Court Decision Rejects Problematic Interpretation of Kvaerner

Organizations could gain ground in efforts to advocate for insurance coverage around claims of faulty workmanship or defective products under a recent Pennsylvania Superior Court decision that rejects an interpretation of the Kvaerner* case often advanced by insurers.

Specifically, the court rejected the assertion that “faulty workmanship” or defective products do not constitute an occurrence under a general liability (GL) policy, even when damage to third-party property is alleged. The court’s decision was handed down on December 3, 2013, in Indalex, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA

Prior to Indalex, the 2006 Kvaerner decision from the Pennsylvania Supreme Court had been interpreted by some as supporting the assertion that faulty workmanship or defective products does not constitute an occurrence under a GL policy.

Indalex also repudiates another key issue in this area of insurance coverage: the application of Pennsylvania’s “gist of the action” theory to insurance coverage. This theory generally disallows a tort cause of action to be brought if the gist of the occurrence was made during the performance of a contract. Lower courts had often used it to bar insurance coverage for complaints.

The Indalex decision is significant because it joins a number of other decisions and legislation in affirming the view that coverage potentially exists under GL policies for claims of faulty workmanship or defective products where the allegation involves damage to third-party property and tort-based causes of action.

Marsh is actively monitoring these developments and will keep clients updated on their potential impact on coverage.

*The full case name is: Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Co.