Appellate Court Cautions Contractors to Supplement Coverage for PA Projects
New Jersey contractors were served a reminder this spring that when taking on a project in Pennsylvania, they will need to supplement their commercial general liability (CGL) policies if they expect to have insurance coverage to indemnify them against faulty-workmanship claims. On April 11, 2017, in Mega Construction Corp. v. XL America Group, the Third Circuit Court of Appeals affirmed a decision by the District of New Jersey, which held that when a New Jersey-based contractor performs work in Pennsylvania, courts should apply Pennsylvania’s rule that faulty-workmanship claims are not covered under a CGL policy. The court held that even though the policy was purchased in New Jersey, Pennsylvania law applied because the construction work and damaged property were located in Pennsylvania and that state’s relationship, therefore, was more significant to the lawsuit.
By way of background, in 2006, the Pennsylvania Supreme Court established in Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Co. that where a CGL provided coverage for property damage caused by any “occurrence,” claims for faulty workmanship are not covered. The court reasoned that “occurrence” means “accident” by definition, and that an “accident” entails something unexpected and not present in a claim for faulty workmanship. Shortly thereafter, the Pennsylvania Superior Court expanded the rule to deny coverage where the alleged faulty-workmanship caused additional extensive damage in and around the insured property.
In New Jersey, on the other hand, claims against a contractor for faulty workmanship are covered under its CGL policy, and claims of faulty workmanship against its subcontractor are also covered if the policy has a subcontractors’ exception. The New Jersey Superior Court recently extended coverage under a CGL policy to include the consequential additional damage arising from the general contractor’s faulty workmanship, and that of the subcontractor’s, if the policy includes a subcontractors’ exception.
To ensure coverage for faulty-workmanship claims on projects in Pennsylvania following the Mega Construction decision, New Jersey contractors have two options. First, they can purchase a “resultant damages endorsement” (or “Kvaerner endorsement”) along with their CGLs, which modifies the definition of “occurrence” in the policy to include property damage resulting from faulty workmanship. However, because there is no standard form for these endorsements and each insurer has drafted its own, there is uncertainty as to the effect of any given form. Alternatively, general contractors can require their subcontractors to post performance and maintenance bonds. Generally, a performance bond ensures that a subcontractor will perform its scope of work, and a maintenance bond serves to guarantee the work and materials for a certain period of time after the conclusion of the project. Resultant damages endorsements, performance bonds or maintenance bonds may not make sense for every project because of financial and cost considerations, as well as the inability of subcontractors to post a bond. However, where a New Jersey contractor wishes to have protection against faulty-workmanship claims on a project in Pennsylvania, it has tools available to supplement its CGL policy to provide the necessary coverage.