In Specialty Surfaces Intern., Inc. v. Continental Cas. Co., --- F.3d ----, 2010 WL 2267197 (3d. Cir. (Pa.) June 8, 2010), appellant, Specialty Surfaces, a Pennsylvania corporation, and its subsidiary, Empire, a California corporation with a principal place of business in Pennsylvania together, doing business as Sprinturf, manufactured and sold synthetic turf for athletic playing fields. Specialty Surfaces was insured by Continental Casualty Company; Empire was named as an additional insured.
The Continental policy agreed to pay damages because of bodily injury or property damage to which the insurance applied. The contract of insurance applied to bodily injury and property damage only if ... [t]he bodily injury or property damage is caused by an occurrence..... Occurrence is defined as an accident, including continuous or repeated exposure to substantially the same general harmful conditions.
The underlying action involved allegations against Specialty Surfaces and Empire by the Shasta Union High School District (Shasta) arising out of the installation of Sprinturf and drainage systems on several high school football fields. Specifically, Shasta alleged that the synthetic turf systems installed on exhibited defects in materials and workmanship, which worsened over time. In addition, it was alleged that that Specialty Surfaces, doing business as Sprinturf, breached the terms of the warranties by failing to make good the aforementioned defects in materials and workmanship in a timely fashion.
Specialty Surfaces provided Continental with notice of the lawsuit and requested coverage. Continental disclaimed coverage stating that the commercial general liability policy did not cover Shasta's claim because [t]he allegations are solely poor workmanship and/or product and [a]ny damage that your company can be responsible for would be for improper installation or a defect in the product itself.
Shasta amended the complaint to include Empire as a defendant. In addition to breach of warranty claims against Specialty Surfaces and Empire, Shasta added a claim for negligence against Empire, Trent Construction, and Airfield.
After the amended complaint was filed, Continental agreed to defend Specialty Surfaces and Empire in the California action, subject to a reservation of rights. Continental stated that it agreed to provide a defense because the amended complaint alleged that negligence resulted in damage to the base below the playing fields and the drainage system. Continental, however, continued to refuse to reimburse Sprinturf for its expenses in defending itself before Continental received notice of the amended complaint.
Sprinturf commenced this action seeking a declaratory judgment that Continental had a duty to defend and to indemnify against any liability in Shasta's suit. Both parties moved for summary judgment on the issue of when Continental was required to provide for its defense. Sprinturf argued that Continental was required to provide a defense when it received notice of Shasta's original complaint because the Shasta complaint alleged property damage to another party's work product. Continental argued that the property damage alleged in the Shasta complaints was not caused by an occurrence covered under the policy and, in the alternative, that policy exclusions applied to the type of damage alleged.
To start, the court analyzed whether Pennsylvania or California law applied. The court found that Pennsylvania law applied. In its choice of law analysis, the court made conclusions regarding the coverage issues presented in this case. The court addressed three Pennsylvania cases which analyzed similar coverage issues regarding faulty workmanship : Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa.2006) (holding the definition of accident required to establish an occurrence cannot be satisfied by claims based upon faulty workmanship as such claims do not present the degree of fortuity contemplated by the ordinary definition of accident); Millers Capital Ins. Co. v. Gambone Bros. Development Co., 941 A.2d 706 (Pa.Super. 2007) (holding that natural and foreseeable acts, such as rainfall, which tend to exacerbate the damage, effect, or consequences caused by faulty workmanship cannot be considered sufficiently fortuitous to constitute an occurrence or accident for the purposes of an occurrence based CGL policy); and Nationwide Mutual Ins.Co. v. CPB International, Inc., 562 F.3d 591 (3d Cir. 2009) (holding that consequential damages resulting from faulty workmanship was not an occurrence).
Based on Kvaerner, Gambone and CPB International, the Third Circuit concluded that Pennsylvania law interprets occurrence based coverage like that provided to Sprinturf in accordance with its literal text. In order for a claim to trigger coverage, there must be a causal nexus between the property damage and an occurrence, i.e., a fortuitous event. Faulty workmanship, even when cast as a negligence claim, does not constitute such an event; nor do natural and foreseeable events like rainfall.
The Third Circuit found that Continental did not have a duty to defend Sprinturf when it received notice of the original complaint because the original complaint only alleged that Specialty Surfaces breached its contract with the school district by failing to make good ... defects in materials and workmanship in a timely fashion. The Court held that a breach of contract claim could not constitute an occurrence in a commercial general liability policy under Pennsylvania law.
The Third Circuit also held that Continental was not required to defend Sprinturf after it received notice of the amended complaint. In the amended complaint, Shasta alleged that Empire was negligent in designing, manufacturing and installing a suitable and compatible subdrain system and impermeable liner in compliance to the contract documents. As a result, Shasta alleged that there was damage to the synthetic turf, the impermeable liner, the subdrain system, and the subgrade.
The court found that the allegations of damages to Empire's own work product based on Empire's alleged negligence were claims of damage based on faulty workmanship and, therefore, not caused by an accident. Sprinturf argued that the damage to the subgrade was accidental, and therefore was a covered occurrence. The court rejected this argument citing Gambone, in which the Superior Court, relying on Kvaerner, held that damage caused by water leaks resulting from faulty workmanship was not an occurrence. The court provided:
Here, Shasta alleged that Empire installed the subdrain system, the impermeable liner, and the synthetic turf. In addition to defects in Empire's work product, Shasta alleged that as a direct result of the problems with the subdrain system, water has leaked from the subdrain system into the subgrade, dirt has washed from the subgrade into the subdrain system, the subgrade has settled and subgrade soil stablilizer has remulsified. Consequently, the fields have developed depressions and unstable playing surfaces.... Thus, the amended complaint alleges that the damage to the subgrade was caused by water leaks that resulted from the faulty workmanship. But water damage to the subgrade is an entirely foreseeable, if not predictable, result of the failure to supply a suitable impermeable liner or properly install the drainage system. Thus, as in Gambone, this damage is not sufficiently fortuitous to constitute an occurrence or accident.
Sprinturf insisted that Gambone was distinguishable because the plaintiffs there did not allege damage beyond the structure of the house, which was the work product of the insured. The court found that Sprinturfs argument ignored that the Gambone Court, following Kvaerner, clearly focused on whether the alleged damage was caused by an accident or unexpected event, or was a foreseeable result of the faulty workmanship when deciding whether the policy covered the damage. The court stated [h]ere, water damage to the subgrade was a foreseeable result of the failure to supply a suitable liner or to ensure the proper design, manufacture and installation of the synthetic turf and subdrain system. As such, the court held that Continental did not have a duty to defend Sprinturf in the California litigation and as such that Continental also had no duty to indemnify Sprinturf.