Am I Covered?
Understanding your insurance policy’s coverage’s before construction
By Nicholas R. Oleski
(Updated, August 27, 2019)
When something goes wrong during a construction project, the first thing most project owners and general contractors ask is “Am I covered?”
Construction insurance coverage is generally meant to protect parties involved from unexpected losses due to fire, theft, natural disasters, etc. With increasing media coverage of weather events including tornadoes and floods, a lot of attention has been focused on coverage for such disasters.
However, a much more common and controversial insurance issue results from what can be called human error, which usually manifests itself in the form of faulty workmanship or defects in materials. Surprising to many people is the fact that most commercial general liability (CGL) policies do 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 insurance agent/broker and legal counsel to ensure they are covered in any situation.
In the recent case (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 luxury hotel and conference center claiming defective work by the general 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 GC 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 a previous well-known decision, the Court explained that an “accident” involves a fortuity. Faulty workmanship, according to the Court, 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.
The implications of this decision for the construction industry may be far-reaching, as general contractors with CGL policies like the one in Ohio N. Univ. v. Charles Constr. Servs., Inc. can expect that claims of faulty workmanship will not be covered. To ensure better protection, general contractors need to ask their agents/brokers to explicitly include an endorsement or separate policy that covers defective workmanship.
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. Due to the increased incidence of hacking, 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.
When dealing with insurance, there is never 100% certainty of how a court will rule in a specific case. Definitions can be interpreted differently and outcomes can vary dramatically depending on the state where the case is decided. 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.
Nick is an attorney in the litigation group of Cleveland-based McCarthy, Lebit, Crystal & Liffman.