Specialty Surfaces Int'l Inc v. Cont'l Cas. Co

Decision Date08 June 2010
Docket NumberNo. 09-2773.,09-2773.
Citation609 F.3d 223
PartiesSPECIALTY SURFACES INTERNATIONAL, INC., doing business as Sprinturf, Inc; Empire and Associates, Inc., Appellantsv.CONTINENTAL CASUALTY CO.
CourtU.S. Court of Appeals — Third Circuit

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On Appeal From the United States District Court For the Eastern District of Pennsylvania (D.C. Civil Action No. 2-08-cv-02089) District Judge: Hon. John P. Fullam.

Timothy P. Law (Argued), Reed Smith, Philadelphia, PA, for Appellants.

Ronald P. Schiller, Jay I. Morstein (Argued), Michael R. Carlson, Daniel J. Layden, Hangley, Aronchick, Segal & Pudlin, Philadelphia, PA, for Appellee.

Before: CHAGARES, STAPLETON, and LOURIE,* Circuit Judges.

OPINION OF THE COURT

STAPLETON, Circuit Judge:

Appellants Specialty Surfaces International, Inc. (Specialty Surfaces) and Empire and Associates, Inc. (Empire) (collectively, “Sprinturf”) appeal from a summary judgment entered by the District Court in favor of appellee Continental Casualty Company (“Continental”). The Court granted summary judgment after concluding that Pennsylvania law applied to the insurance coverage issue presented in this case and that Continental had no duty under Pennsylvania law to defend the appellants against claims asserted in a California lawsuit.

I. Facts and Procedural Background

Specialty Surfaces is a Pennsylvania corporation with a principal place of business in Wayne, Pennsylvania. Empire is a California corporation with a principal place of business in Wayne, Pennsylvania. Empire is a wholly owned subsidiary of Specialty Surfaces, and together, doing business as Sprinturf, they manufacturer and sell synthetic turf for athletic playing fields. Continental, which is licensed to do business in both California and Pennsylvania, issued an insurance policy to Specialty Surfaces. Empire was covered by the policy as an additional named insured. The policy covered the period from October 1, 2005, through October 1, 2006, and had a per occurrence limit of $1,000,000 and a general aggregate limit of $2,000,000. The parties agree that the insurance policy was in effect at the time of the events at issue in the underlying lawsuit and that it covered Sprinturf's activities in California.

In Specialty Surfaces' policy, Continental agreed to “pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” JA 541. Further, Continental agreed that it had “the right and duty to defend the insured against any ‘suit’ seeking those damages.” Id. The contract of insurance applied to ‘bodily injury’ and ‘property damage’ only if ... [t]he ‘bodily injury’ or ‘property damage’ is caused by an ‘occurrence’....” Id. “Property damage” is defined in the policy as [p]hysical injury to tangible property, including all resulting loss of use of that property,” and an “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Id. at 552-53.

At issue here is whether Continental had a duty to defend Sprinturf in a lawsuit filed in the Superior Court of California. According to the allegations in the amended complaint, Shasta Union High School District (“Shasta”) hired Trent Construction as a general contractor on an approximately $3,000,000 project involving the construction and installation of synthetic turf football fields and all weather tracks at four District schools. Trent Construction then hired Empire as a subcontractor to provide and install synthetic turf fields manufactured by Specialty Surfaces and to install drainage systems in the fields. The general contractor, Trent Construction, prepared the base for each field, and Empire installed a drainage system, provided by Airfield Systems, LLC (“Airfield”), including an impermeable liner, and the synthetic turf over the base. As part of the contract, Shasta required Trent Construction and each of the subcontractors to provide warranties for each of the four fields. Pursuant to this requirement, Sprinturf provided an eight-year warranty for each of the four fields.

Shasta initially filed a suit against Specialty Surfaces and Airfield. Shasta's factual allegations about the fields included the following:

Commencing within one year after acceptance of the Project, the synthetic turf systems installed on the Project began to exhibit defects in materials and workmanship, which have since worsened. All the fields have experienced failures of the subdrain system under the synthetic turf, including splits in the subsurface impermeable membrane and inadequate sealing thereof. As a direct result, water has leaked from the subdrain system into the subgrade, dirt has washed from the subgrade into the subdrain system, the subgrade has settled and the soil stabilizer has remulsified. Consequently, the fields have developed depressions and unstable playing surfaces, and the fields fail to drain properly under the synthetic turf. In addition, the synthetic turf material can be torn by hand and is not sufficiently strong for the uses guaranteed under specifications Section 2537, Paragraph 1.02A.

JA 605-06. Further, Shasta alleged that Specialty Surfaces, doing business as Sprinturf, breached the terms of the warranties by failing “to make good the aforementioned defects in materials and workmanship in a timely fashion.” JA 607. Shasta claimed that it would have to pay a significant sum to replace the synthetic turf and the drainage system in each of the fields.

Specialty Surfaces provided Continental with notice of the lawsuit and requested coverage. Continental disclaimed coverage, explaining that the policy only covered an “occurrence” causing “property damage.” Continental stated that the commercial general liability policy did not cover Shasta's claim because [t]he allegations are solely poor workmanship and/or product” and [a]ny damage that your company can be responsible for would be for improper installation or a defect in the product itself.” JA 1465-69.

Shasta then filed an amended complaint. Specialty Surfaces remained a defendant, and Empire was added as a defendant. The allegations as to the conditions of the fields remained identical to those in the original complaint, but Shasta included additional legal claims. In addition to breach of warranty claims against Specialty Surfaces and Empire, Shasta added a claim for negligence against Empire, Trent Construction, and Airfield. The relevant allegations are as follows:

45. Defendants Trent, Empire & Associates, [and] Airfield ... at all relevant times owed the District duties of care including the duties to design, supply, supervise the correct installation and/or correctly install a suitable turf and subdrain system in compliance to the contract documents.
46. Said Defendants breached said duties of care by failure to investigate, test, and design and supply a suitable and compatible subdrain system and impermeable liner in compliance to the contract documents, failure to supervise the installation and install the supplied system properly and in a workmanlike manner, failure to provide adequate training and instructions to the installers and failure to conduct sufficient investigations and inspections to ensure the proper design, manufacture and installation of the synthetic drain system.
47. As a proximate result of said breaches of duty of care, the installed turf and subdrain system has failed, damaging the subdrains, the impermeable liner and the subgrade underneath, and the seams of the synthetic turf system are failing....

JA 619. Thus, this claim alleges that Empire's negligence led to damage to the turf, the subdrain system, the liner, and the subgrade.

After the amended complaint was filed, Continental agreed to defend Specialty Surfaces in the California action, subject to a reservation of rights. Continental stated that it agreed to provide a defense because the amended complaint alleged that negligence resulted in damage to the base below the playing fields and the drainage system. Subsequently, Continental also agreed to defend Empire as an additional named insured.

Continental, however, continued to refuse to reimburse Sprinturf for its expenses in defending itself before Continental received notice of the amended complaint. It also declined to pay Sprinturf's defense counsel the $430 per hour rate he charged. Continental offered to pay $200 an hour to Sprinturf's counsel or to provide Sprinturf with different counsel. Eventually, Sprinturf changed counsel as a result.

Sprinturf then commenced this action in the District Court for the Eastern District of Pennsylvania seeking a declaratory judgment that Continental had a duty to defend and to indemnify against any liability in Shasta's suit. Sprinturf moved for partial summary judgment on the issue of when Continental was required to provide for its defense. Sprinturf contended that Continental was required to provide a defense when it received notice of Shasta's original complaint because the Shasta complaint alleged property damage to another party's work product. In response, Continental filed a cross-motion for summary judgment, arguing that Sprinturf could not establish that it was required to defend or indemnify it based on the allegations in either of the Shasta complaints. Specifically, Continental argued that the property damage alleged in the Shasta complaints was not caused by an “occurrence” covered under the policy and, in the alternative, that policy exclusions applied to the type of damage alleged.

The District Court entered summary judgment in favor of Continental. It first concluded that Pennsylvania law applied to the issue of coverage under the insurance contract. The Court then determined that all of the claims in Shasta's lawsuit, including the negligence claims, were based on “allegations of faulty...

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