DEFECTIVE CONSTRUCTION PRODUCT MANUFACTURERS MUST BE DEFENDED BY THEIR GENERAL LIABILITY INSURERS IN PENNSYLVANIA
DEFECTIVE CONSTRUCTION PRODUCT MANUFACTURERS MUST BE DEFENDED BY THEIR GENERAL LIABILITY INSURERS IN PENNSYLVANIA
Two months ago, in Indalex v. National Union Fire Insurance Co. of Pittsburgh, Pa., No. 126 WAL 2014 (Pa. Sept. 18, 2014), the Pennsylvania Supreme Court refused to hear a petition by the CGL insurers of Indalex, et al in an attempt to overturn the Superior Court’s ruling last year where the court held that the CGL insurers have a duty to defend the defective product manufacturer against claims of third party property damage, mold and personal injuries. Based on this decision, loss arising from a defective product may constitute an “occurrence” triggering general liability insurance coverage under Pennsylvania law.
Background
Indalex, a window and door manufacturer, sought coverage under a commercial umbrella insurance policy issued by National Union Fire Insurance Co. of Pittsburgh, Pa., for multiple lawsuits filed by homeowners and property owners. The lawsuits alleged that Indalex’s windows and doors were defectively designed or manufactured and resulted in water leakage that caused physical damage, including mold and cracked walls, as well as personal injury. The claims against Indalex were based on strict liability, negligence, breach of warranty and breach of contract.
The insurer argued that there was no “occurrence” triggering coverage, relying on Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006). In Kvaerner, Bethlehem brought an action against Kvaerner asserting claims of breach of contract and breach of warranty. In its complaint, Bethlehem alleged that it entered into a contract with Kvaerner (the “Contract”) pursuant to which Kvaerner agreed to design and construct a coke oven battery (the “Battery”) for Bethlehem. According to Bethlehem, under the contract Kvaerner (1) agreed to build the Battery according to certain “plans and specifications that were made a part of the [Contract],” (2) warranted that its materials, equipment, and work would be free from defect, and (3) agreed to repair or replace any defective work or materials.
Bethlehem then contended that based on these facts, Kvaerner breached the above Contract terms because the Battery built by Kvaerner was “damaged” and “did not meet the contract specifications and warranties, or the applicable industry standards for construction ․” Bethlehem further alleged that although it sent Kvaerner a “non-performance list” detailing the Battery's “damages and breaches,” Kvaerner had failed to remedy the Battery's problems. Moreover, Bethlehem incorporated by reference the “damages and breaches” listed in the non-performance list, which enumerated numerous problems with the Battery,
In Kvaerner, the PA Supreme Court ruled there was no “occurrence” because the underlying complaint alleged only property damage from faulty workmanship to the work product itself. Kvaerner also was based on an underlying complaint that contained only claims for breach of contract and breach of warranty.
The facts in Indalex are much different than the ones alleged in Kvaerner and in addition, the cause of action was not based on contract but was based on tort, negligence and third party personal injuries. In Indalex Inc. v. National Union Fire Insurance Co., several lawsuits were filed against Indalex, alleging that windows and doors it supplied to a residential construction project were defectively designed or manufactured, resulting in water leakage that caused physical damage to the underlying plaintiffs’ residences, as well as personal injuries in some instances. Many contractors also impleaded Indalex into lawsuits brought by homeowners directly against them. The primary insurer, One Beacon, defended and indemnified Indalex in these lawsuits. But when its policy limits were exhausted, National Union, the umbrella insurer, refused to defend and indemnify Indalex. Relying upon Kvaerner and its progeny, it claimed that faulty workmanship and product defects do not qualify as an “occurrence” under the National Union policy.
The Indalex court held that National Union was required to defend Indalex with regard to the underlying claims of property damage and personal injury. “Simply stated, because Appellants set forth tort claims based on damages to persons or property, other than the insured’s product, we cannot conclude that the claims are outside the scope of the coverage.”
The Indalex is an important, as well as correct decision
This is an important decision, especially for manufacturers who supply products that are used in construction projects. The critical distinction is that where a faulty product causes harm to other property, a CGL policy may provide coverage, because the damage to the “other property” constitutes an “occurrence.”
Many state supreme courts (for example, Connecticut, North Dakota, and West Virginia) have, in the past year, determined that faulty workmanship can be an occurrence, particularly where it causes unintended and unexpected damage to other property. And, some states have even enacted legislation requiring CGL policies to define occurrence to include property damage or bodily injury resulting from faulty workmanship, or have made it easier for insureds to obtain coverage for damages as a result of work the insureds performed (for example, Arkansas, South Carolina, Colorado and others). New Jersey also recently introduced legislation seeking to require CGL insurers to alter the definition of "occurrence" to include property damage from faulty workmanship.
Although the Indalex decision centered around faulty products, a parallel can be drawn between a faulty product and faulty workmanship, both of which may cause similar unintended damage. At the least, this decision widens coverage for policyholders, and appears to be a step in the right direction toward the majority view nationwide, that CGL policies should cover faulty workmanship that causes damage to other property.
Defense coverage (and perhaps even indemnification) for unexpected damage caused from allegedly defective work or products such as stucco or concrete may now be more likely.
Builders, contractors and manufacturers historically purchased such CGI policies to protect themselves against a multitude of risks and lawsuits, including claims for defective or faulty workmanship or manufacture of their products, and regardless of whether the damages sought from the contractors or manufacturers were for property damage or bodily injury, and by whatever theory of liability which was asserted against the companies.
Over the past several years, however, the Pennsylvania appellate courts had issued several decisions that significantly narrowed the scope of what was a “covered” claim under such CGI policies, which consequently limited the scope of the carrier’s duty to defend the builder, contractor or manufacturer which had been sued for alleged defective or faulty workmanship or products. Businesses were at a serious disadvantage in defending against such lawsuits if they could not at least count on the carriers’ duty to defend them in such a suit, let alone a duty to indemnify them.
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