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Is Faulty Workmanship an “Occurrence” Under a CGL Policy?

Manufacturers often face multiple lawsuits when their products fail to perform as expected.  Sometimes, the cause of the product’s failure is the faulty workmanship of a component manufacturer.  When that is the case, the product manufacturer will seek damages from the component manufacturer for the underlying product defect claims.  The component manufacturer will then turn to its insurance carriers to cover it for the dispute with the product manufacturer.  In a recent case, the Third Circuit Court of Appeals addressed claims by a window component manufacturer against its insurance carriers after the insurance carriers disclaimed coverage for a settlement between the component manufacturer and the product manufacturer.

In Sapa Extrusions, Inc. v. Liberty Mutual Insurance Co., No. 18-2206 (3rd Cir. Sep. 13, 2019), the district court granted summary judgment to the insurance carriers, finding that the product defect claims were not covered under the various CGL policies.  The circuit court affirmed in part and vacated in part.  The court held that “recovery turns on the language of the specific insurance policies at issue” under Pennsylvania law.

The court first discussed how Pennsylvania law required the strict application of the “four-corners” rule and that if the court determines that there is no duty to defend, then there is no duty to indemnify.  The court also discussed in detail how Pennsylvania law requires courts to interpret insurance policies.  Here, the court focused on the definition of “occurrence” found in the 28 applicable insurance policies.  The court organized the policies into three groups:  (a) the “Accident Definition”; (b) the “Expected/Intended Definition”; and (c) the “Injurious Exposure Definition.”  The details of this analysis are in the opinion.  The basis for the division was the differences in the occurrence wording.

The first definition, which covered 19 of the policies, focused on the term “occurrence” being defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  Under Pennsylvania law, this definition required fortuity and “faulty workmanship” did not come within that definition.  Thus, held the court, the factual allegations of the product manufacturer’s complaint did not amount to an occurrence that could trigger coverage.  The allegations of faulty workmanship, said the court, did not amount to an unforeseeable, fortuitous event.  Thus, the court affirmed the grant of summary judgment for those 19 policies.

The court vacated the judgment and remanded the remaining 9 policies back to the district court to consider the implications of the latter two occurrence definitions.  The differences in the definitions, held the court, were unique and the district court should have considered those policies separately.  The court declined to interpret these 9 policies other than to say that the additional language was not mere surplusage and may be considered ambiguous under Pennsylvania law.

The court held that the rule it reemphasized in this opinion was simple:  “in Pennsylvania, insurance policies must be interpreted and applied in accordance with their plain language and relevant Pennsylvania law.”  The remand, said the court, was to give the district court the opportunity to give the latter two categories more consideration based on the difference in the language so as to determine if coverage is triggered.

© Copyright 2019 Squire Patton Boggs (US) LLP

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About this Author

Larry P. Schiffer Commercial Insurance Reinsurance Litigation Lawyer
Partner

Larry Schiffer practices in the areas of commercial, insurance and reinsurance litigation, arbitration and mediation. He also provides advice on coverage, insurance insolvency, and contract wording issues for a wide variety of insurance and reinsurance relationships. 

Larry is active in legal and insurance industry associations where he has held various leadership positions. He has lectured in the US, Bermuda and the UK, and has been widely published on reinsurance and other insurance, litigation and technology topics in various national and...

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