In Indalex, Inc. v. National Union Fire Ins. Co., Pennsylvania’s Superior Court, following reasoning in a U.S. District Court case, National Fire Ins. Co. v. Robinson Fans, has limited the application of Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Ins. Co. in defining what constitutes an occurrence. While identifying various rationales for its decision, the essential part of the Superior Court’s holding is that if a party manufactures a product prior to entering a contract to sell that product, tort law applies and there is a potential “occurrence” under a commercial general liability policy if that product fails and damages other property. If that same party manufactures the same product under a contract, however, then Kvaerner may apply and there is no occurrence if that product fails and later causes foreseeable consequential property damage.
In 2006, Pennsylvania’s Supreme Court issued its Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., clarifying the meaning of “occurrence” in insurance policies, where the underlying nature of the relationship between the insured and the party seeking relief is contractual. More specifically, the case addresses the general circumstances where an insured is engaged to perform some work or provide materials in connection with that work. In short, if the workmanship is faulty and a damages claim is directed at the faulty workmanship, then no occurrence exists and there will be no coverage.
One year later, in Millers Capital Ins. Co. v. Gambone Brothers’ Development Co., the Superior Court addressed the issue of whether claims for damages that go beyond the workmanship or materials in themselves fall within Kvaerner’s “occurrence” analysis. In Gambone there were alleged water leaks in newly constructed homes’ interiors based on purported construction and material defects in the homes’ exterior stucco. Looking to Kvaerner, the Superior Court observed that “natural and foreseeable acts, such as rainfall, 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.” This case has been followed on more than one occasion by the United States Court of Appeals for the Third Circuit.
In a thoroughgoing opinion written in 2012 by Judge Wettick, American Home Assurance Company v. National Union Fire Ins. Co., dealing with the case law on damages flowing from non-occurrence faulty workmanship claims, this leading jurist went through the post-Kvaerner Superior Court and U.S. Court of Appeals for the Third Circuit case law on the scope of an “occurrence.” He concluded:
“We learn from Kvaerner that there is no coverage for property damage caused by faulty workmanship to the work product itself.”
“We learn from the remaining case law that a CGL policy does not cover property damage to the owner’s property caused by the insured’s faulty workmanship where the work was performed pursuant to a contractual relationship between the insured and the owner of the property.”
He went on to observe that the case law did not address claims where the damages flowed to a third party’s property on which the insured did not work, or situations where there was no underlying contract between the insured and the entity suffering property damage. He then concluded:
” In every case which I have discussed, the Court has said that the definition of accident, required to  establish an occurrence, cannot be satisfied by claims based on faulty workmanship. …. Furthermore, there is no language in any of the cases decided after Kvaerner which suggests that the courts’ interpretation of a CGL policy–that injuries caused by faulty workmanship is not an accident–is flexible.”
The Superior Court now appears to have found some such flexibility, without following the same analytic methodology found in Judge Wettick’s analysis. In Indalex, Inc. v. National Union Fire Ins. Co., the Superior Court found that Kvaerner did not apply to a products liability type claim concerning materials used to construct homes. Re-argument has been denied, though a petition for appeal to the Supreme Court may be forthcoming.
The case involved windows and doors alleged to be defectively designed or manufactured and installed into numerous homes nationally. The products allegedly failed, resulting in water leakage that caused physical damage such as mold and cracked walls, in addition to personal injury. The insured was apparently not the builder, but sold these windows to developers, general contractors, or subcontractors. Claimants included persons outside of Pennsylvania, with out-of-state claims based on strict liability, negligence, breach of warranty, and breach of contract. The trial judge, who also happened to be Judge Wettick, granted the insurer summary judgment based upon Kvaerner, finding no “occurrence” under the commercial umbrella policy at issue. The Superior Court reversed on various grounds.
The Superior Court considered it significant that the Indalex policy defined “occurrence” differently than the definition found in the Kvaerner policy: “an accident, including continuous or repeated exposure to substantially the same or general harmful conditions” (Kvaerner) vs. “As respects Bodily Injury or Property Damage, an accident, including continuous or repeated exposure to conditions, which results in Bodily Injury or Property Damage neither expected nor intended from the standpoint of the Insured. All such exposure to substantially the same general conditions shall be considered as arising out of one Occurrence.” (Indalex). The Court accepted the argument that this different language — “neither expected nor intended from the standpoint of the insured” — “provides that it is the insured’s subjective viewpoint, and damages such as mold related health issues were arguably not expected.” On this basis, Indalex may have limited applicability to policies defining occurrence in the same manner as Kvaerner and Gambone.
The Superior Court also considered it significant that prior precedent had, in its review, not given full consideration to the presence of tort claims because those cases focused on contract or warranty claims. A court reviewing coverage had to address an such tort claims if they existed in the underlying complaint, and could not itself eliminate them through use of the gist of the action doctrine. Rather, that doctrine’s application would solely be up to the insured as defendant to raise in the underlying action, and solely up to the judge in the underlying action to decide (distinguishing a prior Superior Court case which had done the contrary). Thus the persistence of tort claims in the underlying action created a material difference in this case than prior case law, per the Indalex Court, in finding Kvaerner inapplicable.
One issue that this raises is whether this “presence of a tort claim” argument is actually a downstream, second level, issue from the source question of whether there is an occurrence. If so, then the “presence of a tort claim” analysis still must address the longstanding Pennsylvania body of coverage case law that the cause of action chosen by the underlying plaintiff, in and of itself, cannot determine the coverage issue. Rather, this is determined by the nature of the allegations in the complaint, not the legal theories a plaintiff puts on them. A label might say anything, but courts must look at what’s actually inside the pleading box, i.e., the factual allegations in the pleadings and not merely the names placed on them. It seems unlikely that Indalex stands for the proposition that if a plaintiff chooses to label a breach of contract claim a negligence claim, or pleads one count in breach of contract and a second as negligent performance of a contract, then Kvaerner doesn’t apply. If it does, then it would be in conflict with existing case law. Rather, the more subtle question it addresses must be whether the pleaded facts allege tort or contract claims in determining coverage; and if they allege an “accident,” then the negligence label may be apt; though the more interesting question appears to be whether these facts allege non-contractual strict products liability claims.
Thus, the most essential point to Indalex is likely the Superior Court’s finding a dispositive distinction between a product liability/strict liability claim and a contract claim for purposes of a Kvaerner analysis. The Superior Court emphasized the difference between the other cases where developers using another’s products were the defendants, and this case where the defendant was an upstream manufacturer whose products were purchased “off-the-shelf”. Thus, the other cases were about faulty workmanship and this case was about bad product. The Court must have recognized, at least implicitly, that the windows were sold under a contract at some point, e.g., from the manufacturer to the general contractor, or a wholesaler to the general contractor or developer, using them to build new homes. However, it did not focus on that relationship or chain of relationships; rather, it focused on the concept that the injured parties’ claims, or joinder complaints by defendants or third party defendants, include strict products liability theories or negligent design or manufacture theories, which, it found, (a) are tort claims distinct from contract claims and/or (b) can co-exist in a complaint with contract claims depending on the specifics of a contract.
Relying on the distinction between an upstream manufacturer mass producing a product and a downstream builder-user of that product, the Indalex opinion foregoes the kind of detailed case-by-case analysis encompassing a consequential damages as occurrence review as found in Judge Wettick’s American Home Assurance opinion. Thus, e.g., the Indalex panel distinguishes Gambone because it did not involve a claim against the seller of the product, but against the builder using the product, and/or because “the panel in Gambone focused on the allegations of faulty workmanship in what they had characterized as the product itself, the home.”
In looking directly at the Gambone opinion, that panel did not clearly state as such that it considered the damaged floor inside the home and the exterior stucco of the same home as part of a single product. Gambone does find that the defective stucco constituted the faulty workmanship/material; and it appears to find that the interior floor, which had no flaw in itself, was damaged through faulty materials elsewhere in the structure as a consequence of that faulty workmanship/material. In that regard, Gambone unquestionably includes an analysis of what consequential damages do not constitute an occurrence under Kvaerner. This would appear to be have been included in the opinion because the panel distinguished the faulty work and product (the stucco) from damage to another part of the work that had no faults (the interior floor). Judge Wettick’s analysis in American Home Assurance follows this line, interpreting subsequent Superior Court and Third Circuit case law to hold that damage flowing from the faulty workmanship/materials are likewise not an “occurrence” because they did not originate in an accident. The Indalex Panel does not clearly address the issue from this perspective.
Taking a further look at Gambone, the panel addressed two complaints in that consolidated case. These included defective product claims. One complaint alleged: “’construction defects and product failures’ in, inter alia, the homes’ vapor barriers, windows, roofs, and stucco exteriors.” In the second complaint, the damages are alleged to be from faulty workmanship, pleaded generally, but also to be from the use of “defective stucco” in the building exterior, which defective stucco resulted in “’delamination, peeling, disfigurement, compromise of structural integrity, infiltration by the elements, mold, cracking of the exterior cladding, and moisture penetration and entrapment in and through said system.’” Thus, Gambone was not limited in its ruling to pure faulty workmanship claims, but also faced claims of defective products directly causing harm, though in the context of the builder/developers use of those defective products. Moreover, in one of the two complaints, a strict liability claim was still pending at the time of the Gambone panel’s decision (apparently based on the builder being in the chain of distribution). Thus, it would appear, prior to Indalex, there is precedent for the Superior Court applying Kvaerner to a strict liability claim against a downstream purchaser of the defective product.
Although not binding on Pennsylvania state courts, the U.S. Court of Appeals for the Third Circuit has predicted that Gambone would be applied in a products liability type setting to a commercial general liability policy. In Nationwide Mut. Ins. Co. v. CPB International, Inc., the insured was an importer and wholesaler of a nutritional supplement, which was then incorporated by other companies into a final product. The importer was sued for selling defective product to an end user under a breach of contract theory. That Court applied Kvaerner’s and Gambone’s foreseeability analysis in finding no occurrence. Later, in Specialty Surfaces International v. Continental Casualty Co., the insureds were a manufacturer of artificial turf and an installer of that turf. The underlying complaint alleged breaches of warranty as to the turf being defective itself and/or improperly installed. Following its own prior precedent, Kvaerner, and Gambone, the Third Circuit predicted that the Pennsylvania Supreme Court would follow Gambone’s analysis concerning consequential damages resulting from faulty workmanship not constituting an occurrence.
Indalex looks to a Federal District Court case that distinguishes Kvaerner, Gambone, and the Third Circuit opinions when applied to a product manufacturer in a design defect case. A few such District Court cases have stated that a party can negligently design or make a product subject to tort law, if that product is sold under a contract after the original manufacture, or if the contract for manufacture lacks specifications and the manufacturer is left to apply “industry standards”. Thus, e.g., if a contract sets out that a product is to be built to certain standards or design specifications, and there was a failure to do so, Kvaerner applies. However, if the contract did not specify standards, and the manufacturer failed to meet industry standards or designed the product improperly, then that could be negligence; or if the product was manufactured prior to a contract being entered, then its design and manufacture would be governed by “industry standards” and tort law, rather than contract law. These courts, and Indalex, also describe the difference between a Gambone type non-occurrence and Indalex occurrence as being that products built prior to a contract create liability when they later “actively malfunction” in use vs. “flawed product-related work done in performance of a contract….”
It would be useful if these courts would more clearly address the basic circumstances that: (a) the insured was contractually engaged to provide the product at some point, and would never have manufactured the products without the hard reality that someone or some entity was going to enter a contract to buy those products; (b) the injured party either contracted directly with the insured to buy the product at some point, or contracted with a party that contracted with the insured to buy the product; and (c) the product was very likely received by the injured party with some level of warranty. Thus, this is not the purely fortuitous situation where an innocent third part is hurt by a product purchased by another. Put another way, the injured party is not random, but is an end user who is contracting for that product at some point, whether directly from the manufacturer, a wholesaler, or a contractor using that product to do the job. Further, to the extent the courts are concerned that there will be no coverage available to manufacturers if the CGL policy provides no coverage, then these courts should consider whether these product manufacturers have, or could have obtained, product liability related insurance designed to protect them from the kind of negligent manufacture/design or strict product liability claims at issue.
These, and the other issues raised in Indalex, will surely require more development and analysis, and we have likely not heard the last of them.
On September 18, 2014, the Supreme Court denied the Petition for Allowance of Appeal in Indalex, No. 612 WDA 2012.