PA Court Suggests Bright-Line Rule in Coverage of Construction Defect Claims

An Allegheny County trial judge recently granted summary judgment in favor of two excess insurers on a matter of first impression relating to the coverage of claims for faulty workmanship.

In the case of American Home Assurance Co. v. Trumbull Corp., Trumbull was employed to prepare the foundational pad on which a new J.C. Penney store would be built in southwestern Pennsylvania. Trumbull completed its portion of the project in late 2006, but J.C. Penney and other shopping center tenants began to experience foundational cracks due to settling and sued for faulty workmanship shortly thereafter. Although Trumbull’s primary insurer agreed to defend the case under a reservation of rights, American Home Assurance and National Union Fire Insurance quickly instituted a declaratory judgment action against the contractor to disclaim excess coverage. The insurers argued that damage to the tenants’ buildings did not constitute an “occurrence,” that is, an accident, in light of Pennsylvania’s recent decisions on the coverage implications of faulty workmanship.

In considering the insurers’ summary judgment motions, Judge R. Stanton Wettick, Jr. quickly pointed out that Pennsylvania courts have yet to address this specific issue. He explained that coverage of faulty workmanship claims has been considered in three factual scenarios, namely: (1) damage to the work itself; (2) damage to the larger project where the work was performed pursuant to a contract between the insured and property owner; and (3) damage to the larger project where there is no contract between the insured and property owner. Although Pennsylvania courts unanimously agree that an insurer may properly disclaim coverage where the damage is to the work itself, judges have applied two conflicting lines of reasoning in respect of the remaining two situations. On the one hand, some previous cases have required coverage for ancillary damage while others have hold that faulty workmanship can never constitute an “occurrence.”

According to Judge Wettick, American Home Assurance presented a fourth factual scenario and thus an opportunity to reconcile the inconsistent treatment of faulty workmanship claims in coverage disputes. He ultimately concluded that the weight of authority supported a growing trend of per se disclaimers and ruled that the excess insurers could decline coverage solely on the nature of the faulty workmanship claim.

While the decision is not precedential, Judge Wettick’s well-reasoned opinion in American Home Assurance indicates that Pennsylvania courts are rapidly approaching a bright-line rule with respect to coverage of faulty workmanship and construction defect claims. Just as important, the ruling in American Home Assurance is likely to provide Pennsylvania’s appellate courts with the opportunity to address definitively coverage issues in construction defect and provide a modicum of predictability to these disputes.

Thanks to Adam Gomez, law clerk, for this post. If you have any questions or comments, please email Paul at pclark@wcmlaw.com.