A Window Opens? Are Defective Product Construction Defect Claims Covered Under Pennsylvania Law?
A recent decision from a Pennsylvania court highlights tension in Pennsylvania law regarding whether a construction defect claim involving consequential damages caused by a defective product involves a covered “occurrence.” Sapa Extrusions, Inc. v. Liberty Mut. Ins. Co., 2018 WL 2045496 (M.D. Pa. May 1, 2018).
In this coverage action, the insured, a window frame manufacturer, sought a declaratory judgment that it was owed coverage for an underlying action brought by a customer that used the window frames to manufacture windows. The customer alleged the window frames were defective and required repair, and sought damages to recoup its repair costs. The customer brought causes of action based in breach of contract and other intentional acts, but did not include any negligence based tort claims. Further, although the insured contended in the coverage action that the customer sought compensation for the cost of repairing damage to property other than the insured’s product, the underlying complaint did not contain specific allegations of damages to such property.
The court held the allegations contained in the underlying action were not an “occurrence” for two reasons. First, the underlying claims were based in contract and intentional acts, not in tort. Second, as established in the well-known Pennsylvania decisions Kvaerner and Gambone, alleged faulty workmanship is not an “accident” and therefore not an “occurrence.” However, the court also acknowledged an exception to this rule established in Indalex, where the court held that a product-liability tort claim alleging damage to property other than the insured’s product is an “occurrence.” Although the Sapa case involved defective window frames and evidence that property other than the windows were damaged as a result, the court held there was no “occurrence” because the underlying complaint alleged neither a cause of action in tort nor damage to property other than the insured’s product. The court then highlighted the Indalex exception, stating that although there was no “occurrence,” had the customer “specifically pled damages to additional property in the underlying action, the outcome here may have differed.”
The court’s opinion in Sapa highlights a tension between Kvaerner and Indalex regarding whether consequential damages resulting from a defective product is a covered occurrence under Pennsylvania law. The court stated that “the mere fact that additional damages subsequently flowed from the costly and disruptive repair process does not suddenly transform this non-occurrence into an occurrence.” However, that is exactly what the Indalex court held, in a case with similar facts involving defective windows. The distinguishing factor appears to be that the underlying claims in Indalex included specific allegations of damage to other property and claims alleging products-liability based tort. While in Sapa, no such claims were alleged, despite the apparent existence of evidence to support such allegations.
Because the Pennsylvania Supreme Court has not spoken directly on the Indalex scenario, this tension between Kvaerner and Indalex will likely continue. Therefore, insurers must look closely at these factors when evaluating coverage in construction defect claims under Pennsylvania law.