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WHEN IS AN OCCURRENCE
NOT AN OCCURRENCE?
Paul Ferrero, Risk Manager
Joann M. Lytle, Esq.
ICM 013 - April 28, 2015
Information which is copyrighted by and proprietary to Insurance Services Office, Inc. ("ISO Material") is included in this publication. Use of the ISO Material is limited to ISO Participating Insurers and their
Authorized Representatives. Use by ISO Participating Insurers is limited to use in those jurisdictions for which the insurer has an appropriate participation with ISO. Use of the ISO Material by Authorized
Representatives is limited to use solely on behalf of one or more ISO Participating Insurers.

ME1 19768157
 Learning Objectives
At the end of this session, you will:

• Understand how insurers’ coverage positions can affect your

business

• Analyze the growing body of case law

• Learn about amendments to traditional GL policies can restore

coverage

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 Agenda
• Overview of Property Damage Coverage in a CGL Policy;
The business risk exclusions;
The Kvaerner decision and its progeny;
– How these decisions have impacted claims determinations;
– Legislative responses to Kvaerner;
– Policyholder response/Underwriting response

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 CGL Insuring Agreement
• Liability policies cover liability arising from “property
damage”

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 “Property Damage”

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 The “Occurrence” Requirement
• “Property damage” must result from an “occurrence”

**

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 Business Risk Exclusions
• “Property damage” to “your work” arising out of it or any
part of it and included in the “products-completed
operations” hazard
• “Impaired property” or property not physically injured
arising out of
– Defect, deficiency, inadequacy, or dangerous condition in
“your product” or “your work”; or
– Delay or failure by you or anyone acting on your behalf to
perform a contract or agreement
• “Property damage” to “your product” arising out of it or
any part of it

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 Faulty Workmanship
• Most courts hold there is no “occurrence” unless there are
consequential damages
– Gen. Sec. Indem. Co. of Ariz. v. Mountain States Mut. Cas.
Co., 205 P.3d 529 (Co. Ct. App. 2009) (“a claim for damages
arising from poor workmanship, standing alone, does not
allege an accident that constitutes a covered occurrence”),
superseded by statute, Colo. Rev. Stat. Ann. § 13-20-808(1)(b)
(III) (2010)

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 Gen. Sec. Indem. Co. of Ariz. v.
Mountain States Mut. Cas. Co. (Cont.)
• The Colorado Legislature criticized the court’s holding:

“The decision of the Colorado court of appeals in General

Security Indemnity Company of Arizona v. Mountain States
Mutual Casualty Company, 205 P.3d 529 (Colo. App. 2009) does
not properly consider a construction professional’s reasonable
expectation that an insurer would defend the construction
professional against an action or notice of claim contemplated
by this part 8.”

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 Faulty Workmanship (cont.)
• Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69
(Ken. 2011) (finding substandard construction, standing
alone, not a fortuitous, accidental event)

• Cherrington v. Erie Ins. Prop. & Cas. Co., 745 S.E.2d 508,
519 n.21 (2013) (listing cases finding defective
workmanship not an “occurrence”)

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 Kvaerner Metals Division of Kvaerner U.S., Inc. v.
Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006)
• Kvaerner contracted to construct a coke oven battery
for Bethlehem Steel
• Bethlehem Steel sued Kvaerner alleging the oven was
damaged
• Kvaerner’s insurer, National Union, argued the suit
did not allege an “occurrence”

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 Kvaerner (cont.)
• Policy defined “occurrence” to require an “accident”

• Court reviewed dictionary definitions of “accident”

– “Unexpected and undesirable event”
– “Something that occurs unexpectedly or unintentionally”

• Court found the term “unexpected” implied fortuity

• Fortuity not present in faulty workmanship claims

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 Expanding Kvaerner
• Millers Capital Ins. Co. v. Gambone Bros. Devel. Co., Inc.,
941 A.2d 706 (Pa. Super. Ct. 2007) (water damage to non-
defective work product not an “occurrence”)
• Bomgardner v. State Farm Fire & Cas., 2010 WL 3657084,
at *4 (E.D. Pa. Sept. 14, 2010)
– “In light of Kvaerner . . . [the insured’s] argument that his claim is
covered under the . . . policy must fail as a matter of Pennsylvania
law. … Claims based on defective workmanship and claims arising out
of a breach of contract do not allege an ‘occurrence,’ and therefore
do not trigger coverage under a commercial liability policy… .”

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 Expanding Kvaerner (cont.)
• Group Builders, Inc. v. Admiral Ins. Co., 123 Haw. 142 (Haw. 2010) (no
“occurrence” when contractor’s work resulted in mold)
• Zurich Am. Ins. Co. v. R.M. Shoemaker Co., 2012 U.S. Dist. LEXIS 35760 (E.D.
Pa. Mar. 16, 2012) (“claims for faulty workmanship … do not constitute an
‘occurrence’ … even if there was damage to … property other than the
property subject to the faulty workmanship.”), aff’d, 519 F. App’x 90 (3d Cir.
2013)
– Third Circuit:
• “Kvaerner and cases following it make clear that faulty workmanship under a contract
is not sufficiently fortuitous to qualify as an ‘occurrence.’” Id. at 92–93.
• “Faulty workmanship—whether caused by the contractor’s negligence alone or by
the contractor’s negligent supervision, which then permitted the willful misconduct
of its subcontractors—does not amount to an ‘accident’ or ‘occurrence.’ Nor does a
foreseeable act like the subsequent water infiltration into the structure.” Id. at 93.

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 Expanding Kvaerner (Cont.)
• Specialty Surfaces Int’l, Inc. v. Cont’l Cas. Co.,
609 F.3d 223, 231 (3d Cir. 2010)
– “In order for a claim to trigger coverage, there
must be a causal nexus between the property
damage and an ‘occurrence,’ i.e., a fortuitous
event. Faulty workmanship, even when cast as a
negligence claim, does not constitute such an
event; nor do natural and foreseeable events like
rainfall.”

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 Product Liability Claims
• Nationwide Mut. Ins. Co. v. CPB Int‘l, Inc., 562 F.3d 591 (3d
Cir. 2009) (no “occurrence” where policyholder supplied
defective ingredient incorporated into nutritional
supplement)
• Nat’l Union Fire Ins. Co. v. Puget Plastics Corp., 649 F.
Supp. 2d 613 (S.D. Tex. 2009) (manufacturing defective
water heater components not an “occurrence” even though
water leaked into other parts of the water heater and
surrounding personal property), aff’d, 454 F. App’x 291 (5th
Cir. 2011)

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 Product Liability Claims (cont.)
• Acceptance Ins. Co. v. Powe Timber Co., 403 F. Supp. 2d 552
(S.D. Miss. 2005) (no “occurrence” where lawsuits alleged
personal injuries resulted from exposure to hazardous
chemicals in wood chips), aff’d, 219 F. App’x 349 (5th Cir.
2007)
– Fifth Circuit:
• “there is little question that [the insured] intentionally did not
include a warning with the wood chips, although [it] knew the
wood had been treated. … Second, because [the insured] knew the
wood had been treated with various chemicals, the resulting
injuries were within its foresight. Thus, [underlying] plaintiffs’
allegations do not constitute an occurrence under the terms of the
insurance policies.”

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 Product Liability Claims (cont.)
• Victaulic Co. v. Am. Home Assurance Co., No. RG 12642929
(Cal. Super. Ct., Alameda Cnty. Jan. 21, 2015)
– Victaulic Co. manufactured valves and piping products used in
various industrial capacities
– Multiple lawsuits alleging damage to third party property
resulting from defective pipes
– Insurers denied coverage arguing that under PA law, third
party property damage arising from faulty workmanship is
not an occurrence

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 Victaulic (cont.)
• “The concept of ‘occurrence’ must be construed broadly to
reflect the wide variety of circumstances which can result in
property damage or bodily injury that an ordinary person
would consider ‘accidental,’ even if the conduct giving rise
to the insured’s liability was deliberate or intentional.”
• Insurers’ “unduly limiting” interpretation of occurrence
would effectively eliminate coverage for what may have
been a central focus of the parties during the underwriting
of the policies – product liability lawsuits brought against
Victaulic.

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 Victaulic (cont.)
• Victaulic court distinguished Kvaerner
– the underlying case involved an alleged breach of contract
and no damage to property other than the insured’s own
work.
– Most other Pennsylvania federal court decisions are
distinguishable on grounds that they either did not involve
any damage to property other than the insured’s own work or
asserted breaches of obligations arising under contract.

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 Clarifying Kvaerner: Indalex
• Indalex Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 83
A.3d 418 (Pa. Super. Ct. 2013), reargument denied (Feb. 10,
2014), appeal denied, 99 A.3d 926 (Pa. 2014)
– Policyholders sought coverage under commercial umbrella policy
for lawsuits filed by out-of-state home and property owners
– Owners alleged policyholders’ windows and doors “were
defectively designed or manufactured and resulted in water
leakage that caused physical damage, such as mold and cracked
walls, in addition to personal injury”
– Claims were based on strict liability, negligence, breach of
warranty, and breach of contract

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 Indalex (cont.)
• Insurer denied coverage, arguing that, under PA law,
damages resulting from alleged design or manufacturing
defects do not result from an “occurrence”
• Policyholders filed suit, and trial court granted SJ in favor of
insurer
– Relying on Kvaerner, held claims were based on faulty
workmanship and, therefore, did not constitute an
“occurrence” under the policies
• Policyholders appealed

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 Indalex (cont.)
• Superior Court reversed trial court
– Distinguished Kvaerner and similar cases:
• “[B]ecause [policyholders] set forth tort claims based on damages
to persons or property other than the insured’s product, we cannot
conclude that the claims are outside the scope of the coverage.”
– Noted Kvaerner policy’s definition of “occurrence” did not
contain the subjective “neither expected nor intended from
the standpoint of the Insured” language found in Indalex
policy
• Court found policyholder arguably did not expect damages such as
mold

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 Indalex (cont.)
• PA Supreme Court declined to review Superior Court’s
Indalex decision
• Implications?
– Positive development for policyholders
– Arguably limits holding/application of Kvaerner
– Clarifies (or does it?) that insurers must defend
policyholders against tort-based claims alleging
damage to third-party property resulting from
policyholder’s alleged negligent design and/or
manufacture of products

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 Post-Indalex
• State Farm Fire & Cas. Co. v. McDermott, 2014 WL 5285335,
at *7 (E.D. Pa. Oct. 15, 2014) (“The Pennsylvania Supreme
Court has held that faulty workmanship in cases such as these
does not constitute ‘accidents’ and are therefore not
occurrences under CGL policies. … This is also true of any
damage resulting from …faulty workmanship.”)
• State Farm Fire & Cas. Co. v. Brighton Exteriors, Inc., 2015 WL
894419, at *6 (E.D. Pa. Mar. 3, 2015) (“Based on [Kvaerner and
its progeny], the Court concludes that the term ‘occurrence’
does not include claims that arise from faulty workmanship,
regardless of whether the claims are phrased as contract or
negligence claims.”)

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 Post-Indalex (cont.)
• Hagel v. Falcone, No. 614 EDA 2014, 2014 WL 8331846 (Pa.
Super. Ct. Dec. 23, 2014)
– Held no “occurrence” where alleged property damage arose
from faulty workmanship
• “[I]t is foreseeable that a failure of workmanship that leaves a
house’s envelope compromised and, therefore, vulnerable to
water penetration, may be damaged thereby. It further is
foreseeable that water penetration may damage the home as
well as property, and even people, contained within it. Thus,
[the insured] was not covered by [the] policy . . . .”

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 Hagel (cont.)
• Are bodily injury claims different?

“In another case, a distinction between property damage and

personal injury might warrant separate analyses of
foreseeability as to each. While leakage arising from a poorly
installed window plainly is foreseeable, at least one
Pennsylvania court has found that personal injury arising from
the growth of mold arising from such a leak is not. … We need
not address that question in the instant case.” -- Id. at *13 n.7

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 Post-Indalex (cont.)
• Westfield Ins. Co. v. Miranda & Hardt Contracting & Bldg.
Servs., L.L.C., No. CV N14C-06-214 ALR, 2015 WL 1477970
(Del. Super. Mar. 30, 2015)
– Policyholder hired to construct home
– Six years later, homeowner reports defects in construction
– Homeowner files lawsuit against policyholder alleging
policyholder, among other things, used inadequate building
materials and improperly installed same
– Homeowner asserts claims against policyholder for
negligence per se, negligence, and fraud

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 Westfield Ins. Co. (cont.)
• Policyholder requested defense and indemnification from
CGL insurer; insurer denied coverage and filed DJ action
• Parties disputed whether alleged property damage was
caused by an “occurrence”
– “Occurrence” defined to mean “an accident, including
continuous or repeated exposure to substantially the same
general harmful conditions”
• DE Court, guided by federal case law, held that defective
workmanship does not constitute an “occurrence” for which
CGL policy grants coverage or triggers insurer’s duty to
defend or indemnify policyholder in underlying action

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 Cutting Through the Confusion
• Distinguishing McDermott, Brighton Exteriors, and Hagel
from Indalex:
– The Court in each case dealt with instances of alleged faulty
workmanship, not alleged defective design or manufacture of
a product that later caused third-party property damage
– Although “water intrusion issues” are mentioned throughout
the opinions, the nature and extent of any actual third-party
property damage is not described in detail, whereas third-
party property damage was evident and a focal point in
Indalex.

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 When is an Occurrence an Occurrence?
• Impact of the Kvaerner/Indalex line of cases in managing
property damage claims

• Look for the negligence claim – are there allegations of

negligent work performance and negligently manufactured
products in violation of industry standards?

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 When is an Occurrence an Occurrence?
• Impact of the Kvaerner/Indalex line of cases in managing
property damage claims

• Find the accident in the facts –

– unexpected, sudden event – look for the collapse, explosion,
or catastrophic failure

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 When is an Occurrence an Occurrence?
• Impact of the Kvaerner/Indalex line of cases in managing
property damage claims

• Look closely at the alleged damages – were they

unexpected and not foreseeable?

• Carefully follow the development of your property damage

claims.

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Legislative Responses to
Kvaerner and its Progeny
It’s not simply a Pennsylvania issue
 Colorado Code –
Section 13-20-808
• For the purposes of guiding pending and future actions
interpreting GL policies issued to construction
professionals, the policy of Colorado is hereby clarified …
– In interpreting a liability policy, a court shall presume that
the work of a construction professional that results in PD,
including damage to the work itself or other work, is an
accident unless the PD is intended and expected by the
insured.
– The insurer bears the burden of proving exclusions,
exceptions or limitations on coverage.

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 Colorado Code –
Section 13-20-808 (cont.)
• Where a policy is ambiguous, a court may consider a
construction professional’s “objective , reasonable
expectations…” including:
– The insured’s objective in purchasing the policy
– Whether a construction defect has resulted in BI, PD or loss
of use of property
– Any non-privileged writing generated, approved, adopted
or relied on by the insurer; an insurance rating or policy
drafting organization such as ISO, EXCEPT that such writing
may not be used to limit coverage beyond what is
reasonably inferred from the words in the policy

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 Hawaii
• HRS § 431:1-217 - Insurance policies issued to construction
professionals
– For purposes of a liability policy that covers occurrences of
damage or injury and that insures a construction
professional for liability arising from construction-related
work, the meaning of the term “occurrence” shall be
construed in accordance with the law as it existed at the
time that the insurance policy was issued.
– Any provision of an insurance policy issued in violation of
this section shall be void and unenforceable as against
public policy.

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 Arkansas
• A.C.A. § 23-79-155 - Commercial general liability insurance
• A CGL policy offered for sale in this state shall contain a
definition of “occurrence” that includes:
***
(2) Property damage or bodily injury resulting from faulty
workmanship.
• This section is not intended to restrict or limit the nature or
types of exclusions from coverage that an insurer may
include in a CGL policy.

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 South Carolina
38-61-70 Commercial general liability policy; coverage for construction
professional doing construction related work; definition of occurrence;
application

• CGL policies shall contain or be deemed to contain a definition of

“occurrence” that includes:
***
(2) property damage or bodily injury resulting from faulty
workmanship, exclusive of the faulty workmanship itself.
• Applies only to a CGL policy that insures a construction professional for
liability arising from construction related work.
• Applies retroactively and prospectively, in any pending or future dispute
over coverage.

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 New Jersey
Proposed Legislation
• Assemb. 4510, 215th Leg. (N.J. Nov. 25, 2013)

• A CGL shall not be delivered, issued, executed, or renewed in NJ unless the

policy contains a definition of occurrence that includes:
***
(b) property damage or bodily injury resulting from faulty workmanship.
• This act shall not be construed to restrict or limit the nature or types of
exclusions from coverage that an insurer includes in a commercial liability
insurance policy.
• Original bill died in committee, but reintroduced on January 16, 2014.
• Referred to the Assembly Financial Institutions and Insurance Committee
as bill A1077 for the 2014-2015 Session.

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 When is an Occurrence
an Occurrence?
• Policyholder Response

Industry offered no alternative insurance product for product

liability coverage – gave us what we had for the past 30 plus
years.

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 When is an Occurrence
an Occurrence?
• Policyholder Response

• Endorsements up the tower – what coverage do we have? Are

there gaps?

• Not surprisingly, underwriters could not agree on the same

language to define “occurrence.”

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 UNDERWRITING RESPONSE
• Amended occurrence definition
• Most favorite state endorsement
• “Deemer” clause

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 AMENDED OCCURRENCE DEFINITION

1. The following is added to section IV. Definitions O. Occurrence, but only

for the purpose of determining whether Resulting Property Damage
Arising Out Of Your Product is caused by an Occurrence:
4. as respects Resulting Property Damage Arising Out Of Your Product, an
act or omission, including all related acts or omissions, which results in
Resulting Property Damage Arising Out Of Your Product.

2. The following is added to section IV. Definitions O. Occurrence, but only

for the purpose of determining whether Resulting Property Damage
Arising Out Of Your Work is caused by an Occurrence:
5. as respects Resulting Property Damage Arising Out Of Your Work, an
act or omission, including all related acts or omissions, which results in
Resulting Property Damage Arising Out Of Your Work.

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 Definition of “Resulting Property Damage Arising out
of Your Product”
3. The following is added to section IV. Definitions:

Resulting Property Damage Arising Out Of Your Product means

Property Damage that:

1. is neither expected nor intended from the standpoint of the

Insured;
2. is to property other than Your Product; and
3. arises out of Your Product or any part of it.

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 Definition of “Resulting Property Damage Arising out
of Your Work”
Resulting Property Damage Arising Out Of Your Work means Property
Damage that:

1. is neither expected nor intended from the standpoint of the

Insured;

2. is to property other than Your Work; and

3. arises out of Your Work or any part of it and is included in the

Products-Completed Operations Hazard.

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 Most Favorable State Endorsement
SECTION VI. CONDITIONS is amended to include the following additional provision:

Most Favorable State

The law of the state most favorable to the Named Insured shall govern whether
Property Damage included within the Products-Completed Operations Hazard is
caused by an Occurrence, provided that such state is a part of the United States of
America including its territories and possessions; and

(1) has a substantial relationship to the Named Insured; or

(2) has a substantial relationship to the state in which such claim or Suit is brought; or
(3) is the state in which we are incorporated, or we have our principal place of
business, or where this insurance contract was delivered to the Named Insured.

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 “DEEMER” CLAUSE
The following is added to Paragraph 1. Insuring Agreement
under COVERAGE A – BODILY INJURY AND PROPERTY DAMAGE
LIABILITY of SECTION I – COVERAGE.

Subject to all terms and conditions of the policy but most

particularly Section I. 2. Exclusions, a. Expected or Intended
Injury, j. Damage to Property, k. Damage To Your Product and
l. Damage To Your Work, “property damage” resulting from
faulty workmanship shall be deemed to be caused by an
“occurrence”.

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 When is an Occurrence
Not an Occurrence?

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 Paul Ferrero
Risk Manager, Arkema Inc.
Paul Ferrero is the Risk Manager for Arkema Inc., a chemical company
with its U.S. headquarters in King of Prussia, Pennsylvania. Paul spends
his time focusing on managing corporate risks, including his business
units’ property loss prevention practices. Paul has experience in long-
tail claims management and commercial claims as well as performing
CONTACT
Arkema Inc. risk assessments for due diligence projects and site business
900 First Avenue
King of Prussia, PA 19406
continuity plan development and management.
610. 205.7708
paul.ferrero@arkema.com

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 Joann M. Lytle
Partner, Insurance Coverage Group
McCarter & English LLP
PRACTICE GROUP
Insurance Coverage Joann Lytle helps corporate policyholders maximize their insurance
CONTACT assets and has recovered hundreds of millions of dollars for a wide
Mellon Bank Center
1735 Market Street
range of companies, including those in the food services,
Suite 700 manufacturing and health care industries. She has handled disputes
Philadelphia, PA 19103-7501
215.979.3878 involving commercial general liability, umbrella liability, errors and
jlytle@mccarter.com
omissions liability, directors and officers liability, employment
EDUCATION
Harvard Law School, J.D., cum laude, 1990 practices liability and cyber liability policies. In addition to
La Salle University, B.A., maxima cum representing policyholders in coverage disputes, Joann also provides
laude, 1987
insurance coverage advice and counseling to her clients on an ongoing
BAR ADMISSIONS
Pennsylvania basis. Business Insurance Magazine recognized Joann as one of its
New York
2014 “Women to Watch.” In 2014, she was recognized by Chambers
U.S. Court of Appeals, Third Circuit
USA as a “Leader in Her Field.” Joann was also selected as the
U.S. District Court, Eastern District of
Pennsylvania exclusive Pennsylvania winner of the Lexology Client Choice Award in
U.S. District Court, Middle District of 2013 and 2014. Joann has also been recognized in Best Lawyers in
Pennsylvania
U.S. District Court, Southern District of
America since 2008 and was named a Pennsylvania Super Lawyer in
New York 2013-2015.

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