Federal Court in Maryland Holds Subcontractor Waived Right to Bring Labor Inefficiency Claim Despite Voicing ‘Expression[s] of Frustration’ and ‘General Complaints’ of Mismanagement Throughout Project
Hagen Constr. Inc. v. Whiting-Turner Contracting Co., No. JKB-18-1201, 2019 BL 36862 (D. Md. Feb. 04, 2019)
This case arose out of the construction of an inn and conference center at Ohio Northern University (“ONU”). After completion of the project, ONU discovered water damage and structural defects in the work and filed suit for breach of contract against its general contractor, Charles Construction Services, Inc. (“Charles”). Charles, in turn, sought defense and indemnity from its commercial general liability insurer, Cincinnati Insurance Company (“CIC”). As required by ONU, Charles’s policy contained a “products-completed operations-hazard” (“PCOH”) clause and terms specifically related to work performed by subcontractors. Under Charles’ policy, the insurance covered “property damage” only if it was caused by an “occurrence,” defined as “[a]n accident, including continuous or repeated exposure to substantially the same general harmful conditions.” “Accident,” however, was not defined. CIC intervened in ONU’s suit, seeking a declaratory judgment that it was not required to defend or indemnify Charles.
The trial court granted CIC summary judgment, holding that CIC had no duty to indemnify or defend Charles. The trial court based its holding on Westfield Inc. Co. v. Custom Agri Sys., Inc., 979 N.E.2d 269, a 2012 decision in which the Ohio Supreme Court concluded that claims for faulty workmanship are not fortuitous, and therefore, not claims for “property damage” caused by an “occurrence” covered by a CGL policy.
Charles and ONU appealed the trial court’s decision and the Court of Appeals, while acknowledging Custom Agri as good law, concluded that the opinion did not address PCOH or subcontractor-specific CGL-policy terms. The court held that the CGL policy language was ambiguous as to coverage for property damage caused by a subcontractor’s defective work, construed the language against the insurer, and reversed the judgment of the trial court.
The Supreme Court reversed the judgment of the Court of Appeals and reinstated the judgment of the trial court. While Charles and ONU, along with several amici curiae, argued that PCOH clauses in CGL policies provide coverage for defects discovered in subcontractor work—and cited several recent opinions by courts across the country holding that the definition of “occurrence” encompasses damage to the insured’s own work arising from faulty subcontractor workmanship—the Supreme Court concluded that, “[t]o resolve this matter, [it] need only apply the holding of Custom Agri.” According to the CGL policy’s terms and Custom Agri’s interpretation of those terms, only “an occurrence” could trigger coverage for property damage. The Court explained that, as held in Custom Agri, faulty work, however, does not meet the definition of an “occurrence” because it is not based on a fortuity. Therefore, claims for defective work are not claims for “property damage” caused by an “occurrence” under a CGL policy. Moreover, the Court concluded that because there was no “occurrence,” the PCOH and provisions relating to subcontractor work had no effect, regardless of the additional money Charles paid for the additional coverage. CIC, therefore, was not required to defend Charles against ONU’s lawsuit or indemnify Charles against any damages.
While the Supreme Court recognized that its decision was contrary to the recent trend in other jurisdictions, it explained that it was bound by the plain language of Charles’ policy and its previous interpretations of that language. The Court therefore invited the Ohio General Assembly, if it were so inclined, to enact legislation redefining “occurrence” to include property damage resulting from faulty workmanship.