CYNTHIA M. RUFE, District Judge.
Before the Court is a breach of contract action, filed by insured Lenick Construction, Inc., seeking a judgment that the company from which it purchased a commercial insurance policy, Selective Way Insurance Company, has a duty to provide a defense and indemnification in state court litigation. There are three motions presently before the Court: 1) Lenick's Motion for Summary Judgment on Selective's duty to provide a defense and pay fees incurred to date in the underlying state court litigation; 2) Selective's Motion for Summary Judgment on the issue of its duty to provide a legal defense to Lenick in the underlying suit; and 3) Selective's Motion for Summary Judgment on its duty to indemnify Lenick if it is found liable in the underlying state court litigation.
The Villas at Packer Park Condominium Association ("Villas") entered into a contract with Westrum Park Place, under which Westrum and related entities (together "Westrum") were to serve as the general contractor in the construction of a 92-unit condominium development project in Philadelphia. Westrum utilized a number of subcontractors, including Lenick. Lenick was subcontracted to perform rough and finish carpentry work for the Villas, and installed paneling, windows, and doors provided by the developer.
On February 28, 2013, after the project was completed, the Villas filed the underlying lawsuit against Westrum in state court, alleging that the owners of the units at the Villas have discovered material construction defects and breaches of warranty in the construction of the units. The defects are alleged to have caused water infiltration into the units, leaks throughout the units, and cracks in the drywall in the units. Westrum joined various subcontractors and suppliers as defendants in the underlying lawsuit, including Lenick, and filed a joinder complaint against the subcontractors.
To cover potential commercial liability, Lenick purchased commercial insurance policies and umbrella excess policies from Defendant Selective over a number of years. The policy in effect during the relevant time period requires Selective to provide a defense and indemnification in certain types of civil lawsuits against the insured. On October 24, 2013, Lenick contacted Selective, and requested a defense and indemnification in the underlying lawsuit. Selective initially denied the request, by letter dated January 27, 2014, but on December 4, 2014, Selective agreed to defend Lenick in the underlying action, subject to a reservation of its right to challenge its obligation to do so under the relevant policy. Lenick then filed this action, seeking a declaratory judgment as to Selective's duty to defend and indemnify it in the underlying lawsuit, under the applicable insurance policies.
The parties' Stipulation of Material Facts
The insurance applies only to property damage that "is caused by an `occurrence,'"
Selective argues that because any liability Lenick will face has arisen from its own faulty workmanship, in breach of its subcontractual duties, the property damage at issue was not caused by an "occurrence," and thus is not covered by the Selective policy.
Under Pennsylvania law, the insurer has a duty to defend the insured if the complaint in the underlying case alleges facts that support recovery under the policy. "In determining the existence of a duty to defend, the factual allegations of the underlying complaint against the insured are to be taken as true and liberally construed in favor of the insured."
On April 14, 2014, Lenick filed this action in state court, seeking a declaratory judgment as to Selective's duty to defend and indemnify it in the underlying litigation. The case was removed to this Court on May 12, 2014.
The underlying complaint initially asserted claims only against the general contractor, Westrum, and not against Lenick or any other subcontractors. Westrum filed a joinder complaint on October 7, 2013 (followed by a number of amended joinder complaints), which named Lenick and others, in a suit for breach of contract, breach of express and implied warranties, common law and contractual indemnification, and negligence.
On December 10, 2013, after Westrum joined the subcontractors and suppliers to the suit, the Villas amended its complaint to add its own claims against the subcontractors. The Villas asserted a single claim against Lenick and the other joined subcontractor defendants, alleging breach of implied warranty.
On December 4, 2014, Selective agreed to defend Lenick in the underlying matter, subject to a reservation of rights. Although Lenick's defense has been provided by Selective since that date, Lenick is seeking reimbursement for $37,677.56 related to its defense in the underlying action, for the period October 22, 2013 through December 2, 2014. Lenick also seeks a declaratory judgment that Selective has an ongoing obligation to provide a defense.
In 2015, the Villas reached a settlement agreement with Westrum in the underlying case. As part of that agreement, Westrum assigned to the Villas its breach of contract and contractual indemnification claims against the subcontractors, including Lenick. Subsequently, the Villas filed the Second Amended Complaint, on October 7, 2015, and then the Third Amended Complaint, on December 4, 2015, asserting claims against the subcontractors. Because the motions for summary judgment were already fully briefed when the Second Amended Complaint was filed, the Court asked for supplemental briefing on this issue. After the Court made that request, but before the supplemental briefs were due, the Villas filed the Third Amended Complaint. The supplemental briefs addressed the allegations in the Third Amended Complaint. The Court must examine the factual allegations in the Third Amended Complaint to determine whether Selective is under an obligation to provide a defense after December 2015.
With regard to Lenick, the Third Amended Complaint alleges claims, as assignee for Westrum, for: 1) breach of contract, by failing to construct the project according to the terms of its contract; 2) breach of implied warranty, as Lenick warranted that its work would be constructed in a good and workmanlike manner and be fit for habitation; and 3) contractual indemnity. As an assignee and on its own behalf, the Villas also asserted a negligence claim against Lenick, alleging that Lenick violated its duty of care in performing work on the project, causing damage to its own work and the work of others. The Villas does not identify any extra-contractual source of a duty to perform the construction in a workmanlike manner in the Third Amended Complaint.
Selective argues that both the Villas' Third Amended Complaint against Lenick and the earlier joinder complaints against Lenick are simply claims for poor workmanship in breach of contract. As such, Selective argues, the events alleged do not constitute "occurrences" under the general liability policy or the umbrella policy, and fall under the "your work" exclusion to coverage. Selective argues that Lenick has failed to establish that any provision of the relevant insurance policy would require coverage; for example, Lenick does not argue that it hired any subcontractors to perform work on Lenick's behalf.
The parties agree that if the underlying claims against Lenick only alleged that Lenick produced defective work due to poor workmanship in breach of its contractual obligations, causing damage to its own work, the applicable insurance policy would not provide for a defense or indemnification.
The negligence claims in the joinder complaint were dismissed in June 2014 by the underlying court, with the finding that all the claims arose from the contract between the parties. This Court also finds that while Westrum's joinder complaints did assert claims against Lenick in both contract and tort, it was clear from the facts alleged in the joinder complaint that the duties alleged to be breached were duties based in the contract between the parties.
With regard to Lenick's argument that the underlying joinder complaint and the Third Amended Complaint did not only allege that Lenick's own work was deficient, but that its defective work caused damage to the work of others, the Court agrees that this is a plausible reading of the underlying complaints. However, where liability is premised upon poor workmanship, the fact that nearby work was also damaged does not change the analysis, so long as such damage is reasonably foreseeable.
Lenick also argues that the underlying complaint does not exclusively allege that Lenick's faulty workmanship was the cause of the water problems the owners experienced. Indeed, the Third Amended Complaint suggests that the problems with the units could (also or instead) be attributed to: 1) poor design and/or a lack of guidance from the project architects; 2) inadequate or faulty materials provided to Lenick by third parties for installation; or 3) damage to Lenick's otherwise non-defective work which was caused by the faulty work of other contractors or subcontractors (e.g. the stucco subcontractor). In these scenarios, Lenick argues, it is possible that Lenick fulfilled his contractual obligations and produced satisfactory work, but the faulty work of others led to the later failure of Lenick's work and resulting water damage to the property of the underlying plaintiff. Thus, Lenick argues that the faulty work of others can be considered an "occurrence" or "accident," from Lenick's perspective, and if liability arises from an occurrence, Selective must provide a defense and indemnification for any liability. However, while it is true that the complaints assert that other contractors or subcontractors may be liable for the water damage to underlying plaintiff's property, they do not allege that Lenick should be held liable (in negligence or under any other theory) for the faulty products or poor workmanship of others. Lenick's own faulty workmanship is the only legal theory under which Lenick, as opposed to other contractors or subcontractors, could be found liable for the property damage to the units. There are no facts alleged to support a tort claim against Lenick.
Therefore, because allegations of faulty workmanship in performance of a contract, without more, are not an "occurrence" under the relevant Selective policy, the Court agrees that Selective is not obligated to pay the pre-tender defense costs, and has no duty to provide an ongoing defense to Lenick in the underlying lawsuit.
With regard to Selective's duty to indemnify Lenick, that duty is triggered when a claim against an insured is actually within the scope of the policy's coverage. Above, the Court held that the asserted claims are not potentially within the scope of the policy's coverage. This is decisive of the issue of whether it is actually within the scope of the policy's coverage.
Lenick also asserts that Selective acted in bad faith in denying benefits under the policy. To succeed on a statutory bad faith claim under Pennsylvania law,
For the reasons set forth herein, Selective's Motions for Summary Judgment on the issues of defense costs and fees and duty to indemnify will be granted, and Lenick's Motion for Summary Judgment on the issue of Selective's duty to defend will be denied. An appropriate Order follows.