OHIO CONSTRUCTION CLAIMS RESOURCES
1 Construction Claims
- 1.1 Common Law & Statutory Claims
- 1.2 Limitations & Repose Periods
- 1.3 Additional Considerations
- 1.4 Indemnification/Additional Insured Contract Clauses
- 1.5 Comparative and Contributory Fault
- 1.6 Joint and Several Liability
- 1.7 Set-Off Rights
- 1.8 Contribution
- 1.9 Damages
- 1.10 Arbitration
- 1.11 Insurance Coverage/Indemnity for Construction Defect Claims
To establish negligence, the Plaintiff must show, by a preponderance of the evidence, that, 1) the defendant owed the plaintiff a legal duty, 2) the legal duty was breached, and 3) the injury or damage (either to person or property) that occurred was proximately caused by the breach. Menifee v. Ohio Welding Prod. Inc. (1984), 15 Ohio St.3d 75, 77. Ohio law charges contractors with a common-law duty to perform construction work in a workmanlike manner. Barton v. Ellis, 34 Ohio App.3d 251, 252- 53 (10th Dist.1986). This standard requires a construction professional to act reasonably in exercising the degree of care which a member of the construction trade in good standing in the community would exercise under the same or similar circumstances. Ohio Valley Bank v. Copley, 121 Ohio App.3d 197, 205, 699 N.E.2d 540 (4th Dist.1997). Ohio law does not require expert testimony to establish a standard of care when the action involves conduct within the common knowledge and experience of jurors. This general rule also applies to claims against contractors. Floyd v. United Home Imp. Ctr., Inc., 119 Ohio App.3d 716, 721 (2nd Dist.1997) (applying rule to builder's alleged deviation from common standards of workmanship or failure to exercise ordinary care). Significantly, for claims involving damage to real or personal property, a construction contractor who merely follows the project plans and specifications cannot be held liable for negligence, unless the plans and specifications were “so obviously defective” that no reasonable person would follow them. Jackson v. City of Franklin, 51 Ohio App.3d 51 (1988); Farr v. Safe-Way Barricades, Inc., No. L-97-1258, 1998 Ohio App. LEXIS 2618.
A design professional owes a duty to exercise that degree of care and competence exercised by ordinary architects/engineers involving projects of similar scope and complexity in the same locality. Ohio law does not specifically define the duty of an architect or engineer. However, one who has contracted in a professional capacity to provide the design for a particular structure may be held liable for damages for the foreseeable consequences of a failure to exercise ordinary and reasonable care in the preparation of the design. Cincinnati Riverfront Coliseum, Inc. v. Clark Engineering, 1985 WL 11516, (1st Dist. Ct. Apps. 1985).
When rendering design services, a design professional has a duty to exercise that degree of care, skill, and diligence as those in his profession ordinarily exercise under similar circumstances. Whether a design professional is found to have exercised reasonable care in the preparation of plans and specifications depends on the standard of care which licensed design professionals must follow. Typically, expert testimony is required to establish that standard of care unless the lack of skill or care of the design professional or engineer is so apparent as to be within the comprehension of the lay person and requires only common knowledge and experience to understand it. Cincinnati Riverfront Coliseum, Inc. v. McNulty Co. (1986), 28 Ohio St. 3d 333; Simon v. Drake Constr. Co. (1993), 87 Ohio App. 3d 23.
A common claim that a design professional’s failure to comply with the Ohio Basic Building Code, or other code regulations, constitutes negligence per se. Ohio courts, however, have held to the contrary. Specifically, courts have held that negligence per se involves violations of legislative enactments, not violations of administrative provisions. Since the Ohio Basic Building Code and municipal building codes are administrative provisions, failure to comply with them cannot constitute negligence per se. Nicholson v. Turner-Cargile (1995), 107 Ohio App. 3d 797; Zimmerman v. St. Peter’s Catholic Church (1993), 87 Ohio App. 3d 752.
A breach of contract claim in Ohio has four elements: 1) the existence of a contract; 2) the plaintiff’s performance; 3) the defendant's breach; and 4) the existence of damages. Pavlovich v. Nat'l City Bank, 435 F.3d 560, 565 6th Cir. 2006
In Ohio, breach of warranty actions are common against both construction and design professionals.
The duty to perform in a workmanlike manner is imposed by common law upon contractors. A construction contract to perform work creates an implied warranty that the contractor will perform the work in a workmanlike manner. Point East Condominium Owners' Assn., 104 Ohio App.3d at 716. The duty to perform the work in a workmanlike manner extends to subsequent vendees not in privity with the builder-vendor. Id., citing McMillan v. Brune-Harpenau-Torbeck Builders, Inc., 8 Ohio St.3d 3 (1983). However, a plaintiff cannot raise a breach of implied warranty claim against a contractor based upon a claim for breach of an implied warranty of fitness for a particular purpose. Corporex Dev. & Const. Mgt., Inc. v. Shook, Inc., 10th Dist. No. 03AP-269, 2004-Ohio-1408, 2004 WL 557339, judgment reversed and remanded on other grounds, 106 Ohio St.3d 412, 2005-Ohio-5409.
In 1918, the Supreme Court of the United States, in the case of U.S. v. Spearin (1918), 248 U.S. 132, held that if a contractor is required to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications. The U.S. Supreme Court’s holding in Spearin was subsequently adopted by the majority of jurisdictions in the United States, including the State of Ohio. In Ohio, courts held that, when an owner furnished plans and specifications for a project, the owner warranted the accuracy, completeness, and suitability of the plans and specifications. Central Ohio Joint Voc. Dist. Bd. of Educ. v. Peterson Constr. Co. (1998), 129 Ohio App.3d 58; Valentine Concrete, Inc. v. Ohio Dept. of Admin. Serv. (1991), 62 Ohio Misc. 2d 591; Condon-Cunningham, Inc. v. Day (1969), 22 Ohio Misc. 71. This responsibility of the owner was not overcome by the usual clauses requiring the contractor to visit the site, check the plans, and to inform itself of the requirements of the work. Condon-Cunningham, supra.
Following Ohio’s adoption of the Spearin Doctrine, contractors and subcontractors wishing to assert delay claims against the owner used the Spearin Doctrine as the basis for its entitlement to recovery of their delay damages. However, in the Ohio Supreme Court case of Dugan & Myers Constr. Co., Inc. v. Ohio Dept. of Admin. Serv., 113 Ohio St.3d 226 (2007), the Ohio Supreme Court limited the application of the Spearin Doctrine as it relates to delay claims. Specifically, the Ohio Supreme Court declined “the opportunity to extend the Spearin Doctrine from jobsite conditions cases to cases involving delays due to plan changes.”
Negligent misrepresentation claims are often asserted against design and construction professionals. To establish a claim for negligent misrepresentation, a plaintiff must show that by a preponderance of the evidence the design or construction professional: 1) in the course of business, profession, or employment, or any transaction in which he has a monetary interest; 2) supplied false information for the guidance of others in their business transactions; 3) which caused losses due to reasonable reliance upon the information; and 4) the person supplying the information must have failed to use reasonable care in obtaining or communicating the information. Delman v. Cleveland Hts., 41 Ohio St. 3d 1 (1989); Dickerson Internationale, Inc. v. Klockner, 139 Ohio App.3d 371.
The elements of fraud require a showing that there was, 1) a representation or, where there is a duty to disclose, concealment of a fact, 2) which is material to the transaction at hand, 3) made falsely, with knowledge of its falsity, or with such utter disregard and recklessness as to whether it is true or false that knowledge may be inferred, 4) with the intent of misleading another into relying upon it, 5) justifiable reliance upon the representation or concealment, and 6) a resulting injury proximately caused by the reliance. Cohen v. Lamko, Inc. (1984), 10 Ohio St.3d 167, quotingFriedland v. Lipman (1980), 68 Ohio App.2d 255.
The Ohio Rules of Civil Procedure require that any plaintiff who alleges fraud must provide more information than that which is normally required in a Complaint and that all the circumstances surrounding an allegation of fraud be stated with particularity. This particularity or heightened pleading requires inclusion of the “time, place, and content of the false representation, the fact misrepresented, and the nature of what was obtained or given as a consequence.” F & J Roofing Co. v. McGinley & Sons, Inc. (1987), 35 Ohio App.3d 16, 17. This heightened pleading requirement stems from a variety of concerns. First, the heightened standard ensures that allegations are concrete and specific enough to provide notice to defendant of exactly what conduct is being complained of. Secondly, it deters the filing of complaints as a mere pretext for discovery of an unknown wrong. Goldman v. Belden, (1983), 98 F.R.D. 733. Most significantly, the heightened standard is driven by the desire that potential defendants be shielded from lightly made or ill-conceived claims which charge the commission of acts that involve immorality. “This need for protection is most acute where the potential defendants are professionals whose reputations in their fields of expertise are most sensitive to slander.” Haddon View Investment Co. v. Coopers & Lybrand (1982), 70 Ohio St.2d 154.O.R.C. §4113.61
Ohio’s Prompt Payment Act (the “Act”) applies to both public and private projects. As its name implies, the Act requires contractors, subcontractors and material suppliers to promptly pay lower tier subcontractors and material suppliers upon receipt of payment for the work or materials provided by that lower tier subcontractor or material supplier.
The Act requires contractors, upon timely application for payment by a subcontractor or material supplier, to pay the subcontractor or material supplier within 10 days of receipt of payment from the owner. Similarly, a subcontractor or material supplier, upon timely receipt of an application for payment from a lower tier subcontractor or material supplier, must pay that lower tier subcontractor or material supplier no later than 10 days upon receipt of payment for the work or materials provided by that lower tier subcontractor or material supplier. Payment owed to subcontractors or lower tier subcontractors is the percentage completion of the subcontractor’s contract permitted by the owner for the amount of work or labor performed. As to material suppliers, required payment is an amount all or that portion of the invoice for materials furnished by the supplier.
The Act permits payments to be reduced by any retainage provision in the contract or by any amount necessary to resolve disputed liens or claims with subcontractors and material suppliers regarding the work, labor, or material furnished. If a party obligated to make payment under the Act receives any final retainage, they are required, upon determining that the lower tier party has satisfactorily performed their duties, to pay the lower tier party their portion of the retainage within the shorter of 10 days after receipt of the retainage or a contractually designated time period.
Failure to timely make payment results in the accrual of interest at a rate of 18% per annum beginning on the 11th day following receipt of payment by the party in violation of the Act and, unless a court determines it to be inequitable, recovery of reasonable attorney’s fees and costs. In deciding whether an award of attorney’s fees is appropriate, a court will look to, 1) the presence or absence of good-faith allegations or defenses asserted by the parties, 2) the proportion of the amount of recovery related to the amount demanded, and 3) the nature of the services rendered and the time spent in rendering the service.O.R.C. Ch. 1312
Ohio’s Residential Right to Cure Statute (the “Statute”) applies to construction defects which are defined to be “a deficiency that arises directly or indirectly out of the construction or the substantial rehabilitation of a residential building.” Residential buildings, in turn, means “a structure that is a one-family, two-family, or three-family dwelling house or a dwelling unit within that structure. . . and a unit in a condominium development in which the owner holds title to that unit”. Under the Statute, an Owner is defined as an “owner or a prospective owner of a residential building or a dwelling unit in a residential building who enters into a contract with a residential contractor for the construction or substantial rehabilitation of that residential building or unit. Finally, a residential contractor is defined as “a person or entity who, for pay, enters into a contract with an owner for the construction or the substantial rehabilitation of a residential building and who has primary responsibility for the construction or substantial rehabilitation of a residential building.”
Upon entering into a contract for construction or substantial rehabilitation of a residential building, the Statute requires a residential contractor to provide the owner with notice of the contractor's right to offer to resolve any alleged construction defect before the owner may file a civil action or arbitration proceedings against the contractor. The contractor may include the notice in the contract or provide the notice as a separate document delivered at the time the owner signs the contract. However, the notice must be conspicuous and in substantially the form identified in the Statute.
No less than 60 days before commencement of a civil action or arbitration proceedings, the owner must provide the residential contractor with written notice of the construction defect which would form the basis of the legal action against the residential contractor. The written notice must, 1) itemize and describe the construction defects, 2) include or attach a copy of documentation concerning the construction defect prepared by a person who inspected the residential building for the owner, and 3) include the name, address and telephone number of the owner, the residential contractor and the address of the building that is the subject of the claim. Upon receipt of the written notice, to the extent an owner has knowledge of the same, a contractor may request the owner to provide a description of the cause of the defects and the nature and extent of repairs necessary to remedy them.
The residential contractor must provide the owner a good faith written response within 21 days of the owner’s written notice. Specifically, the residential contractor must offer to either, 1) inspect the building that is the subject of the claims, 2) compromise and settle the claim without an inspection, or 3) dispute the claim. If the residential contractor fails to timely provide the good faith written response, the owner is deemed to have complied with the Statute and may initiate the civil action or arbitration proceedings.
If the owner decides to reject the offer to inspect the property or to compromise and settle the claim, the owner must provide written notice of that rejection within 14 days. After providing the rejection notice, the owner is deemed to have complied with the Statute and may initiate the civil action or arbitration proceedings.
If the owner accepts the residential contractor’s offer to inspect the building, the owner must notify the residential contractor of such within 14 days. The residential contractor is then required to inspect the building within 14 days and take reasonable efforts to determine the nature and cause of the construction defect and appropriate remedy. Within 10 days of the inspection, the residential contractor must provide the owner with either, 1) a written offer to remedy the defects at no cost to the owner, accompanied by an inspection report, prediction of the additional construction work necessary to remedy each defect and a timetable for completing the work, 2) a written offer to settle the claim, or 3) a written statement that the residential contractor does not intend to remedy the defects. If an owner accepts a residential contractor’s offer to compromise and settle the claim or remedy the defects and the residential contractor fulfills that offer, the owner is barred from filing a civil action or arbitration proceedings. Finally, an owner is deemed to have complied with the Statute and may institute litigation if either, 1) the residential contractor does not inspect the property within 14 days after the owner accepts the offer to inspect, 2) following an inspection, the residential contractor does not provide a written response, 3) following an inspection, the residential contractor does not provide a written response, or 4) the contractor fails to remedy the defects in the manner the contractor describes or within the timetable the contractor provides.ORC Ch. 1345
Ohio’s Consumer Sales Practices Act defines a consumer transaction to include a sale or other transfer of an item of goods to an individual for purposes that are primarily personal, family, or household. As the definition indicates, claimants under the Consumer Sales Practices Act can only be individual consumers. As such, in the construction context, the Consumer Sales Practices Act applies solely to home improvements and home construction. In any event, the Consumer Sales Practices Act prohibits a supplier from engaging in a consumer transaction when the conduct of the supplier is “unfair or deceptive” or “unconscionable”. R.C. §1345.02; R.C. §1345.03. If the supplier has committed an unfair or deceptive act, treble (three times) damages and attorney’s fees may be awarded. R.C. §1345.09. In claims involving residential construction, Consumer Sales Practices Act claims are often asserted in order to bring in the threat of attorney fees (which generally are rarely recoverable in breach of contract and negligence claims) and treble damages (which are never recoverable in breach of contract/negligence claims).
In Ohio, the appropriate statute of limitations period depends on the type of claim asserted. For claims involving bodily injury or damage to personal property, the statute of limitations period is 2 years (R.C. §2305.10). Wrongful death claims are also 2 years (R.C. §2125.02). For claims involving damage to real property, the statute of limitations period is 4 years (R.C. §2305.09). Claims for professional negligence against design professionals are also 4 years (R.C. §2305.09(D)). A claim for breach of a written contract has a statute of limitations period of 8 years (R.C. §2305.06) and 6 years for an oral contract (R.C. §2305.07). Breach of warranty claims ae typically 4 years (R.C. §2305.09), fraud is 4 years after discovery (R.C. §2305.09(c)), and violation of the Consumer Sales Practices Act is 2 years (R.C. §1345.10).
Pursuant to Ohio’s Statute of Repose (R.C. §2305.131), no cause of action exists for real or personal property damage, bodily injury, or wrongful death that arises out of a defective and unsafe condition of an improvement to real property against a person who performs services for the improvement to real property or a person who furnished the design, planning, supervision of construction, or construction of the improvement to real property later than 10 years from the date of substantial completion, regardless of when the cause of action otherwise accrued. However, if a claimant discovers a defective and unsafe condition of an improvement to real property during the 10-year period, but less than 2 years prior to the expiration of that period, the claimant may pursue a claim within 2 years from the date of discovery of the defective and unsafe condition. The Statute of Repose does not bar claims against a person who has expressly warranted or guaranteed an improvement to real property for a period longer than the statutory 10-year period and whose warranty or guarantee has not expired at the time of the bodily injury, injury to real or personal property, or wrongful death. Finally, in response to a split of authority in the lower courts, in 2019, the Ohio Supreme Court held that the statute of repose applies to both contract and tort claims. New Riegel Local School Dist. Bd. of Edn. v. Buehrer Group Architecture & Eng., Inc., 2019-Ohio-2851.R.C. §4113.62(C)
Under Ohio law, no damages for delay clauses in construction contracts have traditionally been valid and enforceable, except “where the delay for which recovery is sought was not reasonably contemplated by the parties at the time of contracting.” JWP/HYRE Electric Co. v. Mentor Village School District, 968 F.Supp. 356, 360 (N.D. Ohio 1996) (citing Carabine Construction Co. v. Chrysler Realty Corp., 25 Ohio St.3d 222, 495 N.E.2d 952 (1986)).
More recently, however, Ohio has recognized several exceptions to this general rule. In Daniel Terreri & Sons, Inc. v. Mahoning Cty. Bd. of Commrs., 152 Ohio App.3d 95, 2003-Ohio-1227 (7th Dist. 2003), the court listed four notable exceptions to enforcement of no damage for delay clauses: 1) the delay was not contemplated by the parties at the time of contracting; 2) the delay resulted from fraud, misrepresentations or bad faith by the party seeking to enforce the clause; 3) the delay has extended the completion date so much that the party suffering the delay would have been justified in abandoning the contract, i.e., performance was made impossible; and 4) the delay is not within the scope of the damage of delay clause. Id. at 105.
Notwithstanding the general enforceability of no damages for delay clauses in Ohio, the Ohio legislature has enacted a statute making them void and unenforceable in certain circumstances. Specifically, pursuant to R.C. §4113.62(C), any provision made part of a construction contract that waives or precludes liability for delays caused by the owner’s act or failure to act, or that waives any other remedy for delays caused by the owner, is void and unenforceable as against public policy. Similarly, any provision made part of a construction subcontract that waives or precludes liability for delay caused by the owner’s or contractor’s act or failure to act, or that waives any other remedy for delays caused by the owner or contractor, is void and enforceable as against public policy.
Ohio courts have noted the distinction between “pay when paid” and “pay if paid” clauses, both of which are generally enforceable. Pursuant to a “pay if paid” provision, the general contractor is required to pay a subcontractor only if the owner pays the general contractor and the risk of owner non-payment falls upon the subcontractor. Kalkreuth Roofing & Sheet Metal v. Bogner Constr. Co., No. 97 CA 59, 1998 WL 666765 (Ohio App. 5 Dist.). A “pay if paid” provision is binding and enforceable as long as such provision is undeniably clear and ambiguous as to the true intent and meaning of the clause. Kalkreuth, supra; Power & Pollution Serv., Inc. v. Suburban Power Piping Corp., 74 Ohio App.3d 89 (1991).
Pursuant to a “pay when paid” clause, however, a general contractor agrees to pay a subcontractor within a period of time after the general contractor is paid by the owner, and the risk of non-payment falls upon the general contractor. Power, supra; Chapman Excavating Co., Inc. v. Fortney & Weygandt, Inc., 2004 WL 1631118 (Ohio App. 8 Dist.). In Power, supra, the court held that a “pay when paid” clause does not set a condition precedent to the general contractor’s duty to pay the subcontractor, but rather constitutes an absolute promise to pay, fixing payment by the owner as a reasonable time for when payment to the subcontractor is to be made. In determining what constitutes a “reasonable time” for payment, courts have, (1) looked to other provisions within the contract at issue which sets forth the time periods for performance of analogous acts, and (2) determined, as a matter of law, when a reasonable time for payment has elapsed. Chapman Excavating, supra. One final point worthy of note is that pursuant to R.C. §4113.62(E), a clause in a construction contract making payment from a, (1) contractor to a subcontractor or material supplier, or (2) from a subcontractor to a material supplier, lower tier subcontractor, or lower tier material supplier, conditioned or contingent upon receipt of payment shall not prohibit a person from filing a claim on a bond or a mechanic’s lien during the pendency of receipt of payment.
A construction site is an inherently dangerous setting. Bond v. Howard Corp., 72 Ohio St.3d 332 (1995); Whitelock v. Gilbane Bldg. Co., 66 Ohio St.3d 594 (1993). Accordingly, the primary responsibility for protecting the employees of a subcontractor lies with the subcontractor, not a general contractor or owner. Eicher v. U.S. Steel Corp., 32 Ohio St.3d 248 (1987). For these reasons, where a subcontractor undertakes to do work for a general contractor, the very doing of which involves elements of potential danger, no liability ordinarily attaches to the general contractor or owner for injuries to the employee of the subcontractor. Wellman v. East Ohio Gas Co., 160 Ohio St. 103 (1953). Accordingly, a general contractor who engages a subcontractor to do work for him, ordinarily owes no duty to employees of the subcontractor in connection with execution of the work. Id.
However, when a general contractor engages the services of an independent subcontractor, and ”actively participates” in the job operation performed by the subcontractor and fails to eliminate a hazard which the general contractor, in the exercise of ordinary care, could have eliminated, the general contractor can be held responsible for the injury or death of an employee of the independent subcontractor. Hirschbach v. Cincinnati Gas & Elec. Co., 6 Ohio St.3d 206 (1983). As a general rule, a general contractor who has not actively participated in the subcontractor’s work does not, merely by virtue of its supervisory capacity, owe a duty of care to employees of the subcontractor who are injured while engaged in inherently dangerous work. Cafferkey v. Turner Constr. Co., 21 Ohio St.3d 110 (1986).
What constitutes “active participation” has changed over the years. In Bond v. Howard, 72 Ohio St.3d 332 (1995), the Ohio Supreme Court defined active participation to mean that the “general contractor directed the activity which resulted in the injury and/or gave or denied permission for the critical acts that led to an employee’s injury…” The general contractor’s job in coordinating the work and directing subcontractors to perform tasks in accordance with the contract specifications does not constitute active participation.
Over the years, courts have applied the same active participation task to suits brought against owners for injuries to employees of independent contractors. In Sopkovich v. Ohio Edison Co., 81 Ohio St.3d 638 (1998), the Ohio Supreme Court refined the active participation test in deciding a claim against the owner, Ohio Edison. In Sopkovich, the plaintiff was an employee of an independent painting contractor hired to perform painting work at an Ohio Edison Electric substation. Although Ohio Edison did not direct or participate in the contractor’s painting work, it was responsible for shutting off the flow of electricity to portions of the substation being painted. Sopkovich was injured when he allegedly came into contact with an energized portion of the substation. In its decision, the Ohio Supreme Court held that active participation on the part of an owner giving rise to a duty of care may be found to exist, (1) through the direction or control of the performance of the work activities, or (2) through the exertion or retention of control over a critical variable in the workplace, including the environment.
Since Sopkovich, some courts have used this expanded definition of “active participation” to claims involving the liability of general contractors. See, e.g., Cefaratti v. Mason Structural Steel Co., 136 Ohio App.3d 363 (1999). In Cefaratti, the court held that a general contractor can be liable to an independent contractor’s employee if, (1) the general contractor exercised control over the work activity, or (2) the general contractor retained control over a critical variable in the workplace, including the work environment.R.C. §4113.62
Pursuant to R.C. §4113.62(A), any provision of a construction contract that waives rights under a surety bond (whether for a public or private project) is void and unenforceable as against public policy. In a similar vein, as to lien rights, R.C. §4113.62(B) provides that any provision of a construction contract that waives any pending or asserted claim based on an owner or upstream party making final payment, is also void and unenforceable as against public policy.R.C. §4113.62(D)
Pursuant to R.C. §4113.62(D)(1), for construction contracts involving real property situated in the State of Ohio, any provision of the contract requiring any dispute or claims to be decided according to the laws of another state is a void and unenforceable as against public policy. Similarly, R.C.§4113.62(D)(2) provides that, for Ohio projects, any provision of a construction contract that requires litigation, arbitration or other dispute resolution process to take place in another state is void and unenforceable as against public policy. Instead, any litigation, arbitration or other dispute resolution process is required to take place in the county in which the improvement real estate is located or another location within the state mutually agreed to by the parties.
In Ohio, the economic loss rule generally prevents recovery in tort of damages for purely economic loss. Chemtrol Adhesives, Inc. v. Am. Mfgr.’s Mut. Ins. Co., 42 Ohio St.3d 40 (1989); Floor Craft Floor Covering, Inc. v. Parma Comm. Gen. Hosp. Assn., 54 Ohio St.3d 1 (1990). The well-established general rule is that a plaintiff who has suffered only economic loss due to another’s wrongful conduct has not been injured in a manner which is legally cognizable or compensable absent privity of contract. Chemtrol, 42 Ohio St.3d at 44. This rule stems from the recognition of a balance between tort law, designed to redress losses suffered by breach of a duty imposed by law to protect societal interests, and contract law, which holds that party to a commercial transaction should remain free to govern their own affairs. Chemtrol, 42 Ohio St.3d at 42, Floor Craft, 54 Ohio St.3d at 7. See, also, Corporex Development & Constr. Mgmt., Inc. v. Shook, Inc., 106 Ohio St.3d 412 (2005).
The Ohio Supreme Court has held that a person needed to be in direct privity with the architect or engineer in order to assert a negligence claim against that design professional for claims involving economic loss damages. Floor Craft, supra. However, subsequent cases have held that a “sufficient nexus” can serve as a substitute for privity and allow a suit as well. Clevecon, Inc. v. Northeast Ohio Regional Sewer Dist. (1993) 90 Ohio App. 3d 215. In Clevecon, a sufficient nexus was found where an architect exercised great control over a contractor during construction.R.C. §2305.31
R.C. §2305.31 prohibits clauses in construction contracts that require a party to be indemnified for its own negligence for damages arising out of bodily injury to persons or damage to property, regardless of whether the party seeking indemnity is solely or partially at fault. The statute applies to all contracts relating to the design, planning, construction, alteration, repair, or maintenance of a building, structure, and roadway, including demolition and excavation. Once again, the focus is on whether the indemnity clause requires the promisor to defend and indemnify the promisee for claims arising from the promisee’s negligence, whether sole or concurrent. If the indemnity clause in any way requires the promisor to defend and indemnify the promisee for its negligence, the clause will be deemed to violate R.C. §2305.31. Kendall v. U.S. Dismantling Co., 20 Ohio St.3d 61 (1985); Kemmeter v. McDaniel Backhoe Service, 89 Ohio St.3d 409 (2000).
Since R.C. §2305.31 was enacted, there has been a body of case law in Ohio addressing the validity of “additional insured” and “defense/indemnification” clauses typically found in construction contracts. As to additional insured provisions, the definition of who is an insured under the policy will determine whether the additional insured clause violates R.C. §2305.31. If the clause requires the promisor to purchase insurance for the promisee for the promisee’s own negligence, whether sole or concurrent, it will be deemed to violate the statute. However, if the clause requires the promisor to purchase insurance for the promisee for liability solely arising out of the promisor’s negligence, the clause will be deemed valid. In other words, if the additional insured provides coverage to the promisee for the promisee’s passive, secondary, and vicarious liability to the primary liability of the promisor, it will be valid. Buckeye Union Ins. Co. v. Zavarella Brothers Constr. Co., 121 Ohio App.3d 147 (1997); Liberty Mut. Ins. Group v. Travelers Property & Casualty, 2002 WL 1933244 (Ohio App. 8 Dist.).
As a matter of practice, in situations where there were negligence allegations against the promisee, the promisor often used this as a basis to deny the promisee’s request for defense and indemnity. In these situations where the promisee later settles the claim, courts have held that the promisee waived its right to pursue a claim against the promisor to recover its fees and expenses based on the argument that the claim did not arise from the promisee’s negligence. C.J. Mahan Constr. Co. v. Mohawk Re-Bar Svs., Inc., 2005 WL 2562600 (Ohio App. 5 Dist.). However, there is case law that stands for the proposition that, in situations where the promisee’s request for defense and indemnity was denied, but the promisee later proves (i.e., by summary judgment or verdict) that the promisee was not negligent, the promisor can be responsible for the promisee’s fees and expenses. Kovach v. Warren Roofing & Illuminating Co., 2007 WL 1508530 (Ohio App. 8 Dist).R.C. §§2307.23, 2307.011 and 2315.32
Pursuant to R.C. §2307.23(A), when making a determination as to whether the negligence or tortious conduct of one or more persons contributed to a particular loss or claim, a court or jury will determine, 1) the percentage of tortious conduct attributable to the plaintiff, 2) the percentage of tortious conduct attributable to each party to the tort action pursuant to which the plaintiff seeks recovery, and 3) the percentage of tortious conduct attributable to each person from whom the plaintiff does not seek recovery.
In that regard, “persons from whom the plaintiff does not seek recovery” includes, but is not limited to, 1) persons who have entered into a settlement agreement with the plaintiff, 2) persons whom the plaintiff has dismissed from the tort action without prejudice, 3) persons whom the plaintiff has dismissed from the tort action with prejudice, and 4) persons who are not a party to the tort action whether or not that person was or could have been a party if the name of the person had been disclosed prior to trial. R.C. §2307.011(H). Finally, pursuant to R.C. §2307.23(C), it is an affirmative defense that a specified percentage of the tortious conduct is attributable to one or more persons from whom the plaintiff does not seek recovery. In other words, if a plaintiff asserts claim against some, but not all, of the parties responsible for the loss or damage, it is at risk of not recovering the entire amount of its damages if a court or jury determines that parties not named in the action were at fault. Furthermore, this would allow the defendants to “point at the empty chair” and obtain an apportionment of damages against a non-party.
The contributory fault of a plaintiff may be asserted as an affirmative defense to a negligence claim, or other tort claims except an intentional tort claim. R.C. §2315.32(B). The contributory fault of a plaintiff does not bar the recovery of damages if the plaintiff’s contributory fault was no greater than the combined tortious conduct of all other persons from whom plaintiff seeks recovery and all other persons from whom the plaintiff does not seek recovery. In short, if plaintiff’s contributory fault is 51% or greater, there is no recovery even though some of the defendants may have been found to be at fault. R.C. §2315.33. However, if the fault attributed to a plaintiff is 50% or less, the compensatory damages award is diminished by the percentage of tortious conduct attributable to the plaintiff. R.C. §2315.35.R.C. §2307.22
In a tort action where it is determined that two or more persons are liable for the same injury, loss to person or property, or wrongful death, and more than 50% of the tortious conduct is attributable to one defendant, that defendant is jointly and severally liable for all compensatory damages that represent economic loss. R.C. §2307.22(A)(1). In other words, a defendant that is greater than 50% at fault can be required to pay 100% of the plaintiff’s economic loss damages instead of just its proportionate share of fault. In that situation, the defendant that paid more than its proportionate share of the economic loss damages would have a right to a contribution action against the other defendants to recover amounts it paid to plaintiff that were beyond its proportionate share of the common liability.
In situations where less than 50% of a defendant’s tortious conduct is attributable to the loss or injury, that defendant is only liable to the plaintiff for its proportionate share of the compensatory damages that represent economic loss. R.C. §2307.22(A)(2). In other words, those defendants would just pay their respective proportionate shares of the economic loss damages. However, where 50% or less of the tortious conduct is attributable to a defendant against whom an intentional tort claim has been alleged and established, that defendant is jointly and severally liable for all compensatory damages that represent economic loss. R.C. §2307.22(A)(3). Finally, as to non-economic loss, each defendant found to be liable is only responsible for its proportionate share of the compensatory damages that represent non-economic loss. R.C. §2307.22.R.C. §2307.28
Pursuant to R.C. §2307.28, when a release is given in good faith to a settling defendant, the release does not discharge any other tortfeasors from liability unless its terms otherwise provide, but it does reduce the claim against the other tortfeasors by the amount stipulated in the release or the amount of consideration paid, whichever is greater. However, the full reduction of the claim against the other tortfeasor does not apply in any cases in which the full reduction results in the plaintiff recovering less than the total amount of its compensatory damages. R. C. §2307.28(A)(1). Moreover, the release discharges the settling defendant from all liability for contribution to any other tortfeasor that believes it paid more than its proportionate share of the common liability. R.C. §2307.28(2).R.C. §2307.25
A tortfeasor has a right of contribution from a joint tortfeasor when he or she has paid more than his or her proportionate share of a common liability. In accordance with R.C. §2307.25(A), if one or more persons are jointly and severally liable in tort for the same injury or loss to person or property or for the same wrongful death, there may be a right of contribution (even if a judgment has not been recovered against all of them). The tortfeasor seeking contribution will be limited to recovering only the amount paid by that tortfeasor in excess of his or her proportionate share. R.C. §2307.25(A). However, a tortfeasor who enters into a settlement with a claimant is not entitled to contribution from another tortfeasor whose liability for the injury or loss to person or property or the wrongful death is not extinguished by the settlement, or in respect to any amount paid in a settlement that is in excess of what is reasonable. |R.C. §2307.25(B). .A joint tortfeasor may not be compelled to make contribution beyond that tortfeasor’s own proportionate share of the common liability. R.C. §2307.25(A). A liability insurer that by payment has discharged in full or in part the liability of a tortfeasor is subrogated to the tortfeasor's right of contribution to the extent of the amount it has paid in excess of the tortfeasor's proportionate share of the common liability. R.C. §2307.25(C). Finally, there is no right of contribution in favor of any tortfeasor against whom an intentional tort claim has been alleged and established. R.C. §2307.25(A).
Generally, the proper measure of damages for breach of a construction contract is the cost of repair. Ohio Valley Bank v. Copley (1997), 121 Ohio App.3d 197, 210. In other words, the recoverable damages in a construction defect claims is the reasonable cost of placing the building in the condition contemplated by the parties at the time they entered into the contract. Hansel v. Creative Concrete & Masonry Constr. Co. (2002), 148 Ohio App. 3d 53, 59. However, if repair would lead to unreasonable economic waste, damages are measured by the difference in market value between the structure as contracted for and the structure as received (the diminution in value of the property). Angles v. West, Pickaway App. No. 02CA16, 2003-Ohio-464, ¶9, citing Ohio Valley Bank.
Compensatory damages representing diminution of value of the property for construction defect claims can also be awarded if the damage to the property is irreparable. Stackhouse v. Logangate Property Mgmt, 172 Ohio App. 3d 65, , 2007-Ohio-3171 (7th Dist.). If the injury is susceptible to repair, the landowner may recover the reasonable cost of restoration plus the reasonable value of the loss of the use of the property. Id. (citing Ohio Collieries Co. v. Cocke, 107 Ohio St. 238, 240 (1923)).R.C. Ch. 2125 and R.C. 2305.21
For claims involving wrongful death arising from the wrongful act or negligence of an individual or party, the personal representative of the decedent can file a civil action for the benefit of the surviving spouse, children, parents and next of kin of the decedent, all of whom are rebuttably presumed to have suffered damages as a result of the wrongful death. R.C. §2125.02(A)(1). In addition to reasonable funeral and burial expenses (R.C. §2125.02(A)(2)), compensatory damages that can be awarded in connection with a wrongful death claim include, 1) loss of support from the reasonably expected earning capacity of the decedent, 2) loss of services of the decedent, 3) Loss of the society of the decedent, including loss of companionship, consortium, care, assistance, attention, protection, advice, guidance, counsel, instruction, training, and education, suffered by the surviving spouse, dependent children, parents, or next of kin of the decedent, 4) loss of prospective inheritance to the decedent's heirs at law at the time of the decedent's death, and 5) the mental anguish incurred by the surviving spouse, dependent children, parents, or next of kin of the decedent. R.C. §2125.02(B). Punitive damages are not recoverable in a wrongful death action. Rubeck v. Huffman, 54 Ohio St. 2d 20 (1978).
A wrongful death claim will often be accompanied by a survivorship claim pursuant to R.C. §2305.21 (which provides, among other things, that personal injury causes of action survive the death of the person entitled thereto). As noted above, a wrongful death claim compensates the decedent’s children, parents and next of kin for their damages associated with decedent’s death. On the other hand, a survivorship claim is brought on behalf of the decedent for the decedent’s damages (conscious pain and suffering and property damage) in connection with the events leading to his/her death. Significantly, punitive damages can be awarded in a survivorship action. Rubeck, supra.R.C. §2315.21
Punitive damages are recoverable in a tort action , which is defined as “a civil action for damages for injury or loss to person or property.” R.C. §2315.21(A)(1). In a tort action tried to a jury in which claims for compensatory and punitive damages are made, the court is required to bifurcate the action upon motion of a party. In the initial stage of the trial, the jury only determines whether there is liability to the defendant[s], and if so, the amount of compensatory damages. If the jury found that one or more of the defendants is liable for compensatory damages, then, in the second stage of the trial, the jury determines whether plaintiff is entitled to recover punitive damages, and if so, the amount of punitive damages. R.C. §2315.21(B). Punitive damages are only recoverable if, 1) The acts/omissions of the defendant demonstrate malice or aggravated or egregious fraud, or that defendant as principal or master knowingly authorized, participated in, or ratified actions or omissions of an agent or servant that so demonstrate, and 2) the trier of fact has returned a verdict or has made a determination of the total compensatory damages recoverable by the plaintiff from that defendant. R.C. §2315.21(C). However, punitive damages are capped at two times the amount of compensatory damages. R.C. §2315.21(D)(2)(a). Further, in the event the defendant is an individual or “small employer” (less than 100 employees on a full time permanent basis), punitive damages are capped at two times the compensatory damages or 10% of the individual’s or company’s net worth (whichever is less) up to $350,000. R.C. §2315.21(D)(2)(b).
R.C. §1343.03 governs the recovery of interest on contracts and judgments. Pursuant to R.C. §1343.03(A), when money becomes due and payable on, among other things, (1) a contract, (2) a settlement between parties, and (3) upon all judgments, decrees, and orders of a judicial tribunal for payment of money arising out of tortious conduct, the creditor is entitled to receive interest at a variable rate determined pursuant to R.C. §5703.47, unless a written contract provides for a different rate of interest. Moreover, pursuant to R.C. §1343.03(C), if, upon motion of a party to a civil action based on tortious conduct where the court has rendered a judgment, decree, or order for the payment of money, the court determines that the party required to pay the money failed to make a good faith effort to settle the case, and that the party to whom the money is to be paid did not fail to make a good faith effort to settle the case, the prevailing party is entitled to pre-judgment interest from the time he first gave notice of the claim to the time of judgment, or from the time the complaint was filed to the time of judgment, whichever period is longer.
As a general rule in Ohio, attorney’s fees are not recoverable in a civil action. Wilborn v. Bank One Corp., 121 Ohio St. 3d. (2009). There are, however, exceptions. Specifically, attorney fees may be awarded when provided for by contract (Nottingdale Homeowners’ Assn.. Inc. v. Darby, 33 Ohio St. 3d. 32 (1987)), when provided by statute (Id.), or when the non-prevailing party acted in bad faith. Pegan v. Crawer, 79 Ohio St. 3d. 155 (1997).
When attorney fees are provided for in a written contract, Ohio courts permit their recovery based on the “fundamental right to contract freely with the expectation that the terms of the contract will be enforced.” Nottingdale at 36. In that regard, the fees awarded must be fair, just and reasonable as determined by the court upon consideration of all of the circumstances of the case. (Id. at syllabus).
In Ohio, liquidated damages clauses are valid and enforceable for both public and private projects. Samson Sales, Inc. v. Honeywell, Inc., 12 Ohio St. 3d 27, 465 N.E.2d 392 (1984). However, they can only be applied in situations where true damages to the non-breaching party are difficult, unknown, or incapable of being calculated. Lakewood Creative Costumers v. Sharp, 31 Ohio App.3d 116, 117, 509 N.E.2d 77, 79 (8th Dist.1986). When a liquidated damages clause operates as a penalty rather than as a good faith estimate of the non-breaching party’s actual damages, it will not be enforceable. Schwartz v. Baker, 59 Ohio Law Abs. 274, 99 N.E.2d 498, 499 (2nd Dist.1950).
Delay damages can be both direct (additional labor and equipment costs, supervision, mobilization, fringe benefits and material price increases, etc.) or indirect (extended field office/overhead, diminished bonding capacity, interest on funds borrowed to complete the work). Often times, extended home office overhead claims are pursued using the “Eichleay formula”.
As a general rule, a contractor has a right to recover for delays caused by the owner. Backus Associates, Inc.v. State of Ohio, 47 Ohio Misc. 11, 13, 352 N.E.2d 663 (Ct. Cl.1976). Recoverable damages can include increased wages and extended general conditions costs. Recovery of home office overhead costs are more difficult. Before a contractor is allowed to pursue a home office overhead claim pursuant to the Eichleay formula, it must demonstrate, a) that it was on “standby” during the period of owner-caused delay, and b) that it was unable to take on new work while on standby. Complete Gen. Constr. Co. v. Ohio Dept. of Transp., 94 Ohio St.3d 54 (2002). A contractor is deemed to be on standby when project work is suspended for a period of uncertain duration and the contractor can, at any time, be required to return to work immediately. Generally, the contractor has to show it remains bound to the project even though it is not working and that it must be ready to immediately resume performance at any time. Moreover, the contractor must show that it was unable to commit to replacement work due to delays of uncertain duration. Impracticality, rather than impossibility, of taking on other work is the standard, and the contractor is entitled to damages only if its inability to take on additional work results from its standby status. Complete Gen., supra. The mere existence of a delay does not entitle an affected contractor to damages for unabsorbed home office overhead. Royal Elec. Constr. Corp. v. Ohio St. Univ. (Dec. 21, 1993) Franklin App. Nos. 93 AP-399, 93 AP-424. Instead, the contractor must demonstrate that the delay caused some portion of its home office overhead to be unabsorbed before the contractor can use a formula to calculate the amount of recovery. Id.
Likewise, absent a contractual liquidated damages clause, an owner is entitled to recover its actual damages for contractor caused delays. In that regard, a court may award damages to an owner including loss of use and revenue, costs for additional project management and engineering, or other costs associated with an extension of the project. Valentine Concrete, Inc. v. Ohio Dept. of Admin. Svcs., 62 Ohio Misc.2d 591, 617, 609 N.E.2d 623 (Ct. Cl.1991).R.C. Ch. 2711
In Ohio, since there is a strong presumption in favor of avenues other than lengthy litigation to settle disputes between parties, alternative dispute resolution provisions in contracts are favored. ABM Farms, Inc. v. Woods, 81 Ohio St.3d 498, 500 (1998); Wishnosky v. Star Lite Bldg. & Dev. Co. (Sept. 7, 2000), Cuyahoga App. No. 77245; Acme Arsena Co., Inc. v. J. Holden Constr. Co., Ltd. (Dec. 11, 2008), Cuyahoga App. No. 91450. For these reasons, in situations where suit is filed but a contract clause requires mediation and/or arbitration, stay of the matter pending mediation or arbitration is appropriate. Acme Arsena, supra; Alliance Corp. Resources, Inc. v. American Greetings Corp., (Sept. 9, 1999), Franklin App. No. 98 AP-1378.
R.C. §2711 also speaks to this issue. Pursuant to R.C. §2711.01, provisions in a contract to resolve disputes by arbitration are valid and enforceable. Moreover, in such instances, the court is required to stay the trial of the matter pending arbitration. R.C. §2711.02. As a general rule, contract clauses governing the arbitration process and discovery during that process are also valid and enforceable. Thus, it is very common to see clauses concerning the number of arbitrators and the arbitrator selection process, location of the arbitration, the extent to which depositions are permitted, whether the prevailing party is entitled to fees and costs, and scope and content of the arbitration award.
Pursuant to R.C. §2711.06, arbitrators have the authority to, 1) administer oaths or affirmations to witnesses, 2) fix the time and place of the hearings, 3) adjourn meetings prior to the hearing, and 4) subpoena witnesses and cause them to bring any book, record, document, or any other item of evidence in the case.
All arbitration awards must be made in writing and be signed by a majority of the arbitrators. R.C. §2711.08. Within one year after an award is made in an arbitration proceeding, a party may apply to the court of common pleas for an order confirming the award. The court of common pleas is then required to grant such an order and enter judgment unless the award is vacated, modified, or corrected in accordance with other sections of the Statute. R.C. §2711.09.
Pursuant to R.C. §2711.10, a court may vacate an arbitration award upon application of a party if, 1) it was procured by corruption, fraud, or undue means, 2) there was evident partiality or corruption on the part of any of the arbitrators, 3) the arbitrators were guilty of misconduct in refusing to postpone the hearing upon the showing of good cause, or in refusing to hear evidence pertinent in material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced, or 4) the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. Furthermore, upon application of a party, a court may modify or correct an award if, 1) there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award, 2) the arbitrators made an award upon a matter not submitted to them, or 3) the award is imperfect in that it does not affect the merits of the controversy.
A CGL carrier has a duty to defend and indemnify its insured whenever there is an “occurrence”, typically defined as an accident that causes property damage or bodily injury, that is not otherwise excluded by the policy. The duty to defend is broader than the duty to indemnify, meaning an insurer will often be obligated to provide a defense even though there may not be an indemnity obligation. In order to determine whether an insurer is obligated to provide a defense, courts must apply four different tests. Cole v. American Industries and Resources Corporation, 128 Ohio App.3d 546, 553, 715 N.E.2d 1179 (7th Dist.1998). If any one of the tests results in a determination that the duty to defend exists, then the insurance company is obligated to defend. Id. These tests are:
- The “Allegations Rule”, which provides that an insurance company is required to defend an insured when the “scope of the allegations contained in the complaint brings the action within the policy coverage.” Id. at 554.
- The “Expanded Allegations Rule”, which provides that an insurance company is required to defend a claim even when the duty to defend is not apparent from the pleadings if “the allegations state a claim which is potentially or arguably within the policy coverage.” Id.
- The “Groundless, False, or Fraudulent, Claims Test”, which provides that if an insurance company represents that it will cover a claim that appears to fall with the policy’s coverage even if it is factually unsupportable, the insurer is required to provide coverage. Id.
- The “True Fact Test”, which provides that an insurance company does not have to provide a defense “if there is no set of facts alleged in the complaint against an insured which, if proven true, would result in the insurance company’s duty to pay damages, then the insurance company need not provide a defense.” Id.
An insurer’s obligation to indemnify its insured is a different story. Ohio courts have essentially held that construction defect claims involving the insured’s defective work are clearly not covered by a CGL policy. For example, claims for defective workmanship of a contractor or its subcontractor do not fall within the definition of “occurrence” under a CGL policy unless the claim alleges that the defective workmanship has caused collateral or consequential damage to other property. Westfield Ins. Co. v. Custom Agri Sys., Inc., 133 Ohio St.3d 476, 2012-Ohio-4712, 979 N.E.2d 269 ; Heile v. Herrmann, 136 Ohio App.3d 351, 354, 736 N.E.2d 566 (1st Dist.1999) (holding that insurance company did not have duty to defend because the only harm alleged by plaintiff’s claim was the insured’s defective workmanship).
More recently, in the case of Ohio N. Univ. v. Charles Constr. Servs., Inc., 155 Ohio St.3d 197, 2018-Ohio-4057, the Ohio Supreme Court expanded on its holding in Westfield Ins. Co., supra, by ruling that an insurer has no obligation to defend or indemnify a commercial general liability policyholder against a suit by a property owner since a subcontractor’s defective work does not constitute an occurrence necessary to trigger coverage.
In Westfield Ins. Co., the Ohio Supreme Court considered what counts as an “occurrence” as that term is defined in a commercial general liability (“CGL”) policy of insurance. The Court framed the coverage issue as whether the contractor’s alleged defective construction of, and workmanship on, a steel grain bin constituted property damage caused by an “occurrence.” Westfield’s policy defined the word “occurrence” as “[…] an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” With this noted, the Court concluded that the spirit of fortuity is fundamental to insurance coverage and therefore, by the plain language of the insurance policy, to be an “occurrence,” the events precipitating the claim must be an accident, i.e., “unexpected, as well as unintended.” In the construction context, the Ohio Supreme Court held that “[…] claims of defective construction or workmanship are not claims for ‘property damage’ caused by an ‘occurrence’ under a commercial general liability policy […].”
The underlying facts giving rise to the claims in Ohio N. Univ. were different. In 2008, Ohio Northern University (“ONU”) contracted with Charles Construction Services, Inc. (“CCS”) to build a new luxury hotel and conference center on ONU’s campus. CCS’ contract with ONU required it to maintain a CGL policy that included a products-completed operations hazard (“PCOH”) clause covering damages arising out of completed operations. CCS obtained a CGL policy through Cincinnati Insurance Company (“CIC”) that included a PCOH clause and terms specifically related to work performed by subcontractors.
Like the policy at issue in Westfield Ins. Co., the CGL policy obtained by CCS from CIC defined an “occurrence” to be an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The insurance policy also provided that CIC would pay those sums that CCS became legally obligated to pay as damages due to “property damage” to which the insurance applied. Moreover, the CIC insurance policy contained an exclusion indicating that the insurance did not apply to property damage to any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it. “Your work” was defined to include work or operations performed by CCS or on its behalf (which would necessarily include a subcontractor’s work). The “your work” exclusion, however, did not apply to “property damage” included in the “products-completed operations hazard.” Further, the exclusion did not apply “if the damaged work or the work out of which the damage arises was performed on [CCS’] behalf by a subcontractor.” CCS even paid an additional premium to CIC for the PCOH coverage.
In September 2011, after the project was complete, ONU discovered extensive water damage from hidden leaks it believed were caused by the defective work of CCS and its subcontractors. ONU also discovered other structural defects while in the process of making repairs. Ultimately, ONU sued CCS. CCS then filed third-party claims against several of its subcontractors. After CCS tendered the defense to CIC, CIC intervened, seeking declaratory relief that it had no duty to defend or indemnify CCS under the CGL policy.
Relying on Custom Agri Sys. Inc., CIC filed a motion for summary judgment on the basis that claims for defective workmanship are not claims for “property damage” caused by an “occurrence.” ONU and CCS filed cross-motions for summary judgment arguing, in part, that the PCOH clause and subcontractor-specific terms in the CIC policy distinguished this case from Custom Agri Sys. Inc. The trial court granted CIC’s summary judgment on the basis that it was “constrained” by the Ohio Supreme Court’s decision in Custom Agri Sys. Inc.
CCS and ONU then appealed the coverage dispute. The appellate court determined that Custom Agri Sys. Inc. remains good law with respect to construction defects caused by an insured’s own work. The appellate court noted, however, that Custom Agri Sys. Inc. did not address any PCOH or subcontractor-specific provisions under the CGL policy. As such, the appellate court found CIC’s policy language to be ambiguous as to whether it covered claims for property damage caused by a subcontractor’s defective work and, when construing ambiguous language against the insurer, it reversed the judgment of the trial court.
On appeal to the Ohio Supreme Court, the Court relied heavily on its prior reasoning in Custom Agri Sys. Inc. Specifically, based on the language in the CIC policy, the Court noted that only an “occurrence” can trigger coverage for property damage. Without an “occurrence” as that term is defined by the insurance policy, the PCOH and subcontractor language in the CIC policy had no effect even though CCS paid additional money for it. Notably, the insurance policies construed in the Custom Agri Sys. Inc. and Ohio N. Univ. cases defined an “occurrence” to be an “accident including continuous or repeated exposure to substantially the same general harmful conditions.” As such, the Court concluded that an accident was something that was “unexpected as well as unintended.” Underpinning this point, inherent in the plain meaning of word “accident” is the concept of fortuity. In this instance, however, the Court could not say the subcontractors’ faulty work was fortuitous and noted 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.”
In its opinion, the Court recognized that parties to a construction contract understand that contractors can buy coverage for defects discovered after completion through the PCOH clause and that CGL policies and PCOH clauses have changed over time to assure that a subcontractor’s work is covered. The Court also noted that decisions from other states have found coverage under a CGL policy to be applicable in these instances and that its decision conflicts with these decisions from other states. Despite these legal trends in other states, the Court emphasized that it needed to look no further than the plain and ordinary meaning of the language in the CGL policy before it. As such, in holding that property damage caused by a subcontractor’s faulty work is not fortuitous and does not meet the definition of an “occurrence” under a CGL policy, the Court reversed the judgment of the appellate court and reinstated the decision of the trial court granting summary judgment in favor of CIC.