NO BAD FAITH WHERE NO COVERAGE DUE; NO BAD FAITH WHERE LAW IS UNSETTLED ON SCOPE OF COVERAGE; KVAERNER INTERPRETATION OF OCCURRENCE CAN APPLY TO PROPERTY DAMAGE OUTSIDE THE SCOPE OF THE CONSTRUCTION CONTRACT (Middle District)
There can be no bad faith where no coverage is due, or where coverage is a close question based on unsettled law.
Court Applies Kvaerner to ALL Reasonably Foreseeable Damages Resulting from Faulty Workmanship
Middle District Judge Brann addressed an expanding body of case law in Pennsylvania’s Superior Court that would appear to require coverage for damages flowing from faulty workmanship, even if the faulty workmanship itself is not covered. He rejected, however, the Superior Court’s interpretation of what constitutes a covered occurrence under the Pennsylvania Supreme Court’s 2006 Kvaerner decision.
Judge Brann relied on Third Circuit precedent emphasizing that all reasonably foreseeable damages resulting from faulty workmanship do not constitute an occurrence, whether that is damage to the product being constructed or damages to property beyond the scope of the construction contract resulting from that faulty workmanship.
Thus, e.g., in Judge Brann’s and the Third Circuit’s perspective, if a contractor improperly installs a roof, the roof leaks, and other parts of the building or personal property are damaged, there is no occurrence for this other damage to third party property, even though it is beyond the contracted work itself, if that other damage is reasonably foreseeable. By contrast, the new Superior Court cases would find this third party damage outside the scope of the actual construction work to be a covered occurrence, even if reasonably foreseeable.
Judge Brann observes, “Despite the caselaw that has emerged from the Superior Court, the [District] Court notes that it is not bound by these decisions. As the Third Circuit has explained, although courts should ‘give due deference to the decisions of intermediate state courts…[s]tate appellate decisions…are not controlling.’ Thus, ‘while [courts] may not ignore the decision of an intermediate appellate court, [they] are free to reach a contrary result if, by analyzing other persuasive data, [they] predict that the State Supreme Court would hold otherwise.’”
In the present case, Judge Brann held no coverage due to replace a roof that had been improperly constructed. Further, there was no coverage due to areas of the roof damaged that were outside the scope of the contracted roof work, which also had to be replaced as a result of the faulty construction, as these third party property damages were reasonably foreseeable. Thus, he granted judgment on the pleadings in favor of the insurer as to coverage.
No Bad Faith Where no Coverage Due
On the insured’s bad faith claim, Judge Brann likewise granted judgment on the pleadings. First, he observed that the insurer properly denied benefits. Thus, he found there could be no bad faith because the insurer “certainly had ‘a reasonable basis for denying benefits under the policy,’ meaning that [the insured] cannot demonstrate bad faith.”
Judge Brann then added, “even if this Court were incorrect in its decision that [the insurer] owes no duty to indemnify [the insured], the duty to indemnify is, at the very least, debatable, in light of the differing conclusions reached by the Superior Court and the Third Circuit. Given that the caselaw in this area does not establish a clear duty … to indemnify …, it cannot be said that [the insurer] had no reasonable basis to deny benefits.”