Pennsylvania “property damage” caused by an “occurrence”

In Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., J-161-2004 (Pa. Oct. 25, 2006), the insured contractor was sued by Bethlehem Steel alleging physical injury to a coke oven battery the insured designed and built for Bethlehem Steel. The insured subcontracted a portion of its work. The physical injury consisted of deformities in the brick walls and roof of the battery.  The alleged cause of the deformities was premature grouting of the brick joints. A torrential rain washed the grout out of the joints and into expansion joints.  When the oven was fired and the brick expanded, the deformities developed.  The complaint alleged causes of action for breach of contract and breach of warranty.  The complaint sought damages for the cost to replace the oven or, alternatively, the diminishment in value of the oven.  The insurer denied a defense and the insured filed suit seeking declaratory judgments on the insurer’s duty to defend and indemnify.  The CGL insurer moved for summary judgment on the basis that, because the property damage resulted from the insured’s failure to perform its contractual obligation, there was no “occurrence.” The insured filed a cross-motion for summary judgment.  The trial court granted summary judgment for the insurer on the no-occurrence issue alone.  The Pennsylvania intermediate appellate court reversed and remanded, finding that the claim alleged an “occurrence.”   The court then correctly stated that the real issue with regard to CGL coverage for construction defects is the applicability of the business risk exclusions.  The court “readily agrees” that, absent the subcontractor work exception, these exclusions preclude coverage for “property damage” to the insured’s product—the coke oven battery. Because the allegations implicated subcontractor work, the case was remanded to address this issue.  However, the Supreme Court of Pennsylvania granted the insurer’s petition for leave to appeal and subsequently reversed the intermediate court of appeals. The court held that the intermediate appellate court erred in going beyond the complaint and considering the insured’s expert opinion that unusual rains caused the property damage.  This was apparently not alleged in the complaint.  The court held that property damage to the insured’s work product caused by the insured’s faulty workmanship does not constitute “property damage” caused by an “occurrence.”  While the complaint did not allege it, the insured’s response to the insurer’s motion for summary judgment stated that some of the work was done by a subcontractor.  The court did not address the subcontractor’s work exception.