Pennsylvania Courts Keep Barring Coverage for Defective Workmanship Under the CGL
August 20, 2018
The United States Court of Appeals for the Third Circuit has decided to follow Pennsylvania's trend in adhering to a ruling from 2006 which found that there was no coverage for defective workmanship claims under ordinary commercial general liability policies. The case is Lenick Constr., Inc. v. Selective Way Ins. Co., No. 16-1891, 2018 U.S. App. LEXIS 15197 (3d Cir. June 6, 2018).
A company or various entities collectively called Westrum was hired by The Villas at Packer Park Condominium Association (The Villas). Westrum subcontracted with Lenick Construction Inc (Lenick) to perform some carpentry, and install paneling, walls, and doors supplied by Westrum. After the project was completed, it was discovered that some units had suffered from water infiltration, leaks, and cracked drywall.
In February 2013 The Villas sued Westrum for the damages, alleging contract and warranty claims. In response, Westrum impleaded Lenick for breach of contract and indemnification. Soon after Lenick had been joined as a defendant, it informed its insurer, Selective, of the claims stating that they were entitled to defense and indemnification due to the commercial general liability policy that was in place when the defective work was discovered. The claim was initially denied, but eventually Selective agreed to defend Lenick, subject to a reservation of rights. When Lenick received the reservation of rights letter, it immediately sought a declaration that Selective was obligated to defend and indemnify Lenick. Selective moved the case to the federal court where the parties filed cross-motions for summary judgment, both dealing with the duty to defend. The District Court concluded that the allegations of breach of contract and indemnification against Lenick were not covered by its CGL policy, so Selective had no duty to either defend or indemnify Lenick. Lenick appealed.
In the 2006 ruling by the Supreme Court of Pennsylvania called Kvaerner Metals Div of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., property damage claims arising out of poor workmanship are not covered under typical CGL policies. The Court initially examines the language of the insurance policy to determine if coverage is applicable. In this case, the CGL policy insured against bodily injury and property damage caused by an “occurrence” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions”. Lenick argued that the property damage were covered consequential damages beyond the work that Lenick performed. The Court relied on its previous decision in Specialty Surfaces Int'l v. Consequential Cas. in which the Court found that “damages that are a reasonably foreseeable result of the faulty workmanship are. . . not covered,” even when the damage occurs to areas outside of the work performed by the insured.
The court rejected Lenicks' argument that the damage was caused by other subcontractors or by defective materials supplied by Westrum, because Lenick failed to mention facts supporting these allegations in the underlying complaints.
Editor's Note: Although there is a lot of legal procedure in this case, the main takeaway is that under Pennsylvania law, claims of faulty workmanship do not constitute an occurrence under commercial liability policies. Insureds have made a significant effort to avoid the holding in Kvaerner from being upheld, but Pennsylvania courts continue to find that there is no coverage for defective workmanship claims. The two cases that the Pennsylvania Supreme Court relied upon in deciding this case were Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 589 Pa. 317, 908 A. 2d 888 (2006) and Specialty Services Int'l v. Cont'l Cas. Co., 609 F. 3d 223 (3d Cir. 2010).