When something goes wrong during a construction project, the first thing most business owners and general contractors ask is, “Am I covered?”
Some commercial general liability (GCL) policies may not cover faulty workmanship or related defects. That’s why general contractors often purchase additional policies to provide added coverage or request special clauses, such as the products-completed operations-hazard (PCOH) clause, which covers damages “arising out of completed operations.”
A recent Ohio Supreme Court decision, however, has cast doubt on the degree of confidence that these special clauses can create and highlights the need for businesses to thoroughly review their policies with their insurers and legal counsel to ensure they are covered in any situation.
Smart Business spoke with Nicholas R. Oleski, an associate at McCarthy, Lebit, Crystal & Liffman Co., LPA, about ensuring your business is actually covered during a construction project.
What was the Ohio Supreme Court decision that impacts PCOH clauses?
In Ohio N. Univ. v. Charles Constr. Servs. Inc., Ohio Northern University filed a lawsuit against general contractor Charles Construction for water damage at its new hotel, claiming defective work by the contractor and its subcontractors. Charles Construction submitted a claim to its insurance company, believing that it was covered as a result of its PCOH clause. Charles Construction had paid an additional premium for the clause, which included terms that specifically applied to work performed by subcontractors.
The insurance company refused to pay the claim and asked the court to issue a ruling that it did not have to defend or indemnify Charles Construction under the CGL policy. The Supreme Court agreed the insurer did not have to indemnify the contractor based on a single definition contained within the policy. According to the court, the CGL policy, by its term, only was triggered by an ‘occurrence.’ The CGL policy defined an occurrence as ‘An accident, including continuous or repeated exposure to substantially the same general harmful conditions.’
Relying on one of its previous decisions, the court explained that an ‘accident’ involves a fortuity and faulty workmanship. According to the court, water damage resulting from the alleged defective work did not constitute a fortuity. The court went on to explain that ‘CGL policies are not intended to protect owners from ordinary ‘business risks’ that are normal, frequent or predictable consequences of doing business that the insured can manage.’ So, despite the fact that Charles Construction paid additional money for the PCOH clause to cover claims against its subcontractors, it still was not covered against the supposed faulty workmanship of its subcontractors.
What are the implications for businesses of the court’s decision?
The implications of this decision for the construction industry are far-reaching, as general contractors with CGL policies can expect that claims of faulty workmanship will not be covered. To ensure better protection, general contractors need to ask their insurers to explicitly include an endorsement that covers defective workmanship.
Such miniscule definitions should be carefully considered in all insurance policies, whether they are related to construction or not. Consider, for example, a typical cyber insurance policy. Many companies today purchase special riders that they believe will completely cover them in the event of a computer hack. Depending on the wording of the policy, however, the insurance company may only pay to fix the problem, but not cover the loss of income incurred while the computer system was down or the damage to the company’s relationships with its valued customers as a result of the hack.
How can businesses ensure they’re protected during construction?
When dealing with insurance, it’s never clear how a court will rule in a specific case. Definitions can be interpreted very differently, and outcomes could vary dramatically depending on the state where the case is being tried. You can help mitigate this uncertainty, however, by involving legal counsel in the review of pertinent insurance policies and analysis of other previous relevant cases.
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