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Insurance Coverage For Defective Work Differs Across States

Posted by Jeffrey Forbes on Jan 3, 2019 9:00:00 AM

Insurance Coverage For Defective Work Differs Across State Lines

Commercial general liability policies provide insurance on a per occurrence basis.  What constitutes an occurrence, though, is an area of significant debate.  This is an issue that constantly arises in construction cases, especially construction defect.  The commercial general liability standard language defines an occurrence as an “accident . . .”.  Yet courts have divided on whether faulty workmanship in the course of construction constitutes an “accident” and therefore an “occurrence” triggering coverage under a commercial general liability policy. 

Many Points Of View Are In The Mix

States generally fall into one of several camps on this issue. 

  • One camp holds that defective work is an occurrence provided that the faulty work is unexpected and unintended by the insured.  A number of states have overturned precedent recently to join this camp. 
  • Another camp holds that while defective work does not constitute an occurrence, resulting damage to other work or to third party property does.  This reading severely limits the application of the commercial general liability for general contractors, as the entire building constitutes their work or their property, but can be useful to subcontractors who damage the work of others by accident.   
  • Finally, some states maintain that faulty workmanship never constitutes an occurrence.

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Fewer States Holding That Faulty Workmanship Is An Occurrence

While the number of states falling into that last camp has diminished in recent years, the Ohio Supreme Court recently took the opportunity to underline their commitment to this approach.  Ohio N. Univ. v. Charles Constr. Servs., Inc. involved a lawsuit over the construction of a new $8 million hotel on a university campus.  After the project’s completion, the university discovered extensive water damage and structural defects that cost $6 million to repair.  The university sued their contractor, who in turn sued their subcontractors and submitted the claim to their insurance, who took the contractor to court separately for a declaratory judgment. 

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Coverage Denied For Faulty Workmanship

The Ohio Supreme Court denied the claim for insurance coverage.  Regardless of who performed the faulty work or which property was damaged, the Court stated that faulty workmanship was not “fortuitous” and was an ordinary business risk.  Therefore it was a matter of contract between the contractor and the purchaser, not a matter of insurance between the contractor and their insurance company.   The Court even acknowledged that its ruling stood in contrast to many other courts in different states that had chosen to take a different approach, but held fast to its principles

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Be Sure To Get The Right Language For YOUR Business Based On YOUR Needs (And Location)

Cases like these are a good reminder that even standardized insurance coverage can vary from state to state due to the different ways that state legislators and state courts act.  A full understanding of your company’s exposures needs to take this into account.  What’s covered by your CGL policy in Pennsylvania may not cover you to the same extent in Ohio. 

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Topics: For Your Business, Insurance Coverage, Small Business, Risks For Businesses, Contracts