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This case involves an Indalex type claim where an insured’s defectively manufactured product causes damage to other property when used in a construction project. In this case, plaintiff-assignee alleged that the insured was negligent in manufacturing concrete used to build a bridge. The defective concrete caused components of the bridge to fail, and required replacing bridge columns.

The general contractor sued the insured. The insured lost a multi-million dollar arbitration, and incurred over $500,000 in defense fees and costs. The insured assigned any claims against its insurer to the general contractor, and the GC pursued breach of contract and bad faith claims.

The court rules providing a faulty product may state a claim for coverage.

The insurer denied a defense and coverage under the Pennsylvania Supreme Court’s Kvaerner decision, as well as pre-Indalex cases, on the basis that providing a faulty product was not an occurrence. The court applied the Superior Court’s 2013 decision in Indalex and held that damages resulting from a negligently manufactured product can be a covered “occurrence”. Judge Horan distinguished Kvaerner because that case only applied to faulty workmanship claims (which are not occurrences). By contrast, Pennsylvania’s Superior Court ruled that negligently making defective products, which later cause damages when incorporated into a construction project, are outside Kvaerner’s ambit.

The court further found that denying coverage based on six specific policy exclusions could not be determined at the motion to dismiss stage. These included the insured contract exclusion (exclusion b), workmanship exclusions (exclusions j(5-6)), the “your product” (exclusion k), the “your work” (exclusion l), and the impaired property exclusion (exclusion m).

The bad faith claim likewise survives a motion to dismiss.

The insurer had also moved to dismiss the bad faith claim on the theory that there was either no “occurrence” under Kvaerner, or because one or more of the exclusions cited above applied. In addressing this argument, rather than citing the Terletsky/Rancosky test for bad faith, the court relied upon the Superior Court’s 2012 Berg decision. The court stated that “42 Pa.C.S. § 8371 applies in any action in which an insurer is called upon ‘to perform its contractual obligations of defense and indemnification or payment of a loss that failed to satisfy the duty of good faith and fair dealing implied in the parties’ insurance contract.’”

Under this principle the court concluded that “[b]ecause the Court has determined that [plaintiff] has sufficiently pleaded, at this stage, the factual bases to sufficiently support its claim that [the insurer] breached its contractual obligations to defend and indemnify [the insured], [plaintiff] has sufficiently pleaded a statutory bad faith claim.” [Note: See the recent 1009 Clinton Properties decision on the notion that finding a breach of the insurer’s contractual obligation alone may be sufficient to survive a motion to dismiss a concomitant bad faith claim. It should also be noted here that the insurer’s sole argument to dismiss the bad faith claim was based on an absence of coverage, and not, e.g., a failure to allege facts sufficient to support a bad faith claim that the coverage denial was unreasonable and/or that the insurer knew or recklessly disregarded the fact that it was unreasonable, even if coverage was due.] 

Date of Decision: March 6, 2019

Brayman Construction Corp. v. Westfield Insurance Co., U. S. District Court for the Western District of Pennsylvania No. 2:18-CV-00457-MJH, 2019 U.S. Dist. LEXIS 36432 (W.D. Pa. Mar. 6, 2019) (Horan, J.)