Insurers are often required to defend a lawsuit where a nominal count or allegation implicates coverage, despite the fact that the nature of the complaint is clearly outside of the scope of coverage.

This was recently at issue in State Farm Fire & Casualty Co. v. McDermott. A homebuilder, the PulteGroup Inc., sued  contractor Patrick McDermott Plastering, claiming that McDermott performed defective plaster, stucco, and window installation work on almost 300 homes in a housing community. PulteGroup’s also alleged negligence and breach of contract, which McDermott claimed triggered coverage under the CGL policy.

State Farm, McDermott’s insurer, agreed to defend McDermott in the underlying action under a reservation of rights and subsequently filed a declaratory action arguing that the complaint in the underlying suit failed to allege an occurrence needed to trigger coverage. Specifically, State Farm noted that nothing in the complaint suggested that an accident occurred, which the policy language identified as necessary to qualify as an occurrence. Despite the negligence and breach of contract allegations in PulteGroup’s complaint, State Farm argued that the claims did not suggest an unexpected accident but that the underlying substance of the complaint was faulty workmanship, which was not covered.

The Eastern District of Pennsylvania court ultimately agreed with State Farm that the underlying complaint alleged faulty workmanship which was not an accident as necessary to constitute an occurrence under the policy. The court noted that McDermott’s contract with PulteGroup made it McDermott’s contractual duty to complete the project in a “workmanship like manner,” so any liability McDermott faced would stem from his alleged failure to meet such contractual obligations. Thus, relying on the “substance” of the negligence allegations, the court granted State Farm’s Motion for Summary Judgment.

Thanks to Nicole Pedi for her contribution to this post.  Please write to Mike Bono for more information.