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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.

Ohio Medicaid Starts Paying Pharmacists for COVID-19 Testing & Pilots Focus on Direct Care from Pharmacists

Two significant announcements were made by Ohio’s Department of Medicaid recently. Both announcements provide greater access to healthcare services for Medicaid beneficiaries in Ohio and by utilizing the expertise of pharmacists and providing reimbursement for their services related to COVID-19 testing.

Employer COVID Toolkit

As employees come back to work and employers operate “mid-COVID” in the “new normal,” employers must update their Employee Handbook and related employment policies. BMD has put together an Employer COVID Toolkit to supplement an employer’s existing Employee Handbook and policies to ensure compliance with the Department of Labor guidance, OSHA, FFCRA, the CARES Act and state law. Below is a description of policies and their purpose.

SBA Releases New Frequently Asked Question (No. 49) - Maturity Dates for PPP Loans

On June 25, 2020 the SBA released a new Frequently Asked Question (No. 49) concerning the maturity dates for PPP Loans as modified by the recently passed Paycheck Protection Program Flexibility Act. All PPP Loans received on or after June 5, 2020, will have a five-year maturity. Any PPP Loan received before June 5, 2020, has a two-year maturity, unless the borrower and lender mutually agree to extend the term of the loan to five years. Businesses should address the maturity issue with their SBA lender and discuss any available change to the loan maturity date.

Top 10 Signs that May Indicate Financial Distress

The business world has been turned upside down with COVID-19 and the financial disruption it has created. Once healthy businesses are taking protective measures to remain viable. The impact of this health and financial crisis has affected nearly all industries in some manner. Being aware of areas or issues where your company is vulnerable is critically important. We have identified ten signs to look for when evaluating whether your company has some degree of financial distress.

HHS Delays Quarterly Reporting for Provider Relief Funds

There is good news for providers that received either (1) General Distributions from the HHS Provider Relief Funds [link to my article], or (2) Targeted Distributions from the HHS Provider Relief Funds [link to Ashley’s article]. HHS reversed its stance requiring quarterly reports for providers that received Provider Relief Funds and PPP loan monies. The initial quarterly reports would have been due by July 10, 2020. However, on June 13, 2020, HHS delayed the quarterly reporting requirement.