A Pennsylvania appellate court in Indalex, Inc. v. National Union Fire Ins. Co., No. 612 WDA 2012 (Dec. 3, 2013), found that a general liability insurer must defend a window and door manufacturer against claims alleging that defects in the manufacturer’s windows and doors caused damage to property and bodily injuries. The court also firmly rejected application of the “gist of the action” doctrine in the insurance coverage context, because its application would be irreconcilable with the insurer’s broad duty to defend.
Indalex, Inc. (“Indalex”), a manufacturer of windows and doors, was sued by contractors, product suppliers and homeowners for damages allegedly caused by defectively designed windows and doors made by Indalex. The underlying lawsuits alleged that the defective products caused property damage to homes (for example, mold and cracked walls) and, in some instances, caused bodily injuries. The underlying lawsuits asserted claims based on strict liability, negligence, breach of warranty and breach of contract.
Indalex was insured under policies of general liability insurance that afforded coverage for, among other things, lawsuits seeking damages because of “bodily injury” or “property damage.” Indalex tendered the underlying defect lawsuits to its primary carrier, and requested that the primary carrier provide a defense and indemnification. The primary carrier complied. When the primary policy’s limits were exhausted, Indalex tendered the lawsuits to its umbrella carrier, National Union Fire Insurance Company (“National Union”), but National Union denied coverage, asserting that the underlying lawsuits do not allege an “occurrence” and, therefore, the lawsuits did not trigger coverage. Indalex then filed suit in Pennsylvania’s Court of Common Pleas.
The trial court granted summary judgment in National Union’s favor, finding that the underlying lawsuits did not allege an “occurrence.” The trial court found, therefore, that National Union was not required to defend or indemnify Indalex. Indalex appealed.
APPEAL AND ARGUMENTS
Indalex raised three assignments of error on appeal. First, Indalex claimed that the trial court erred in finding that the underlying lawsuits involved only “faulty workmanship” and, therefore, did not allege an “occurrence.” Second, Indalex claimed that the trial court erred in failing to find that the underlying lawsuits pleaded tort-based product liability claims involving damage to property other than the doors and windows themselves. Third, Indalex claimed that the trial court improperly applied Pennsylvania’s “gist of the action doctrine” in concluding that the underlying lawsuits pled breach of contract claims and not negligence claims and, therefore, failed to assert claims that triggered the insurer’s broad duty to defend.
The appeals court observed that the trial court’s decision was based on the Supreme Court of Pennsylvania’s decision in Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 918 A.2d 888 (Pa. 2006). In Kvaerner, the supreme court held that coverage does not extend under contracts for general liability insurance to claims alleging “property damage” arising solely out of faulty workmanship. Kvaerner explains that to hold otherwise would effectively transform the insurance policy into a performance bond, since it would operate to guarantee the product and workmanship of the insured.
In Kvaerner, the insured was sued for breach of contract and breach of warranty over allegations that the insured’s product — a coke oven battery — was damaged and failed to meet construction specifications. The insurer denied coverage, claiming that the damage to the coke oven battery was not an “occurrence” and, even if it was damaged, as alleged, it was not an “accident” as defined in the insurance policy. Of significance in Kvaerner was that the alleged damage was only to the insured’s product. As the court explained, however, Kaevrner’s policy afforded coverage only for tort liability resulting from physical damages or injury to others and not for Kaevrner’s contractual liability.
Kvaerner is plainly distinguishable from the facts in Indalex. In Indalex, the insured’s products allegedly caused “property damage” to property other than the allegedly defective windows and doors. Similarly, the allegedly defective products caused “bodily injury,” which provided an independent basis on which to find there to be an “occurrence.”
Furthermore, Indalex did not foresee the “property damage” or “bodily injury” that resulted from its allegedly defective products. This, the court explained, was significant because the policy’s definition of “occurrence” required that Indalex neither expect nor intend the resulting injuries — a requirement that did not exist in the policy at issue in Kvaerner. The court concluded, therefore, that the claims against Indalex “set forth tort claims based on damages to persons or property other than the insured’s product,” which did not fall “outside the scope of coverage.”
Finally, the court specifically rejected application of the “gist of the action” doctrine, which has historically been applied under Pennsylvania law to prevent plaintiffs from pleading in tort what are actually and substantively contract claims. The court explained that the doctrine is unworkable in the insurance coverage context because it conflicts with the broad duty to defend afforded under general liability insurance policies, which requires 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 claim to a recovery excluded from the scope of the policy. This principle would be inconsistent with the “gist of the action” doctrine when analyzing a duty to defend. That doctrine precludes plaintiffs from re-casting ordinary breach of contract claims into tort claims. Thus, it makes sense that the doctrine does not govern an analysis of duty to defend coverage.
Indalex serves as a reminder of the broad coverage that general liability insurance provides for today’s manufacturers and product distributors. Where allegedly defective products cause resulting damage to property other than the insured’s product or work, or where an allegedly defective product or work results in bodily injury, that damage or injury constitutes an “occurrence” and should be entitled to coverage. Likewise, claims alleging such damage to property or resulting bodily injury should be sufficient to trigger an insurer’s duty to defend. And, where multiple claims are involved, it is no defense for the insurer that one or more of the claims may not allege an “occurrence,” because the broad duty to defend is triggered where even one claim against the insured is potentially covered under the policy.