The Superior Court’s recent decision in Indalex v. National Union Fire Insurance Co. of Pittsburgh, 83 A.3d 418, 2013 Pa.Super. 311, diverged significantly from the expected result given recent trends in the case law. With its decision to reverse the trial court, the Superior Court provided a workaround to expand coverage with the right facts and strategic planning.
For years, Pennsylvania courts have routinely enforced the “your work” exclusion in commercial general liability policies. The gist-of-the-action doctrine has also been used to preclude claimants from converting standard breach of contract complaints into tort claims that trigger insurance coverage. Then, the case of Kvaerner Metals Division of Kvaerner U.S. v. Commercial Union Insurance, 908 A.2d 888, 589 Pa. 317 (2006), narrowed coverage further in the construction context by constraining the definition of “occurrence.” The reach of Kvaerner and the tide of shrinking coverage for companies involved in the construction industry, however, seems to have been stemmed by the decision in Indalex.
The Indalex case was an insurance coverage dispute brought by Indalex America in an effort to obtain coverage under a commercial umbrella policy for out-of-state lawsuits brought by property owners and homeowners. In a generic sense, coverage was sought from National Union Fire Insurance for claims that can be described as allegations of defective design and manufacture of windows and doors. Closer evaluation of the claims, and more importantly how they were pleaded, reveals more though.
The underlying complaints against Indalex asserted strict liability, negligence, breach of warranty and breach of contract as theories of liability. The damages component described water leakage that caused physical damage like mold and cracked walls, as well as consequential personal injuries. Perhaps these stated theories of liability and related damages are what caused One Beacon, the primary insurance carrier, to defend the lawsuits until the policy limits were exhausted.
Nonetheless, National Union took the position that coverage was not owed to Indalex and filed a motion for summary judgment. The trial court granted it based on the Superior Court’s prior holding in Kvaerner: The claims were for damage caused by defective workmanship, so they did not constitute an occurrence and could not support a claim for coverage. On appeal, the Superior Court disagreed and made several critical distinctions to insurance claims in the construction context.
Tenets of Insurance Coverage Still Apply
Courts are still required to give clear and unambiguous language its plain meaning and to favor the insured when a policy is unclear. The insurer’s right to indemnify is a separate obligation from the duty to defend, and the duty to defend is a larger obligation. An insurer has a duty to defend in any multi-claim case as long as at least one allegation in the complaint could trigger coverage. Importantly, the duty to defend is triggered by the allegations in the complaint regardless of the ultimate veracity of those factual averments.
These basic tenets of insurance law served as the foundation from which the remainder of the Indalex court’s decision was constructed. Because the claims for which Indalex sought coverage were primarily tort claims, coverage was owed until it could be shown that the claims did not constitute an occurrence or that a policy exclusion applied.
Kvaerner Takes a Hit
As the successful appellant in the Kvaerner case, National Union made the same argument in the Indalex case. Relying on Kvaerner, National Union argued that the damage caused by the defective design and manufacture of the windows and doors failed to qualify as an occurrence under the policy. It lacked the required fortuitous nature and the damage was to work product. The Superior Court distinguished Kvaerner from the situation in which Indalex found itself and overturned the trial court’s order.
In Kvaerner, the Pennsylvania Supreme Court held that there was not coverage for defective work under a commercial general liability policy because defective work did not constitute an occurrence under the policy. That conclusion, however, was based in part on the fact that the underlying claims in Kvaerner were contractually based.
The claims at issue in Kvaerner arose when a coke oven battery constructed for Bethlehem Steel failed to meet the project specifications and damage occurred to the coke oven itself. When Kvaerner sought coverage from National Union for a claim made by Bethlehem Steel, the insurer denied coverage on the basis that the damage was not an occurrence and fell into the “your work” exclusion. Specifically, National Union maintained that the damage caused by rain in the oven did not result from an accident. Instead, it was the result of defective workmanship that allowed the water into the oven. The Supreme Court agreed and ultimately denied coverage for “faulty workmanship” because it did not qualify as an accident.
The Indalex case was postured differently. The Superior Court noted in its opinion that Indalex was factually distinct from Kvaerner because it had more than contract-based claims in it. The essence of the underlying allegations sounded in tort. Central to this conclusion was the fact that the failed windows and doors were off-the-shelf products that allegedly caused property damage and personal injury. The issue was a defective product, not bad workmanship, in the Superior Court’s eyes. Accordingly, the allegations mirrored a products liability claim more than a breach of construction contract.
In Indalex, the underlying theories of liability were based largely in tort. Rather than arguing that they did not get the benefit of the bargain, the plaintiffs framed their complaints as products liability and negligence claims. This included the description of the damages as largely consequential. Indalex maintained that these claims were covered under its policy, but National Union prospectively argued that the gist-of-the-action doctrine prevented Indalex from recasting the plaintiffs’ contract claims as covered tort claims.
While the trial court sided with National Union, the Superior Court agreed with Indalex. In so doing, the Superior Court correctly prohibited the prospective application of the gist-of-the-action doctrine. National Union indirectly sought to take the decision on the validity of the underlying claims away from the court in which they were pending by arguing that the underlying tort claims should be ignored for coverage purposes. Stated differently, application of the gist-of-the-action doctrine in the coverage case could take the decision away from the trial courts in other locales considering the homeowners’ and property owners’ claims through concepts of res judicata, collateral estoppel and the coordinate jurisdiction rule. Because the decision on coverage is to be made on the face of the complaint regardless of the veracity of the claims, it is not the role of a court considering coverage to decide the validity of the underlying claims.
The end result is that the gist-of-the-action doctrine is not the gist-of-the-action doctrine in insurance coverage cases. According to the Superior Court in Indalex, the courts should be wary of prospectively throwing out tort claims as part of a coverage analysis.
‘Your Work’ Exclusions and Consequential Damages
Although the opinion does not directly address the “your work” exclusion by name, the decision by the Indalexcourt impacts it directly. The “your work” exclusion applies to exclude an otherwise-covered loss when the damages sustained are to work performed by the contractor making the claim against the policy. Similar to the analysis of what constitutes an occurrence under Kvaerner, damages to the work itself which result from a negligent act of the contractor are deemed to be a risk controlled by the contractor. The failure to meet contract specifications or the standards in the industry is not often covered as a result. When the damages are to other elements-or what the law classifies as consequential damages-they are more likely covered under the general liability policy form.
In Indalex, the damages claimed by the plaintiffs in the underlying lawsuits were to drywall in the buildings and personal injury, including mold-related problems. Defective windows and doors themselves were not claimed as part of the damages. The property damage and personal injuries that were the consequences of the water leakage caused by the defective windows and doors could not be defined as “your work” and, as a result, did not fit into the policy exclusion.
What It Means
The Indalex case is the first appellate decision since Kvaerner to refrain from shrinking insurance coverage for construction companies. It significantly reduces the impact of Kvaerner by providing an opportunity for a properly pleaded complaint to withstand a challenge to coverage on the basis that the loss does not qualify as an occurrence. It also prohibits the prospective use of the gist-of-the-action doctrine. Perhaps most importantly, it sends a message to insurance companies that not every claim in the construction context can be denied under what seemed to be the ever-growing reach of Kvaerner.
Construction defect claims can be large and complex. Absent the insurance coverage that most construction clients believe they purchased, many companies do not have the resources to handle such claims. It becomes the obligation of construction counsel to frame a complaint that will both trigger coverage and withstand challenge in a declaratory judgment action. Absent a properly pleaded complaint, counsel in the coverage arena will lack the required tools to defend an effort to disclaim coverage.
Construction and coverage counsel should be cognizant of the Indalex decision when framing complaints for coverage purposes. Where the facts make it possible, lead with plausible tort claims and focus on the damages that occur to people and things other than the construction work product itself. Emphasis should be placed on consequential damages. Finally, be on guard for efforts to use the gist-of-the-action doctrine prospectively.
In the interim, stay tuned. The case remains in the Superior Court on a motion for reconsideration until later this year. Because Indalex creates some conflicts in the law, the case might be taken up on further appeal by the Pennsylvania Supreme Court.
Reprinted with permission from the August 5, 2014 issue of The Legal Intelligencer, ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.