I’ve represented the construction industry for 25 years, and along the way, I’ve met many really good contractors. Most of my cases start out the same way. My client says something like, “I never thought this would happen to me. I’m not one of those guys.” They trusted their customer. They assumed because they did a “good job,” they’d never get embroiled in a legal dispute with their customer. They wonder what they can do to avoid these types of problems in the future.
A lot of these contractors fell into the trap of trying to save nickels and dimes. In so doing, they failed to seek basic legal advice in drafting a contract which could have protected them from a lawsuit. They didn’t know in advance the legal requirements of contracting with a consumer, and unwittingly step into liability by failing to comply with the law.
For example, in one recent case, a contractor downloaded a home construction contract from the internet, which unfortunately failed to comply with the applicable statutory laws in Ohio requiring disclosures of certain information about the contractor, including the contractor’s liability insurance info, phone numbers and address. In the absence of disclosing that information, that contractor was potentially liable for violating a statute requiring disclosures that weren’t included in the contractor’s internet contract.
Woe to the residential contractor who steps into the litigation arena without having done enough to protect himself or his company in these dangerous times. That contractor could face significant liability, subjecting both his company and personal assets to judgment liens.
Ohio’s Statutory Liability
Generally speaking, residential building contractors have a major disadvantage when sued by homeowner for alleged construction defects. Ohio’s Consumer Sales Practices Act (CSPA) (ORC §§1345, et seq), heavily favors consumers and provides significant deterrents for contractors to litigate disputes with homeowners. Among other things, the CSPA makes contractors potentially liable for statutory damages, treble damages, and the homeowner’s attorney’s fees. The CSPA not only creates liability for the company that contracts with a consumer, it also makes the individuals who committed the alleged CSPA violations personally liable. Thus, even though an individual incorporated his business, and even though that person did not contract with the consumer and acted solely in their capacity an employee of a corporation, that person is liable to the consumer if he violated the CSPA.
The CSPA is a broadly worded statute that applies to just about any transaction for goods or services between a business and a consumer. Under the CSPA, a “consumer” is “a person who engages in a consumer transaction with a supplier”. ORC §1345.01(D). (Bold added for emphasis). A “supplier” is “a seller…or other person engaged in the business of effecting or soliciting consumer transactions…”. ORC §1345.01(C). (Bold added). A “consumer transaction” is a “sale…or other transfer of an item of goods, a service, a franchise, or an intangible, to an individual for purposes that are primarily personal, family, or household…”. ORC §1345.01(A). (Bold added). Based on these definitions, the CSPA applies to just about any transaction between a contractor and a homeowner.
The Home Construction Services Suppliers Act (HCSSA)
In 2012, Ohio’s consumer laws changed to create an exception to CSPA for certain residential contractors. The new law offers limited protection the residential construction contractor. Ohio’s General Assembly adopted HB 383, which amended the CSPA and adopted ORC §4722.01. This legislation set forth an exception to CSPA liability for residential construction contractors. Known as “The Home Construction Services Suppliers Act,” or “HCSSA,” HB 383 exempted home construction contractors from the CSPA. In return, the law now requires residential contractors to include certain disclosures in home construction contracts. The failure to disclose certain information to the homeowner contract makes the residential contractor liable for either damages or rescission of the contract. But unlike the CSPA, under HB 383, the contractor is not liable for treble damages, and the contractor only has to pay the homeowner’s attorney’s fees only when the contractor “willfully” violates the HCSSA. Furthermore, unlike the CSPA, there is no reason to believe an employee of a contracting company is personally liable for a corporations violations of the HCSSA, assuming the corporation contracts with the homeowner.
If you’re a residential contractor reading this, this sounds pretty good, right? Unfortunately, while the HCSSA seems well intentioned, applying the HCSSA is not as simple as one might think. A close look at the HCSSA reveals open questions of when and how the HCSSA’s exceptions to CSPA liability can or should apply to residential construction contractors.
The starting place for this analysis is the CSPA’s and HCSSA’s statutory language. HB 383 amended ORC §1345.01(A) to include the following sentence: “[T]ransactions involving a home construction service contract” are NOT “consumer transactions” under the CSPA. Id. (Emphasis added).
At first blush, this sentence appears to indicate that as long as a contract is a “home construction service contract,” the CSPA won’t apply. But to rule out a CSPA claim, the construction contract itself must meet the requirements of the HCSSA.
Whether a contract and a contractor meet the necessary requirements to be exempt from the CSPA is not a simple matter. The HCSSA defines a “Home Construction Services Contract” as, “a contract between an owner and a supplier to perform home construction services…for an amount exceeding twenty-five thousand dollars.” ORC §4722.01(C). A “home construction service” is simply, “the construction of a residential building”. ORC §4722.01(B). A “residential building” is a “one…family dwelling and any accessory construction incidental to the dwelling.” ORC §4722.01(F).
Thus, ORC §1345.01 and ORC §4722.01 read together appear to create an exception to CSPA liability for contractors performing residential construction contracts for single family homes for amounts greater than $25,000.00. Logically speaking, such contracts are not “consumer transactions” to which the CSPA applies.
But to reach this conclusion, the contractor must also meet the definition of a “Home Construction Service Provider.” For a residential contractor to be a “Home Construction Services Supplier,” that contractor must met the following definition:
(D) “Home construction service supplier” or “supplier” means a person who contracts with an owner to provide home construction services for compensation and who maintains in force a general liability insurance policy in an amount of not less than two hundred fifty thousand dollars.
ORC §4722.01 (emphasis added).
Thus, to constitute a “Home Construction Services Contract” that is exempt from the CSPA, the service, the contract and the contractor must all meet the above definitions. Stated otherwise, if either the service, the contract, or the contractor do not each meet the HCSSA’s statutory requirements, the contractor is still potentially liable under the CSPA.
The Insurance Dilemma
Particularly interesting is subsection (D)’s requirement that a “supplier” or “service supplier” “maintain in force a general liability insurance policy for at least $250,000.00.”
Homeowners seeking to invoke the CSPA may argue that when the contractor’s commercial general liability insurance provider (CGL insurance provider) denies coverage, issues a reservation of right and/or files a declaratory judgment action, that contractor failed to meet this insurance requirement found in ORC §4722.01. But does a CGL insurance policy of at least $250,000 satisfy the HCSSA’s insurance requirement in the first place?
Notably, the HCSSA’s language does not refer to CGL coverage, but rather “general liability insurance”. The words of the statute do not match the term generally used by insurers for insurance policies covering contractors. Most insurance companies refer to such policies as “CGL” or “General Commercial Policies,” but HCSSA refers to a “general commercial liability” policy. Furthermore, other than a minimal amount of $250,000, the HCSSA does not include any specific requirements for the type of insurance coverage required.
Further still, the definition of “home construction service supplier” requires that the supplier maintains a “general liability insurance policy,” as opposed to any special endorsement or performance bond. And perhaps most significantly, the statute does not require a contractor or supplier to purchase insurance covering claims filed under ORC §4722. et seq—assuming a contractor could even buy insurance covering such claims to begin with.
The HCSSA only requires a contractor to “maintain general liability insurance” in amounts exceeding $250,000.00. This requirement seems focused on an amount of coverage, as opposed to a specific type of coverage. Unfortunately, the absence of any detail on the type of coverage required leaves open questions about what’s necessary to invoke the HCSSA and thereby avoid liability under the CSPA.
For example, what happens if the insurer denies coverage? Insurance coverage disputes involving alleged construction defects are not new to Ohio, and certainly, the legislature must have known of the decisions of Ohio’s courts on this subject when it drafted the HCSSA. Despite most certainly having knowledge of the ongoing court battles surrounding insurance coverage for construction defects, the General Assembly chose to only require “General Liability Insurance” in its definition of a “service supplier” in ORC §4722.01(D). Indeed, nowhere does the HCSSA require actual liability coverage for a construction defect or a coverage for claims under §§4722, et seq.
At the time the General Assembly passed H.B. 430, it certainly would have been aware of the numerous Ohio cases in which insurance companies denied liability insurance coverage to contractors for alleged construction defects on the basis that the alleged defective work is not an “occurrence’ as defined by the general commercial policy. For example, in Westfield Ins. Co. v. R.L. Diorio Custom Homes, Inc., 187 Ohio App.3d 377, 2010-Ohio-1007, 932 N.E.2d 369, ¶ 42 (12th Dist.), the court held Westfield had no obligation to indemnify or defend a contractor because the construction defects at issue were not “an occurrence” as defined by Westfield’s policy with the contractor. “Because the [owner] failed to allege damages as a result of an ‘occurrence’ as defined in [contractor’s] policy with Westfield, we find the trial court did not err in holding that Westfield has neither a duty to defend nor indemnify Diorio in the underlying action.”
Indeed, one of the most significant insurance coverage/construction defect case in Ohio in the past 20 years was Westfield Ins. Co. v Custom Agri Sys., 2012-Ohio-4712, 133 Ohio St 476, decided October 16, 2012. This case was pending before the Ohio Supreme Court when the legislature passed the HCSSA, and most assuredly, the General Assembly would have had knowledge of that case and the significant insurance coverage question pending before the Supreme Court when it passed the HCSSA.
Moreover, in the 6 years after the Westfield v. Custom Agri case, the legislature has taken no steps to amend ORC §4722.01(D) to require a specific type or kind of coverage for a contractor to meet the definition of a “Home Construction Service Supplier.”
Despite the General Assembly’s presumed knowledge of insurance coverage questions involved with nearly all residential construction defect cases, HB 383 only requires residential construction contractors to “maintain general liability insurance of at least $250,000,” as opposed to a performance bond or some other specialized insurance to meet the required definition of a “home construction service” provider who is exempt from CSPA liability. But what happens when the policy excludes coverage for “your [i.e. the contractor’s] work?” Considering that virtually all CGL policies exclude coverage for “your work,” is the HCSSA’s liability insurance requirement illusory?
At the time of writing this article, there were no Ohio cases interpreting ORC §4722(D). Perhaps future cases will address this issue. The answer is important to consumers and residential contractors alike, as the outcome determines whether the consumer can “treble” damages from faulty construction. In the absence of any amendments to ORC §§4722. et seq, Ohio’s courts will hopefully provide guidance as to what kind of insurance actually qualifies a contractor for protection under the HCSSA. But only time will tell whether the HCSSA offers contractors an escape from the CSPA or merely false promise of relief from potential liability.
Please contact me at email@example.com or 937-999-6214 to discuss.