Tred R. Eyerly – May 1, 2013
The Third Circuit followed Pennsylvania law in determining that damage caused by faulty workmanship did not arise from an occurrence. Zurich Am. Ins. Co. v. R. M. Shoemaker Co., 2013 U.S. App. LEXIS 6093 (3d Cir. March 27, 2013).
The County sued R. M. Shoemaker, alleging faulty construction of an addition to a correctional institution. The County alleged Shoemaker negligently supervised its subcontractor, thereby permitting the subcontractor to engage in willful misconduct, resulting in damage to structural elements of the correctional institution. The County alleged that Shoemaker’s negligence permitted water to intrude, damaging the electrical systems, acoustic ceilings and miscellaneous equipment.
Zurich sought a declaratory judgment that it was not required to defend or indemnify Shoemaker. The district court granted Zurich summary judgment. Relying on Pennsylvania law, the district court found that the allegations in the underlying action did not arise from an occurrence.
On appeal, the Third Circuit noted that in Kvaerner Metals Div. of Kvaemer U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888, 897 (Pa. 2006), the Pennsylvania Supreme Court found that claims of faulty workmanship were not sufficiently fortuitous from the perspective of the insured to constitute an accident. In a second case, Millers Capital Ins. Co. v. Gambone Brothers Dev. Co., 941 A.2d 706 (Pa. Super. Ct. 2007), the court rejected the argument that faulty workmanship by a subcontractor could constitute an “occurrence” from the perspective of the contractor. Gambone further noted that insurance coverage was precluded for “natural and foreseeable acts, such as rainfall, which tend to exacerbate the damage, effect, or consequences caused ab initio by faulty workmanship” since such acts, like faulty workmanship, were not sufficiently fortuitous.
These two state cases controlled the outcome here. Faulty workmanship – whether caused by the contractor’s negligence alone or by the contractor’s negligent supervision, which then permitted the willful misconduct of its subcontractors- did not amount to an “accident.”
The decision did not address the purpose of the business risk exclusions in the policy, nor whether the subcontractor exception to the “your work” exclusion had any impact on the outcome.