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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.

Investment Training for the Second and Third Generations

Consider this scenario. Mom and Dad started the business from the ground up. Over the decades it has expanded into a money-making machine. They are able to sell the business and it results in a multimillion-dollar payday for their labors. The excess money has allowed Mom and Dad to invest with various financial advising firms, several fund management groups, and directly with new startups and joint ventures. Their experience has made them savvy investors, with a detailed understanding of how much to invest, when, and where. They cannot justify formation of a full family office with dedicated investors to manage the funds, but Mom and Dad have set up a trust fund for the children to allow these investments to continue to grow over the years. Eventually, Mom and Dad pass. Their children enjoy the fruits of their labors, and, by the time the grandchildren are adults, Mom and Dad's savvy investments are gone.

Provider Relief Funds – Continued Confusion Regarding Reporting Requirements and Lost Revenues

In Fall 2020, HHS issued multiple rounds of guidance and FAQs regarding the reporting requirements for the Provider Relief Funds, the most recently published notice being November 2, 2020 and December 11, 2020. Specifically, the reporting portal for the use of the funds in 2020 was scheduled to open on January 15, 2021. Although there was much speculation as to whether this would occur. And, as of the date of this article, the portal was not opened.

Ohio S.B. 310 Loosens Practice Barrier for Advanced Practice Providers

S.B. 310, signed by Ohio Governor DeWine and effective from December 29, 2020 until May 1, 2021, provides flexibility regarding the regulatorily mandated supervision and collaboration agreements for physician assistants, certified nurse-midwives, clinical nurse specialists and certified nurse practitioners working in a hospital or other health care facility. Originally drafted as a bill to distribute federal COVID funding to local subdivisions, the healthcare related provisions were added to help relieve some of the stresses hospitals and other healthcare facilities are facing during the COVID-19 pandemic.

HHS Issues Opinion Regarding Illegal Attempts by Drug Manufacturers to Deny 340B Discounts under Contract Pharmacy Arrangements

The federal 340B discount drug program is a safety net for many federally qualified health centers, disproportionate share hospitals, and other covered entities. This program allows these providers to obtain discount pricing on drugs which in turn allows the providers to better serve their patient populations and provide their patients with access to vital health care services. Over the years, the 340B program has undergone intense scrutiny, particularly by drug manufacturers who are required by federal law to provide the discounted pricing.

S.B. 263 Protects 340B Covered Entities from Predatory Practices in Ohio

Just before the end of calendar year 2020 and at the end of its two-year legislative session, the Ohio General Assembly passed Senate Bill 263, which prohibits insurance companies and pharmacy benefit managers (“PBMs”) from imposing on 340B Covered Entities discriminatory pricing and other contract terms. This is a win for safety net providers and the people they serve, as 340B savings are crucial to their ability to provide high quality, affordable programs and services to patients.