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Vol. 7, Iss. 2
March 7, 2018

Pennsylvania Policyholder Finally Cracks The Kvaerner/Gambone Nut

For the past ten-plus years the insurers’ record in Pennsylvania faulty workmanship coverage cases has resembled that of the Harlem Globetrotters. The Pennsylvania Supreme Court’s 2006 decision in Kvaerner Metals v. Commercial Union Ins. Co. and the Superior Court’s 2007 decision in Millers Capital Ins. Co. v. Gambone Bros. Dev. Co. have been a one-two punch denying coverage to policyholders for construction defects. Kvaerner held that faulty workmanship does not constitute an “occurrence” under a commercial general liability policy. Gambone subsequently held that even consequential damages of faulty workmanship does not constitute an “occurrence.”

Well, the Washington Generals finally won. The Pennsylvania Superior Court recently decided J.J.D. Urethane Co. v. Westfield Ins. Co., No. 1440 EDA 2017 (Pa. Super. Ct. Feb. 9, 2018) (unpublished). It reads like most Pennsylvania faulty workmanship coverage cases -- until you get to the end.

The Borough of Bedford hired Howard Robson, Inc., a construction company, to upgrade the Borough’s wastewater facility. Robson hired J.J.D. Urethane, as a subcontractor, to supply and install urethane foam insulation, to the annular space on digester tanks, to create a seal against the tank walls. A few years later the Borough discovered that one of the digester tanks had been damaged. Robson had failed to correct it. The Borough sued Robson, who, in turn, filed a joinder complaint against J.J.D., claiming that “J.J.D. had improperly handled expanding foam insulation which was the ultimate cause of the damage to the digester tank.”

J.J.D. sought coverage from Westfield under a commercial general liability policy. Westfield disclaimed coverage and J.J.D. filed a declaratory judgment action. The trial court held that Westfield “did not have a duty to defend either the breach of contract or the breach of warranty claims in the joinder complaint since the claims were premised upon faulty workmanship, which does not constitute an ‘occurrence’ under the parties’ policy. [citing Kvaerner] However, the court found that the language in the Authority’s complaint and the joinder complaint regarding property damage that ‘occurred as a result of conduct outside of the scope of the [Authority’s contract with Robson] and J.J.D.’s Subcontract[,]’ could be considered an ‘occurrence’ under the policy, which could potentially fall within the policy’s coverage. Simply put, the trial court found that Westfield has a duty to defend, and potentially indemnify, Robson where it ‘carelessly allowed foam insulation to enter the digester [t]ank.’”

Westfield appealed to the Superior Court. The appeals court was not at all unmindful of the limitations placed on coverage for faulty workmanship by Kvaerner and Gambone. However, like the trial court, the appeals court also identified negligence outside the plans and specifications of the project; a possible scenario that the court noted was identified in Gambone.

The court held that “the complaint against the insured, J.J.D. (or, the joinder complaint), alleges negligent handling of the foam insulation and careless/negligent installation of the foam not in accordance with the plans and specifications of the project. Therefore, while the [Borough’s] complaint [against Robson] was grounded in allegations of defective workmanship, Robson’s joinder complaint does allege claims of negligent and careless work and work outside of the scope of the parties’ contract. Under such circumstances where the complaint ‘might or might not’ fall within the policy’s coverage as an ‘occurrence’, the insured is obligated to defend.” (emphasis added).

For sure the J.J.D. court could have done a better job of explaining this distinction, between work performed within the contract and outside of it. The court could have been more specific in this regard. Nonetheless, has the Superior Court – with its “work outside of the scope of the parties’ contract” concept -- just provided a way for underlying claimants to plead into long-denied construction defect coverage for their contractors -- at least for a defense. And with a defense in hand, the insured may have taken the first step to get its insurer to provide indemnity.

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