If you were to search for a quick answer about whether a Commercial General Liability (CGL) policy covers damages resulting from faulty workmanship under Pennsylvania law, you’d probably come away thinking the answer was “no.” Many headlines, purported state investigations, and news reports come to this conclusion based on the general finding that a manufacturing defect causing damage only to the work itself is not an “event.” according to the standard definition of the CGL insurance policy. But this analysis misses a critical nuance in the case law and the important distinction between damages to the negligent contractor’s work and damages to “other property”.
A recent decision in federal court for the Eastern District of Pennsylvania is another example of a case seeking to exclude coverage for faulty workmanship as a general proposition. But a closer look at this decision…Main St. America Assurance Co. v. Howard Lynch Plastering, Inc.— reveals that it has no impact on claims for property damage and bodily injury caused to third parties by poor workmanship.
In this case, WB Homes built a number of homes in Montgomery County, Pennsylvania using Howard Lynch Plastering as a subcontractor. WB asked Lynch to take out CGL insurance for the project. After completion, many homeowners asserted claims for faulty work, including missing flashings, exposed wood, inadequate drainage, and other issues. Some of the claims were resolved and others were still in arbitration or litigation, but the common question among them was whether Lynch’s liability insurance provided coverage.
The insurer, Main Street America Assurance Company, filed an action for declaratory judgment asserting that it had no obligation to defend or indemnify WB or Lynch in the owners’ claims. Main Street argued that because the owners’ claims were for construction defects, they did not constitute “events” under the Main Street policy. In response, WB argued that the claims constituted events because they involved “faulty products” instead of “faulty construction”.
Citing prior authority from the Pennsylvania Supreme Court, the district court observed that an “event” generally does not include faulty construction in Pennsylvania, because liability policies are intended to cover “accidents” and a faulty construction is not an “accident”. To hold otherwise, according to the district court, would turn liability policies into performance bonds. Importantly, the district court distinguished Indalex Inc. c. National Union Fire Insurance Co., a more recent case in which a defective product caused property damage other than the product itself. Because the owners have asserted claims against WB and Lynch for purely defective workmanship, none of this is surprising or out of the ordinary. The court’s final ruling simply reiterated what Pennsylvania courts have already said: a manufacturing defect that only damages the work itself is not an “event.”
Therefore the BM The decision should be viewed for what it is: an ordinary faulty case where the insured requested coverage to repair the faulty work itself. There is no indication in the BM decision that the owners allege damage to other property resulting from the faulty work. Indeed, the BM court specifically distinguished Indalexin which the Pennsylvania Superior Court ruled that where the underlying cases “disclosed tort claims based on damages to persons or property, other than the product of the insured, we cannot conclude that the claims are not covered by the cover. The Pennsylvania Supreme Court declined to review the Superior Court’s decision in Indalex, and that remains the good law in Pennsylvania. Although this decision focuses on defective products, clear similarities can be drawn between a defective product and defective workmanship, both of which can cause unintended damage to non-defective work.
To the extent that defective work causes property damage other than the work itself, there is always a path to coverage in Pennsylvania. Indeed, other Pennsylvania courts have recently recognized that liability policies can provide coverage for faulty workmanship causing bodily injury or damage to other property. Policyholders should not accept an insurer’s refusal to cover faulty workmanship claims. There may be covered damages entitling you to a defense and compensation.