The Federal District Court in Virginia found that allegations of faulty workmanship could arise from an occurrence. Nautilus Ins. Co. v. Strongwell Corp., 2013 U.S. Dist. LEXIS 79163 (W. D. Va. June 4, 2013).
Strongwell supplied certain fiberglass reinforced plastic materials to a subcontractor of Black & Veatch for a construction project at power plant. Black & Veatch subsequently sued Strongwell, claiming that numerous defects in Strongwell's materials and work were discovered after the project was completed. The complaint further alleged that as a result of the defects, there was widespread property damage to portions of the power plant.
Nautilus defended under a reservation of rights. Nautilus also filed suit for a declaratory judgment that to establish it had no duty to defend or indemnify Strongwell. Strongwell moved to dismiss the complaint insofar as it requested a declaration that there was no duty to defend. Strongwell also filed a motion to stay the coverage action until the underlying case was completed.
In response to the motion to dismiss, Nautilus argued it was unnecessary because it was defending Strongwell. Further, the motion was premature because the duty to defend could be more conclusively determined after discovery was conducted. The court disagreed the motion was unnecessary because Nautilus expressly sought a declaratory judgment that it had no duty to defend. The court also disagreed the motion was premature because the duty to defend was determined by the eight corners rule - i.e., comparing the allegations of the underlying complaint with the terms of the policy.
Turning to the merits, Nautilus argued there was no "occurrence" because the underlying allegations alleged faulty workmanship and defective product supplied by Strongwell. The court noted that the damages sought in the underlying action were not limited to the costs of repairing or replacing Strongwell's purportedly defective work product. There were also allegations that Strongwell provided a defective product that caused physical damage to other property which Black & Veatch was required to repair. Therefore, the allegations were sufficient to support the possibility of an "occurrence" under the policy, thereby giving rise to potential coverage.
Nautilus also relied upon two exclusions to relieve it of the duty to defend. For Nautilus to be successful, the allegations in the underlying action had to clearly and unambiguously establish that one or more of the exclusions applied to bar coverage for the claims asserted by Black & Veatch.
The first exclusion relied upon by Nautilus was the contractual liability exclusion. The amended complaint, however, did not allege that Strongwell had any contract with Black & Veatch, or that Strongwell otherwise agreed to assume liability for any damages sought by Black & Veatch. Instead, the claims for property damage against Strongwell included tort claims and statutory causes of action for the alleged breach of obligations imposed by law, rather than by contract.
The second exclusion relied upon by Nautilus was the Professional Liability Exclusion. The exclusion stated, in part, "This policy shall not apply to liability arising out of the rendering of or failure to render professional services . . . ." Some of the underlying allegations were unconnected to the exercise of any specialized knowledge or intellectual skill. Therefore, these allegations did not clearly and unambiguously fall within the scope of the exclusion.
Finally, the court agreed to stay the coverage action, other than allowing some limited discovery by Nautilus to take place. The duty to indemnify relied on litigated facts. It was therefore premature to rule on the insurer's duty to indemnify while the underlying action was pending.