Policy language is key in interpreting “occurrence” under Pennsylvania law
In Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., the Pennsylvania Supreme Court held that claims of faulty workmanship, including the natural consequences of that faulty workmanship, do not arise from an “occurrence”. 908 A.2d 888, 898 (Pa. 2006). The CGL policy at issue in Kvaerner defined “occurrence” as an “accident”.
In two 2019 decisions, Pennsylvania federal courts continued to follow the rule established in Kvaerner, but they emphasized that the specific policy language was determinative of the issue. Sapa Extrusions, Inc. v. Liberty Mut. Ins. Co., 939 F.3d 243, 254 (3d Cir. 2019); Utica Mut. Ins. Co. v. Voegele Mech., Inc., No. 18-3959, 2019 WL 5191008 (E.D. Pa. Oct. 15, 2019).
The Sapa decision
In Sapa, a manufacturer of aluminum window profiles sought coverage for a buyer’s claims that the manufacturer had used a defective coating on the profiles that caused them to rust prematurely. The lawsuit involved a number of CGL policies that did not all have the same definition of “occurrence.” The District Court for the Middle District of Pennsylvania analyzed coverage under all the policies as a single group, applied Kvaerner, and held that the buyer’s claims did not arise from an “occurrence.” Therefore, the court concluded that the policies did not provide coverage.
On appeal, the Third Circuit focused its analysis on the specific language of each policy, and divided the policies into three groups based on their differing definitions of “occurrence:”
- The “Accident Definition” – “Occurrence” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
- The “Expected/Intended Definition” – “Occurrence” defined as “an accident, including continuous or repeated exposure to conditions, which results in Bodily Injury or Property Damage neither expected nor intended from the standpoint of the Insured.”
- The “Injurious Exposure Definition.” – “Occurrence” defined as “injurious exposure, including continuous or repeated exposure, to conditions, which results, during the policy period, in personal injury or property damage ... neither expected nor intended from the standpoint of the insured.”
The Third Circuit held that allegations of faulty workmanship did not constitute an “occurrence” under the policies with the “Accident Definition,” because the allegations did not amount to an “unforeseeable, fortuitous event.” The court rejected the insured’s argument that coverage was triggered based on allegations of third-party property damage, and reasoned that it was “certainly foreseeable that the product [the insured] sold would be used for the purpose for which it was sold.” The Third Circuit explained:
"foreseeable acts which tend to exacerbate the damage, effect, or consequences caused ab initio by faulty workmanship also cannot be considered sufficiently fortuitous to constitute an ‘occurrence’ or ‘accident’ for the purposes of an occurrence-based CGL policy."
The court affirmed the district court’s judgment relating to the “Accident Definition” policies.
The Third Circuit reached a different conclusion as to the policies that contained the “Expected/Intended Definition” and “Injurious Exposure Definition” of “occurrence,” finding that the inclusion of “subjective language” in those definitions meant that an “occurrence” depended on the insured’s subjective intent. It found that those definitions of “occurrence” were ambiguous in the context of the claim at issue, and would include consequences that were different than the same general type of result that the insured intended to cause.
The Sapa court’s decision as to these two definitions raises several questions. First, given that the “Expected/Intended Definition” defines “occurrence” as an “accident,” the court’s conclusion does not appear internally consistent. Second, both definitions state that any “property damage” must be “neither expected nor intended from the standpoint of the insured.” Many other courts read this language as not only “subjective,” but also as implicating the objective expectations and intentions of the insured.
The Utica decision
In Utica, a retirement community filed an arbitration against a general contractor and subcontractor, alleging they had defectively replaced and installed air conditioning units at the community’s facility, resulting in water infiltration and mold.
Both the subcontractor and the general contractor, as an alleged additional insured, sought coverage under a CGL policy issued to the subcontractor by Utica Mutual. The policy defined “occurrence” as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions”.
In the declaratory judgment action filed against Utica, the Eastern District of Pennsylvania stated that “at bottom, the AAA Complaint alleges faulty workmanship”, noting that the demand alleged the general contractor “improperly installed” certain materials and defectively performed its contracted-for services. The court found that those allegations
"do not amount to an “occurrence” – that is, an unforeseeable, “fortuitous event”, [because it was] certainly foreseeable that the faulty installation of air conditioning units and windows could lead to water damage and the growth of mold."
The court entered judgment declaring that Utica had no obligation to defend or indemnify the subcontractor or general contractor.
As these decisions illustrate, the specific policy language at issue can be, and actually should be, the driving force behind a court’s conclusion as to the interpretation of an insurance policy. It is critical to pay careful attention to the language that is employed in the policy when analyzing the coverage issues that may be implicated for particular claims.