Schuylkill Stone Corp. v. State Auto. Mut. Ins. Co.

735 F.Supp.2d 150

SCHUYLKILL STONE CORP. n/k/a Environmental Materials, LLC, Plaintiff,

v.STATE AUTOMOBILE MUTUAL INSURANCE COMPANY, Defendant.

Civil No. 09-5812 (NLH) (AMD).

United States District Court, D. New Jersey.

Aug. 17, 2010.

Peter A. Gaudioso, McElroy, Deutsch, Mulvaney & Carpenter, LLP, Morristown, NJ, for plaintiff.

Michael Robert Fox, Nelson Levine Deluca & Horst, LLC, Blue Bell, PA, for defendant.

OPINION

HILLMAN, District Judge.

Presently before the Court are the parties' cross-motions for summary judgment on plaintiff's declaratory judgment action for insurance coverage under an insurance policy issued by defendant.¹ Specifically, plaintiff is demanding that defendant provide it a defense in an underlying state court case, which involves claims by homeowners for damages resulting from the faulty construction of their homes. Plaintiff contends that defendant is obligated to provide it with a defense, and has acted in bad faith in failing to do so. Defendant counters that the insurance policy at issue does not provide coverage to plaintiff because it was issued to a now-defunct entity. Defendant further contends that its declination of coverage was also proper because the allegations in the underlying state court case do not trigger coverage and are subject to a coverage exclusion in the policy. Based on these reasons, defendant also argues that it has not acted in bad faith in declining to provide plaintiff with a defense.

For the reasons expressed below, the Court finds that the insurance policy affords plaintiff coverage, but that defendant did not act in bad faith in its decision to decline coverage.

DISCUSSION

A. Summary Judgment Standard

If review of cross-motions for summary judgment reveals no genuine issue of materialfact, then judgment may be entered in favor of the party deserving of judgment in light of the law and undisputed facts. See Iberia Foods Corp. v. Romeo Jr., 150 F.3d 298, 302 (3d Cir.1998) (citation omitted); Fed. R. Civ. P. 56(c).

B. Background and Analysis

On April 21, 2008, thirty-nine homeowners in three residential communities in Marlton and Evesham Township, New Jersey filed their tenth-amended complaint in New Jersey Superior Court alleging that the developer, The Quaker Group and its affiliates ("Quaker"), and Quaker's subcontractors, among others, defectively designed and constructed their homes in an unworkmanlike and unsatisfactory manner, and also failed to comply with building codes and laws, industry standards, design documents, and the requirements in written contracts and implied and express warranties. ( Wallach Complaint ¶¶ 61-77, Pl. Ex. B.) The homeowners claim that their homes have sustained water damage due to the construction problems, and that they have suffered not only property damage, but also injury to their health through mold and mildew exposure.

On July 1, 2008, Quaker filed a third-party complaint against its subcontractors, including plaintiff Schuylkill Stone Corp. ("Schuylkill Stone"), which is now Environmental Materials, LLC, alleging joint-tortfeasor liability and other claims. (Pl. Ex. C ¶ 36.) Quaker claims that should it be held liable to the Wallach plaintiffs for conduct by any of its subcontractors, Quaker is entitled to contribution or indemnification from those subcontractors, including plaintiff here.

On August 5, 2008, plaintiff tendered a demand for a defense to defendant State Automobile Mutual Insurance Company ("State Auto"). Schuylkill Stone was a Commonwealth of Pennsylvania corporation and, as noted, is the predecessor to Environmental Materials, LLC. State Auto issued a commercial general liability policy to Schuylkill Stone with an effective date of May 10, 1999 to May 10, 2002. State Auto declined, however, to provide Schuylkill Stone with a defense to the underlying state court action for numerous reasons. (See Sept. 28, 2009, Declination of Coverage Letter, Pl. Ex. K.)

Through the course of this litigation, State Auto has narrowed its declination of coverage to four bases: (1) the policy was issued to Schuylkill Stone, which is now defunct, and the policy did not transfer to Environmental Materials; (2) even if the policy is valid, the Wallach plaintiffs' claims for property damage and bodily injury do not amount to an insured "occurrence" because their claims for faulty workmanship-a contractual, not tort, claim-cannot be considered an "accident," which the policy defines to constitute an "occurrence"; (3) Schuylkill Stone's claims are barred under the "Contractual Liability" provision, which excludes coverage for contractual damages that Schuylkill Stone agreed with Quaker to assume; and (4) the damage to two of the four homes Schuylkill Stone worked on manifested after the policy coverage period.

Schuylkill Stone argues that none of these bases is valid. It further argues that not only did State Auto decline to provide a defense for incorrect reasons, it did so in bad faith. The Court will address each of State Auto's reasons for declining coverage, and then address Schuylkill Stone's bad faith claim.

1. Whether the State Auto policy is valid

On October 30, 2002, Schuylkill Stone sold its assets to Stone Acquisition, LLC, which was a 100-percent owned affiliated entity of Environmental Materialsand established specifically to facilitate the purchase of Schuylkill Stone's assets. One of Schuylkill Stone's assets acquired by Stone Acquisition was the State Auto insurance policy. (Pl. Ex. A at 3.) Stone Acquisition then merged into Environmental Materials, and Environmental Materials continued to carry out the business of Schuylkill Stone.

State Auto contends that the insurance policy prohibited such a transfer. It also argues that because the transfer of the policy was not a result of a merger or consolidation, and therefore not properly assigned to Environmental Materials, the policy coverage extinguished when the entity Schuylkill Stone officially dissolved in June 2004.

State Auto's position is unavailing. Even though the policy contains a clause that states, "Your rights and duties under this policy may not be transferred without our written consent," a clause such this is invalid where an assignment of the policy has been made after the insured's right to payment has already accrued. The Pennsylvania Supreme Court has explained,

Generally, non-assignment clauses are included in insurance policies for the protection of insurers. Such clauses are designed to guarantee that an increase of the risk of loss by a change of the policy's ownership cannot occur without the consent of the insurer. Because non-assignment clauses limit the amount of risk that the insurer may be forced to accept, courts will generally strike down an insured's attempt to assign its policy to a new insured. Consistent with the general purposes of non-assignment clauses, however, courts are reluctant to restrict the assignment of an insured's right to payment which has already accrued. Therefore, because an insured's right to proceeds vests at the time of the loss giving rise to the insurer's liability, restrictions on an insured's right to assign its proceeds are generally rendered void.

Egger v. Gulf Ins. Co., 588 Pa. 287, 903 A.2d 1219, 1227 (2006) (quoting Continental Cas. Co. v. Diversified Indus., Inc., 884 F.Supp. 937, 948 (E.D.Pa.1995) (discussing Nat'l Mem'l Services, Inc. v. Metro. Life Ins. Co., 355 Pa. 155, 49 A.2d 382 (1946))).²

In this case, it is undisputed that the claims of two of the four Wallach plaintiffs with Schuylkill Stone stonework accrued during the policy effective period, and before the policy transfer (the water damage having manifested between December 2000 and March 2001 (Greenberg) and sometime before December 2001 (Smid/Heiligman)). Therefore, the State Auto policy is still effective to the assigned insured, Environmental Materials, should these claims qualify Environmental Materials for coverage.³ Accordingly, State Auto's first basis for coverage denial is without merit.

2. Whether the Wallach plaintiffs' claims for property damage and bodily injury amount to an insured "occurrence" so that State Auto's duty to defend is triggered

Under Pennsylvania law, "[a]n insurer's duty to defend an insured in litigation is broader than the duty to indemnify, in that the former duty arises whenever an underlying complaint may 'potentially' come within the insurance coverage." Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 193 F.3d 742, 746 (3d Cir.1999) (citingErie Ins. Exch. v. Claypoole, 449 Pa.Super. 142, 673 A.2d 348, 355 (1996)). In examining a complaint to determine whether an insurer has a duty to defend its insured, a court "construes the factual allegations of the underlying complaint liberally in favor of the insured." Id. (citing Biborosch v. Transamerica Ins. Co., 412 Pa.Super. 505, 603 A.2d 1050, 1052 (1992)). "[T]he particular cause of action that a complainant pleads is not determinative of whether coverage has been triggered. Instead it is necessary to look at the factual allegations contained in the complaint." Mut. Benefit Ins. Co. v. Haver, 555 Pa. 534, 725 A.2d 743, 745 (1999) (citations omitted).

The State Auto policy provides coverage for "bodily injury" or "property damage," but only if that damage is caused by an "occurrence," which means "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." State Auto's position is that the Wallach plaintiffs' claims and resulting damages do not constitute an "accident." State Auto views the Wallach plaintiffs' allegations of water damage caused by Schuylkill Stone, among others, to assert faulty workmanship claims sounding in contract, which cannot be considered sufficiently fortuitous to constitute an "occurrence" or an "accident."

Schuylkill Stone counters that gist of the Wallach action sounds in tort. The underlying complaint alleges that Quaker, and Quaker's subcontractors, including Schuylkill Stone,...