Indalex Case – Case Law Changes – Pennsylvania Faulty Work

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Quick Recap:
Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006) (“Kvaerner”):

Deemed that there was no occurrence for two (2) distinct reasons:

1. Lawsuit alleged breach of warranty and breach of contract
2. Property damage was limited to the work product itself (defective coke battery) (i.e.: no other property damage)

Millers Capital Ins. Co. v. Gambone Bros. Dev. Co., 941 A.2d 706 (Pa. Super. 2007) (“Gambone“):

Took Kvaerner further by stating that since the work product had faulty workmanship, there was no occurrence to trigger coverage for the resultant property damage (i.e.: water intrusion and mold). The work product was defined as the whole “home” which prevented coverage under the CGL policy.

Additional Reading: Erie Ins. Exchange v. Abbott Furnace Co., 972 A.2d 1232 (Pa. Super. 2009) (“Abbott”)

Indalex, Inc. Background & Decision:
Indalex, Inc., et al, was a manufacturer of windows and doors. Contractors utilizing their products filed lawsuits against Indelex alleging defective products that caused water leakage and physical damage including mold and cracked walls and personal injury. The lawsuits included tort liability, negligence, breach of warrant and breach of contract. The trial court cited Kvaerner, Gambone and Abbott in siding with National Union Fire Insurance Company (“AIG”) determining that there is no occurrence in this situation. The faulty work product and resultant damage did not trigger coverage under the CGL policy.

Indalex, Inc. appealed this decision to the Superior Court which overturned the trial court’s decision and walked a very tight rope in citing its reasons. Each of the above cases (with the exception of “Abbott”) provide the precedent to help policy holders greatly if this decision is upheld (should it reach the PA Supreme Court):

1. The Kvaerner case was limited to faulty workmanship and property damage to the work product itself (defective coke battery). Since this case had actual property damage, other than the products (windows and doors), the court determined that there was in fact a trigger of coverage (property damage).
2. The Gambone case defined the work product of Gambone Bros to be the entire home itself. Therefore, the property damage to the homes was determined to be the work product itself and did not constitute an occurrence.
3. The Abbott case was slightly different, but took Kvaerner further by dictating the allegations of the case to be about breach of contract – it does not, therefore, apply to Indalex.

Conclusions:
We at Safegard have been monitoring the Indalex case since the beginning as the potential ramifications for our manufacturing and construction clients is significant. It’s no secret that Pennsylvania has been notoriously difficult for our clients from a General Liability standpoint because of the far reaching decisions and interpretations of Kvaerner, Gambone & Abbott. The jurisdiction is insurer-friendly and left many customers with no coverage for claims alleging faulty workmanship, regardless of whether the work was done by an insured or a subcontractor.

The decision made by the Superior Court in December of 2013 shows a clear attempt by the courts of Pennsylvania to correct the over-reaching of the current precedents and allows a glimmer of hope to our manufacturing and construction customers in Pennsylvania. We feel that this is a good start to open a dialogue with our insurance companies and brings PA more in line with the rest of the country with regards to coverage for faulty work and resultant damages and most importantly, an insurance company’s duty to defend its customers.

Keep in mind, the allegations of the lawsuit are broad, but the Superior Court has determined that AIG has to defend Indalex, et al, as there are allegations of property damage and strict liability on the insurer’s part. Prior to this decision, insurance companies could cite Kvaerner (and the others) as grounds to deny a claim outright with no defense for our customers (“no occurrence”). With this case, we now have a new tool to fight for our clients and potentially provide defense and investigation costs depending on the claims situation.

Please review the information in this write-up and should you have any questions or require any additional information, do not hesitate to contact Apurva Upadhyay or your assigned Claims Representative at The Safegard Group, Inc. We strive to keep our customers advised of current claims situations and their impact specifically to your operations and exposures.

Apurva Upadhyay, CRIS
Assistant Vice President