Carrier Has Duty to Defend Claim for Active Malfunction of Product

Tred R. Eyerly | Insurance Law Hawaii

   Rejecting that the underlying claim was based solely on faulty workmanship, the Third Circuit held the insurer had a duty to defend allegations of a malfunctioning product. Nautilus Ins. Co. v. 200 Christina Street Partners LLC, 2020 U.S. App. LEXIS 22118 (3d Cir. July 16, 2020).

    The insureds were sued by homeowners in two separate suits alleging defects in the construction of their homes. Nautilus defended under a reservation of rights. Nautilus filed suit in District Court and moved for judgment on the pleadings. The District Court denied the motion, finding Nautilus had a duty to defend because the underlying claims sufficiently alleged product–related tort clams that could fall within the scope of coverage under the relevant policies.

    The Third Circuit affirmed. There was a distinction between a claim of faulty workmanship, for which the insurer did not have a duty to defend, and a claim of “active malfunction” of a product, for which an insurer did have such a duty. An active malfunction was sufficiently fortuitous as to constitute an “occurrence.”  

    Nautilus argued that the underlying claims stemmed from the insureds’ alleged faulty workmanship, so the defects alleged were not “occurrences.” Liberally construing the underlying complaints in favor of the insureds, however, the complaints alleged the use of faulty materials, and the active malfunction of products, such as windows and moisture barriers. These active product malfunctions constituted “occurrences” under the policies. Thus, the District Court properly held that Nautilus had a duty to defend the underlying cases. 

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