Bad subcontractor work not an ‘accident’ – Ohio USA

Patrick Bracher, Norton Rose Fulbright

Ohio’s high court has held that damage from a subcontractor’s faulty work is not fortuitous in the context of a commercial general liability policy which covered an ‘occurrence’ meaning an ‘accident, including continuous or repeated exposure to substantially the same general harmful conditions’ causing property damage including physical injury to or destruction of tangible property.

The constructors built a new luxury hotel and conference centre with the help of subcontractors. After the work was completed the hotel suffered extensive water damage from hidden leaks caused by defective work and other serious structural defects were uncovered. The repair costs were estimated at $6 million for a $8 million project.

The water damage was ‘property damage’ but there was no ‘occurrence’ as defined. The faulty work was not fortuitous as was required by the plain and ordinary meaning of the language used in the policy.

The court refused to follow what was alleged to be a trend in the law to cover bad workmanship under commercial general liability policies. The courts in a number of states have found that general liability policies cover damage tied to subcontractors’ defective work. The Ohio court refused to follow any such trend. CGL policies, it said, 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.

South African courts will require a fortuitous occurrence according to principles of insurance and are unlikely to follow the trend in some of the US states to cover defective subcontractor work.

The case is Ohio Northern University v Charles Construction Services Inc.

First published by: Financial Institutions Legal Snapshot