Todd J. Leon

In two separate decisions handed down last month, the Third Circuit Court of Appeals re-affirmed that, under Pennsylvania law, claims against contractors for faulty workmanship do not constitute an “occurrence” and are therefore not covered under standard commercial general liability policies. The Third Circuit’s recent pronouncements thus affirm the continued vibrancy of the Supreme Court of Pennsylvania’s 2006 decision in Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Insurance Co., despite a recent trend of courts in other jurisdictions – including neighboring New Jersey – holding otherwise.

The first of the two recent Third Circuit cases was Berkley Specialty Insurance Co. v. Masterforce Construction Corp., which was decided on May 11, 2023. In a decision written by former Chief Judge Theodore McKee, the panel unanimously held that Berkley Specialty did not owe a duty to defend or indemnify its policyholder, Masterforce Construction, for claims for faulty workmanship related to the installation of metal roof panels. The court so held despite the fact that Masterforce Construction’s poor workmanship resulted in damage beyond the panels themselves, and extended to related components such as the roof sheathing and wood blocking.

The Third Circuit reached the same conclusion in its May 31, 2023, decision in American Home Assurance Co. v. Superior Well Services, Inc. There, Judge Kent Jordan wrote for a unanimous panel in finding that damage caused by Superior Well Service to wells owned by U.S. Energy while Superior Well Service was performing fracking work was not covered, as the claim was for faulty workmanship and did not meet the definition of “occurrence” in the CGL policy.

In both instances, the Third Circuit relied almost entirely upon the Supreme Court of Pennsylvania’s decision in Kvaerner. In Kvaerner, the issue was whether Kvaerner was entitled to coverage under its CGL policy with respect to the design and construction of a coke oven battery for Bethlehem Steel. More specifically, Bethlehem Steel contended that the battery was damaged and did not meet the contract specifications and warranties, or the applicable industry standards for construction.

After examining case law from other jurisdictions addressing the question of whether faulty workmanship could constitute an “occurrence,” the Supreme Court of Pennsylvania set forth its oft-cited conclusion that that the definition of “accident” required to establish an “occurrence” under the policies cannot be satisfied by claims based upon faulty workmanship. In short, the Supreme Court based its decision upon the observation that claims for faulty workmanship do not present the degree of fortuity contemplated by the ordinary definition of “accident” or its common judicial construction in this context. The court further concluded that finding that CGL policies provide coverage for claims for faulty workmanship would amount to converting a policy of insurance into a performance bond.

In its recent decisions, the Third Circuit returned to Kvaerner’s rationale in finding that Masterforce Construction and Superior Well Service were not entitled to defense and indemnification. In Masterforce Construction, the panel rejected the insured’s contention that it was entitled to coverage, commenting that there is “no ‘occurrence’ under the applicable policies insofar as the damages [that] resulted from either poor workmanship or faulty workmanship was foreseeable.” Similarly, in Superior Well Services, the court concluded that the claim that the insured did not complete its work “in a workmanlike manner” did not constitute an “occurrence” under Pennsylvania law, since causes of action for poor workmanship are too foreseeable to be considered an accident.

As the Third Circuit’s recent decisions make clear, just shy of its seventeenth birthday, Kvaerner remains good law in Pennsylvania. That said, a change in the doctrine is always possible, especially as jurisdictions around the country continue to hold that faulty workmanship may, in certain circumstances, constitute an “occurrence”. Indeed, just across the Delaware River, the Supreme Court of New Jersey held in its 2016 decision in Cypress Point Condominium Ass’n, Inc. v. Adria Towers, LLC that claims against a general contractor involving consequential property damage to work or property other than the faulty workmanship performed by a subcontractor do indeed meet the definition of “occurrence” under a standard CGL policy.

We will continue to monitor cases in jurisdictions around the country involving issues of insurance coverage for faulty workmanship, as the various courts considering the issues weigh in on the question of whether coverage should be afforded for such claims.

 

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