Pennsylvania Supreme Court Finds No Insurance Coverage for Negligent Breach of Contract

Pennsylvania Supreme Court Finds No Insurance Coverage for Negligent Breach of Contract

November 2006

In 2003, Pennsylvania’s Superior Court issued two apparently contradictory opinions. In Freestone v. New England Log Homes, the Superior Court found that the “gist of the action” doctrine mandated that a claim for providing faulty building materials was solely a breach of contract claim and not a tort claim. As breaches of contract are not occurrences or accidents under insurance policies, these were not covered claims. In seemingly direct contradiction with Freestone and prior Superior Court case law, a three judge panel in Kvaerner Metals v. Commercial Union Insurance Company found that a breach of warranty/contract claim for poor workmanship could be an accident or occurrence. In essence, this Court, while never addressing the gist of the action doctrine, found that there could be insurance for a negligent breach of contract. Both cases went up to the Supreme Court. On October 25, 2006, the Supreme Court reversed the Superior Court’s decision and found no insurance coverage for the breach of contract and breach of warranty claims; rejecting the idea that a negligent breach of contract is covered. Claims for poor workmanship are not accidents constituting occurrences under commercial general liability policies.

The Freestone case settled before oral argument, leaving only the Kvaerner case for decision. The Supreme Court did not expressly address the gist of the action doctrine on whether a claim sounds in contract or tort and how this would affect all insurance coverage under a general liability policy, because the Freestone case — which directly addressed the gist of the action doctrine — had settled. Kvaerner only involved a claim for damages directly to the product that was purportedly the object of the poor workmanship. It is certainly clear that a claim based on failure of performance by an insured resulting in damages to the object of that performance is not a covered claim.

Finally, the Supreme Court rejected the idea that the question of a duty to defend or to cover could go outside the four corners of the Complaint. The Superior Court in Kvaerner had been willing to consider the insured’s expert report that the damage may have occurred from severe winds rather than poor workmanship, as well as some premature grouting work that constituted an occurrence. The Supreme Court rejected that argument, making clear that it was only the Complaint that could frame the underlying claims and duty to defend and indemnify.

The Supreme Court’s Opinion can be found at Kvaerner Metals, a Division of Kvaerner U.S. v. Commercial Union Ins. Co. For further information please contact Lee Applebaum, Esq., at (215) 893-8702.