Completed-Operations Coverage: What Is Included and Excluded from Your Commercial General Liability Policy?

January 31, 2017Articles

In 2008, Ohio Northern University (ONU) entered into a contract with Charles Construction Services, Inc. (CCS) for the construction of The Inn, a new luxury hotel and conference center on ONU’s Campus, consisting of 57,000 square feet of space, including guest rooms, meeting rooms, kitchen, laundry, spa, front desk lobby, office area and support areas. After construction was complete, ONU discovered damage to the Inn caused by water intrusion and moisture in The Inn’s wall coverings, dry wall, insulation and exterior walls.1 Remediation of this damage led to the discovery of additional structural defects.2 ONU subsequently brought a claim against CCS in 2012 seeking damages relating to the deficient construction services. CCS then brought third-party claims against many of its subcontractors that performed the work, which resulted in the alleged property damage.

CCS’s insurer, Cincinnati Insurance Company (CIC), intervened in the lawsuit and filed a motion for summary judgment, asking the Hancock County Court of Common Pleas3 to dismiss it from its obligation to defend CCS, relying upon the Ohio Supreme Court’s precedent from Westfield Ins. Co. v. Custom Agri Systems, Inc.4 In Westfield Ins., the Supreme Court of Ohio held “that claims of defective construction or workmanship brought by a property owner are not claims for ‘property damage’ caused by an ‘occurrence’ under a commercial general liability policy.”5

“Courts generally conclude that commercial general liability policies are intended to insure the risks of an insured causing damage to other persons and their property, but that the policies are not intended to insure the risks of an insured causing damage to the insured’s own work . . . . In other words, the policies do not insure an insured’s work itself; rather, the policies generally insure consequential risks that stem from the insured’s work.”6

The Hancock County Court of Common Pleas granted CIC’s motion on September 16, 20157, dismissing CIC from its obligation to defend CCS. The dismissal relied completely upon the holding in Westfield Ins. by finding that CCS’s subcontractors’ defective work was not consequential property damage that amounted to an “occurrence” under CIC’s commercial general liability policy. Instead, it was damage to the insured’s own work—whether that work was performed by the contractor or its subcontractors did not matter.

On appeal, ONU and CCS each challenged the trial court’s reliance on the decision in Westfield Ins. by drawing a distinction between the facts of the Westfield Ins. case and the damages alleged by ONU. ONU’s motion in opposition explained that its claims against CCS involved damages arising after the conclusion of construction, not during the project (as was the case in Westfield Ins.) and the claims were for property damage resulting from the defective workmanship of CCS’s subcontractors, not the defective work itself. Further, both “ONU and CCS argued that CCS purchased additional ‘products-completed operations’ coverage as an add-on to its commercial general liability policy, which expressly contemplates and provides coverage for ONU’s claims against CCS.”8

On Monday, January 23, 2017, the Ohio Second District Court of Appeals reversed and remanded the judgment of the Hancock County Court of Common Pleas.9 The Court of Appeals analyzed the provision of CCS’s policy relating to products-completed operations. The Court agreed with ONU and CCS in that this provision specifically contemplated coverage for property damage arising after the completion of the project. However, the products-completed operations coverage in CCS’s policy included an exclusion from coverage for “property damage” arising due to “your work.” Therefore, property damage occurring after completion of construction, which arose due to CCS’s work, was excluded from the products-completed operations coverage.

But, does CCS’s “work” encompass the “work” of CCS’s subcontractors? Maybe not. The exclusion to the products-completed operations coverage included an exception: “[t]his exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”10 Therefore, products-completed operations coverage seems to apply in CCS’s case because: “(1) the project was completed at the time the claim arose and; (2) the claim involved ‘property damage’ caused by work performed on [CCS’s] behalf ‘by a subcontractor.’”

The Court of Appeals concluded that, at the very least, the combination of the products-completed operations coverage and the exclusions and exceptions thereto created an ambiguity as to whether “the parties intended and specifically contracted for ‘property damage’ caused by a subcontractor’s faulty workmanship in a completed project.”11 Because the well-established rule of contract construction states that ambiguities will be strictly construed against the drafter (in this case, CIC) and liberally in favor of the non-drafter (CCS)12, the trial court’s grant of summary judgment relieving CIC from its obligation to defend CCS was reversed.

In summary, review your commercial general liability policy. Does it include completed-operations coverage? Be prudent about reviewing any exceptions or exclusions from that coverage, as well as any other provisions of your commercial general liability coverage. You can bet that your insurer will now be taking a closer look at these provisions. Contact your Dinsmore attorney with any questions or concerns.

1 Ohio N. Univ. v. Charles Constr. Servs., 3d Dist. Hancock No. 5-16-01, 2017-Ohio-258, at ¶ 3.
2 Id.
3 Id. at ¶ 6.
4 Westfield Ins. Co. v. Custom Agri Sys., 133 Ohio St.3d 476, 2012-Ohio-4712, 979 N.E.2d 269.
5 Ohio N. Univ. v. Charles Constr. Servs., 3d Dist. Hancock No. 5-16-01, 2017-Ohio-258.
6 Id. at ¶ 21 (citing Westfield Ins. Co., at ¶ 9) (emphasis added).
7 Id. at ¶ 10.
8 Id. at ¶ 15.
9 Ohio N. Univ. v. Charles Constr. Servs., 3d Dist. Hancock No. 5-16-01, 2017-Ohio-258.
10 Id. at ¶ 33 (emphasis added).
11 Id. at ¶ 41.
12 Id. at ¶ 40.