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| by Richard M. Garner | | January 5, 2012 |
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Construction Defect Damages and CGL Coverage
by Richard M. Garner
Commercial general liability (“CGL”) coverage is one of the most common forms of commercial insurance purchased by construction businesses. Across Ohio and the country, courts are divided on the issue of whether standardized CGL policies*1 provide liability coverage for damages sought by property owners for “defective construction” or “defective workmanship”
In their simplest forms, claims of “defective construction” or “defective workmanship” can be broadly divided into two categories: (1) those where the construction business injures existing property and the property owner sues for such injury *2; and (2) those where the construction business simply fails to deliver what was promised and the property owner sues to receive the benefit of its bargain --which typically consists of amounts claimed necessary to raise the quality of the work and materials to the level promised.
Courts universally hold that this first category will trigger the insuring agreement of a standard CGL policy although various exclusions may diminish or eliminate coverage for such damages.
Courts are sharply divided, however, with respect to the second category--with the majority of courts holding that where a construction business fails to deliver what it promised, the insuring agreement of a standard CGL policy is not triggered (regardless of whether exclusions would otherwise diminish or eliminate coverage) and a minority of courts holding the opposite *3.
Not surprisingly, the same split has occurred in Ohio. A majority of appellate districts holds that where a construction business fails to deliver what was promised, and the property owner sues to receive the benefit of its bargain, the standard CGL insuring agreement is not triggered *4. A minority of appellate districts disagrees and holds that such defective construction claims trigger the standard CGL insuring agreement *5. Yet other appellate districts have issued conflicting opinions on the subject *6. Consequently, it is not surprising that both state and federal courts in Ohio have recognized that the division is such that resolution by the Supreme Court of Ohio is appropriate *7.
On November 2, 2011, in Westfield Ins. Co. v. Custom Agri Systems, Case No. 2011-1486, the Supreme Court of Ohio agreed to answer two questions certified from the United States Court of Appeals for the Sixth Circuit (“Sixth Circuit”) that should help to bring clarity and consistency to Ohio insurance law with respect to this second category of construction defect claims:
(1) Are claims of defective construction/workmanship brought by a property owner claims for “property damage” caused by an “occurrence” under a commercial general liability policy?
(2) If such claims are considered “property damage” caused by an “occurrence,” does the contractual liability exclusion in the general liability policy preclude coverage for claims for defective construction/workmanship?
This is of no small moment. Construction-related industry in Ohio employs hundreds of thousands of people who work on projects worth tens of billions of dollars *8. Most, if not all, of these construction businesses carry one or more CGL policies that may be called upon to respond whenever a construction project doesn’t turn out as promised. Like Custom Agri Systems, such cases often include a multitude of parties with competing experts and theories that make litigation expensive and time-consuming. The present uncertainty in Ohio law only exacerbates the situation. Currently, there is no statewide controlling legal authority in Ohio on this issue and Ohio’s appellate courts are split on what damages, if any, are covered by standard CGL coverage. Consequently, a defective construction lawsuit filed in Canton may have a different outcome than one filed in Toledo for no other reason than geography. It should be axiomatic that geographic fortuity is not a desirable element of Ohio substantive law. It certainly complicates the handling of such claims by insurers. For insurers, legal ambiguity is always bad.
Davis & Young handled the insurance coverage litigation in Custom Agri Systems from the beginning and prevailed in the federal district court. From the earliest stages of the case, we developed and pursed a coverage resolution strategy that bypassed Ohio’s intermediate courts of appeals, shortened the resolution time by years and put the decision in the hands of jurists that could resolve the conflicts in the substantive law and hopefully end the resource draining ambiguity caused by such conflict. Our strategy also dramatically reduced the coverage litigation expenses for our client. It is this deliberate and coordinated approach that has made the difference in our success in the case thus far and why Davis & Young lawyers so often appear as counsel of record in “game changing” cases.
If you would like more information about Custom Agri Systems, Davis & Young’s insurance coverage or appellate practice groups or Davis & Young generally, please contact one of our attorneys in our offices in Cleveland, Akron or Youngstown.
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Footnotes:
*1 Most modern CGL policies are based upon standardized language developed decades ago by the predecessors to the Insurance Services Office (“ISO”). Stempel, J., Stempel on Insurance Contracts (2007), §14.01[A][2], pp 14-13 (Emphasis added). Variations on such policy language have been considered time and again by Ohio courts. See e.g. Cincinnati Ins. Co. v. Anders, 99 Ohio St.3d 156, 2003-Ohio-3048, at ¶¶29-35 (defining “occurrence” as “an accident . . . which results, during policy period, in . . . property damage”).
*2 Such claims are sometimes referred to as involving “collateral damages” or “consequential damages”. In the construction defect insurance context, “collateral damages” or “consequential damages” means “damages, losses or injuries to property other than [the insured’s] products”. GRE Ins. Grp v. Int’l EPDM Rubber Roofing Systems, Inc., 6th Dist. No. L-95-306, 1996 Ohio App. LEXIS 2665, at *32; United Fire & Cas. Co. v. Boulder Plaza Residential, LLC (D. Col. Feb. 1, 2010), Case No. 06-cv-00037-PAB-CBS, 2010 U.S. Dist. LEXIS 14257, at *17-20. This should not be confused with the more general use of the term “consequential damages” as being damages in excess of the parties’ contractual consideration on the basis that such damages were foreseeable. See eg. World Metals, Inc. v. AGA Gas, Inc. (9th Dist. 2001), 142 Ohio App.3d 283, 287-290, 755 N.E.2d 434.
*3 See e.g. Pursell Constr. Inc. v. Hawkeye-Security Ins. Co. (Iowa Sup. Ct. 1999), 596 N.W.2d 67, 70-72 (“The majority of courts that have considered this issue have concluded that a CGL policy does not provide coverage for claims against an insured for the repair of defective workmanship that damaged only the resulting work product”); Essex Ins. Co v. John Holder (2008), 372 Ark. 535, 261 S.W.3d 456, 459-460 (holding the same and citing examples of cases demonstrating the national split); Auto-Owners Ins. Co. v. Home Pride Cos., Inc. (2004), 268 Neb. 528, 684 N.W.2d 571, 575-579 (holding the same and citing examples of cases demonstrating the national split).
*4 First Appellate District, Fifth Appellate District, Ninth Appellate District and Twelfth Appellate District.
*5 Sixth Appellate District and Tenth Appellate District.
*6 Eighth Appellate District and Eleventh Appellate District.
*7 See e.g. The Cincinnati Ins. Co v. G.L.H., 6th Dist. No. E-07-053, 2008-Ohio-5028, at ¶¶26-28 (recognizing that “[a] conflict currently exists between Ohio appellate districts as to whether allegations of poor workmanship by an insured in construction of real property constitutes an ‘occurrence’ in policies with identical language” but declining to certify the conflict to this Court because of specific facts of case); Stiggers v. Erie Ins. Co., 8th Dist. No. 89781, 2008-Ohio-1702, at ¶¶36-37 (acknowledging split of authority on issue of whether defective workmanship constitutes “occurrence”); Westfield Ins. Co. v. R.L. Diorio Custom Homes, Inc., 187 Ohio App.3d 377, 2010-Ohio-1007, at ¶23 (acknowledging split of authority on issue of whether defective workmanship constitutes “occurrence”); Younglove Constr. Co. v. PSD Development LLC (N.D. Ohio 2010, 724 F.Supp.2d 847, 852 (acknowledging split of authority on issue of whether defective workmanship constitutes “occurrence”); Younglove Constr. LLC v. PSD Development, LLC (6th Cir. (Oh.) Aug. 29, 2011), No. 11-3213 (certifying question to this Court for answer).
*8 See http: //factfinder. census.gov/ servlet/ IBQTable?_ bm=y&-geo_id= 04000US39&-ds_name=EC0723A1&-_lang=en.
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