Kvaerner Metals v. Commercial Union Ins.

• Decision Date: 25 October 2006
• Docket Number: No. 47 MAP 2004.,No. 48 MAP 2004.,47 MAP 2004.,48 MAP 2004.
• Court: Pennsylvania Supreme Court
• Parties: KVAERNER METALS DIVISION OF KVAERNER U.S., INC. f/k/a Kvaerner Davy Division of Kvaerner U.S. Inc. f/k/a Davy International, A Division of Trafalgar House, Inc. and Kvaerner Songer, Inc., f/k/a Kvaerner Davy Songer, Inc. f/k/a Davy Songer, Inc., Together A Joint Venture; Kvaerner Metals Division of Kvaerner U.S., Inc. f/k/a Kvaerner Davy Division of Kvaerner U.S. Inc f/k/a Davy International, A Division of Trafalgar House, Inc., Kvaerner Songer, Inc., f/k/a Kvaerner Davy Songer, Inc. f/k/a Davy Songer, Inc.; Kvaerner Public Liability Company f/k/a Trafalgar House Public Liability Company; and Kvaerner ASA v. COMMERCIAL UNION INSURANCE COMPANY, Lexington Insurance Company, National Union Fire Insurance Company of Pittsburgh, PA, Bethlehem Steel Corporation, Thyssen Still Otto Anlagentechnick GMBH, Successor-in-interest to Still Otto, GMBH. Appeal of National Union Fire Insurance Company Of Pittsburgh, PA.

908 A.2d 888

589 Pa. 317

KVAERNER METALS DIVISION OF KVAERNER U.S., INC. f/k/a Kvaerner Davy Division of Kvaerner U.S. Inc. f/k/a Davy International, A Division of Trafalgar House, Inc. and Kvaerner Songer, Inc., f/k/a Kvaerner Davy Songer, Inc. f/k/a Davy Songer, Inc., Together A Joint Venture; Kvaerner Metals Division of Kvaerner U.S., Inc. f/k/a Kvaerner Davy Division of Kvaerner U.S. Inc f/k/a Davy International, A Division of Trafalgar House, Inc., Kvaerner Songer, Inc., f/k/a Kvaerner Davy Songer, Inc. f/k/a Davy Songer, Inc.; Kvaerner Public Liability Company f/k/a Trafalgar House Public Liability Company; and Kvaerner ASA v. COMMERCIAL UNION INSURANCE COMPANY, Lexington Insurance Company, National Union Fire Insurance Company of Pittsburgh, PA, Bethlehem Steel Corporation, Thyssen Still Otto Anlagentechnick GMBH, Successor-in-interest to Still Otto, GMBH.

Appeal of National Union Fire Insurance Company Of Pittsburgh, PA.

No. 47 MAP 2004.

No. 48 MAP 2004.

Supreme Court of Pennsylvania.

Argued October 19, 2004.

Decided October 25, 2006.

Michael J. Cawley, Deborah Malamut Minkoff, Gaele M. Barthold, Philadelphia, Jay M. Levin, Paoli, Leanne Alsen Waldie, for Nat. Union Fire Ins. Co. of Pittsburgh, PA, appellant.

Michael Scott Olsan, Philadelphia, for Complex Ins. Claims Litigation Ass'n, appellant amicus curiae.

Joseph Leonard Luciana, III, Kenneth John Lund; Robert L. Byer, Philadelphia; John R. Dingess; Philip Marsh Hof, Eason, for Kvaerner Metals Div. of Kvaerner et al., appellees.

John Norig Ellison, Philadelphia, for United Policyholders, appellee amicus curiae.

James G. McLean, Pittsburgh, for Mechanical Contractors Ass'n of Western PA, Inc., appellee amicus curiae.

Before: CAPPY, C.J., CASTILLE, NIGRO, NEWMAN, SAYLOR, EAKIN and BAER, JJ.

OPINION

Chief Justice CAPPY.

In this insurance coverage dispute, Appellant National Union Fire Insurance Company of Pittsburgh, Pennsylvania ("National Union") appeals from the Superior Court's April 16, 2003 order, which reversed the trial court's order granting National Union's motion for summary judgment and remanded the case for additional proceedings to determine whether National Union was responsible for defending and indemnifying Appellee Kvaerner Metals Division of U.S., Inc., and other related companies (collectively, "Kvaerner") in an action brought by Bethlehem Steel Corporation ("Bethlehem"). Because we find that National Union has no duty under its policies to defend or indemnify Kvaerner in this case, the order of the Superior Court is reversed.

In June 1997, Bethlehem brought an action against Kvaerner asserting claims of breach of contract and breach of warranty. In its complaint, Bethlehem alleged that it entered into a contract with Kvaerner (the "Contract") pursuant to which Kvaerner agreed to design and construct a coke oven battery (the "Battery") for Bethlehem. According to Bethlehem, under the contract Kvaerner (1) agreed to build the Battery according to certain "plans and specifications that were made a part of the [Contract]," (2) warranted that its materials, equipment, and work would be free from defect, and (3) agreed to repair or replace any defective work or materials.

Bethlehem then contended that based on these facts, Kvaerner breached the above Contract terms because the Battery built by Kvaerner was "damaged" and "did not meet the contract specifications and warranties, or the applicable industry standards for construction ..." Bethlehem further alleged that although it sent Kvaerner a "non-performance list" detailing the Battery's "damages and breaches," Kvaerner had failed to remedy the Battery's problems. Moreover, Bethlehem incorporated by reference the "damages and breaches" listed in the non-performance list, which enumerated numerous problems with the Battery, including the following:

(1) "100% of the ovens have cracked paver bricks"; (2) "[s]hifting brickwork has caused maximum deviation of centerlines of flue inspection ports"; (3) "[t]he larry car rails are introducing eccentric loads on the oven walls"; (4) "[d]ue to displacement of oven top brick and appurtenances (e.g. larry car rail chairs) the chairs are not directly above the centerline of the heating walls"; (5) "[t]he non-uniform shifting of brickwork in the oven roof resulted in a tilted configuration of the flue inspection ports"; (6) "[s]heared/open joints are present in the horizontal plane of roof brick and there are open joints in the vertical plane of roof brick," causing the migration of gas; (7) "[s]ections of seven lintel blocks [have subsided] and the outer blocks of two ovens are completely broken or shattered"; (8) the centerlines of the Battery's ovens are displaced, causing multiple door jams; (9) there are sheared/open joints between the silica and fireclay in the Battery; (10) the oven walls are not plumb and are distorted, causing them to experience compressive stress orders of a magnitude greater than design; (11) the oven walls are spalling; (12) certain braces deviate from the Contract design specifications; (13) the spring adjustments are inadequate; (14) the tie rod housings are bowed; (15) the buckstays do not comply with the erection tolerances; and (16) water is penetrating the coke side bench.

Bethlehem's Non-Performance List, attached to May 15, 1997 Letter of Final Notification of Contract Non-Performance ("Non-Performance List"), Exh. 3 to Kvaerner's Motion for Reconsideration, at 1-14 (incorporated by reference in Bethlehem Complaint, Exh. A to Kvaerner Complaint, at 8-9). As a result of these damages to the Battery, Bethlehem asserted that Kvaerner was liable to it for either "the amount that it will cost to replace the Coke Oven Battery, or the difference in value between the defective Coke Oven Battery that it received and the Coke Oven Battery that [Kvaerner] warranted that it would deliver." Id. at 10.

After being served with Bethlehem's complaint, Kvaerner notified its insurer, National Union, of the suit, seeking defense and indemnity pursuant to two commercial general liability ("CGL") policies (collectively, the "Policies"). The first policy was a "claims made" policy for the period of September 30, 1995 to September 30, 1996 (the "1996 Policy") whereas the second policy was an "occurrence" policy for the period of April 1, 1997 to December 31, 1997 (the "1997 Policy").¹ National Union subsequently notified Kvaerner that it was disclaiming "coverage, defense, and indemnity for all allegations contained in [the] complaint" based on its conclusion that Bethlehem's claims did not fall within the coverage provisions of the Policies. August 29, 1997 Letter from AIG Claim Services, Inc. to National Union, Exh. H of Index of Exhibits in Support of National Union's Motion for Summary Judgment, at 6.

Due to National Union's refusal to provide coverage, Kvaerner commenced the instant action in the Court of Common Pleas of Northampton County against National Union, seeking, inter alia, a declaratory judgment that National Union has a duty to defend and indemnify it pursuant to the Policies. National Union responded by filing an answer and a new matter, raising numerous affirmative defenses.² The parties engaged in discovery and in September 2000 National Union filed a motion for summary judgment, arguing that judgment must be entered in its favor because (1) the Policies only permitted coverage for allegations of "property damage" caused by an "occurrence," which was defined by the Policies as an accident, and Bethlehem had not alleged that the Battery was damaged by such an occurrence, and (2) even if Bethlehem alleged property damage caused by an occurrence, such damages were excluded under various "business risk/work product" exclusions in the Policies.

Kvaerner filed a brief in opposition to National Union's motion for summary judgment as well as a cross-motion for summary judgment, asserting that National Union was responsible for defending and indemnifying it under the Policies because the Battery's damages were caused by an occurrence, which it deemed to be an unintended and unexpected event. According to Kvaerner, the Battery was damaged because of "longitudinal movement of the roof," which was caused because the bricks in the Battery's roof were "grouted" too early and because of heavy rains that occurred on October 31, 1994. Kvaerner's Bf. in Opposition to National Union's Motion for Summary Judgment, at 6, 24. In support of this claim, Kvaerner submitted a report from two experts in which they collectively opined that the damages to the Battery were caused from displacement and movement of the Battery's roof, which occurred because Kvaerner grouted the bricks earlier than had been scheduled. See Expert Report of Mr. Chuck Beechan and Dr. Clayton Liu, Exh. 8 to Appendix to Kvaerner's Responses in Opposition to the Motions for Summary Judgment of Commercial Union and National Union and in Support of its Cross-Motion for Summary Judgment. The experts further opined, however, that "the heavy `monsoon-type' rain which occurred on October 31 could have damaged the joints in the roof." Id. at 3. Kvaerner then explained that because it did not intend or expect the early grouting of the Battery's bricks or the October 31 rains to cause the movement in the Battery's roof and thereby damage the Battery, the Battery's damages were caused by an "accident" for purposes of the Policies. See Kvaerner's Bf. in Opposition to National Union's Motion for Summary Judgment, at 23-24.

Kvaerner further asserted that the Policies included "Completed Operations Coverage," which, according to Kvaerner, meant that National Union would provide coverage for damages to Kvaerner's completed work product in certain circumstances, such as where the damages were the result of improper work performed by its subcontractor, Thyssen Still Otto Anlagentecnick ("Thyssen"). According to Kvaerner, it was entitled to coverage under the above...