June 17, 2009
Written by Attorney: Michael A. Hamilton
Note: This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
Following the Pennsylvania state court decisions in Kvaerner Medals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Co., 908 A.2d 888 (Pa. 2006); and Miller's Capital Insurance Co. v. Gambone Brother's Development Co., 941 A.2d 706 (Pa. Super. 2008), the Third Circuit Court of Appeals issued a precedential decision in Nationwide Mutual Insurance Co. v. CPB International, Inc., 2009 WL 989115 (3d Cir. April 14, 2009), holding that claims for faulty workmanship do not constitute an "occurrence" under a CGL policy.
CPB International is an importer and wholesaler of chondroitin, a nutritional supplement made from animal cartilage. Rexall Sundown, Inc. ordered chondroitin from CPB. After a dispute arose concerning payment for the product, CPB filed suit against Rexall claiming breach of contract. Rexall counterclaimed, asserting that the Chondroitin was deficient and unusable for its intended purpose. Rexall demanded return of its initial payment and consequential damages. Nationwide, CPB's liability insurer, assumed CPB's defense under a reservation of rights and filed a declaratory judgment action against its insured.
CPB conceded that the claim for faulty workmanship was not covered under the policy. However, CPB argued that Rexall's claim for consequential damages comes within the ambit of the policy. The Third Circuit, relying on Kvaerner and Gambone, held that Rexall's claim did not present the "degree of fortuity" necessary to fall within the ordinary definition of an "accident." Id. at *4. In other words, according to the Court, "it is largely within the insured's control whether it supplies the agreed-upon product, and the fact that contractual liability flows from the failure to provide that product is too foreseeable to be considered an accident." Id.
Furthermore, the Third Circuit noted that Pennsylvania law does not recognize the application of CGL policies to breach of contract and breach of warranty claims. Coverage under a CGL policy is for tort liability for physical damage to others, not for the insureds' contractual liability for economic loss because the product or work is not that for which the claimant bargained. Id. at *5.Thus, the Third Circuit concluded that claims for faulty workmanship, including consequential damages related thereto, are not covered under CGL policies. The Third Circuit's opinion is a reaffirmance of Pennsylvania law on the construction of the policy term "occurrence," and a recognition that this concept applies to general business disputes.
