HILLMAN, District Judge.
Presently before the Court are the parties' cross-motions for summary judgment on plaintiff's declaratory judgment action for insurance coverage under an insurance policy issued by defendant.
For the reasons expressed below, the Court finds that the insurance policy affords plaintiff coverage, but that defendant did not act in bad faith in its decision to decline coverage.
If review of cross-motions for summary judgment reveals no genuine issue of material
On April 21, 2008, thirty-nine homeowners in three residential communities in Marlton and Evesham Township, New Jersey filed their tenth-amended complaint in New Jersey Superior Court alleging that the developer, The Quaker Group and its affiliates ("Quaker"), and Quaker's subcontractors, among others, defectively designed and constructed their homes in an unworkmanlike and unsatisfactory manner, and also failed to comply with building codes and laws, industry standards, design documents, and the requirements in written contracts and implied and express warranties. (Wallach Complaint ¶¶ 61-77, Pl. Ex. B.) The homeowners claim that their homes have sustained water damage due to the construction problems, and that they have suffered not only property damage, but also injury to their health through mold and mildew exposure.
On July 1, 2008, Quaker filed a third-party complaint against its subcontractors, including plaintiff Schuylkill Stone Corp. ("Schuylkill Stone"), which is now Environmental Materials, LLC, alleging joint-tortfeasor liability and other claims. (Pl. Ex. C ¶ 36.) Quaker claims that should it be held liable to the Wallach plaintiffs for conduct by any of its subcontractors, Quaker is entitled to contribution or indemnification from those subcontractors, including plaintiff here.
On August 5, 2008, plaintiff tendered a demand for a defense to defendant State Automobile Mutual Insurance Company ("State Auto"). Schuylkill Stone was a Commonwealth of Pennsylvania corporation and, as noted, is the predecessor to Environmental Materials, LLC. State Auto issued a commercial general liability policy to Schuylkill Stone with an effective date of May 10, 1999 to May 10, 2002. State Auto declined, however, to provide Schuylkill Stone with a defense to the underlying state court action for numerous reasons. (See Sept. 28, 2009, Declination of Coverage Letter, Pl. Ex. K.)
Through the course of this litigation, State Auto has narrowed its declination of coverage to four bases: (1) the policy was issued to Schuylkill Stone, which is now defunct, and the policy did not transfer to Environmental Materials; (2) even if the policy is valid, the Wallach plaintiffs' claims for property damage and bodily injury do not amount to an insured "occurrence" because their claims for faulty workmanship—a contractual, not tort, claim—cannot be considered an "accident," which the policy defines to constitute an "occurrence"; (3) Schuylkill Stone's claims are barred under the "Contractual Liability" provision, which excludes coverage for contractual damages that Schuylkill Stone agreed with Quaker to assume; and (4) the damage to two of the four homes Schuylkill Stone worked on manifested after the policy coverage period.
Schuylkill Stone argues that none of these bases is valid. It further argues that not only did State Auto decline to provide a defense for incorrect reasons, it did so in bad faith. The Court will address each of State Auto's reasons for declining coverage, and then address Schuylkill Stone's bad faith claim.
On October 30, 2002, Schuylkill Stone sold its assets to Stone Acquisition, LLC, which was a 100-percent owned affiliated entity of Environmental Materials
State Auto contends that the insurance policy prohibited such a transfer. It also argues that because the transfer of the policy was not a result of a merger or consolidation, and therefore not properly assigned to Environmental Materials, the policy coverage extinguished when the entity Schuylkill Stone officially dissolved in June 2004.
State Auto's position is unavailing. Even though the policy contains a clause that states, "Your rights and duties under this policy may not be transferred without our written consent," a clause such this is invalid where an assignment of the policy has been made after the insured's right to payment has already accrued. The Pennsylvania Supreme Court has explained,
Egger v. Gulf Ins. Co., 588 Pa. 287, 903 A.2d 1219, 1227 (2006) (quoting Continental Cas. Co. v. Diversified Indus., Inc., 884 F.Supp. 937, 948 (E.D.Pa.1995) (discussing Nat'l Mem'l Services, Inc. v. Metro. Life Ins. Co., 355 Pa. 155, 49 A.2d 382 (1946))).
In this case, it is undisputed that the claims of two of the four Wallach plaintiffs with Schuylkill Stone stonework accrued during the policy effective period, and before the policy transfer (the water damage having manifested between December 2000 and March 2001 (Greenberg) and sometime before December 2001 (Smid/Heiligman)). Therefore, the State Auto policy is still effective to the assigned insured, Environmental Materials, should these claims qualify Environmental Materials for coverage.
Under Pennsylvania law, "[a]n insurer's duty to defend an insured in litigation is broader than the duty to indemnify, in that the former duty arises whenever an underlying complaint may `potentially' come within the insurance coverage." Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 193 F.3d 742, 746 (3d Cir.1999) (citing
The State Auto policy provides coverage for "bodily injury" or "property damage," but only if that damage is caused by an "occurrence," which means "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." State Auto's position is that the Wallach plaintiffs' claims and resulting damages do not constitute an "accident." State Auto views the Wallach plaintiffs' allegations of water damage caused by Schuylkill Stone, among others, to assert faulty workmanship claims sounding in contract, which cannot be considered sufficiently fortuitous to constitute an "occurrence" or an "accident."
Schuylkill Stone counters that gist of the Wallach action sounds in tort. The underlying complaint alleges that Quaker, and Quaker's subcontractors, including Schuylkill Stone, failed to comply with industry standards because Schuylkill Stone installed a defective product (the stone veneer). Schuylkill Stone argues that this claim sounds in tort, which is further evidenced by Quaker's third-party claims against Schuylkill Stone for joint tortfeasor liability. Because the Wallach plaintiffs allege that Quaker and its subcontractors, including Schuylkill Stone, acted tortiously when they constructed their homes, causing them property damage and personal injury, such a claim constitutes an "occurrence," and therefore State Auto is required to provide Schuylkill Stone with a defense.
The question of law to be decided, therefore, is whether the Wallach claims can be considered an "occurrence" so that State Auto's duty to defend is triggered. Another judge in this District recently has had the occasion to address the almost identical question involving the same parties. In Wausau Underwriters Ins. Co. v. State Auto. Mut. Ins. Co., 557 F.Supp.2d 502, 511 (D.N.J.2008), Judge Joseph Irenas considered whether a state court complaint by homeowners against a developer and its subcontractors, including Schuylkill Stone, contained claims that triggered Wausau Underwriters Insurance Company's duty to defend under the same policy language in the State Auto policy in this case.
Wausau, 557 F.Supp.2d at 512.
Judge Irenas considered Pennsylvania law and how the courts in Pennsylvania have interpreted the standard CGL insurance provisions concerning "occurrence" and "accident," and then applied those interpretations to the claims in the Laurel Creek complaint. First, Judge Irenas analyzed the two main Pennsylvania Supreme Court cases that have addressed the language: Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Comm. Union Ins. Co., 589 Pa. 317, 908 A.2d 888 (2006) and Donegal Mut. Ins. Co. v. Baumhammers, 595 Pa. 147, 938 A.2d 286 (2007). Both of these cases explained that "accident," as ordinarily used, is "an unexpected and undesirable event, or something that occurs unexpectedly or unintentionally," with "[t]he key term in the ordinary definition of `accident' [being] `unexpected,'" which "implies a degree of fortuity." Kvaerner, 908 A.2d at 898. The cases also explained that an "injury therefore is not `accidental' if the injury was the natural and expected result of the insured's actions." Baumhammers, 938 A.2d at 292.
Even with the same interpretation of "occurrence" in mind, these two cases diverged on their result. Judge Irenas succinctly summarized the cases:
On the other hand, the Pennsylvania Supreme Court in Baumhammers held that an accident had occurred, and therefore the insurance company was required to defend the underlying suit. In that case, the underlying suit was a negligence claim against the parents of an adult son who killed five people and injured a sixth. The insurance company sought a declaration that they were not required to defend or indemnify the parents under their homeowners' insurance policy, asserting that the intentional act of killing five people and injuring another was not an "accident." The underlying complaint asserted negligence on the part of the parents, in failing to take away their son's gun and failing to alert mental health professionals or law enforcement about his dangerous propensities. In holding that an "accident" had occurred, the court explained, "`the test of whether an injury is a result of an accident is to be determined from the viewpoint of the insured and not from the viewpoint of the one that committed the act causing the injury.'" Applying Kvaerner's definition of "accident," the court further concluded that
Wausau, 557 F.Supp.2d at 513-14 (internal citations omitted).
Facing "the difficult task of determining whether the instant case [was] more like Kvaerner or Baumhammers," Judge Irenas found that based on the sparse factual allegations of the Laurel Creek complaint, he could not rule out the possibility that the alleged manufacturing or design defect in the stone fascia resulted from Schuylkill's negligence. Id. at 514. Judge Irenas therefore found that the complained-of damage could be interpreted to result from an "occurrence" under the Wausau policy. Id. at 515. In making his decision, Judge Irenas found Kvaerner, and other similar faulty workmanship cases, to be distinguishable from the Laurel Creek case because Schuylkill had no contractual relationship with the Laurel Creek plaintiffs, and the underlying claims were not for breach of contract. Id. at 514. In contrast, Judge Irenas found the Laurel Creek case to be similar to Baumhammers, explaining that "[a]lthough Baumhammers was a much clearer case of an accident from the insureds' perspective, the underlying complaint alleged negligence of the insureds." Id. at 515. Judge Irenas elaborated,
Id.
Unlike in Wausau, the Wallach complaint at issue before this Court does not present the same "difficult task" of determining whether it is more like Kvaerner or Baumhammers. If the Wallach plaintiffs alleged that Quaker, and its subcontractors, including Schuylkill Stone, contracted with them to install a stone facade according to certain plans and specifications that ultimately malfunctioned—a faulty workmanship claim that State Auto contends is alleged in the Wallach complaint—then Kvaerner would clearly bar Schuylkill Stone's claim under the State Auto insurance policy. Indeed, under those circumstances, to permit such claims would "convert CGL policies into performance bonds, which guarantee the work, rather than like an insurance policy, which is intended to insure against accidents." Kvaerner, 908 A.2d at 899; see also Millers Capital Ins. Co. v. Gambone Bros. Development Co., Inc., 941 A.2d 706, 713 (Pa.Super.2007) (finding that the underlying complaints were based on claims for faulty workmanship and therefore, in accord with Kvaerner, were not "occurrences").
No such claim exists in this case, however. The Wallach plaintiffs allege that Quaker negligently failed to comply with industry standards in the construction of their homes.
To further support the fortuitous nature of the Wallach plaintiffs' claims are their claims for not only property damage as a result of Schuylkill Stone's negligence, but also for their personal injuries. They claim that because of Schuylkill Stone's
Under Pennsylvania law, "[a]fter determining the scope of coverage, the court must examine the complaint in the underlying action to ascertain if it triggers coverage." General Acc. Ins. Co. of America v. Allen, 547 Pa. 693, 692 A.2d 1089, 1095 (1997). "If the complaint against the insured avers facts that would support a recovery covered by the policy, then coverage is triggered and the insurer has a duty to defend until such time that the claim is confined to a recovery that the policy does not cover." Id. In this case, the claims of the Wallach plaintiffs as currently alleged in their tenth-amended complaint against Quaker and its subcontractors, including Schuylkill Stone, and further imputed onto Schuylkill Stone through Quaker's third-party joint tortfeasor claims, can be considered an "occurrence" under the State Auto policy. Therefore the Wallach plaintiffs' claims trigger State Auto's duty to defend Schuylkill Stone in that case.
The State Auto policy contains a "Contractual Liability" provision, which excludes coverage for damages incurred by Schuylkill Stone as a result of "the assumption of liability in a contract or agreement." The subcontractor agreement between Quaker and Schuylkill Stone contains a provision where Schuylkill Stone agrees to hold Quaker harmless from "any claim, fines or litigation ... resulting from [Schuylkill Stone's or Schuylkill Stone's employees'] performance of the work." State Auto argues that because Schuylkill Stone contracted with Quaker to assume all liability for its work, and such assumption of liability is specifically excluded from coverage, there is no coverage for Schuylkill Stone under the policy.
Schuylkill Stone counters that the assumption of liability for its conduct in its contract with Quaker is exempted from the Contractual Liability exclusion. The exemption provides that the policy affords coverage for an "insured contract," which is where the insured "assumes the tort liability of another party to pay for" bodily injury or property damage to a third party. Schuylkill Stone argues that in its contract with Quaker, it assumed liability for "any claim," which encompasses the Wallach plaintiffs' tort claims. Thus, Schuylkill Stone argues that its contract with Quaker is an insured contract, which is exempted from the exclusion.
In order for the Contractual Liability exclusion to apply to Schuylkill Stone, the Wallach claims must only sound in contract. Because the Court has already determined that the Wallach plaintiffs have asserted tort claims directly and derivatively against Schuylkill Stone, the exclusion does not apply. Accordingly, State Auto's declination of coverage on the Contractual Liability exclusion is unavailing.
State Auto argues that in the event the Court finds that Schuylkill Stone is entitled to a defense, State Auto should only be obligated to defend the claims of the two homeowners where it has been
The Court agrees with Schuylkill Stone. "[I]f a single claim in a multiclaim lawsuit is potentially covered, the insurer must defend all claims until there is no possibility that the underlying plaintiff could recover on a covered claim." Frog, Switch & Mfg. Co., Inc. v. Travelers Ins. Co., 193 F.3d 742, 746 (3d Cir.1999) (citing Erie Ins. Exch. v. Transamerica Ins. Co., 516 Pa. 574, 533 A.2d 1363, 1368 (1987)). Although State Auto may not ultimately have to indemnify Schuylkill Stone for those two homeowners' claims, it still must provide Schuylkill Stone with a defense to those claims. Thus, this basis for declining coverage is without merit.
State Auto has moved for summary judgment in its favor on Schuylkill Stone's claim that State Auto acted in bad faith when it declined to provide Schuylkill Stone with a defense.
To prove a bad faith claim against an insurer, an insured must show clear and convincing evidence of bad faith. Terletsky v. Prudential Property and Cas. Ins. Co., 437 Pa.Super. 108, 649 A.2d 680, 688 (1994) (citations omitted). This is done through demonstrating that the insurer "did not have a reasonable basis for denying benefits under the policy and that [the insurer] knew or recklessly disregarded its lack of reasonable basis in denying the claim." Id. (citations omitted).
In this case, State Auto argues that because it based its declination of coverage on its reasonable interpretation of applicable legal precedent, there can be no finding of bad faith. In contrast, Schuylkill Stone contends that because (1) State Auto was aware that the same policy language had been previously interpreted to afford coverage, (2) evidence provided to State Auto by Schuylkill Stone showed that at least two of the Wallach plaintiffs' claims arose during the policy period, and (3) State Auto failed to undertake any independent investigation into the Wallach matter, State Auto intentionally, knowingly, and unreasonably declined to provide Schuylkill Stone with a defense under the policy.
Prior to Judge Irenas's decision in Wausau, the case law was not especially clear on what allegations in a complaint constituted an "occurrence" as defined in standard CGL policies. Indeed, when Judge Irenas addressed the question in June
As evidenced by the Terletsky case, State Auto's failure to adopt one federal court's view of the issue, and its continued reliance upon its own interpretation of state law, is not by itself an act of bad faith. But, as noted above, despite Judge Irenas' decision being published and remaining good law, State Auto agreed with Schuylkill Stone and the other insurer defendants to never rely upon that decision in future litigation. State Auto's agreement to act as if the Wausau decision does not exist, and to steadfastly maintain its prior position, could be evidence of motive of self-interest or ill will required for a finding of bad faith. An insurance company that agrees to settle an adverse case so long as that case can never be used against it in the future, thereby providing the insurer with a cloak of innocence to "reasonably" deny the same claims to different insureds, appears to us to be at best a questionable practice even if it appears to foster settlements.
However, here, Schuylkill Stone also agreed to not use the Wausau case against State Auto. Thus, Schuylkill Stone cannot say that State Auto unreasonably denied coverage based on State Auto's knowledge of the most recent state of the law, when at the same time it mutually agreed to act as if that law did not exist. Moreover, even where there is evidence of "questionable conduct giving the appearance of bad faith,"
Because the state court Wallach complaint contains allegations that trigger State Auto's duty to defend under its policy issued to Schuylkill Stone, and because that policy is still effective to Schuylkill Stone's successor-in-interest, Environmental Materials, State Auto improperly declined to afford Schuylkill Stone/Environmental
An appropriate Order to this effect will be entered. The parties shall confer and provide the Court with a proposed Order of Judgment within 10 days.
Regardless of whether the parties have agreed to act as if the Wausau Opinion does not exist, Judge Irenas has not vacated his decision, and it has not otherwise been overturned or abrogated. The case therefore stands as valid persuasive authority that this Court is free to consider. Indeed, even if Schuylkill Stone's counsel had been aware of the agreement and neither party ever cited to the decision, a simple search through the Court's independent research would have instantly revealed its existence.
