Introducing Construction Defect Coverage Quarterly, and an Analysis of “Occurrence” in Defect Coverage Actions
We are pleased to introduce the inaugural issue of Sedgwick’s Construction Defect Coverage Quarterly. In our first issue, we discuss the definition of an “occurrence” in the construction defect action context, and analyze a recent Colorado case which applied the “business risk exclusion” to preclude coverage.
As we note in the newsletter, one of the largest issues litigated in today’s construction defect coverage actions is whether defective construction constitutes an “occurrence” (and, therefore, may be covered) under liability insurance policies. In addition to the analysis in the newsletter, we thought our readers would be interested in this case from the Ohio Supreme Court which held that faulty construction work does not qualify as an “occurrence” within the meaning of a general liability policy.
Through its recent opinion in Westfield Ins. Co. v. Custom Agri Systems, Inc., 2012 WL 4944305 (Ohio Oct. 16, 2012) (“Westfield”), the Ohio Supreme Court joined the majority of states in holding that faulty construction work does not qualify as an “occurrence” within the meaning of a general liability policy.
In Westfield, Younglove Construction (“Younglove”) contracted with PSD Development (“PSD”) to construct a feed manufacturing plant. After PSD withheld payment, Younglove sued PSD for breach of contract in Ohio federal court. In its answer, PSD alleged that one of Younglove’s subcontractors, Custom Agri Systems, Inc. (“Custom”), defectively constructed a steel grain bin, but did not allege that Custom’s defective construction work damaged PSD’s other property. Younglove then sued Custom for contribution and indemnity, and Custom sought a defense and indemnity from its general liability insurer, Westfield Insurance Company (“Westfield”). Westfield intervened in the action, seeking a declaration it was not obligated to provide coverage to Custom because Younglove’s claim against Custom did not seek damages arising out of “property damage” caused by an “occurrence.” Westfield and Custom cross-moved for summary judgment on the issue.
In deciding the motions, the court acknowledged that Ohio law did not address whether defective construction work qualifies as an “occurrence” within the meaning of a liability policy. Rather than decide the issue, however, the court found that a contractual liability exclusion in Westfield’s policy precluded coverage and granted summary judgment to Westfield. Custom appealed to the Sixth Circuit, and Westfield filed an unopposed motion to certify two questions of state law to the Ohio Supreme Court: whether a property owner’s claims of defective construction allege “property damage” caused by an “occurrence” under a commercial general liability policy, and, if so, whether contractual liability exclusions nevertheless preclude coverage for such claims. The Sixth Circuit granted Westfield’s motion, and the Ohio Supreme Court accepted certification.
Addressing only the first question because the court believed it was dispositive, the Ohio Supreme Court held that defective construction does not constitute an occurrence. The court reasoned that general liability policies are “not intended to protect business owners against every risk of operating a business,” nor are they “intended to insure the risks of an insured causing damage to the insured’s own work.” The court also looked at court decisions in other jurisdiction, and found the majority view is that claims of defective construction are not claims for “property damage” caused by an “occurrence” within the meaning of general liability policies. The court then analyzed whether Custom’s defective construction of the grain bin was an “occurrence,” noting the policy defined “occurrence” as an “accident including continuous or repeated exposure to substantially the same general harmful conditions.” Although the policy did not define “accident,” the court noted that the term has an inherent “fortuity principle” under which losses must be “unexpected, as well as unintended,” and concluded that Custom’s defective work on the steel grain bin was not an “occurrence.”