For a long time policyholders in Pennsylvania have had a rough go at getting coverage for property damage caused by defective construction. The principal hurdle has been Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006), where the state supreme court held that “the definition of ‘accident’ required to establish an ‘occurrence’ under the policies cannot be satisfied by claims based upon faulty workmanship. Such claims simply do not present the degree of fortuity contemplated by the ordinary definition of ‘accident’ or its common judicial construction in this context.”
Then, in the second of a one-two punch, the Pennsylvania Superior Court took Kvaerner a step further in Millers Capital Ins. Co. v. Gambone Bros. Dev. Co., Inc., 941 A.2d 706 (Pa. Super. Ct. 2007), holding that the natural and foreseeable acts of faulty workmanship also “cannot be considered sufficiently fortuitous to constitute an ‘occurrence’ or ‘accident’ for the purposes of an occurrence based CGL policy.”
The combination of Kvaerner and Gambone have led to Pennsylvania decision after decision holding that no coverage was owed, usually to a contractor, for property damage caused by its defective construction.
On January 30, the Eastern District of Pennsylvania held – at the judgment on the pleadings stage – that Kvaerner was not an impediment to an insured’s entitlement to a defense for claims for the defective construction of residences.
At issue in Nautilus Ins. Co. v. 200 Christian Street Partners, Nos. 18-1364, 18-1545 (E.D. Pa. Jan. 30, 2019), was coverage, for a defense, for 200 Christian Street Partners, for suits filed against it for its defective construction of two homes in Philadelphia. Specifically, owners of homes alleged that 200 Christian Partners marketed itself as a seller of luxury homes, yet sold homes that were “riddled with construction defects.”
Nautilus undertook 200 Christian Partners’s defense under commercial general liability policies and the insurer filed actions, seeking declaratory judgments, that it was not obligated to defend the insured.
The decision addresses a number of issues. The crux is this: “Nautilus contends that all of the allegations in the Underlying Complaints stem from issues regarding Defendants’ faulty workmanship. The parties agree [as did the court] that Pennsylvania law does not consider faulty workmanship to be an ‘occurrence’ that is covered under a Commercial General Liability (‘CGL’) policy. However, Defendants and the Owners counter that Pennsylvania law does recognize product-related tort claims, such as product malfunctions, as ‘occurrences,’ and the Underlying Complaints allege such malfunctions.”
In essence, the insureds and owners were arguing that Indalex, Inc. v. National Union, 83 A.3d 418 (Pa. Super. Ct. 2013) applied. In Indalex, in general, the Superior Court distinguished Kaverner [and Gambone] in the context of a “products” case. Specifically, windows and doors were defectively designed or manufactured by the insured and resulted in water leakage that caused physical damage, such as mold and cracked walls, in addition to personal injury. The court held that the issues were framed in terms of a bad product, which could be construed as an active malfunction, and not merely bad workmanship. An active malfunction, the court concluded, is fortuitous enough to constitute an “occurrence.”
However, in general, courts have consistently concluded that Indalex does not apply in cases involving faulty construction. See Hagel v. Falcone, No. 614 EDA 2014, 2014 Pa. Super. Unpub. LEXIS 464 (Pa. Super. Ct. Dec. 23, 2014) (declining to distinguish Kvaerner and Gambone) (“[T]he most critical element in Indalex was that the appellant’s claims were product-liability/tort claims that were based on damages to persons or property, other than the insured’s product. Such claims are absent here, where workmanship is at issue, rather than an active malfunction or product liability, as such. Hence, Indalex cannot carry the day for Appellants.”); Northridge Vill., LP v. Travelers Indem. Co., No. 15-1947, 2017 U.S. Dist. LEXIS 140541 (E.D. Pa. Aug. 31, 2017) (noting that “Indalex did not announce a new majority rule, but instead carved out a discrete scenario where a claim based in products liability could constitute an ‘occurrence’” and that the claims at issue did not “amount to an ‘active malfunction’ in any product, nor do they state a product liability claim”); MMG Ins. Co. v. Floor Assocs., No. 15-4814, 2017 U.S. Dist. LEXIS 124883 (E.D. Pa. Aug. 8, 2017) (“Because this case is about shoddy workmanship, Floor Associate’s reliance on Indalex, Inc. v. National Union Fire Insurance Co., is misplaced.”).
Despite these decisions, declining to apply Indalex to a faulty workmanship case, the court in 200 Christian Partners did so: “Here, although the Owners primarily allege claims for faulty workmanship, they also explicitly bring a claim for negligence, stating broadly that Defendants should be liable for negligently constructing the homes in a manner that presented a danger to the Owners. The Owners also make allegations specific to a product defect theory of negligence, such as that Defendants used faulty materials and that specific materials have caused problems. Moreover, the underlying complaint in Nautilus I alleges physical injury, such as respiratory issues, to in persons the home as a result of the issues with the home.” [More specifically, the complaints alleged, multiple times, that “[t]he Home was not free from ... faulty materials” and detailed specific concerns with certain products, including the windows, which caused water damage and mushrooms inside the home.”]
The court concluded that the underlying complaints “could encompass product-related tort claims.” Thus, the court could not “foreclose the possibility that Defendants used a third party’s product that actively malfunctioned in an ‘occurrence.’ Even though these allegations are far from specific or cohesive, we are required to resolve all doubts in favor of the insured.”
There is a world of difference between the product-related aspect of Indalex and that at issue here. Indeed, several courts have declined to apply Indalex to a faulty workmanship case. Nonetheless, the court held that Nautilus had a duty to defend until it became clear that there was no longer a possibility of a product related tort claim.
