Faulty work not covered by CGL policy: Pa. court

HARRISBURG, Pa.--Faulty workmanship cannot be considered an accident in order to establish coverage under commercial general liability insurance policies, the Pennsylvania Supreme Court has ruled.

Wednesday's opinion in Kvaerner Metals Division of Kvaerner U.S. Inc. et al. vs. Commercial Union Insurance Co. et al. overturned a 2003 Pennsylvania Superior Court ruling that had awarded coverage to a contractor, the Kvaerner Metals Division of Kvaerner U.S. Inc. of Bridgewater, N.J., which was sued in 1997 for breach of contract and breach of warranty by Bethlehem Steel Co., a customer to which it had sold a faulty piece of equipment.

In its decision, the lower Pennsylvania court determined that defense cost coverage should be granted to Kvaerner because the cause of the defect was in dispute--and one of the possible causes could have been torrential rains that occurred during installation of the equipment, known as a coke oven battery, which would have been a covered peril under the CGL policy.

However, because Bethlehem Steel's underlying lawsuit alleged only breach of contract and breach of warranty--not improper installation or damage due to weather--there was no coverage for Kvaerner Metals under the CGL policy issued by Boston-based Commercial Union Insurance Co., a unit of American International Group Inc., the Pennsylvania Supreme Court found.

The decision could have wide implications in other construction-defect coverage cases in Pennsylvania because the issue of what constitutes an occurrence triggering coverage under CGL policies has been widely disputed in the state for the past several years, said Deborah M. Minkoff, one of the attorneys at Cozen O'Connor in Philadelphia who represented the insurer in the case.

"Whether faulty workmanship can constitute an occurrence is a very hot topic right now," she said. "Two years ago, policyholders were successful in arguing that it was an accident because it was unexpected and unintended. Courts then were wanting to stretch coverage."

However, "with this decision, Pennsylvania holds that claims of faulty workmanship are not covered by commercial general liability policies. Many construction-defect claims and other insurance coverage disputes will be affected by this opinion," Ms. Minkoff said.

The case is also likely to be cited in jurisdictions outside of Pennsylvania because contractors nationwide have been challenging the definition of occurrence under CGL policies, said Charles T. Young, a policyholder attorney at McNees Wallace & Nurick L.L.C. in Harrisburg, Pa., who was not connected to the Kvaerner case.

"This case will be cited in other jurisdictions, but it's obviously not controlling. So it will have some splash outside the state of Pennsylvania, but not huge," he said. "But it's the last word in Pennsylvania."

Attorneys at Kirkpatrick & Lockhart Nicholson Graham L.L.P. in Pittsburgh, who represented policyholder Kvaerner in the case, were not available for comment at deadline.