Indalex v. National Union: Carving Away at Gambone, Insurance Policyholder Advocate

In several decisions over the last few years, courts in Pennsylvania have—inappropriately, in this author's view—taken a narrow view of coverage available under commercial general liability ("CGL") policies for liabilities resulting from construction and product defect claims. In a decision issued on December 3, 2013, Indalex Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2013 Pa. Super 311 (2013), http://www.pacourts.us/assets/opinions/Superior/out/J-A02017-13o%20-%201016361921823493.pdf, the Pennsylvania Superior Court appears to stem the erosion of coverage that has resulted from these decisions, which started with Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006) ("Kvaerner"), and continued with Millers Capital Ins. Co. v. Gambone Bros. Dev. Co., 941 A.2d 706 (Pa. Super. 2007) ("Gambone") and Erie Ins. Exchange v. Abbott Furnace Co., 972 A.2d 1232 (Pa. Super. 2009) ("Abbott"). The Kvaerner and Gambone cases rely in part on a determination that has no basis in standard CGL language: i.e., that defective construction can never be an occurrence because it is not "accidental." See, e.g., Kvaerner, 908 A.2d at 899 ("We hold that the definition of 'accident' required to establish an 'occurrence' under the policies cannot be satisfied by claims of faulty workmanship" because such claims "do not present the degree of fortuity contemplated by the ordinary definition of 'accident.'")

Given the effort it makes to distinguish these earlier cases—and Gambone in particular—the Superior Court's opinion in Indalex seems to reflect a recognition that Kvaerner and its progeny went too far in restricting coverage for the types of liabilities arising in the construction and manufacturing businesses that seem plainly to fall within the scope of CGL coverage: accidental property damage and bodily injury resulting from defective work or a defective product.

In Indalex, the insured (Indalex) manufactured windows and doors. Lawsuits were filed against Indalex by contractors or property owners alleging that Indalex's products were defective, resulting in "water leakage that caused physical damage, such as mold and cracked walls, in addition to personal injury." 2013 Pa. Super. 311 at 2 (page cites are to website version of the opinion cited above). The lawsuits included claims based on strict liability, negligence, breach of warranty, and breach of contract. Id. at 2-3. The trial court concluded that the decisions in Kvaerner and its progeny barred coverage on the basis that there was no "occurrence" as defined under the policy (id. at 7), and Indalex appealed.

On appeal, the Superior Court reviewed the Pennsylvania Supreme Court's 2006 decision in Kvaerner, as well as its own earlier decisions in Gambone and Abbott. Focusing on the duty to defend, the Superior Court held that the underlying complaints against Indalex triggered coverage because they alleged tort claims that the court could not conclude "are outside the scope of coverage." Id. at 14. Based on the allegations in the underlying complaints, this is clearly the right result. What is most interesting, however, is how the Superior Court got there: by distinguishing the holdings in Kvaerner, Gambone and Abbott, all of which contain expansive language on the "no occurrence" issue that has been read very broadly by some courts—and even more broadly by some insurers—to restrict coverage for damages resulting from construction and product defects on the supposed basis that such defects can never constitute an "occurrence."

In reaching its conclusion, the Superior Court first distinguished Kvaerner as requiring the result it did because the underlying complaint "alleged only faulty workmanship to the work product itself." Id. at 8. (To the extent that is all Kvaerner stands for, this is a correct result under standard-form CGL language, although an allegation of damage to property other than to the work itself clearly would trigger coverage.) The Superior Court further noted that Kvaerner involved only claims for breach of contract and breach of warranty, rather than tort claims. Id. at 9.

The Superior Court turned next to its own earlier decision in Gambone, distinguishing it on similar grounds: "the panel in Gambone focused on the allegations of faulty workmanship in what they had characterized as the product itself, the home." Id. at 10. This is a technically correct reading of Gambone, though insurers and other courts have incorrectly characterized the ruling as supporting the conclusion that faulty workmanship can never be an occurrence, even if there is damage to property other than the work itself.

Turning next to its 2009 decision in Abbott, the Superior Court correctly noted that Abbott had "further extended the Kvaerner holding to a suit involving a negligence claim, as well as breach of contract claims." The court then pointed out that, in Abbott, the panel had concluded that the underlying complaint did not adequately plead a negligence claim, and that "the gist of the action, therefore, was a breach of contract that was not an occurrence." Indalex at 12, citing Abbott, 972 A.2d at 1239. (Notably, one of the key issues raised on appeal in Abbott was that the underlying complaint had in fact pleaded damage to property other than to the work itself, but the court in Indalex failed to address that point, instead simply pointing to the portion of the opinion in which the Abbott court had concluded that the "negligence claim was not adequately pled.")

The Indalex court then took issue with its own earlier application of the "gist of the action" doctrine in Abbott. The Abbott panel had applied that doctrine to conclude that since the claim involved was, in its view uncovered breach-of-contract claims rather than (presumably, covered) negligence claims, there was no coverage. The Indalex panel expressed disagreement with that analysis in plain terms: "the gist of the action has not been adopted by our Supreme Court in an insurance coverage context" and therefore, applying it "at this juncture in a duty to defend claim is inappropriate." Indalex at 15, 17.

As a result of its valiant efforts to distinguish these earlier cases, the Indalex court held that coverage under the CGL policy was triggered: "Because the underlying complaints alleged defective products resulting in property loss, to property other than Appellants' products, and personal injury, we conclude there was an 'occurrence." Id. at 17. Unquestionably, the Superior Court got to the right result, but due to its own earlier decisions—which it now apparently recognizes resulted from an overly broad application of the "no occurrence" rulings in Kvaerner and Gambone—it had to tiptoe carefully through a precedential minefield to get there.

So where does this leave Pennsylvania law on the "no occurrence" issue? At the very least, the Indalex decision suggests a recognition by the Superior Court that Pennsylvania courts have gone too far in extending Kvaerner and it progeny to the types of claims insureds would expect to be covered, such as claims involving unintentional damage to work or property other than the insureds' work or property. If the Pennsylvania courts follow this ruling—and they should—they will be joining the majority of other states. CGL policies unquestionably exclude damage to the insured's own work or products, but nowhere do they say, in plain terms or otherwise, that liability for unintentional damage resulting from defective work or products is not covered.

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