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Product manufacturers looking to recover insurance coverage for disputes stemming from allegedly defective products must base their claims solely on the plain language of the policies and the underlying products liability complaint—and may not look to outside factors—a federal appeals court has ruled, applying Pennsylvania case law.

A panel of the U.S. Court of Appeals for the Third Circuit on Friday rejected an aluminum parts manufacturer's argument that courts look at the facts pleaded in a complaint when considering whether carriers should indemnify them.

According to Judge David Porter, Sapa Extrusions had been seeking coverage for a "large sum" settlement it entered into with Marvin Lumber and Cedar Co. and Marvin Windows of Tennessee, which it had provided materials to for use in window- and door-related products. In making its determination, Sapa Extrusions, Porter said, wanted the court to consider any facts that Sapa or Marvin knew when they entered into the settlement.

Porter, however, said courts should follow the "four-corners" rule consistently applied by Pennsylvania state courts, which holds that, when a carrier is sued, its duty to defend is triggered by the factual allegations made in the underlying complaint.

"Sapa points to no case law holding that, when an underlying complaint never triggered a duty to defend, an insured may rely on facts outside the complaint to show that coverage exists," Porter said. "Indeed, were that the case, 'an insurer would be required to monitor the pre-trial developments of a case in which coverage was denied to [e]nsure that no discovery sheds light upon a possible claim for which a defense is mandated.'"

The dispute stemmed from a decades-old relationship between Sapa and Marvin, where Sapa sold millions of aluminum extruded profiles that Marvin incorporated into millions of windows and doors. Porter noted that, occasionally, customers would complain that the aluminum parts would oxidize, but, by the mid-2000s, the number of complaints increased, especially from people who lived within a mile of the ocean.

Marvin sued Sapa in 2010, alleging breach of contract, breach of several warranties, fraud, negligent misrepresentation, unlawful trade practices, consumer fraud and fraudulent concealment. The parties settled in 2013 for "a large sum," Porter said.

Sapa, Porter said, had 28 insurance policies from eight carriers during the time period their contract was in place, but the carriers disclaimed coverage, so Sapa then sued seeking indemnification. Looking only to the policies and the allegations in the underlying complaint, the district court determined that the carriers did not have to indemnify Sapa.

On appeal, Sapa argued the court should have expanded the scope of what it could review, citing the 2013 Pennsylvania Superior Court case, State Farm v. DeCoster. According to Porter, that case distinguished between a duty to indemnify and a duty to defend, and said a duty to indemnify "is not necessarily limited to the factual allegations of the underlying complaint. Rather, there must be a determination that the insurer's policy actually covers a claimed incident."

Porter said Sapa argued the case meant that courts could rely on facts outside the complaint to prove coverage existed. However, Porter said that, while the case made a distinction between a duty to defend and a duty to indemnify, it simply held that the complaint must trigger the more "broad" duty to defend, but those allegations were still the trigger for the duty to indemnify.

"Pennsylvania law thus creates a ratchet of sorts between the two duties. The initial allegations in the underlying complaint that may trigger the insurer's duty to defend must eventually mature into provable facts to spark a duty to indemnify," Porter said. "But this ratchet works in only one direction."

Reed Smith attorney James Martin represented Sapa Extrusions, and Teresa Ficken Sachs of Marshall Dennehey Warner Coleman & Goggin represented Liberty Mutual. Neither attorney returned a call seeking comment Friday. Stephen Cozen of Cozen O'Connor represented Pacific Employers Insurance Co. and Ace American Insurance Co. Cozen declined to comment.

Judges L. Felipe Restrepo and D. Michael Fisher joined the precedential ruling filed in Sapa Extrusions v. Liberty Mutual Insurance.