On October 23, 2019, the Ohio House of Representatives introduced a bill (H.B. No. 380) that would amend Ohio’s Prompt Pay Act (ORC Section 4113.61) to provide general contractors with payment protection similar to that currently enjoyed by subcontractors under the Act. Specifically, the proposal would require project owners to pay contractors within 35 days
Steel and other construction material tariffs necessitate careful evaluation and allocation of project cost and schedule risks. For example, when steel costs increased suddenly based solely on presidential executive orders, the building trades and owners saw drastic increases in costs, shop drawing review times and delivery dates. In many instances, contract documents failed to account for such risks.
Another factor that can significantly increase the price of material, and even the market price for labor, include catastrophic weather events. When bad weather occurs, contractors may no longer be able to obtain the material at originally budgeted pricing, or secure necessary labor forces to perform the work. Labor and material shortages domino into project delays, potential liquidated damages and claims.
In the case of Waverly City School District Board of Education, et al. v. Triad AR, Inc, et al., the Fourth Appellate District Court found that recovery is not limited to the amount of damages claimed; rather, the owner is entitled to recover damages on each contract, apart from any recovery on the other separate and distinct contracts. This means that an owner may recover damages in excess of the total damages identified for each responsible subtrade. Upstream contractors should take care in their subcontracts to ensure that their total liability for the defective work of their subtrades – irrespective of apportioned responsibility – be covered under the subtrade’s indemnity obligations.
Ohio High Court’s October 2018 Ruling Denying Coverage for Defective Construction Work Confirms Need to Re-Evaluate and Revise Traditional Risk Transfer Mechanisms
Beware! On October 9, 2018, the Ohio Supreme Court issued a final ruling that, not surprisingly, will effectively eliminate meaningful insurance coverage for contractors, subcontractors, and owners for defective construction work. The most recent ruling reaffirms what experienced construction counsel cautioned for years; project participants cannot rely on comprehensive general liability (“CGL”) insurance coverage to remediate defective or non-conforming work. According to the Ohio Supreme Court, although defective construction work causes “property damage,” that damage is neither “accidental” nor “fortuitous” and, therefore, represents an “ordinary business risk” that members of the construction industry must manage without recourse to insurance proceeds. It does not matter that the cause of loss was defective work of a contractor or its downstream subcontractor. This decision is a significant, if not insurmountable, bar to insureds forcing insurers to defend defective work claims, pay for expert evaluations, or to fund settlements under standard coverage forms that have permeated the Ohio construction industry for decades. The Court held that, under the terms of these form insurance agreements, no downstream insurance coverage exists for damages arising from defective work of a subcontractor. Ohio Northern University v. Charles Construction Company, et al. (Ohio Supreme Court, October 9, 2018)
It is critical that industry participants understand the far-reaching and long-term effects of the Ohio Northern University decision and take prompt action to evaluate and mitigate risk or loss. The decision reaffirms and expands the Supreme Court’s 2012 ruling in Westfield Ins. Co. v. Custom Agri Sys., Inc. to the detriment of Ohio’s construction industry participants since it involved a contractor’s policy, and it denied coverage under standard “products completed operations” (“PCOC”) endorsements. For years, insurance agents and insureds’ assumed PCOC endorsements and related policy provisions covered losses arising after substantial completion to the extent the cause of loss was a subcontractor or other lower tier’s defective work. The October 2018 Supreme Court ruling will also impact available insurance coverage for work performed out of state if a contractor’s or subcontractor’s CGL policies are governed by Ohio law.
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.