Kvaerner Revisited… Again

Once in a while, a legal case comes along and gains such a level of notoriety that it becomes known by one name.  Like Cher and Madonna, the court case of Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Company, at least in the construction and insurance industries, has achieved this one-name status.  “Kvaerner” has become common in the lexicon of contractors and insurance professionals alike.  So notorious is the Kvaerner decision that some insurers have reacted by offering “Kvaerner gap” coverage to contractors. 

To refresh the reader’s memory, Kvaerner was a case in which Kvaerner Metals Division of Kvaerner U.S., Inc., as a contractor to project owner Bethlehem Steel, agreed to design and construct a coke oven battery.  Under the contract, Kvaerner agreed to build the battery according to plans and specifications that were part of the contract, warranted that its materials, work and equipment would be free from defects, and agreed to repair or replace any defective work or materials.  Shortly after commencement of operation of the newly constructed battery, Bethlehem Steel filed a lawsuit against Kvaerner alleging that it had breached the contract because the battery built by Kvaerner was damaged and did not meet the contract specifications and warranties or the applicable industry standards for construction.  Bethlehem Steel further contended that Kvaerner failed to remedy the battery’s problems.  Kvaerner sought coverage from two commercial general liability (CGL) policies issued by National Union in order to defend the action and for indemnification.  The insurer, National Union, refused to provide coverage and Kvaerner commenced a declaratory judgment action seeking a declaration from the court that it was entitled to coverage under the CGL policies issued by National Union.  The trial court decided that Kvaerner was not entitled to coverage under the policies.  On appeal, the Pennsylvania Superior Court reversed the decision of the trial court.  The case was appealed to the Pennsylvania Supreme Court which reversed the Superior Court.  In doing so, the court stated that the provisions of the insurance policies limited coverage to bodily injury or property damage caused by an “occurrence,” which the policy defined as an “accident.”  The Court went on to say that, because the underlying lawsuit alleged only property damage arising from faulty workmanship, there wasn’t the required “occurrence” or “accident” to trigger coverage and the duty of the insurer to defend and indemnify.  Because the term “accident” was not defined in the insurance policies themselves, the Court looked to the dictionary definition; and, adopting the definition in Websters II New College Dictionary, determined that an “accident,” sufficient to trigger coverage under the CGL policies would have to be “an unexpected and undesirable event” or “something that occurs unexpectedly or unintentionally.”  Faulty workmanship, the court said, does not qualify as the required “unexpected” fortuitous occurrence to meet the definition of “accident.” 

Kvaerner, as decided by the Pennsylvania Supreme Court, has come to stand for the legal proposition that (barring a specific contrary provision in a commercial general liability policy) there is no insurance coverage for property damage claims based on the faulty workmanship of contractors when the property damage is to the work product itself.  Simply put, the Court concluded that faulty workmanship could never qualify as an “occurrence” as required under the CGL policy.  The Court explained that to equate faulty workmanship with an “occurrence” or “accident” would be to convert a policy for insurance into a performance bond.  This is the case even in instances where artful attorneys draft the underlying complaints to include claims for negligence.  The Pennsylvania appellate courts have held that the nature of the claims pled, whether they be couched in terms of a breach of contract or negligence, is not determinative of the issue of whether the insurer’s obligations to defend and indemnify the insured contractor would be triggered.  Efforts by Plaintiffs and their attorneys to circumvent the Kvaerner decision by including negligence claims have been uniformly rejected by the courts when there is a contractual relationship between the injured party Plaintiff and the contractor under a doctrine referred to as the “gist of the action” doctrine.  Kvaerner has been the law in this Commonwealth since 2006. 

In the recent case of American Home Insurance Company and National Union Fire Insurance Company of Pittsburgh, PA v. Trumbull Corp., et al, in a decision authored by Senior Judge Stanton Wettick, Jr., the court revisited Kvaerner and other subsequent cases regarding the issue of whether a CGL policy could ever under any scenario be deemed to cover property damage caused by the insured’s faulty workmanship.1  Judge Wettick noted that there are four different factual scenarios under which an insured would be seeking coverage under a CGL policy for damages caused by the insured’s faulty workmanship.  They are: (1)  The faulty workmanship causes property damage to the work product itself (Kvaerner case scenario); (2)  The faulty workmanship causes property damage to the larger project (not the insured’s work product) with the work having been performed pursuant to a contract between the insured and the owner of the property that was damaged; (3)  The faulty workmanship causes property damage to the larger project (not the work product) but there is no contract between the party seeking insurance coverage and the owner of the property that was damaged; and (4)  The faulty workmanship causes property damage to the property of a stranger, a person who has had no involvement with the project and no relationship with the insured.  Judge Wettick, in this October 2012 decision, concluded that, based on Kvaerner and other subsequent appellate cases, there is no obligation on the part of an insurer under a CGL policy to defend or provide indemnification for any damages if those damages were caused by faulty workmanship thus expanding the reasoning of Kvaerner to all four scenarios.  Judge Wettick’s decision, being a Common Pleas Court decision, is not binding precedent on any other Common Pleas Court, much less an appellate court, faced with the issue of whether a CGL policy covers damage resulting from an insured’s faulty workmanship.  However, Judge Wettick is a highly experienced and well-respected jurist, and thus his decision in American Home may provide us with a glimpse ahead and guidance as to how Pennsylvania courts in future cases will rule on these issues. 

It bears noting that Pennsylvania is actually in the minority when it comes to these issues.  The Supreme Courts of a majority of other states have held that faulty workmanship can be an “occurrence” under CGL policies.  Contractors and insurers doing business in Pennsylvania will have to stay tuned.

 

1          In the Court of Common Pleas of Allegheny County, American Home Insurance Company and National Union Fire Insurance Company of Pittsburgh, PA v. Trumbull Corporation, Bed, Bath and Beyond, Inc., HCB Foundry, LLC, J.C. Penney Properties, Inc., J.C. Penney Corporation, Ross Stores, Inc., and Ross Dress for Less, Inc., Case No. GD-11-006886.   

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Harrisburg Magazine Readers' Choice 2011