, may appear to apply to the cost of repairs to defective work performed by a subcontractor.

Contractors should consult experienced legal counsel to assess their exposure and to develop appropriate risk management strategies to address gaps in their insurance coverage.  If you have any questions about this, or other matters affecting your business, do not hesitate to contact Martin Pangrace, Partner in BMD's Construction Group at (216) 658-2324 or mjpangrace@bmdllc.com.

CLIENT ALERT: Construction Law Update: Communication is Key! And Other Lessons Learned From A Recent Public Project Court Decision

In a recent decision, the Ohio Court of Claims entered a $2.2 million judgment in favor of the general trades contractor, and against a public university, in connection with an on-campus renovation project. Mid American Construction, LLC v. Univ. of Akron, Ct. of Cl. No. 2016-00685JD, 2018-Ohio-4513.

CLIENT ALERT: Ohio Incentivizes Cybersecurity Measures

On November 2, 2018, Ohio’s Data Protection Act (“DPA”) went into effect. The DPA incentivizes Ohio businesses to proactively address cybersecurity and data protection by providing an affirmative defense/safe harbor for claims related to data breach. However, the safe harbor is only applicable if the organization can prove “reasonable compliance” to the DPA.

CLIENT ALERT: Update on Discrimination

The “#metoo” presence and the recent Kavanaugh confirmation hearings have brought sexual discrimination issues to the forefront of the American mind. Always an incendiary and confusing topic, it also includes various permutations of issues involving sex, sex stereotyping, sexual orientation, and transgender situations.

CLIENT ALERT: Taxpayer Passport Application will be Denied Due to Unpaid Taxes

In late 2015, Congress passed The Fixing America’s Surface Transportation Act (FAST) into law. This law allows the IRS and State Department to refuse to issue a Passport if the taxpayer has a seriously delinquent tax debt. The law also permits the IRS and State Department to revoke a taxpayer’s Passport for these same delinquent tax debts. To be considered a seriously delinquent tax debt, the tax debt must total more than $51,000.

CLIENT ALERT: New Opportunity Zone Incentives Promise to Spur Economic Development

Created as part of the recently passed Tax Cuts and Jobs Act, “Opportunity Zones” are designed to encourage long-term investments in underserved communities. By offering tax benefits to private investors who choose to invest their capital at the nexus of need and opportunity, the program supports a broad array of investments and offers opportunity for creative problem-solving strategies to address community needs. The program offers investors tiered tax benefits depending on the term of the investment, including a temporary deferral and partial reduction of unrealized capital gains, as well as the potential to exclude all future appreciation on the investment. The program is designed to tap into the estimated $6T+ of unrealized capital gains held by U.S. individuals and companies by incentivizing investors to re-invest that capital in low-income communities to spur economic development and job creation.