Insurer's Duty to Defend Contractor Expanded

In December, the Pennsylvania Superior Court decided a case that could have an impact on the coverage available to contractors under commercial general liability insurance policies.  Often, when an owner sues a contractor for faulty workmanship, a contractor’s ability to receive coverage and a defense from its insurance carrier is dependent upon whether the allegedly faulty workmanship is an “occurrence” as defined in the insurance policy.  If it is not an occurrence there is no coverage and the contractor is on its own when it comes to defending a lawsuit and paying any damages that may result. 

In Pennsylvania, the Supreme Court, in Kvaerner Metals v. Commercial Union Insurance Company, held that claims for faulty workmanship did not meet the definition of “accident.” Without an accident there is no “occurrence” and thus no coverage.  The Kvaerner case has been routinely cited by insurance companies in denying contractors coverage for lawsuits arising out of allegedly faulty workmanship.  Although the Kvaerner case is still the law in Pennsylvania, the Superior Court’s decision in Indalex, Inc. v. National Union Insurance Company, 2013 WL 6237312 (December 3, 2013), may have cracked the Kvaerner wall just a bit.  The crack may be enough for a contractor to get coverage when, before Indalex, coverage would have routinely been denied. 

The Indalex case involved a number of lawsuits claiming that windows that were installed in a residential development “were defectively designed or manufactured and resulted in water leakage that caused physical damage, such as multi-cracked walls, in addition to personal injury.”  The lawsuits filed against Indalex by the homeowners pleaded a number of counts including breach of contract, breach of warranty, strict liability and negligence.  Indalex sought coverage and a defense from its liability insurance carrier. The insurance carrier refused coverage claiming there was no “occurrence.”  Indalex filed a lawsuit against its carrier based on that refusal.  Based on Kvaerner, the trial court agreed with the insurance company and dismissed the lawsuit.  According to the trial court, the case was essentially one for faulty workmanship and, therefore, Pennsylvania’s gist of the action doctrine barred coverage.  The gist of the action doctrine essentially bars claims based upon negligence if the negligence arose from a contract and the negligence claim duplicates the breach of contract claim.  The contractor appealed the decision of the trial court claiming that the homeowners’ lawsuit involved damage to property other than the work itself, i.e. the doors and windows, and, therefore, was covered by the insurance policy. 

The Superior Court reversed the decision of the trial court.  The Court found that the Kvaerner case was “limited to situations where the underlying claims were for breach of contract and breach of warranty and the only damages were to the insured’s work product.”  The Indalex case involved a malfunctioning window system and was not limited to the contractor’s allegedly poor workmanship.  The Court also noted that the definition of “occurrence” in the insurance policy at issue was different than the definition in the Kvaerner case.  The definition of “occurrence” in the Indalex policy defined “accident” as “including continuous or repeated exposure to conditions which results in bodily injury or property damage, neither expected nor intended from the standpoint of the insured.”  The policy in Kvaerner defined an occurrence as “an accident, including continuous or repeated exposure to substantially the same or general harmful conditions.”  The Superior Court found that the key distinction in the definitions was the inclusion of the phrase “neither expected nor intended from the standpoint of the insured.”  Since this is a fairly subjective standard, the Superior Court found that “an insurance company is obligated to defend its insured whenever the Complaint filed by the insured party may potentially come within the policy’s coverage.”  Given the definition of “occurrence” in the policy at issue in the Indalex case, the claims alleged by the homeowners could potentially come within the policies coverage. 

 As to whether the gist of the action doctrine barred claims for negligence like those pleaded in the Indalex case, the Court quoted an earlier Superior Court case that “if the underlying complaint contains more than one cause of action, and one of them would constitute a claim within the scope of the policy’s coverage, the insurer must defend the complaint until it can confine the complaint to a recovery excluded from the scope of the policy.”  The Court noted that the gist of the action doctrine has not been adopted by the Pennsylvania Supreme Court in an insurance coverage context and “that, at this juncture of a duty to defend claim, applying the gist of the action doctrine would be inappropriate.”

There are two important takeaways for contractors from this case:  (1) if you are sued because a manufactured item (for example windows) that a contractor installed malfunctioned and caused property damage there may be coverage under your insurance policy; and (2) a lawsuit that includes counts for breach of contract and negligence arising out of the same scope of work may still trigger coverage as long as one of the counts pleaded could potentially be an “occurrence” as defined in the insurance policy. 

If you have questions regarding an insurance policy, please contact us at 717-763-1383 or asouders@reageradlerpc.com.   

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