Source: http://www.thelegalintelligencer.com, August 11, 2015
By: Mason Avrigian Jr. and Jeffrey P. Wallack
It’s an all-too-frequent fact pattern: construction contractors or subcontractors perform allegedly defective work on a building construction project, resulting in damage not only to the work itself but other aspects of the building. The owner (often an innocent homeowner) has a damaged building; the developer has an unsatisfied owner and looks to its construction contractors; and the contractors and subcontractors are subject to claims and lawsuits, but have little financial capability to address the problems and damages, much less defend against any owner- or developer-filed claims and lawsuits.
Can the contractors or subcontractors look to their commercial general liability (CGL) insurance for defense or indemnification? At least in Pennsylvania, the contractors’ and subcontractors’ insurance companies apparently have little to no legal obligation to participate in the defense or indemnification of the claims.
Across the country, CGL insurance coverage for defective construction continues to be a hot-button legal issue. Prior trends toward no coverage for defective construction continue to shift and erode nationwide as, whether by legislative enactment or judicial decision, coverage for defective construction once again takes hold in many jurisdictions (Connecticut, West Virginia and North Dakota, to name a recent few). As recently as June, the U.S. Court of Appeals for the Eleventh Circuit held, under Alabama law, that a property damage claim arising from a contractor’s faulty work can arise out of an accident and, therefore, be an insured “occurrence” under a CGL insurance policy. But, in the face of all of the rapidly changing nationwide trends and developments, Pennsylvania largely remained a constant, with courts continually finding that defective construction is neither accidental nor an occurrence and, therefore, is ineligible for coverage under contractors’ and subcontractors’ CGL policies. Until December 2013, that is.
In December 2013, the Pennsylvania Superior Court issued its decision in Indalex v. National Union Fire Insurance, 83 A.3d 418 (Pa. Super. 2013), app. denied 99 A.3d 926 (Pa. 2014). Despite some potentially distinguishable factual circumstances, Indalex appeared to crack open the door to at least some CGL coverage in Pennsylvania for defective construction work resulting in unintentional damage to property other than the insured’s work—a position quickly becoming the majority view nationwide. Throughout late 2014 and 2015, however, the door to coverage in Pennsylvania seems again to have creaked shut. Through a series of unreported decisions over the last 18 months, Pennsylvania state courts and federal courts applying Pennsylvania law have consistently looked past or distinguished Indalex and rapidly reverted to Pennsylvania’s staunch position of no coverage for defective construction.
In October 2014, the U.S. District Court for the Eastern District of Pennsylvania decided State Farm Fire & Casualty v. McDermott, Docket No. 11-5508, holding that an insurer had no obligation to defend or indemnify a subcontractor insured in a “defective construction” lawsuit alleging various stucco and flashing installation problems, resulting in widespread water intrusion and resultant property damage. Although barely even referencing Indalex, the McDermott court found that the subcontractors’ alleged failures were contractual and, therefore, neither accidental nor unforeseeable, as required to establish an insured occurrence under the applicable CGL policy.
In December 2014, the Superior Court did, in fact, address Indalex head-on, and, in another unpublished opinion, effectively limited the potential breadth of coverage arising from the Indalex decision. In Hagel v. Falcone, 614 EDA 2014, the question before the Superior Court was whether a CGL policy provided coverage for faulty workmanship claims arising from alleged improper installation of windows and stucco in a home. Finding a lack of CGL coverage, the Superior Court identified at least three distinguishing circumstances that were present in the Indalex case that were not present in Hagel or, presumably, other, more typical faulty construction cases: (1) the allegations in Indalex were that the insured improperly manufactured defective windows, making it more akin to a product case than a defective construction case; (2) the plaintiffs’ alleged damages in Indalex included personal-injury claims; and (3) the definition of “occurrence” in the CGL policy in Indalex included subjective language requiring the “accident” at issue to result in damage “neither expected nor intended from the standpoint of the insured”—a subjective component not typically found in more recent policy definitions of “occurrence.”
In short, the Hagel court found it foreseeable and, therefore, neither an “accident” nor an “occurrence” that faulty construction could leave a house vulnerable to water infiltration and that water infiltration could damage both the house and property within the house.
In March, the Eastern District of Pennsylvania issued a decision in State Farm Fire & Casualty v. Brighton Exteriors, No. 2014-03987, holding that an insurance carrier had no duty to defend or indemnify an insured in a lawsuit alleging faulty stucco remediation work resulting in damage to a home. There, the court echoed prior state and federal precedent, finding a lack of coverage even if the alleged faulty work caused additional property damage and irrespective of whether the underlying claims sounded in contract or in tort. Also in March, the Middle District of Pennsylvania, in its decision in National Fire Insurance Co. of Hartford v. Gabe’s Construction, No. 2014-1570, reaffirmed what the Pennsylvania Supreme Court had previously made clear—that defective construction claims do not find coverage within occurrence-based insurance policies.
And, in May, the Superior Court issued yet another unreported decision in the matter of Erie Insurance Exchange v. Costa Construction, No. 1516 WDA 2014, affirming judgment on the pleadings in favor of an insurance carrier in a case seeking insurance coverage for alleged defective construction of a home. There, the homeowner’s complaint not only pleaded claims of defective construction against the contractor, but also, in the alternative, pleaded damage to the residence as a result of mine subsidence or possible “rogue” acts of subcontractors. In affirming the lower court’s order, the Superior Court found that allegations of mine subsidence were merely allegations of defective construction (failing to account for existing circumstances) and that defective work performed by subcontractors did not provide a basis for insurance coverage.
Finally, amidst the recent plethora of unreported defective construction coverage decisions referenced above, the Pennsylvania Supreme Court issued its decision in Pennsylvania National Mutual Casualty Insurance v. St. John, 106 A.3d 1 (Pa. 2014), affirming that the “first manifestation” rule applies to trigger property-damage insurance coverage, as opposed to a “continuous” or “multiple” trigger of coverage as is often available in asbestos personal-injury cases. As such, even if there is available CGL coverage in a Pennsylvania defective-construction case, that coverage likely only places the policy in effect when the harm first manifests itself on the risk, thereby further limiting any available insurance coverage.
Although some may argue that certain of the post-Indalex decisions are difficult to reconcile with the path to possible coverage that many thought Indalex had opened, the current trend of cases again puts Pennsylvania at the forefront of jurisdictions that do not find CGL insurance coverage in defective-construction cases.
Where does that leave the construction industry? Owners and developers are frequently left without meaningful remedies or viable recourse against uninsured contractors and subcontractors. The cost to pursue these uninsured claims often outweighs any potential benefit. Contractors and subcontractors can seek to procure defective-construction insurance, but premiums for such insurance, if available, are likely cost-prohibitive. Higher-tier parties can try to require surety bonds, but many subcontractors are unable to obtain bonds, and even so, costs can be prohibitive. The risk, cost and burden up and down the construction ladder is real, but apparently remains here to stay in Pennsylvania absent some type of legislative involvement or a future case where the Pennsylvania Supreme Court sees a need to revisit this vitally important construction industry issue.