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There is No Bad Faith Claim Where the Breach of Insurance Contract Claims Failed Either Because there was No Coverage or Insurer’s Position was Reasonable; Contract Claims against the Insured Contractor Failed Because they Do Not Constitute an Occurrence under Kvaerner or as "Subcontracted Work Property Damage"; or are Subject to CGL Exclusions J(5) and J(6), and Conduct at Issue is Outside Products Completed Operation Hazard; And there is No Duty to Defend in the Absence of a Suit (Third Circuit and Western District)

Fineman Krekstein Harris P.C. - Philadelphia Office

August 5, 2014

Previously published on August 1, 2014

In Allegheny Design Management v. Travelers Indemnity Company of America, the insured was a general contractor with a commercial general liability policy. It hired a subcontractor to install glass and another to clean the glass that was to go in the new construction of a store. After installation, but during the cleaning process, the glass was discovered to have significant scratching. At that time, the store had not yet opened for business. The owner made demand against the insured, but had not brought suit. The carrier declined coverage.

The trial court found that there was no “occurrence” under the Pennsylvania Supreme Court’s 2006 Kvaerner Metals case, the leading Pennsylvania case on faulty workmanship and the definition of “occurrence”. The insured contractor acknowledged that either the installer or the cleaner damaged the glass, but attempted to argue that cleaning glass was not workmanship. The court disagreed.

Next, the policy had a separate definition of “occurrence” for “subcontracted work property damage.” This came down to whether the work at issue was within the “products-completed operations hazard”. The insurer asserted the work had not been completed as the entire contract had not been completed and/or that the particular part of the job had not been put to its intended use by a third party. The court agreed with the carrier that the job had not been completed, as, at a minimum, punch list items remained open; and that the work had not been put to its intended us as the store for which the glass was installed was not opened for business until a few days later.

The trial court also found two exclusions barred coverage: j(5) — “[t]hat particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the ‘property damage’ arises out of those operations” — and j(6) — “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it”.

Further, the trial court found that there could be no duty to defend in the absence of a suit against the insured, and where there was no duty to indemnify.

In addressing the insured’s bad faith claim, the trial court concluded that: “Where, as here, there is no coverage under an insurance policy, an insurer cannot be found to have acted in bad faith for denying coverage.”

On appeal, the Third Circuit affirmed. Rather than drilling into detail on the second definition of occurrence for “subcontracted work property damage,” it found that exclusion j(6) would bar coverage in any event. It agreed with the trial court that the glass had not been put to its intended use until the store for which the glass was installed actually opened for business. The court also agreed that exclusion j(5) applied, and that there was not duty to defend.

On the bad faith issue, the panel concluded there was no bad faith because the carrier “had a reasonable basis for denying coverage ... based upon the ‘occurrence’ definition and the Exclusions referred to above.”

Date of Decision in District Court: September 25, 2013

Date of Decision in Third Circuit: July 11, 2014

Allegheny Design Mgmt. v. Travelers Indem. Co. of Am., No. 2:12-cv-00658-TFM, 2013 U.S. Dist. LEXIS 137748 (W.D. Pa. Sept. 25, 2013) (McVerry, J.)

Allegheny Design Mgmt. v. Travelers Indem. Co. of Am., No. 13-4263, 2014 U.S. App. LEXIS 13190 (3d Cir. July 11, 2014) (Rendell, Chagares, Jordan, JJ.)


The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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