In Berkley Specialty Ins. Co. v. Masterforce Constr. Corp., No.
4:19-CV-01162, 2021 U.S. Dist. LEXIS 14006 (M.D. Pa. Jan. 26, 2021) (Brann,
J.), the Court recently concluded that, under Pennsylvania law, all reasonably
foreseeable damages to third-party property caused by faulty workmanship do not
constitute an “accident” sufficient to trigger coverage under a commercial
general liability (“CGL”) insurance “occurrence” policy. The Court also
emphasized that there could be no bad faith finding where the insurer has a
“reasonable basis for denying benefits” under the policy or where coverage is
“debatable.”

The underlying state court action arose after the homeowners contracted with a construction company to install a new standing seam metal roof. Although the company purported to be the contractor that would install the roof, it hired a subcontractor to install the roof and instructed him to conceal his identity as a subcontractor and represent himself as an employee of the company. The homeowners alleged that the roof leaked multiple times, causing property damage to the home, and they ultimately discovered that the roof was improperly installed and needed to be replaced by a different contractor.[1]

Following a two-day bench
trial, the state court found in favor of the homeowners and agreed that the
roof was improperly installed and never should have been installed, as the
slope violated zoning regulations and manufacturer recommendations. The state court
also found that the construction company and its subcontractor and others
conspired to deceive and defraud the homeowners by their intentional actions
and inactions.[2] The
state court awarded the homeowners reimbursement for the leak repairs, as well
as for the replacement roof. The state court also awarded the homeowners treble
damages and attorneys’ fees because of the intentionally fraudulent conduct.

In the subsequent federal
coverage case, the Court considered whether the damages awarded in the
underlying case were covered. Relying on a prior Pennsylvania Supreme Court
decision, the Court stated that, “where property damages result ‘from poor
workmanship,’ such damage is not covered” and “the insurer has ‘no duty to
defend or indemnify’ the insured.”[3]  Despite this holding, the Court acknowledged
the “open question whether, under Pennsylvania law, an ‘accident’ occurs when
the underlying claims are based upon faulty workmanship when the faulty
workmanship results in damage to third-party property – i.e., property that
belongs to someone other than the insured.”[4] Although
the Pennsylvania Superior Court had concluded that damage to third-party
property caused by faulty workmanship is covered under general liability
insurance policies, the Court was not persuaded that the Pennsylvania Supreme
Court would agree. Relying on Third Circuit precedent, the Court predicted
instead that “the Supreme Court of Pennsylvania would determine that damage to
third-party property caused by faulty workmanship does not qualify as an
accident sufficient to trigger insurance coverage.”[5] 

Specifically, the Court relied
on the Third Circuit’s decision in Specialty
Surfaces Int’l, Inc. v. Cont’l Cas. Co., 609 F.3d 223 (3d Cir. 2010), in
reaching its decision. In that case, the Circuit Court found that a CGL insurer
had no duty to defend or indemnify the insured turf manufacturer against faulty
workmanship claims arising from the insured’s construction and installation of
synthetic turf football fields.[6]  The Third Circuit held that consequential
damages to the subgrade of the synthetic turf caused by the insured’s faulty
workmanship did not constitute an “occurrence,” even though the subgrade was
not a part of the insured’s work, because such damages were “an entirely foreseeable,
if not predictable, result” of the insured’s failure to properly complete its
work.[7]  In so holding, the Circuit Court was focused
on “whether any damage was a natural consequence of faulty workmanship, such
that it cannot be considered ‘an unexpected and undesirable event[.]’”[8]  

The Court used that test as a
baseline and found that all of the damages in this matter fell squarely within
the category of damages that are not covered under an “occurrence” policy.[9]
The Court determined that there was no coverage for replacement of the roof
itself, as those were costs to repair and replace the insured’s own product.
Notably, the Court also held that even damage to the home itself and the wood
beneath the roof was not covered, as such damages were “an entirely foreseeable
result of the [insured’s] failure to properly cover or install the roof.”[10] The
Court further concluded that the insurer was not required to indemnify the
insured for the state court’s award of treble damages or attorneys’ fees
resulting from the insured’s intentional acts or any of the damages resulting
from the underlying action, as they do not constitute “occurrences.”[11] 

Finally, the Court granted
judgment on the pleadings in favor of the insurer on the insured’s bad faith counterclaim.
The Court further concluded that, even if its decision that the insurer owed no
duty to indemnify were incorrect, the duty to indemnify is at least “debatable”
in light of the differing opinions of the Superior Court and Third Circuit. Id. at *25.

While this decision is
informative on the current state of the law in the Third Circuit, it bears
noting that the homeowners filed an appeal of the Court’s decision before the
Third Circuit on February 18, 2021. Insurers and insureds alike will be watching
that appeal with interest.

[1] Id. at *2-*3.

[2]
Id. at *3-*4.

[3]
Masterforce, 2021 U.S. Dist. LEXIS
14006, at *13 (citing Kvaerner Metals
Div. of Kvaerner U.S., Inc. v. Com. Union Ins. Co., 908 A.2d 888, 900 (Pa.
2006)).

[4]
Id. at *14.

[5]
Id. at *16.

[6]
Masterforce, 2021 U.S. Dist. LEXIS
14006, at *16-*17.

[7]
Id. at *18 (quoting Specialty Surfaces, 609 F.3d at 239).

[8]
Masterforce, 2021 U.S. Dist. LEXIS
14006, at *20 (quoting Kvaerner, 908
A.2d at 898, and citing Specialty
Surfaces, 609 F.3d at 239).

[9]
Masterforce, 2021 U.S. Dist. LEXIS
14006, at *20.

[10]
Id. at *22.

[11]
Id. at *23-*24.