Pennsylvania courts continue to struggle with complex concepts underpinning when faulty workmanship can be an “occurrence” triggering coverage under Commercial General Liability (“CGL”) policies. In Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Co., 908 A.2d 888 (Pa. 2006), the Pennsylvania Supreme Court found that, in certain circumstances, faulty workmanship does not constitute an “occurrence” because the resulting damage is not truly “unexpected.” According to the court, because a key component of the definition of “occurrence” is an “accident,” there is implied a degree of fortuity in “occurrence” not present in a claim for an insured’s failure to live up to its contractual undertaking. After Kvaerner, Pennsylvania courts and federal courts applying Pennsylvania law misapplied its holding, finding that faulty workmanship did not constitute an occurrence even when it caused unexpected, third-party property damage. See e.g., Millers Capital Ins. Co. v. Gambone Bros. Dev. Co., Inc. 941 A.2d 706(Pa. Super. 2007).
The Pennsylvania Superior Court corrected that trend and clarified the limited reach of Kvaerner in Indalex, Inc. v. National Union Fire Insurance Co. of Pittsburgh, PA, 83 A.3d 418 (Pa. Super. 2013). Indalex involved claims that the appellant manufactured defective windows that resulted in water leakage and interior damage, including mold, as well as personal injury. National Union denied coverage on the basis that there was no “occurrence.” The Superior Court distinguished Kvaerner, Gambone, and other cases by noting that “the Kvaerner holding was limited to situations ‘where the underlying claims were for breach of contract and breach of warranty, and the only damage were to the [insured’s] work product.’” Indalex, 83 A.3d at 424. The court distinguished those cases by noting that the definition of “occurrence” in the Indalex policy included the language “neither expected nor intended from the standpoint of the Insured.” Because the window manufacturer was sued for tort claims, in addition to contract claims, and because the definition of “occurrence” contained a subjective component not found in most other policies, the Superior Court in Indalex found a duty to defend.
In Hagel v. Joseph A. Falcone, Jr., et. al., No. 614 EDA 2014 (December 23, 2014), the Superior Court recently distinguished Indalex and further limited the potential for a recovery for construction defect claims. In Hagel, the plaintiffs entered into a contract with Falcone for the construction of their home. Penn Framing installed the windows, but did so improperly so that water leaked throughout the house, causing mold. Plaintiff sued both Falcone and Penn Framing. Penn Framing did not appear to defend itself, so plaintiffs took a default judgment. Plaintiff tried to execute on the judgment by garnishing against Erie Insurance Company, Penn Framing’s liability insurer. The plaintiffs argued that there was an “occurrence” because there was damage to property other than Penn Framing’s direct work and, because of damage to their personal property inside their house, property that was not even part of Falcone’s work.
The Superior Court went through the history of the “occurrence” litigation in Pennsylvania and noted that Kvaerner,Gambone, and Erie Ins. Exchange v. Abbott Furnace Co., 972 A.2d 1232 (Pa. Super. 2009), “have left open the door to a finding of an occurrence where unworkmanlike construction causes damage to property other than the work itself, and we discern no binding precedent that conclusively rejects this possibility.” Slip Op. at 22-23. The Superior Court ultimately distinguished Indalex by holding that the most critical element in that case was that the claims were product-liability/tort claims “based on damages to persons or property other than the insured’s product.” Slip Op. at 25. The court noted that there were no active malfunction or product liability claims, as such, being made against Penn Framing. Finding no “occurrence,” the Superior Court noted “ . . . it is foreseeable that a failure of workmanship that leaves a house’s envelope compromised and, therefore, vulnerable to water penetration, may be damaged thereby. It further is foreseeable that water penetration may damage the home as well as property, and even people, contained within it.” Slip Op. at 26.
Hagel is yet another example of how Pennsylvania courts have struggled with foreseeability concepts in applyingKvaerner’s holding. It is difficult to reconcile Hagel with Indalex; no one involved in a construction project intentionally performs shoddy work and they certainly do not expect that faulty work will result in any third-party damage beyond the work itself.
Hagel highlights the importance of retaining experienced insurance coverage counsel to review your insurance policies whenever a claim of faulty workmanship is asserted.