Change in Ohio Law – Construction Insurance – Need for Revised Language in Construction Contracts to Cover Defective Subcontractor Work

Completed Operations Coverage Negated By Recent Court Decision.

A recent decision from the Ohio Supreme Court has eliminated insurance coverage in Ohio under the “Completed Operations” segment of Commercial General Liability (CGL) policies issued to construction contractors, leaving contractors and project owners vulnerable to repair costs and property damage costs stemming from defective work of subcontractors. These risks had, since 1986, been covered with the purchase of the standard Completed Ops. segment. Ohio owners thus need to take affirmative steps to fill the gaps created by the decision.

Case Details. 

The case involved Ohio Northern University (ONU), a small private university in Northeast Ohio.  In 2008, it hired Charles Construction to build an Inn on university property as a place where visiting alumni and dignitaries could stay while participating in on-campus events.

After substantial completion, water infiltration caused by the defective work of Charles Construction’s subcontractors was discovered to have damaged the wood and drywall structure of the Inn, to the point that the entire brick façade had to be removed and replaced and the structural elements re-built. 

ONU sought damages from Charles Construction. Charles turned to its insurance company, and brought claims against its subcontractors, alleging that the subcontractor’s defective work caused ONU’s property damage.  The insurance company provided a defense but denied coverage and sought declaratory judgment that it had no duty to defend or indemnify Charles.

The Ohio Supreme Court Used “Occurance” To Void Policy Provisions.

On October 9, 2018, the Ohio Supreme Court held that defective construction is not an “occurrence” triggering coverage under a CGL insurance policy even if the defective construction was performed by an insured’s subcontractor.  This decision voids the “Completed Ops.” segment that heretofore provided coverage for the defective work of subcontractors that causes damage to the project itself after substantial completion.  The decision did not explain why paying for this separate coverage would not be illusory if it didn’t cover anything. The Ohio Supreme Court recognizes that its decision leaves Ohio as the only state where coverage for this otherwise insurable risk has been (and remains) voided, but defers to the state legislature to fix the Court’s decision. A copy of the decision can be found at this link.

Because of this decision, contractors must obtain an endorsement, and project owners need to add language to standard construction contracts requiring contractors to obtain non-standard CGL policies or endorsements for projects in Ohio to replace the coverage eliminated by the Ohio Supreme Court.  Most insurers make such coverage readily available by endorsement for little or no additional cost, and it may even be added mid-project. 

The additional language to be added to construction contacts can be similar to the following: 

Contractor’s commercial general liability policies shall include “completed operations” segment to provide coverage for damage to the project itself arising after substantial completion and caused by the defective work of Subcontractors.  In all commercial general liability policies for projects located in the state of Ohio, Contractor shall obtain, by endorsement or otherwise, coverage that does not exclude defective work of subcontractors as an “occurrence,” and shall require all subcontractors to obtain similar insurance coverage.

Please contact Vorys attorneys Allen Rutz, Mitch Tobias, or Rick Grady if you would like to discuss this change in Ohio law or need assistance in how to effectively modify standard construction contracts to prevent your projects from being exposed. 

About the Authors:

Allen Rutz is a partner in the Vorys Columbus office practicing in construction law, architect/engineer professional liability, products liability, and he leads the firm’s drone and autonomous vehicle working group. He can be reached at 614.464.5644 or alrutz@vorys.com.

 Rick Grady is a partner in the Vorys Columbus office. He is a construction attorney who works on projects throughout the U.S. and internationally. He can be reached at 614.464.5455 or rwgrady@vorys.com.

Mitch Tobias is an associate in the Vorys Columbus office and a member of the litigation group. Mitch is a member of Vorys’ drone and autonomous vehicle working group, with a focus on the energy industry. He can be reached at 614.464.6214 or at matobias@vorys.com.