On December 3, 2013, a Pennsylvania Appellate Court revisited insurance coverage claims under Pennsylvania Law and determined that there could be an insurance covered “occurrence” in the construction setting perhaps loosening the previous case law precluding such coverage.
In Indalex v. National Union Fire Insurance Company of Pittsburgh, a Pennsylvania Appellate Court limited the faulty workmanship exclusion of many insurance policies and, in some instances, found an “occurrence” that could provide insurance coverage under a commercial insurance liability policy.
In Indalex, the insured was sued in multiple out-of-state lawsuits filed by homeowners and property owners as a result of defectively designed or manufactured windows and doors. The defect allowed water into the home, causing physical damage such as mold and rot in addition to claimed personal injury. The Trial Court, applying the seminal case Kvaerner Metal Division of Kvaerner US, Inc. v. Commercial Union Ins. Co., 589 Pa. 317 (Pa. 2006), barred the insurance coverage based upon the analysis that insurance will not cover property damage as a result of the insured’s work product pursuant to a “Product-Completed Operation Hazard.” In Kvaerner, there was a breach of contract and a breach of warranty claim due to a coke oven battery failure. The Pennsylvania Supreme Court found that the definition of an “accident” required to establish an “occurrence” could not be satisfied by the claim based upon faulty workmanship. Without an occurrence, the insurance carrier has no duty to defend or duty to indemnify.
Pennsylvania Courts have further extended Kvaerner’s holding to suits involving negligent claims, as well as breach of contract claims, where it is clear that the “accident” was a result of faulty workmanship.
In Indalex, the Appellate Court distinguished the Kvaerner line of cases with the failure of the off-the-shelf product of windows and doors. Here, there are issues framed in terms of a bad product which can be construed as an “active malfunction” and not merely bad workmanship.
The Court then relied upon the standards for interpreting an insurance policy and determined if a single claim in a multi-claimed lawsuit has potential coverage, the insurance company must defend against all claims of that complaint until it is clear that the underlying plaintiff cannot recover on any claim. The language of the complaint determines the insurer’s duties regardless if the factual allegations are true, false or fraudulent. The Court also distinguished that the duty to defend these claims requires a much broader interpretation of the policy language than a duty to indemnify and/or pay on the claim. However, both duties flow from the language within the complaint.
One of the inherent questions raised by the Appellate Division was a refusal to follow the “gist of the action doctrine” which the courts in Pennsylvania have long recognized to rule out tort/negligence claims when those tort claims arise solely from contractual relationships. Here, the Court opens this matter for Supreme Court review when it states:
Ultimately, because the gist of the action doctrine has never been adopted by our Supreme Court in an insurance coverage context, we are convinced that, at this juncture of a duty to defend claim, applying the gist of the action doctrine is inappropriate.
Past experience of case law will not be the last word on this subject and the pendulum may be shifting more towards the construction contractors, away from the insurance work product preclusion of coverage. Underlying cases holding faulty workmanship as not covered by an insurance policy seems firm, however, this case chips away at that foundation.