Pennsylvania “occurrence”

In Indalex Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2013 WL 6237312 (Pa. Super. 2013), insured Indalex was sued in multiple underlying actions, filed in states other than Pennsylvania, alleging that Indalex defectively designed or manufactured windows and doors resulting in leaks causing damage beyond the Indalex product, including mold, wall cracks, and personal injuries.   The complaints included strict liability, negligence, breach of warranty, and breach of contract causes of action.   After Indalex’s primary CGL policies exhausted, Indalex filed a declaratory judgment action against its umbrella insurer National Union.  The Pennsylvania state trial court entered summary judgment for National Union, holding that, following Kvaerner, the underlying complaints did not allege an “occurrence.”  The intermediate court of appeals reversed, holding:

Because the underlying complaints alleged defective products resulting in property loss, to property other than [the insured’s] products, and personal injury, we conclude there was an “occurrence.”

The court distinguished Kvaerner on two grounds.  First, the court states that Kvaerner is limited to where the underlying complaint alleges (1) breach of contract and breach of warranty causes of action only, and (2) damage to the insured’s work only.  Here, the underlying complaints alleged tort causes of action and damage to property other than the insured’s work.  Second, the definition of “occurrence” in the National Union policy included the limitation that the damage be neither “expected nor intended from the standpoint of the insured.”  The underlying complaints did not allege that the insured subjectively expected “damages such as the mold related health issues.”  

The court also distinguished  Millers Capital Ins. Co. v. Gambone Bros. Development Co., Inc., 941 A.2d 706 (Pa. Super. 2007) by suggesting that a bad workmanship claim against a building contractor, as in Gambone, is materially different from a bad product claim against an off-the shelf product manufacturer as in Indalex.    Other Pennsylvania decisions suggest the failure of an off-the-shelf product may not be foreseeable, and thus constitute an “occurrence,” whereas the failure of a product to meet contract requirements or specifications is a foreseeable business risk and thus not an “occurrence.”

With respect to the tort causes of action, the court effectively retreated from its application of the “gist of the action” doctrine it had applied in Abbott Furnace in determining that a tort claim was not sufficiently plead and the gist of action was breach of contract such that Kvaerner applied.  The court rejected application of the doctrine stating that the legal sufficiency of a tort claim should be determined in the underlying action, not in the separate coverage action.

Indalex is most significant for its express rejection of the “gist of the action” doctrine in insurance coverage actions.    Thus, in determining a duty to defend under Pennsylvania law, an insurer will no longer be able to disregard any tort causes of action that are plead with contract based causes of action.  While Indalex arguably signals a drawback on the broadening application of Kvaerner, it is limited for two reasons.  First, the definition of “occurrence” in Indalex included the “neither expected nor intended from the standpoint of the insured” limitation.  As such, insurers can correctly argue that Indalex is limited to policies including that definition of “occurrence.”  Second,  Indalex is arguably limited to claims against an off-the shelf product manufacturer and thus Kvaerner and Gambone still apply to claims against building contractors. Indalex also casts some doubt on the viability of the federal court decision Specialty Surfaces International, Inc. v. Continental Cas. Co., 609 F.3d 223 (3rd Cir. 2010) which applied Kvaerner even where the damage was not limited to the insured’s work.