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, 2024), 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.