On October 9, 2018, the Ohio Supreme Court ruled that general liability insurance purchased by a contractor does not cover the defective work of its subcontractors. As a result, even with additional subcontractor coverage, a commercial general liability (CGL) policy does not cover downstream defective work.

The case involved claims by an owner and contractor seeking insurance coverage for damages caused by defects in the work of certain subcontractors in connection with the construction of a hotel and conference center at Ohio Northern University in Ada, Ohio.  The contractor had secured the required insurance coverage for the project, including a CGL policy with “products-completed operations hazard” (PCOH) coverage. The PCOH covered damages “arising out of completed operations,” and included terms applicable to the work of subcontractors.

Reversing the Third Circuit Court of Appeals, the Supreme Court held that there was no coverage in this case because the policy covers an “occurrence,” which it defines as an “accident,” not faulty work. The Court reasoned that the purpose of a CGL policy is to protect business owners against the unintended risk of damage, not from “ordinary business risks.”

Yesterday’s opinion is in line with the Court’s 2012 ruling Westfield Ins. Co. v. Custom Agri Sys., Inc. in which the Court held that a contractor’s claim under a CGL policy for property damage caused by its own defective work is not an “occurrence” that is covered by a CGL policy.  The ruling yesterday extends the Court’s reasoning to damages caused by the defective work of a subcontractor.

The Court acknowledged that the Ohio General Assembly could change the law and require that any CGL policy sold in the state define “occurrence” to include property damage caused by faulty workmanship. Other states have made that very change.  But until that happens in Ohio, owners will face the argument that there is no coverage of contractors under a CGL policy for faulty work self-performed or performed by contractors.