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Legal Updates for Insurance Services

Doubling Down: Two Third Circuit Decisions Reaffirm that Faulty Workmanship Does Not Constitute an “Occurrence” in Pennsylvania

Legal Updates for Insurance Services – June 1, 2023

June 1, 2023

by 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.

 

The material in Legal Updates for Insurance Services, June 1, 2023, has been prepared for our readers by Marshall Dennehey. It is solely intended to provide information on recent legal developments and is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. We welcome the opportunity to provide such legal assistance as you require on this and other subjects. If you receive the alerts in error, please send a note to tamontemuro@mdwcg.com 

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Firm Highlights

Result

No-Cause Jury Verdict Secured in Wrongful Death Trial

We successfully obtained a no-cause jury verdict in a 13-day wrongful death trial. The decedent, a 59-year-old man, was admitted to the emergency room on February 15, 2019, with complaints of abdominal pain, decreased appetite, and constipation, despite the use of laxatives. The patient did not complain of any nausea, vomiting, or diarrhea. He had a significant medical history including diabetes, hypertension, prior coronary artery stenting, morbid obesity (with past gastric bypass surgery), longstanding ventral hernia, and back pain. A CT scan revealed multiple hernias and a potential closed-loop bowel obstruction, leading to a surgery consultation. Our client, an emergency general surgeon, interpreted that the patient did not have a closed loop or any significant obstruction and recommended non-surgical management. The patient was approved to have clear liquids, and had a vomiting incident shortly after, but our client was not notified. The patient was returned to NPO status, and after improving overnight, he was returned to “clears” and additional medical and renal consults were ordered. Our client did not receive any communications from the residents/nurses of any changes in the patient’s condition. On February 18, 2019, two rapid responses were called due to increased heart rate and vomiting. It is believed that the vomiting resulted in aspiration, causing sepsis, ultimately leading to the patient’s death. During the trial, the plaintiff’s sole medical expert highlighted imaging on the wrong hernia, which called into question all of his opinions in the case. We made key objections related to the expert testimony, limiting what the allegations were, and preventing new allegations from being made. After approximately two and a half hours of deliberating, the jury returned a no-cause verdict. 

Thought Leadership

PA Middle District Dismisses Claims Against School District and its Superintendent, Principal, Special Education Director, and Classroom Teacher

A five-year-old special education student was enrolled in the Wyoming Valley West School District and attended the State Street Elementary School during the 2024-2025 school year. The student refused to clean up classroom toys at dismissal. When his teacher allegedly grabbed him by the wrist to walk him back to his seat, the student dropped to the floor and began crying. The teacher then allegedly grabbed the student by the ankle and dragged him across the floor. Following an investigation, criminal charges were not advanced by the county DA, and the school permitted the teacher to return to the classroom. The student’s parents sued, lodging thirteen legal counts under both state and federal law, which sought monetary damages from the teacher, the school district, the superintendent, the principal, and the director of special education. The plaintiff’s 42 USC 1983 claims were dismissed as to the school district for failure to allege a policy or custom violation, and the failure to alleged deliberate indifference in the failure-to-train context. As to the superintendent, building principal, and special education director, the Section 1983 claims were also dismissed for failure to allege personal involvement on the part of the individuals. Regarding an equal protection claim asserted against all defendants, the motion to dismiss was also granted for a failure to advance a plausible equal protection claim, holding that “plaintiffs' single-act allegations do not include a factual basis to even infer that the act was motivated by discriminatory animus rather than some other non-discriminatory impulse.” The court further dismissed the plaintiff’s negligence-based claims including negligence against the teacher and district administrators, NIED, and vicarious liability under the Political Subdivision Tort Claims Act (PSTCA). The federal claims under the IDEA, Section 504, and the ADA were also dismissed in various respects. The IDEA claim was dismissed against all defendants with prejudice for failure to exhaust administrative remedies. The Section 504 claims against the individual defendants were also dismissed with prejudice, as districts, not individuals, are the recipients of federal funds under Section 504. However, the Section 504 and ADA claims were dismissed without prejudice as to defendant Wyoming Valley West, and the plaintiff was permitted leave to amend.

Thought Leadership

U.S. Supreme Court Decides Key Issue Regarding Interstate Freight Broker Liability

Freight brokers are intermediaries.  They connect shippers of goods with trucking companies that transport those goods.  Freight brokers match a load of freight with a trucking company and oversee the logistics of the transportation. For a number of years there has been a division among the Federal Circuits regarding the potential liability of freight brokers when the trucking companies that they retain for interstate loads are involved in accidents.  At the center of this division was the Federal Aviation Administration Authorization Act of 1994 (FAAAA).  Some Federal Circuit Courts have held that state law negligent hiring claims against freight brokers were preempted by the FAAAA .  Other Federal Circuits Courts have held that even if preemption applied, the “safety exception” in the FAAAA saved state law negligent hiring claims from federal preemption.  On May 14, 2026, the U.S. Supreme Court addressed the conflict in Montgomery v. Caribe Transport II, LLC, et al, No24-1238. In that case freight broker C.H. Robinson selected Caribe Transport to haul an interstate load. The commercial truck driver employed by Caribe Transport allegedly caused an accident and the plaintiff, Montgomery, was seriously injured. Montgomery brought an action against the driver, Caribe Transport and C.H. Robinson. The allegation against C.H. Robinson was that it negligently retained Caribe Transport when it knew, or should have known, that it was an unsafe company. The Seventh Circuit Court of Appeals held that Montgomery’s claims against C.H. Robinson were preempted by the FAAAA. The plaintiff appealed to the U.S. Supreme Court.  The U.S. Supreme Court’s decision focused primarily on the safety exception in the FAAAA.  That provision provides that the FAAAA preemption “…shall not restrict the safety regulatory authority of a State with respect to motor vehicles.” C.H. Robinson argued, as freight brokers historically have, that their function was not “with respect to motor vehicles” because they do not own trucks or employ drivers. They are merely intermediaries, connecting entities who need freight moved with entities who can do that job. Therefore, C.H. Robinson argued that preemption applied, not the safety exception. The U.S. Supreme Court did not accept that argument. The Court focused on the meaning of the phrase “with respect to” in the safety exception. The Court held that it means “referring to”, “concerning” or “regarding”. Therefore, writing for a unanimous Court, Justice Barrett concluded that “[r]equiring C.H. Robinson to exercise ordinary care in selecting a carrier therefore “concerns” motor vehicles—most obviously, the trucks that will transport the goods. So, Montgomery’s negligent-hiring claim falls within the FAAAA’s safety exception, which saves it from preemption.” Justice Kavanaugh, in his concurring opinion, noted the effect this ruling may have on freight brokers and their insurers throughout the country: Importantly, the Court's decision today should not be read to mean that brokers will routinely be subject to state tort liability in the wake of truck accidents. As even plaintiff's counsel stressed, brokers should be able to successfully defend against state tort suits if the brokers have acted reasonably and arranged transportation with reputable trucking companies. Tr. of Oral Arg. 27-29. In plaintiff's counsel's words, the brokers "just have to hire carriers that actually have a reasonable policy," and "the broker is not going to have a problem if it's asking the hard questions of the carrier." Id., at 42, 45. In addition, the proximate-cause requirement in typical state tort law should help protect brokers from excessive liability. Id., at 25. That said, the brokers rightly caution against naivete. In the real world, as the brokers forcefully respond, state tort law can be unpredictable, and the costs to brokers of litigation and insurance may be significant even when brokers prevail in lawsuits. Moreover, the costs of litigation and insurance, as well as the costs of brokers' conducting more substantial inquiries into trucking companies, will cascade through the economy and be paid in part by American consumers in the form of higher prices. The concerns expressed by the brokers are legitimate and weighty. The key point here is that freight brokers can no longer claim they are protected from negligent retention claims by the FAAAA (in cases involving interstate transportation). The challenge will be to determine what is considered ”reasonable efforts” used by brokers when retaining transportation companies.