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This is case involves bad faith claims and Kvaerner coverage issues, based on damages resulting from the installation of a fuel system.  The insured brought breach of contract and bad faith claims, and the insurer moved for judgment on the pleadings.

Judge Surrick sets out the law on faulty workmanship, faulty products, and what constitutes a covered occurrence

Eastern District Judge Surrick does an analysis of the case law on whether faulty workmanship can constitute an occurrence, whether damages solely resulting from faulty products can be an occurrence, and whether the reasonably foreseeable results of faulty workmanship can be an occurrence when the results of that faulty workmanship are damage to other property.

He observes there is no question that faulty workmanship in itself is not an occurrence under Kvaener and its progeny. He also accepts the Indalex principle that damages solely flowing from a faulty product are the result of an occurrence.  Based on clear precedent, however, he rejects the notion that reasonably foreseeable damages to a third party’s property resulting from faulty workmanship constitutes an occurrence.

In the present case, it was unclear whether the damages resulted from a faulty product or faulty workmanship, so the coverage issue could not be determined at the judgment on the pleadings stage.

Bad faith claim allowed to proceed

Judge Surrick likewise found the bad faith claim could not be resolved via a judgment on the pleadings.

The insurer initially denied a defense and coverage, but later issued a reservation of right letter, provided a defense, and brought a declaratory judgment action.  The insurer argued the amended and second amended complaints against the insured provided no basis for coverage, and even if they did, it was still reasonable to deny coverage.

The insured focused on the original complaint, observing that the insurer denied a defense based on the original complaint, before the amended complaints were ever filed.  After the insured protested, the carrier did rescind the original denial and defended under a reservation or rights.  The insured used these facts to support a bad faith claim that the original position was unreasonable.  The insured also asserted the insurer’s investigation “was rushed, incomplete, half-hearted, and faulty, which also supports its claim for bad faith.”

Judge Surrick accepted the insured sufficiently pleaded a bad faith claim based on the insurer’s conduct surrounding the original complaint, and its initial refusal to defend based on the original complaint’s allegations.

 “The Original Complaint, unlike the First or Second Amended Complaints, included various counts and allegations of negligence and gross negligence…. When the complaint asserts an injury which may be within the policy, the insurer is required to defend. … Therefore, where a claim is potentially within the scope of an insurance policy, the insurer who refuses to defend at the outset does so at its peril.”

Date of Decision:  September 30, 2021

Harleysville Worcester Insurance Company v. Gateway Petroleum Technology Inc., U.S. District Court Eastern District of Pennsylvania No. CV 20-4863, 2021 WL 4477149 (E.D. Pa. Sept. 30, 2021) (Surrick, J.)