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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.

Governor DeWine Signs Bill Tolling Statutes of Limitations During COVID-19 Emergency Period

During his March 27, 2020 press conference on Ohio’s ongoing efforts to respond to COVID-19, Governor Mike DeWine officially signed House Bill 197 into law. HB 197, which passed the Ohio House and Senate with unanimous bipartisan support, contains important provisions affecting the legal rights of litigants whose claims may be subject to the statutes of limitations enacted under the Ohio Revised Code.

Is Insurance Available for Coronavirus Losses?

The shutdown of non-essential businesses in Ohio and other states, as well as the economic impacts caused by the coronavirus, are forcing businesses to evaluate all options to keep their doors open and their staff employed. Many businesses are asking whether their insurance policies provide for the recovery of lost business income and expenses due to the coronavirus.

Exempt Organizations: Form 990s Due May 15 Have Not Been Extended

Although the IRS has automatically postponed the filing and payment deadline from April 15, 2020 until July 15, 2020 for most taxpayer returns, the IRS notice specifically does not apply to any Federal informational return.

UPDATE: COVID-19 Considerations for the Construction Industry

The implications of COVID-19 for the construction industry are significant and rapidly evolving, since Governor Mike DeWine instructed Ohioans to “stay at home” via Order (the “Order”) effective March 23, 2020.

FFCRA Update: Implementation Date Accelerated from April 2 to April 1

The Families First Coronavirus Response Act (FFCRA) was signed into law on March 18, 2020, and provides several responses to address the ongoing coronavirus pandemic, including providing for free coronavirus testing, giving a boost to funding for state unemployment compensation (subject to states waiving work search requirements and the waiting week), and leave for employees affected by coronavirus through the Emergency Family and Medical Leave Expansion Act and the Emergency Paid Sick Leave Act. The FFCRA also provides refundable tax credits for employers providing the required paid family and sick leave to employees in connection with this public health emergency.