Christopher Tellner, Kaufman Dolowich & Voluck

No matter how much lipstick claimants and policyholders put on claims arising from faulty workmanship, they still remain a nonoccurrence under CGL policies. Continuing into 2018, Pennsylvania state and federal courts have been expanding the Pennsylvania Supreme Court's Kvaerner ruling in favor of finding no coverage for faulty workmanship claims under CGL policies of insurance. Courts have expanded their findings of no coverage to include not only the faulty workmanship but also damage to other property and work outside of that provided by the insured that was a reasonably foreseeable result. Recently, the U.S. Court of Appeals for the Third Circuit cemented this scope of coverage law to find that damages flowing from faulty workmanship were not an occurrence. Similarly, Pennsylvania courts are routinely rejecting bad faith claims when insurers deny coverage for faulty workmanship and related damages. Ultimately, insurers should issue all appropriate coverage determinations to the insured when claims of faulty workmanship are submitted from coverage and seek an immediate court declaratory judgment that defines the scope of coverage, if any, when warranted.

Since 2006, Pennsylvania law provides that there can be no finding of an occurrence under a general liability policy for faulty workmanship of an insured. This holds true for all claims of faulty workmanship asserted under claims of breach of contract and breach of warranty.  Simply put, Pennsylvania law finds that such claims are not a fortuitous accident, and therefore, are not an occurrence.

Pennsylvania law is clear with respect to interpretation of the term “occurrence” in CGL policies. “The definition of 'accident' required to establish an 'occurrence' under the policies cannot be satisfied by claims based upon faulty workmanship,” see Kvaerner Metals Division of Kvaerner U.S. v. Commercial Union Insurance, 908 A.2d 888, 899 (Pa. 2006). Claims based upon faulty workmanship “simply do not present the degree of fortuity contemplated by the ordinary definition of 'accident' or its common judicial construction in this context.” Property damage to the work product itself arising from poor workmanship does not trigger the defense duty, (holding no duty to defend claims arising from damaged coke battery, interpreting “accident” within the meaning of “occurrence”).

Post-Kvaerner, a trend emerged, though, where underlying claimants began to assert tort-based claims in an effort to trigger coverage. Namely, claimants began to allege that faulty workmanship of an insured resulted from claims of negligence, negligent misrepresentation, negligent failure to perform professionals services, and myriad others. Numerous courts have expanded Kvaerner to find that, simply relabeling causes of action to appear accidental is insufficient to alter what would otherwise be non-accidental conduct into that of an occurrence.

The proclamations of Kvaerner have been extended under Pennsylvania law to preclude coverage for damage to property that was a “natural and foreseeable” result of the faulty workmanship. The “natural and foreseeable” results of faulty workmanship include:

• Millers Capital Insurance v. Gambone Bros. Development, 941 A.2d 706 (Pa. Super. Ct. 2007) (no duty to defend water damage to other property that resulted from defective stucco installation).
• Peerless Insurance v. Brooks Systems, 617 F. Supp. 2d 348 (E.D. Pa. 2008) (finding no duty to defend against professional negligence, breach of contract, and breach of warranty claims that clearly constituted allegations of faulty workmanship per Kvaerner).
• Meridian Mutual Insurance. v. James Gilligan Builders, 2008 U.S. Dist. LEXIS 109018 (E.D. Pa. June 18, 2009) (finding no duty to defend claims of “defects in stucco application, sealing at the windows, doors, and other penetration points” because such claims were based on faulty workmanship).
• Nationwide Mut. Ins. Co. v. CPB International, 562 F.3d 591 (3d Cir. 2009) (“natural and foreseeable acts … which tend to exacerbate the damage, effect, or consequences caused ab initio by faulty workmanship also cannot be considered sufficiently fortuitous to constitute an 'occurrence' or 'accident' for the purposes of an occurrence based CGL policy.”).
• Bomgardner v. State Farm Fire & Casualty, 2010 U.S. Dist. LEXIS 96379 (E.D. Pa. Sept. 14, 2010)(holding there was no duty to defend “claims based on defective workmanship” and rejecting the alternative argument that the damaging results from the defective workmanship constitute an “occurrence”).
• Specialty Surfaces International v. Continental Casualty, 609 F.3d 223 (3d Cir. 2010) (relying on Gambone in holding insurer had no duty to defend manufacturer-seller of synthetic turf against negligence and breach of warranty claims because “faulty workmanship, even when cast as a negligence claim, does not constitute [an 'occurrence']”).
• Tower Insurance v. Dockside Associations Pier 30 LP, 834 F. Supp. 2d 257 (E.D. Pa. 2011) (no duty to defend claim “that as a result of faulty construction, water 'intruded' into [underlying plaintiff's condominium] unit causing water damage and mold.”).
• Westfield Insurance v. Bellevue Holding, 856 F. Supp. 2d 683, 702 (E.D. Pa. 2012) (finding no duty to defend because the underlying claims against the insured were “based entirely on claims of faulty workmanship”).
• Zurich American Insurance v. R.M. Shoemaker, 2012 U.S. Dist. LEXIS 35760 (E.D. Pa. Mar. 16, 2012)(relying on Gambone and Kvaerner for the proposition that “faulty workmanship by a contractor which results in damage to additional property of the other party to the underlying contract is not an 'occurrence'” and that “[w]ater damage is a foreseeable result of faulty workmanship” lacking in the “required 'degree of fortuity' for an occurrence to have taken place, even if couched in terms of negligence”).
• BUT SEE – Indalex v. National Union Fire Insurance of Pittsburgh, PA, 83 A.3d 418 (Pa. Super. Ct. 2013) (finding an occurrence when it was alleged that windows and doors manufactured by the insured and installed by a third party in claimants' homes were defectively designed or manufactured, “actively malfunctioned,” and allegedly caused damage). The Superior Court found that faulty workmanship, alone, did not contribute to the underlying claims. Rather, there were “issues framed in terms of a bad product … an 'active malfunction,' and not merely bad workmanship.” Thus, Indalex truly does not stand for the proposition that faulty workmanship can give rise to an occurrence, but rather, that claims of product liability of an insured can give rise to an occurrence.
• Hagel v. Falcone, 116 A.3d 698 (Pa. Super. Ct. 2014)(no duty to defend claims for consequential damages to property other than the property that the insured installed).
• Atain Insurance v. East Coast Business Fire, 2018 U.S. Dist. LEXIS 15535 (E.D. Pa. Jan. 31, 2018) (granting insurer's motion for judgment on the pleadings, declaring no duty to defend or indemnify the insured for claims of negligence, negligence misrepresentation and unjust enrichment, relative to alleged faulty commercial fire suppression installation and maintenance, because the claims were not an “occurrence” given all duties and breaches arise from contractual obligations).
• Sapa Extrusions v. Liberty Mutual Insurance, 2018 U.S. Dist. LEXIS 73162 (M.D. Pa. May 1, 2018) (where aluminum window extrusion manufacturers products, which were incorporated into doors and windows, began to oxidize, absent any tort claims based on products liability or an “active malfunction,” there was no occurrence for claims sounding breach of contract, breach of express warranty, breach of implied warranty, fraud, fraudulent concealment, negligent misrepresentation, unlawful trade practices—absent any tort claims based on products liability or an active malfunction).
• Lenick Construction v. Selective Way Insurance, 2018 U.S. App. LEXIS 15197 (3d Cir. June 6, 2018) (finding no occurrence and no duty to defend subcontractor, despite argument that faulty workmanship of others led to the later failure of its work, because the underlying complaint did not seek to hold the insured liable for others' faulty products or poor workmanship) (rejecting bad faith claim because there was no coverage). Thus, the policyholder could only be found liable in the underlying lawsuit for its own faulty workmanship.

Thus, there is no duty to defend when faulty workmanship of an insured caused natural and foreseeable damages to other property. Claims for breach of contract and warranty, negligence, strict liability, fraud, and consumer protection violations, which were founded upon allegations of faulty workmanship and resulted in natural and foreseeable damages, even when exacerbated by other factors such as rainfall, are deemed caused by faulty workmanship and not sufficiently fortuitous to constitute an occurrence.

Certainly, in an effort to trigger coverage, claimants will continue to craft lawsuits that seek to avoid non-accidental language. Thus, it is imperative for insurers to revisit Kvaerner and its progeny to determine whether an occurrence has been alleged. In those cases where it is not crystal clear that an occurrence has been alleged—especially in substantial claims—insurers should file a declaratory judgment action either under a proper reservation of rights or after disclaiming coverage, see American Legacy Foundation v. National Union Fire Insurance, 623 F.3d 135 (3d Cir. 2010). Where there is no coverage, there can be no bad faith for denying coverage.  Lenick (citing Grossi v. Travelers Personal Insurance, 79 A.3d 1141 (Pa. Super. Ct. 2013)).

Christopher J. Tellner is a partner in the Pennsylvania offices of Kaufman Dolowich & Voluck where he concentrates his practice in the fields of insurance coverage, professional liability and business litigation.