Policyholders seeking defense costs for products liability claims received welcome support from a Pennsylvania appellate court which rejected an excessively restrictive view of the scope of coverage offered under commercial general liability (CGL) policies.  The court in Indalex, Inc. v. National Union Fire Insurance Co. of Pittsburgh, Pa., reversed, or at least slowed, what appeared to be a trend in that state toward expanding the notion that product defect claims amounted to complaints of “faulty workmanship” that lacked the “fortuity” contemplated under an occurrence-based CGL policy.  In deciding that the manufacturing and design defect claims at issue in Indalex constituted an “occurrence” and thus were covered, the opinion reaffirms one of the basic purposes of purchasing a standard CGL policy, namely, to protect against third-party personal injury and property damage claims purportedly arising from the manufacturer’s product.  It also underscores the breadth of an insurer’s duty to defend and instructs on the proper analysis a court should apply in determining whether that duty exists.  A court must consider all claims asserted against the policyholder and may not focus on what it deems to be the “gist” of the action, as the duty to defend is triggered so long as one claim falls within the scope of coverage.

The coverage dispute in Indalex arose out of products liability litigation against door and window manufacturer Indalex, in which the plaintiffs claimed they suffered mold related health issues and property damage from water leaking through Indalex’s purportedly defective doors and windows.  When Indalex’s primary policies were exhausted, National Union Fire Insurance Co. of Pittsburgh, Pa., which issued a commercial umbrella policy to Indalex, refused to defend, claiming that there had not been an “occurrence” which triggered coverage.  The lower court agreed, relying upon a line of Pennsylvania cases holding that claims brought for faulty workmanship “do not present the degree of fortuity contemplated” by the definition of an “occurrence” in a general liability policy.

On appeal, the Superior Court of Pennsylvania reversed, holding that the underlying complaint did not limit its claims based solely on faulty workmanship but included claims alleging damage to property other than the insured’s own product, and thus covered under the CGL policy.  The court also noted that the policy’s definition of “occurrence” contained subjective language, as “occurrence” was defined as “including continuous or repeated exposure to conditions which results in bodily injury or property damage, neither expected nor intended from the standpoint of the insured.”  Arguably, Indalex did not expect the mold related health problems purportedly suffered by its customers.

In reaching its conclusion, the appellate court distinguished the line of cases relied upon by the trial court.  Two of those cases, according to the Superior Court, involved contract and warranty claims against the insured for property damage to the insured’s product due to faulty workmanship.  By contrast, the claims asserted against Indalex were not confined to physical damage to the insured’s own product but involved “off the shelf” products that had failed, causing personal injuries and property damage to someone other than the policyholder.

The Indalex court also concluded that the trial court did not apply the proper analysis in deciding whether National Union had a duty to defend.  By applying the “gist of the action” doctrine, under which a court may disregard asserted tort claims if it determines that the gist of the complaint is based on a contractual dispute, the trial court ignored legally viable tort claims pled against Indalex.  Noting that the Pennsylvania Supreme Court had never applied the “gist of the action” doctrine in the insurance context, the Indalex court concluded that its application in determining an insurer’s duty to defend was inappropriate.   An insurer has a duty to defend the entire suit when any claim asserted against the policyholder is potentially covered and thus a court must consider all claims in determining whether that duty exists.  The gist of the action doctrine, the appellate court concluded, is therefore “inconsistent with the duty to defend.”

Indalex should, correctly, put the brakes on a trend in Pennsylvania toward limiting the scope of commercial liability insurance in products defect cases.  As a majority of courts have held, third-party personal injury and property damage purportedly caused by design or manufacturing defects in the insured’s product constitute an “occurrence” and thus may be covered under a CGL policy.  Those claims should not be shoehorned into the faulty workmanship exclusion.  The opinion also serves as a reminder that, when analyzing an insurer’s duty to defend, a court may not disregard tort-based claims in suits against the insured.  Because the duty is triggered if there is even a possibility of coverage, as determined by the language of the complaint against the policyholder, a careful analysis of all of the underlying claims is required.

Read the Pennsylvania Superior Court’s full opinion in Indalex Inc. v. National Union Fire Insurance Co.