Pennsylvania Supreme Court Considers Whether Allegations of Faulty Workmanship
Constitute "Occurrence"
November 2006
In Kvaerner Metals Division of Kvaerner U.S.,
Inc. v. Commercial Union Insurance Company (Pa. Oct. 25, 2006), the insured
was sued for breach of contract and breach of warranty in connection with its
design and construction of a coke oven battery.
by Kevin
Merriman
Goldberg
Segalla LLP
The complaint alleged that the insured agreed to build the battery according
to certain plans and specifications that were part of a contract; that the insured
warranted that its materials, equipment, and work would be free from defects;
and that it would repair and replace any defective work or materials. The complaint
alleged that the insured breached the contract because the battery was damaged
and did not meet contract specifications and warranties, or applicable industry
standards. The complaint sought the amount it would cost to replace the coke
oven battery or the difference in the value of the battery it received and the
one that the insured warranted it would deliver.
Upon receipt of the suit, the insured notified its insurer, and requested
defense and indemnity under two commercial general liability (CGL) policies.
The insurer disclaimed coverage on various grounds, including that the claim
did not involve "property damage" arising from an "occurrence" as required by
the policies and that the damages were excluded under the business risk exclusions.
A declaratory judgment action ensued.
On motion for summary judgment, the insured argued (with the support of two
experts) that the insurer was obligated to defend and indemnify it because the
battery was damaged by an accident, i.e., that the battery was damaged because
of "longitudinal movement of the roof," which was caused by heavy rains and
because the bricks in the battery's roof were grouted too early. The insured
argued that because it did not expect or intend early grouting or the rains
to cause movement in the roof, it was an accident or "occurrence" within the
meaning of the policies. The insured also argued that "completed-operations
coverage" was included in the policy, and that such coverage included damages
to improperly completed work product performed by a subcontractor.
First, the Pennsylvania Supreme Court considered whether it was proper to
look beyond the allegations in the complaint to determine the insurer's duty
to defend and indemnify its insured. The court adhered to well-established precedent
for its holding that an insurer's duty must be determined solely from the language
of the complaint and the language of the applicable policies. It was improper,
the court concluded, to consider expert reports that torrential rains may have
caused the damages.
Next, the court considered the language of the policies, which provided coverage
for an "occurrence," defined by the policy as an "accident." The court concluded
that, while the term "accident" was not defined by the policy, an ordinary definition
of that term (Webster's II New College Dictionary (2001)) is "an unexpected and undesirable event," or "something that occurs
unexpectedly or unintentionally," the key being something "unexpected." The
court concluded that the term "implies some degree of fortuity not present in
a claim for faulty workmanship."
Citing a number of decisions from other jurisdictions, and the oft-cited
law review article by Roger C. Henderson, Insurance
Protection for Products Liability and Completed Operations; What Every Lawyer
Should Know, 50 Neb. L. Rev. 415 (1971), the court held:
- 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. To hold otherwise would be to convert a policy for insurance
into a performance bond. We are unwilling to do so, especially since such
protections are already readily available for the protection of contractors
[referring to the insured's builders risk and professional liability policies].
Finding that the complaint detailed construction defects and a series of
workmanship-related irregularities, the court concluded that the suit alleged
only property damage from poor workmanship to the insured's own work product.
Thus, the court held that the insurer had no duty to defend or indemnify the
insured in the underlying action. In view of this, the court found it unnecessary
to address the business risk exclusions.
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