Tuesday, January 17, 2012

Federal Middle District Court Judge Robert D. Mariani Issues Opinion On Coverage Question in Construction Case

Judge Robert D. Mariani, who recently took the bench in the U.S. Federal District Court for the Middle District of Pennsylvania, has handed down one of his first Opinions on insurance coverage and bad faith issues in the context of the construction-related case of L.R. Costanzo Co., Inc. v. Am. Fire & Cas. Ins. Co., et al.,3:10-CV-774, 2012 U.S. Dist. LEXIS 1655 (Jan. 6, 2012).

By way of background, L.R. Costanzo Co., Inc., a construction company was a general contractor involved in the construction of a building for a client. After the project was completed the client began to notice water damage about the building. The client filed an underlying suit against the construction company alleging (1) breach of contract; (2) breach of warranty; (3) breach of the duty of good faith; and (4) negligence in the construction of the building.

When L.R. Costanzo Co., Inc. turned to its carrier for coverage and a defense, the carrier conducted an investigation and denied coverage. The construction company sued its carrier in the Lackawanna County Court of Common Pleas for breach of contract and bad faith. The carrier removed the matter to Federal Court where it eventually came before Judge Mariani on the carrier’s motion for summary judgment.

On January 6, 2012, the Court granted the Defendants’ Motions for Summary Judgment. In its opinion, the Court addressed, among other issues, whether the carrier(s) sued had breached a duty to defend the construction company in the underlying action, and if so, whether the carrier(s) acted in bad faith in not defending L.R. Costanzo Co., Inc.

Citing well-settled Pennsylvania case law, i.e., Kvaerner Metals Div. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006), Judge Mariani stated that, in determining whether an insurer has a duty to defend the insured, a reviewing court must look only at the underlying complaint and apply the allegations of the Complaint to the insurance policy at issue. L.R. Costanzo at *9. Judge Mariani concluded that the underlying Complaint in this matter, “on its face, the Complaint alleges faulty workmanship as the basis for its counts/claims.” Id. at *11.

The insurance policy at issue allowed for coverage in the event of an “occurrence,” which was generally defined as an “accident” in the policy.

Judge Mariani went on to note that it was equally well-settled that the faulty workmanship alleged in the underlying Complaint has not been considered to constitute an “occurrence” under Pennsylvania law. Id. at *12. The court stated, “there is substantial case law in Pennsylvania and the Third Circuit stating that breach of contract, breach of warranty, and even negligence claims do not give rise to an ‘occurrence’ when it means ‘accident’ as it does here.” Id. at *13.

Relying on Millers Capital Ins. Co. v. Gambone Bros. Dev. Co., 941 A.2d 706 (Pa. Super. Ct. 2007), the Court went on to note that “Even if Plaintiff’s work itself were not faulty and a subcontractor’s work were faulty, there is no duty to defend.” Id. at *15.

The Court also rejected the argument of the construction company that its work was not faulty but was in accordance with the architect’s faulty design. Judge Mariani ruled that even were the Court to decide that the underlying Complaint alleged defective design by the architect, there was still no “occurrence” because Plaintiff’s argument was analogous to asserting faulty workmanship by a subcontractor, which, under Gambone does not result in any implication of coverage.

With regards to the Plaintiff’s bad faith claim, Judge Mariani relied on Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680, 688 (Pa. Super. Ct. 1994), which holds, “[u]nder Pennsylvania law, to recover for bad faith, the insured must show that the insurer ‘did not have a reasonable basis for denying’ the requested relief, and ‘knew or recklessly disregarded its lack of reasonable basis in denying the claim.’” L.R. Costanzo at *18.

After reviewing the evidence presented, the Court held that “Because there was no ‘occurrence’ under the policy, Defendants did not act in bad faith in denying a defense to Plaintiff in the underlying case.” Id. at *19. The Court also found that the carrier(s) engaged in a thorough inquiry before determining that there was no duty to defend.

A copy of Judge Mariani's decision in L.R. Costanzo v. Am. Fire & Cas. Ins. Co. can be viewed here.

Source: Blog post on PDI's blog, Counterpoint Plus, by Attorney Timothy W. Stalker and Attorney Matthew J. Brasch who are both affiliated with the Blue Bell, PA firm of Stalker, Vogrin, Bracken & Frimet.

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