June 17, 2009
Written By Attorneys Robert T. Horst and Mark H. Rosenberg
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.
In Erie Ins. Exchange v. Abbott Furnace Co., --- A.2d ---, 2009 WL 1315456 (Pa. Super. Ct. May 13, 2009), the Pennsylvania Superior Court affirmed summary judgment in an insurer's favor in a declaratory action seeking a judgment that the insurer had no duty to provide coverage on a standard commercial general liability policy with regard to a lawsuit against the policyholder, a furnace manufacturer. This lawsuit was based upon the contention that the manufacturer provided a furnace with significant design defects, thereby destroying laminations produced by the customer who purchased the furnace. The lawsuit contended that the manufacturer was negligent in designing a furnace with such defects, or alternatively, that the manufacturer was negligent in failing to warn of these defects.
In granting summary judgment in the insurer's favor, the trial court relied upon the Pennsylvania Supreme Court's decision in Kvaerner Metals Div. of Kvaerner United States, Inc. v. Commercial Union Ins. Co., 589 Pa. 317, 908 A.2d 888 (2006), in which the Court held that a standard commercial general liability policy does not provide coverage for a lawsuit limited to contentions of faulty workmanship and damage to the insured's work product. On appeal, the policyholder contended that this matter was distinguishable from Kvaerner, because the complaint at issue alleged that the furnace caused damage to other personal property - namely, the laminations produced by the customer.
On appeal, the Superior Court applied the "gist of the action" doctrine. This doctrine, which is applied in Pennsylvania whenever "a plaintiff alleges that the defendant committed a tort in the course of carrying out a contractual agreement," has the purpose of "preclud[ing] plaintiffs from recasting ordinary breach of contract claims into tort claims." Abbott Furnace, 2009 WL 1315456 at *5. The doctrine requires courts to examine whether the claim at issue sounds in contract by arising out the breach of "duties imposed by mutual consensus agreements between particular individuals," or whether the claim sounds in tort by arising out the breach of "duties imposed by law as a matter of social policy." Id. (citations and internal quotation marks omitted).
Applying this doctrine to the allegations set forth in the underlying lawsuit, the Court concluded that the purported "damage to [the] laminations resulted from [the policyholder's] contractual breach in failing to design the furnace in accordance with [the customer's] requested needs and intended use." Abbott Furnace, 2009 WL 1315456 at *5. The Court therefore held that the underlying lawsuit should be construed as "a contract claim because the parties' obligations are defined by the terms of the contract, and not by the larger social policies embodied by the law of torts." Id. Accordingly, the Court affirmed the trial court's determination that coverage for such claims was not provided under the terms of the commercial general liability policy.
Abbott Furnace follows the Superior Court's decision in Millers Capital Ins. Co. v. Gambone Bros. Development Co., 941 A.2d 706 (Pa. Super. Ct. 2007), in which it reinforced the Kvaerner holding that a CGL policy did not provide defense and indemnification for litigation arising from faulty workmanship. Through its application of the "gist of the action" doctrine, the Court has made clear that it will look with suspicion upon any attempts by policyholders to creatively interpret actions in order to avoid the limitations on coverage recognized in Kvaerner and Gambone.
