Gilbert Lee | Sedgwick Insurance Law Blog | October 24, 2014
In State Farm Fire & Casualty Co. v. McDermott, 2014 WL 5285335 (E.D. Pa. Oct. 15, 2014), a federal court recently held that an insurer has no duty to defend or indemnify its insured against an underlying construction defect lawsuit containing causes of action sounding in negligence under a commercial general liability (“CGL”) policy affording coverage for property damage caused by an “occurrence.” Upon considering the substance of the underlying lawsuit, the court concluded that under Pennsylvania law faulty workmanship is not an “occurrence” (defined to mean an accidental or unforeseeable event) that is covered under a CGL policy and, therefore, granted the insurer’s summary judgment motion.
In McDermott, the insured contracted with a homebuilder to provide plaster, stucco and window and door installation services for nearly three hundred homes built in Pennsylvania. The insured was later named in a negligence and breach of contract lawsuit by the builder, alleging a variety of defective construction practices that purportedly resulted in water intrusion and corresponding home damages. The insurer agreed to defend the insured subject to a reservation of its rights to disclaim coverage under the terms of the CGL policy prior to commencing a declaratory action challenging coverage.
Relying on Pennsylvania case law, the court determined at the outset that faulty workmanship, and any resulting damages, is not an “accident” (as it is neither unexpected nor unintentional) and therefore not an occurrence under a CGL policy. Thus, the issue of whether coverage was triggered under the policy hinged on the possibility that liability might rest on the insured’s alleged negligent work performance. In reaching its decision, the court looked beyond the negligence allegations to conclude that, regardless of how it was framed, the substance of the insured’s potential liability stemmed from its alleged failure to meet contractual expectations. Because the insured had a contractual duty to perform its tasks in a satisfactory manner, its alleged failure to do so was neither an accident nor an unforeseeable event covered under a CGL policy because the insured was bound to avoid that particular outcome.