In Indalex, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2013 PA Super 311 (December 3, 2013), the Superior Court of Pennsylvania held that claims alleging that defectively designed and manufactured doors and windows caused physical damage and personal injury constituted an “occurrence” covered under the manufacturer’s commercial umbrella insurance policy. In doing so, the court rejected the application of the gist of the action doctrine for purposes of characterizing the underlying claims as contractual in analyzing the duty todefend.
Indalex, Inc. (“Indalex”) manufactured windows and doors. Multiple lawsuits were filed against Indalex and its affiliates claiming that Indalex’s windows and doors were defectively designed or manufactured and resulted in water leakage that caused physical damage, including mold and cracked walls, as well as personal injury. These lawsuits were filed against Indalex by homeowners or property owners directly, as well as by contractors and product suppliers as third or fourth party complaints. The lawsuits asserted causes of action for strict liability, negligence, breach of warranty, and breach of contract against Indalex.
Indalex’s primary insurance carrier provided a defense and indemnity to Indalex for the underlying lawsuits until November of 2005 when the limits of that policy were exhausted. Indalex then sought coverage under a commercial umbrella policy issued by National Union Fire Insurance Company of Pittsburgh, PA (“National Union”). The National Union policy defined “occurrence” 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.” National Union contended that it did not owe coverage for the underlying lawsuits because they did not constitute a covered “occurrence” under Pennsylvania law. A coverage action ensued. In the coverage action, the trial court granted summary judgment in favor of National Union finding that the claims were not a covered “occurrence” as that word is defined in the policy based on the Pennsylvania Supreme Court decision in Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006).
On appeal, the Superior Court, focusing on the duty to defend, first analyzed Kvaerner. In Kvaerner, claims for breach of contract and breach of warranty were brought against the manufacturer of a coke oven battery due to the coke oven battery failing to meet construction specifications and being in a damaged condition. The Supreme Court in Kvaerner concluded that the definition of “accident” required to establish an “occurrence” could not be satisfied by claims based on faulty workmanship. Therefore, the Supreme Court held that the damage to the coke oven battery based on the defective workmanship of the insured was not a covered “occurrence.”
The Superior Court next analyzed its own decisions in Millers Capital Ins. Co. v. Gambone Bros. Development Co., Inc., 941 A.2d 706 (Pa. Super. 2007) and Erie Ins. Exch. v. Abbott Furnace Co., 972 A.2d 1232 (Pa. Super. 2009). In Gambone, the Superior Court, relying on Kvaerner, held that claims of homeowners stating that their homes had suffered damage attributable to faulty workmanship were not covered. Similarly, in Abbott, the Superior Court held that claims for damage to an annealing furnace due to faulty welding was not covered.
The Superior Court held that Kvaerner, Gambone and Abbott were each distinguishable and did not act to bar coverage for the claims asserted against Indalex. The court stated that the Kvaerner holding was limited to situations “where the underlying claims were for breach of contract and breach of warranty, and the only damages were to the [insured’s] work product.” The court also found that the policy language in Kvaerner was distinguishable as it omitted the subjective language contained in Indalex’s policy, i.e., “… which results in Bodily Injury or Property Damage neither expected nor intended from the standpoint of the Insured.” The court noted that damages such as mold related to health issues were arguably not expected. The court also concluded that the claims in Gambone were against a homebuilder, not a product manufacturer, and that the “product” in that case was the home itself. The claims against Indalex were framed in terms of a bad product, which the court noted could be construed as an “active malfunction,” and not merely bad workmanship. The court found the court in Abbott applied the gist of the action doctrine to limit the underlying case to a contract dispute that was not covered. Ultimately, the court held that because the underlying lawsuits were product-liability-based tort claims for damages to persons or property, other than the insured’s product, the claims are a covered “occurrence” under the National Union policy issued to Indalex.
Significantly, in reaching its conclusion, the Superior Court rejected the use of the gist of the action doctrine to preclude coverage. The gist of the action doctrine operates to preclude breach of contract claims from being re-cast as tort claims. The court found that the application of the gist of the action doctrine in this context would be inconsistent with the duty to defend, which is applicable when a claim is potentially covered. Although it acknowledge that it applied the gist of the action doctrine in Abbott, the Superior Court followed an analysis from an unpublished decision from the United States District Court for the Western District of Pennsylvania which found that the gist of the action doctrine does not govern an analysis of the duty to defend. The court concluded that “[w]hether the laws under which the complaints are brought will bar those tort claims because of the application of the gist of the action or a similar doctrine will be decided by the courts presiding over those lawsuits.”