Specialty Surfaces International, Inc. v. Continental Casualty Co. , 609 F.3d 223 ( 2010 )


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  •                                     PRECEDENTIAL
    UNITED STATES COURT OF APPEALS
    FOR THE THIRD CIRCUIT
    No. 09-2773
    SPECIALTY SURFACES INTERNATIONAL, INC.,
    doing business as SPRINTURF, INC;
    EMPIRE AND ASSOCIATES, INC.,
    Appellants
    v.
    CONTINENTAL CASUALTY CO.
    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
    Argued February 25, 2010
    Before: CHAGARES, STAPLETON, and
    LOURIE,* Circuit Judges
    (Opinion Filed: June 8, 2010)
    Timothy P. Law (Argued)
    Reed Smith
    2500 One Liberty Place
    1650 Market Street
    Philadelphia, PA 19103
    Attorney for Appellants
    Jay I. Morstein (Argued)
    DLA Piper US
    6225 Smith Avenue
    Baltimore, MD 21209
    and
    Ronald P. Schiller
    Hangley, Aronchick, Segal & Pudlin
    One Logan Square
    18th & Cherry Streets - 27th Floor
    Philadelphia, PA 19103
    Attorneys for Appellee
    OPINION OF THE COURT
    *
    Hon. Alan D. Lourie, United States Circuit Judge for the
    Federal Circuit, sitting by designation.
    2
    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
    3
    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.
    4
    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
    5
    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
    6
    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
    7
    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.
    8
    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 workmanship and failure to comply with the contract
    documents, which are not accidents.” JA 6. Accordingly, the
    Court held that the alleged property damage had not been caused
    by an “occurrence” and that Continental had no duty to defend
    Sprinturf under Pennsylvania law.
    9
    Sprinturf filed a timely notice of appeal.1
    II. Choice of Law
    The parties agree that the choice of law rules of the
    forum state, Pennsylvania, apply when a federal court is sitting
    in diversity. See Klaxon Co. v. Stentor Elec. Mfg. Co., 
    313 U.S. 487
    , 496 (1941). Further, they agree that Pennsylvania applies
    a “flexible rule which permits analysis of the policies and
    interests underlying the particular issue before the court” and
    directs courts to apply the law of the state with the “most interest
    in the problem.” Hammersmith v. TIG Ins. Co., 
    480 F.3d 220
    ,
    227 (3d Cir. 2007) (quoting Griffith v. United Air Lines, Inc.,
    
    203 A.2d 796
    , 805–06 (Pa. 1964)); see Budtel Assocs., LP v.
    Continental Cas. Co., 
    915 A.2d 640
    , 644-45 (Pa. Super. Ct.
    2006) (holding that the Griffith choice of law rule applied in the
    contract law context). In applying this rule, if confronted with
    a true conflict, we first consider each state’s contacts with the
    contract as set forth in the Restatement (Second) of Conflict of
    1
    The District Court had jurisdiction pursuant to 
    28 U.S.C. § 1332
    . We have jurisdiction pursuant to 
    28 U.S.C. § 1291
    . We
    exercise plenary review over a District Court’s choice of law
    analysis, see Thabault v. Chait, 
    541 F.3d 512
    , 535 (3d Cir.
    2008), and its decision to grant summary judgment, see State
    Farm Fire & Cas. Co. v. Estate of Mehlman, 
    589 F.3d 105
    , 110
    (3d Cir. 2009).
    10
    Laws. See Hammersmith, 
    480 F.3d at 231
    ; Compagnie des
    Bauxites de Guinee v. Argonaut-Midwest Ins. Co., 
    880 F.2d 685
    ,
    688-89 (3d Cir. 1989); Melville v. Am. Home Assurance Co.,
    
    584 F.2d 1306
    , 1311 (3d Cir. 1978). We then “weigh the
    contacts on a qualitative scale according to their relation to the
    policies and interests underlying the [relevant] issue.” Shields
    v. Consol. Rail Corp., 
    810 F.2d 397
    , 400 (3d Cir. 1987).
    We must first determine whether there is a true conflict
    between the relevant laws of California and Pennsylvania.
    Hammersmith, 
    480 F.3d at 230
    . A “‘deeper [choice of law]
    analysis’ is necessary only if both jurisdictions’ interests would
    be impaired by the application of the other’s laws.”           
    Id.
    (emphasis in original) (quoting Cipolla v. Shaposka, 
    267 A.2d 854
    , 856 (Pa. 1970)). When both states’ interests would be
    harmed by the application of the other state’s law, there is a
    “true conflict,” and we must engage in the contacts and interests
    analysis to determine which state’s law should apply. 
    Id.
     at 230-
    31.
    A. Actual Conflict
    No relevant conflict has been identified in the laws of
    California and Pennsylvania with respect to when an insurer has
    a duty to defend an insured. In both jurisdictions, an insurance
    policy like that before us would be construed to impose a duty
    to defend if the facts alleged in support of a claim, taken as true,
    hold the potential for the imposition of a liability for which the
    11
    insured would be entitled to be indemnified under the policy.
    Sprinturf, however, in addition to arguing that it is entitled to
    coverage under Pennsylvania law, insists that there is a conflict
    between the laws of California and Pennsylvania with respect to
    whether the facts alleged by Shasta hold that potential – i.e.,
    whether the alleged property damage results from an
    “occurrence” within the meaning of the policy.
    We first consider the law of Pennsylvania. In Kvaerner
    Metals Division of Kvaerner U.S., Inc. v. Commercial Union
    Insurance Co., 
    908 A.2d 888
     (Pa. 2006), the Supreme Court of
    Pennsylvania was asked to decide whether a claim of faulty
    workmanship could constitute an “occurrence” under
    commercial general liability policies. The policies at issue
    defined an “occurrence” as an “accident, including continuous
    or repeated exposure to substantially the same or general
    harmful conditions.” 
    Id. at 897
     (quoting the insurance policy).
    Because there was no definition of accident in the policies, the
    Supreme Court used a dictionary definition, observing that
    “[t]he key term in the ordinary definition of ‘accident’ is
    ‘unexpected’” and that “[t]his implies a degree of fortuity that
    is not present in a claim for faulty workmanship.” 
    Id. at 898
    .
    The Court there held:
    We hold that the definition of “accident”
    required to establish an “occurrence” under the
    policies cannot be satisfied by claims based upon
    faulty workmanship. Such claims simply do not
    12
    present the degree of fortuity contemplated by the
    ordinary definition of “accident” or its common
    judicial construction in this context. To hold
    otherwise would be to convert a policy for
    insurance into a performance bond. We are
    unwilling to do so, especially since such
    protections are already readily available for the
    protection of contractors.
    
    Id. at 899
     (footnotes omitted). Kvaerner’s holding was limited
    to claims of damage to the work product itself. 
    Id. at 900
    . It left
    open the question of whether damage to property other than the
    work product itself resulting from faulty workmanship might
    constitute property damage caused by an “occurrence” under a
    commercial general liability policy.
    In Millers Capital Insurance Co. v. Gambone Bros.
    Development Co., 
    941 A.2d 706
    , 713 (Pa. Super. Ct. 2007), the
    parties disputed whether an insurer had a duty to defend against
    claims for damages to property arising out of faulty
    workmanship. Specifically, the complaint alleged that faulty
    workmanship in constructing the exteriors of homes led the
    stucco exteriors to fail and resulted in “ancillary and accidental
    damage caused by the resulting water leaks to non-defective
    work inside the home interiors.” 
    Id.
     The insureds conceded
    that, under Kvaerner, the damages to the exteriors of the homes
    was not caused by an “occurrence” but argued that the damage
    to the interior of the homes was nevertheless caused by an
    13
    “occurrence” because the rainfall constituted an “occurrence.”
    The Superior Court rejected this proposition. Based on
    Kvaerner, the Court held “that natural and foreseeable acts, such
    as rainfall, which tend to exacerbate the damage, effect, or
    consequences caused ab initio by faulty workmanship also
    cannot be considered sufficiently fortuitous to constitute an
    ‘occurrence’ or ‘accident’ for the purposes of an occurrence
    based [commercial general liability policy].” 
    Id.
    In Nationwide Mutual Insurance Co. v. CPB
    International, Inc., 
    562 F.3d 591
     (3d Cir. 2009), this Court
    addressed whether under Pennsylvania law consequential
    damages resulting from faulty workmanship constituted an
    “occurrence” under a commercial general liability policy. In
    that case, the insured had sold a contaminated product which the
    purchaser had thereafter utilized with resulting damage to other
    property owned by the purchaser. We held that the resulting
    damage was not property damage caused by an “occurrence”
    because the purchaser’s use was foreseeable and not fortuitous.
    In so holding, we determined that Gambone had persuasively
    predicted the view that the Supreme Court of Pennsylvania
    would take. 
    Id. at 597
     (“[O]pinions of intermediate appellate
    state courts are not to be disregarded by a federal court unless it
    is convinced by other persuasive data that the highest court of
    the state would decide otherwise.” (quoting Nationwide Mut.
    Ins. Co. v. Buffetta, 
    230 F.3d 634
    , 637 (3d Cir. 2000)). Because
    the Supreme Court of Pennsylvania has not subsequently issued
    14
    a contrary opinion, we must follow the determination of the
    CPB International panel. Thus, we must decline Sprinturf’s
    invitation to reject Gambone and we accept both it and CPB
    International as accurately reflecting Pennsylvania law.
    Based on Kvaerner, Gambone and CPB International, we
    conclude that Pennsylvania law interprets “occurrence” based
    coverage like that provided to Sprinturf in accordance with its
    literal text. In order for a claim to trigger coverage, there must
    be a causal nexus between the property damage and an
    “occurrence,” i.e., a fortuitous event. Faulty workmanship, even
    when cast as a negligence claim, does not constitute such an
    event; nor do natural and foreseeable events like rainfall.
    Having so concluded, we now turn to California law to
    see if it conflicts with our understanding of Pennsylvania law.
    Sprinturf insists that the Supreme Court of California’s decision
    in Geddes & Smith, Inc. v. Saint Paul-Mercury Indemnity Co.,
    
    334 P.2d 881
     (Cal. 1959), demonstrates such a conflict. In that
    case, a building contractor had ordered 760 aluminum doors,
    jambs, and associated hardware for use in constructing housing.
    After installation, defects appeared in virtually all the doors.
    The contractor sued the supplier alleging breach of warranty and
    negligence, and the supplier demanded that its insurer defend
    the contractor’s suit. Under the policy, the insurer was
    committed to indemnify the insured for “all sums . . . the insured
    . . . become[s] obligated to pay by reason of liability imposed .
    . . because of injury to or destruction of property, including the
    15
    loss of use thereof, caused by accident.” 
    Id. at 883
    . It was
    undisputed that injury to or destruction of the doors themselves
    were expressly excluded.
    The Court held that the supplier’s liability arising from
    the damage to the houses caused by the defective doors was
    within the policy coverage. It reasoned as follows:
    Defendant contends that there was no
    injury to or destruction of property caused by
    accident. No all-inclusive definition of the word
    ‘accident’ can be given. It has been defined as ‘a
    casualty something out of the usual course of
    events, and which happens suddenly and
    unexpectedly and without design of the person
    injured.’ It “includes any event which takes place
    without the foresight or expectation of the person
    acted upon or affected by the event.” ‘Accident,
    as a source and cause of damage to property,
    within the terms of an accident policy, is an
    unexpected, unforeseen, or undesigned happening
    or consequence from either a known or an
    unknown cause.’         The door failures were
    unexpected, undesigned, and [unforeseen]. They
    were not the result of normal deterioration, but
    occurred long before any properly constructed
    door might be expected to wear out or collapse.
    Moreover, they occurred suddenly.
    16
    
    Id. at 884
     (citations omitted).
    We agree that there is a conflict between Geddes and the
    Pennsylvania case law we have described. The Geddes Court
    would not have decided Gambone and CPB International in the
    same way the courts applying Pennsylvania law did. We note at
    the outset, however, the character of the issue involved and the
    conflict. In each instance, the issue before the Court was one of
    contract interpretation – i.e., the meaning of “occurrence” and
    “accident” as used in the policy. While reaching different
    conclusions, the courts in each instance resolved the issue by
    seeking to determine the intent of the parties to the policy based
    on its text.
    B. True Conflict
    We also agree with Sprinturf that a “true conflict” exists
    because the interests of both California and Pennsylvania would
    be adversely affected to some degree by application of the other
    state’s law. Hammersmith, 
    480 F.3d at 231
    . California has an
    interest in whether the potential liability in the California
    litigation is covered, given that the property damage alleged is
    damage to a California school district and that one of the insured
    parties is a California corporation. Pennsylvania also has an
    interest in having its law apply to an insurance policy issued in
    Pennsylvania by a company licensed to do business in
    Pennsylvania to two companies that have their principal place of
    business in Pennsylvania. Pennsylvania has an interest in
    17
    having its law applied even if the insurer is not a Pennsylvania
    company. Cf. Hammersmith, 
    480 F.3d at 232
     (“New York’s
    interests are also implicated even though the insurer . . . is not a
    New York resident. There is no evidence that New York
    intended its . . . rule to protect only resident insurers, rather than
    all insurers doing business in the state of New York.” (emphasis
    in original)). Therefore, we conclude that a true conflict exists,
    and we must therefore conduct an analysis of each state’s
    contacts with the contract of insurance and its interests in having
    its law applied to the question at hand.
    C. Contacts and Their Relation to the Policies and
    Interests Underlying the Relevant Issue
    We begin the Pennsylvania choice of law analysis by
    examining each state’s contacts with the contract at issue under
    the Restatement (Second) of Conflict of Laws, “bearing in mind
    that ‘[w]e are concerned with the contract of insurance’ and not
    the underlying tort,” Hammersmith, 
    480 F.3d at 232-33
     (quoting
    McCabe v. Prudential Prop. & Cas. Ins. Co., 
    514 A.2d 582
    , 586
    (Pa. Super. Ct. 1986)).
    Section 193 of the Restatement (Second) of Conflict of
    Laws addresses casualty insurance policies such as this one.
    Section 193 states:
    The validity of a contract of fire, surety or
    casualty insurance and the rights created thereby
    18
    are determined by the local law of the state which
    the parties understood was to be the principal
    location of the insured risk during the term of the
    policy, unless with respect to the particular issue,
    some other state has a more significant
    relationship under the principles stated in § 6 to
    the transaction and the parties, in which the local
    law of the other state will be applied.
    Restatement (Second) of Conflict of Laws § 193 (emphasis
    added). Section 193 does not apply to the insurance policy
    issued to Sprinturf because there was no principal place of
    insured risk. See Hammersmith, 
    480 F.3d at 233
     (holding that
    there was no principal place of insured risk where the policy
    covered the insured subsidiaries in over twenty states and
    internationally). The undisputed evidence in the record
    establishes that the policy was not limited to a specific state or
    project, that Sprinturf performed work nationally, and that the
    insurance company anticipated that it would cover risks outside
    of Pennsylvania. Although Empire, an additional named
    insured, performed work only in California, there was no
    principal location of insured risk in this policy.2
    2
    In an argument raised for the first time in its reply brief,
    Sprinturf argues that Comment f. to § 193 suggests that it
    weighs in favor of applying California law. Even if this
    argument had not been waived, we would be unable to agree.
    Comment f. applies to a situation in which there are multiple,
    19
    When § 193 does not apply to the policy in question, we
    look next to the contacts listed in § 188(2) of the Restatement
    (Second) of Conflict of Laws to determine which state has
    greater contacts with the contract at issue. Hammersmith, 
    480 F.3d at 233
    ; Compagnie des Bauxites de Guinee, 
    880 F.2d at 690
    . These factors include: “(a) the place of contracting, (b) the
    place of negotiation of the contract, (c) the place of
    performance, (d) the location of the subject matter of the
    contract, and (e) the domicile, residence, nationality, place of
    incorporation and place of business of the parties.” Restatement
    (Second) of Conflict of Laws § 188(2). Section 188(2) directs
    that “[t]hese contacts are to be evaluated according to their
    relative importance with respect to the particular issue.” Id.
    In this case, the first and second factors, the place of
    contracting and negotiation, favor the application of
    Pennsylvania law because the parties agree that the insurance
    site specific risks and the policy includes state specific forms for
    each risk. See St. Paul & Marine Ins. Co. v. Building Constr.
    Enters., Inc., 
    526 F.3d 1166
    , 1168 (8th Cir. 2008). It advises
    that, with regard to this sort of policy, courts will likely consider
    treating the policy “as if it involved [separate] policies” and
    interpret each policy with regard to the law of the state in which
    the particular risk is located. Restatement (Second) of Conflict
    of Laws § 193 cmt. f. The policy at issue here is a commercial
    general liability policy, and, as discussed above, there was no
    site specific risk identified in the policy.
    20
    policy was negotiated, issued, and delivered in Pennsylvania.
    The third factor, the place of performance, requires
    greater examination. Pursuant to the contract of insurance,
    Sprinturf was obligated to pay premiums to Continental, and,
    thus, it performed where it paid the premiums. See, e.g.,
    Armotek Indus., Inc. v. Employers Ins. of Wausau, 
    952 F.2d 756
    ,
    761 (3d Cir. 1991). Although Continental argues that this factor
    favors Pennsylvania law, the record does not reflect where the
    premiums were paid. Accordingly, we are unable to determine
    where Sprinturf performed its contractual obligations. Its
    principal place of business, however, was in Pennsylvania, and
    there is no reason to believe that premiums were paid in
    California.
    For its part, Continental promised to defend or indemnify
    Sprinturf if certain events occurred, and thus it performs under
    the contract of insurance where it is required to defend or pay
    benefits to Sprinturf. In this instance, Continental’s duty to
    defend, if required by the policy, was to be performed in
    California. Therefore, one of the places of performance was
    California. See Hartford Underwriters Ins. Co. v. Found.
    Health Servs., Inc., 
    524 F.3d 588
    , 596 (5th Cir. 2008)
    (concluding that the insurer’s performance took place where it
    defended the underlying lawsuits); cf. Northern Ins. Co. of N.Y.
    v. Allied Mut. Ins. Co., 
    955 F.2d 1353
    , 1360 (9th Cir. 1992)
    (observing that the promise to provide a defense was one of the
    two “essential promises” the insurer made in a liability policy).
    21
    The fourth factor, “location of the subject matter of the
    contract,” does not favor the application of either California or
    Pennsylvania law because the policy provided nationwide
    coverage to Sprinturf, and thus there is no identifiable location
    for the risk insured by the contract.
    Next, we examine the domicile, residence, place of
    incorporation, and place of business of the parties. Both
    Specialty Surfaces and Empire have their principal place of
    business in Pennsylvania.          Specialty Surfaces is also
    incorporated in Pennsylvania. Although Empire is incorporated
    in California, this contact is of lesser consequence because “a
    corporation’s principal place of business is a more important
    contact than the place of incorporation. . . .” Restatement
    (Second) of Conflict of Laws § 188 cmt. e. Continental is
    incorporated in Illinois and licensed to do business in both
    California and Pennsylvania. Because both of the insured
    parties have their principal place of business in Pennsylvania
    and Continental’s place of incorporation is neutral, this factor
    favors the application of Pennsylvania law.
    Finally, we “must weigh these contacts on a qualitative
    scale according to their relation to the policies and interests
    underlying” the relevant issue on which there is a conflict – the
    coverage issue. Shields, 
    810 F.2d at 400
    . We note at the outset
    that, while California and Pennsylvania reach different
    conclusions on this specific issue, there are no conflicting
    governmental interests behind the positions of the two
    22
    jurisdictions. Neither jurisdiction has expressed a governmental
    interest favoring or disfavoring the disputed coverage. Both
    recognize the right of the negotiating parties to allocate risks of
    this kind for themselves and affirm the governmental interest in
    enforcing the agreement that they reach regarding that matter.
    The conflict before us is thus unlike conflicts between state laws
    regarding the validity of particular contract provisions, conflicts
    based on differing views on regulatory issues, or conflicts
    regarding issues where state law supplements the agreement of
    the parties by filling gaps left by the parties. Where, as here, the
    sole interest of both jurisdictions is in enforcing the intent of the
    parties, we believe Pennsylvania’s choice of law rules would
    favor giving primary weight to the jurisdiction providing the
    context in which the decision making parties negotiated their
    agreement. Accordingly, in this case, we believe that the place
    of contracting, the place of negotiation, and the parties’
    principal places of business are the most important contacts
    when determining which state’s law should be applied. In short,
    Pennsylvania law was the context in which the parties
    negotiated and expressed the agreement they had reached.
    While Empire was a California corporation, it was a non-
    participating beneficiary of its parent’s negotiations and its
    business was conducted from Pennsylvania.
    Contrary to Sprinturf’s argument, we believe that the
    place of performance of any duty on the part of Continental to
    defend the underlying lawsuit is entitled to relatively little
    weight. The state in which a claim is filed and Continental is
    23
    required to defend a lawsuit is not significantly related to the
    coverage question at issue here. This is not a case in which the
    disputed issue relates to extra-contractual requirements imposed
    by the forum state regarding the manner in which a duty to
    defend must be executed. Rather, the issue is the intent of the
    parties when they allocated risks in the policy. This distinction
    is well illustrated by the Fifth Circuit’s decision in Foundation
    Health Services. The underlying suit there had been filed in
    Mississippi and, under Mississippi law, an insurer defending an
    insured under a reservation of rights is required to provide
    independent counsel to the insured. The Court held that
    Mississippi law governed the “narrow issue” of whether the
    insurer was required to provide independent counsel. In doing
    so, however, it stressed that the case before it was materially
    different from the typical case involving only contract
    interpretation:
    We recognize that the place of contracting
    and place of negotiation are often relevant to
    disputes involving contract interpretation.
    Further, we acknowledge that, to some extent,
    whether Hartford has a duty to provide
    independent counsel to Magnolia is related to the
    scope of Hartford’s contractual duty to defend.
    However, this case is different from the typical
    contract interpretation case. Typically, a duty to
    defend provision can be interpreted without
    reference to where the underlying “defending” is
    24
    taking place, because the task of pure contract
    interpretation merely requires the court to
    ascertain the parties’ intent from the language of
    the contract itself and, at times, the circumstances
    surrounding formation of the contract. See One
    South, Inc. v. Hollowell, 
    963 So.2d 1156
    , 1162
    (Miss. 2007) (discussing contract interpretation
    principles). This case is different because the
    issue of whether Hartford owed a duty to provide
    Magnolia with independent counsel is closely
    connected to the court where the “defending” took
    place. The court where a case is tried has a
    substantial interest in preventing conflicts of
    interest. In other words, the court where a claim
    is tried has little interest in whether an insurer’s
    duty to defend is triggered under an insurance
    contract, but it does have a significant interest in
    whether independent counsel is provided to avoid
    a conflict of interest.
    
    524 F.3d at 595-96
    . The comments to the Restatement (Second)
    of Conflict of Laws observe that “the place of performance can
    bear little weight in the choice of the applicable law when . . . at
    the time of contracting it is either uncertain or unknown . . . .”
    Restatement (Second) of Conflict of Laws § 188(2) cmt. e.
    Here, the parties did not know at the time of contracting where
    Continental might be called upon to defend Sprinturf, as
    Sprinturf operated nationwide. Thus we give the place of
    25
    performance less weight in our analysis.
    Moreover, even if we were to accept Sprinturf’s
    argument that the place of performance should be given greater
    weight in this dispute, Pennsylvania still has more significant
    contacts with this contract of insurance than California. Indeed,
    California had only limited contacts with the insurance contract
    until Shasta was allegedly harmed and the lawsuit was filed in
    California. See Hammersmith, 
    480 F.3d at 232-33
     (“‘We are
    concerned with the contract of insurance’ and not the underlying
    tort.” (quoting McCabe, 514 A.2d at 586)).
    Based on the foregoing, we conclude that Pennsylvania
    has a far greater interest in having the coverage issue determined
    in accordance with its law than California has in having that
    issue determined in accordance with California law.
    Accordingly, we will determine the coverage issue based on
    Pennsylvania law.
    In reaching this conclusion, we are not unmindful of
    Sprinturf’s insistence that a contrary result is dictated by our
    decision in American Contract Bridge League v. Nationwide
    Mutual Fire Insurance Co., 
    752 F.2d 71
     (3d Cir. 1985). We
    conclude that American Contract Bridge League is not binding
    on our panel for at least two reasons.
    In January of 1985, a panel of this Court issued an
    opinion applying Pennsylvania choice of law rules in a suit
    26
    involving a dispute over an insurer’s duty to defend. See
    American Contract Bridge League, 
    752 F.2d at 74-75
    . The case
    involved two insurance policies, one of which was negotiated,
    issued, and delivered in Tennessee and issued to an entity with
    its principal place of business in Tennessee. The underlying
    lawsuit involved a Pennsylvania plaintiff, alleged that the harm
    occurred in Pennsylvania, and was filed in Pennsylvania. In the
    federal litigation, the parties disagreed about whether the policy
    required the insurer to defend the insured against claims made
    in the underlying lawsuit. The opinion resolved the choice of
    law issue with the following brief analysis:
    In Griffith v. United Air Lines, 
    416 Pa. 1
    ,
    
    203 A.2d 796
     (1964), the Pennsylvania Supreme
    Court adopted a flexible choice-of-law rule which
    permits an “analysis of the policies and interests
    underlying the particular issue before the court”
    and a determination of which jurisdiction is most
    intimately concerned with the outcome of the
    litigation. Id. at 21, 22, 
    203 A.2d 796
    .
    Both Nationwide and Aetna are licensed to
    do business in Pennsylvania. The Livezey suit has
    been brought in Pennsylvania and involves the
    Pennsylvania Contract Bridge Association, as
    well as several Pennsylvania residents. The harm
    alleged in the Livezey suit occurred in
    Pennsylvania. Clearly, under Pennsylvania’s
    27
    “policy, interests and contacts test,” it is
    Pennsylvania law which should be applied to
    resolve the present controversy.
    
    752 F.2d at
    74–75.
    While our opinion makes clear that there was a dispute as
    to the insurer’s duty to defend and “as to which state law should
    be applied to the issues in [this] case,” 
    id. at 74
    , it does not
    identify how those state laws differed in a relevant manner, and
    one can accordingly not determine the issue as to which there
    was a conflict. Most importantly for present purposes, the
    opinion does not address any coverage issue turning on a dispute
    as to the intent of the contracting parties. As a result, there is no
    holding relevant to the issue before us.
    However, even if American Contract Bridge League had
    held that the place of the harm giving rise to the tort liability and
    the forum of the underlying tort suit should be given controlling
    weight in determining the law to be applied in determining
    coverage from the intent of the contracting parties, we would
    not consider ourselves bound by its holding.
    When a federal court sitting in Pennsylvania exercising
    diversity jurisdiction is faced with a choice of law question,
    generally it must predict how the Supreme Court of
    Pennsylvania would decide the question. See Erie R.R. Co. v.
    Tompkins, 
    304 U.S. 64
    , 78-80 (1938); Buffetta, 
    230 F.3d at 637
    .
    28
    In making such a prediction, a federal court follows relevant
    decisions of the Pennsylvania Supreme Court and gives “due
    regard, but not conclusive effect” to decisions of the state’s
    lower courts. See Buffetta, 
    230 F.3d at 637
    . In situations like
    the one before us, where the case said to be controlling is
    twenty-five years old, a federal court cannot properly determine
    the precedential value of that case without considering whether
    there have been relevant developments in the state case law
    during the intervening period.         Nationwide Ins. Co. of
    Columbus, Ohio, v. Patterson, 
    953 F.2d 44
    , 46 (3d Cir. 1991)
    (“[W]hen we are applying state law we are, of course, free to
    reexamine our state law interpretation based on subsequent
    decisions” of the state courts.).
    Since the decision in American Contract Bridge League
    was issued in 1985, the Pennsylvania Superior Court has
    decided a line of cases in which it applied Pennsylvania choice
    of law rules to determine which state’s law governed
    interpretation of a contract of insurance. See, e.g., Budtel
    Assocs., 
    915 A.2d at 643-45
    ; Hughes v. Prudential Lines, Inc.,
    
    624 A.2d 1063
    , 1066 n.2 (Pa. Super. Ct. 1993); McCabe, 514
    A.2d at 585-86. In each of these cases, the Superior Court
    consistently emphasized that Pennsylvania’s choice of law rules
    were concerned with examining the states’ contacts with the
    contract of insurance, not the tort involved in the underlying
    suit. See Budtel Assocs., 
    915 A.2d at 643
    ; Hughes, 
    624 A.2d at
    1066 n.2; McCabe, 514 A.2d at 585-86. While the Supreme
    Court of Pennsylvania has not spoken on this issue, we believe
    29
    that the cases decided by Pennsylvania’s intermediate courts of
    appeals in the twenty-five year period after the decision in
    American Contract Bridge League constitute intervening
    authority. This intervening authority suggests that the panel in
    American Contract Bridge League was mistaken if it predicted
    that the Pennsylvania Supreme Court in a case turning on
    interpretation of an insurance policy would apply the of law of
    the state where the tort occurred and the tort lawsuit was filed
    instead of the law of the state with the most significant contacts
    with the contract of insurance. Following the guidance of the
    Pennsylvania Superior Court, we predict that the Pennsylvania
    Supreme Court would decide that Pennsylvania law applied to
    this coverage dispute.
    III. Duty to Defend
    Under Pennsylvania law, “[a] carrier’s duty to defend and
    indemnify an insured in a suit brought by a third party depends
    upon a determination of whether the third party’s complaint
    triggers coverage.” Kvaerner, 908 A.2d at 896 (citing Mut.
    Benefit Ins. Co. v. Haver, 
    725 A.2d 743
    , 745 (Pa. 1999)). We
    examine only the allegations in the complaint when determining
    whether the insurance company must defend the insured. We
    now turn to the question of whether the allegations in the
    original complaint or the amended complaint triggered coverage
    under the policy issued to Sprinturf.
    A. Original Complaint
    30
    Continental did not have a duty to defend Sprinturf when
    it received notice of the original complaint in the California
    litigation. Shasta alleged in the original complaint only that
    Specialty Surfaces breached its contract with the school district
    by failing “to make good . . . defects in materials and
    workmanship in a timely fashion.” JA 607. As earlier noted,
    we predicted in CBP International that a breach of contract
    claim could not constitute an “occurrence” in a commercial
    general liability policy under Pennsylvania law. See 
    562 F.3d at 598
     (“We are, therefore, confident that the Supreme Court of
    Pennsylvania would conclude that an underlying claim alleging
    breach of contract would not trigger coverage under a
    [commercial general liability] policy.”); see also Pa. Mfrs.
    Assoc. Ins. Co. v. L.B. Smith, Inc., 
    831 A.2d 1178
    , 1181 (Pa.
    Super. Ct. 2003) (“Pennsylvania law does not recognize the
    applicability of a general liability policy to breach of contract
    and breach of warranty claims.”); Redevelopment Auth. of
    Cambria County v. Int’l Ins. Co., 
    685 A.2d 581
    , 592 (Pa. Super.
    Ct. 1996) (en banc). Accordingly, Continental did not have a
    duty to defend Specialty Surfaces after receiving notice of the
    original complaint.
    B. Amended Complaint
    Neither was Continental required by the policy to defend
    Sprinturf after it received notice of the amended complaint. In
    the amended complaint, Shasta alleged that Empire was
    negligent in designing, manufacturing and installing a suitable
    31
    and compatible subdrain system and impermeable liner in
    compliance to the contract documents. As a result, Shasta
    alleged that there was damage to the synthetic turf, the
    impermeable liner, the subdrain system, and the subgrade.
    Continental was not required to defend Sprinturf because
    the allegations in the amended complaint do not support a
    determination that any damage was caused by an “occurrence.”
    Any damages to Empire’s own work product based on Empire’s
    alleged negligence are claims of damage based on faulty
    workmanship. Because they are not caused by an accident,
    under Kvaerner, they are not a covered “occurrence” under the
    insurance policy. See 908 A.2d at 889-90.
    Sprinturf, however, argues that the damage to the
    subgrade, which was prepared by Trent Construction, was
    accidental, and thus constitutes a covered occurrence. This
    argument is foreclosed by the Superior Court’s decision in
    Gambone, in which the Court rejected a similar argument made
    by the insured. There, the insured alleged that there was
    “ancillary and accidental damage” caused by water leaks that
    resulted from faulty workmanship. 
    941 A.2d at 713
    . The
    insured argued that the water damage to the non-defective work
    constituted an occurrence under the policy. Relying on
    Kvaerner, the Superior Court rejected the argument that the
    damage caused by water leaks resulting from faulty
    workmanship was an occurrence. The Court observed that the
    Kvaerner Court’s emphasis on the “degree of fortuity”
    32
    “suggested that natural and foreseeable acts, such as rainfall,
    which tend to exacerbate the damage, effect, or consequences
    caused ab initio by faulty workmanship also cannot be
    considered sufficiently fortuitous to constitute an ‘occurrence’
    or ‘accident’ . . . .” 
    Id.
     Thus, damages that are a reasonably
    foreseeable result of the faulty workmanship are also not
    covered under a commercial general liability policy. 
    Id.
     at 713-
    14; see also CBP International, 
    562 F.3d at 596-97
    .
    Here, Shasta alleged that Empire installed the subdrain
    system, the impermeable liner, and the synthetic turf. In
    addition to defects in Empire’s work product, Shasta alleged that
    “as a direct result” of the problems with the subdrain system,
    “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 subgrade soil stablilizer has
    remulsified.     Consequently, the fields have developed
    depressions and unstable playing surfaces . . . .” JA 615. Thus,
    the amended complaint alleges that the damage to the subgrade
    was caused by water leaks that resulted from the faulty
    workmanship. But water damage to the subgrade is an entirely
    foreseeable, if not predictable, result of the failure to supply a
    “suitable” impermeable liner or properly install the drainage
    system. Thus, as in Gambone, this damage is not “sufficiently
    fortuitous to constitute an ‘occurrence’ or ‘accident.’” 
    941 A.2d at 713
    .
    Sprinturf insists that Gambone is distinguishable from
    33
    our case because the plaintiffs there did not allege damage
    beyond the structure of the house, which was the work product
    of the insured. This argument, however, ignores that the
    Gambone Court, following Kvaerner, clearly focused on
    whether the alleged damage was caused by an accident or
    unexpected event, or was a foreseeable result of the faulty
    workmanship when deciding whether the policy covered the
    damage. Here, water damage to the subgrade was a foreseeable
    result of the failure to supply a suitable liner or “to ensure the
    proper design, manufacture and installation of the synthetic turf
    and subdrain system.” JA 619. Accordingly, we believe the
    District Court properly predicted that the Pennsylvania Supreme
    Court would decide that Continental did not have a duty to
    defend Sprinturf in the California litigation. It follows that
    Continental had no duty to indemnify Sprinturf.
    IV. Conclusion
    For these reasons, we conclude that Pennsylvania law
    applies to this insurance coverage dispute and that Continental
    had no duty to defend Sprinturf under its commercial general
    liability policy. Therefore, we will affirm the judgment of the
    District Court.
    34
    

Document Info

Docket Number: 09-2773

Citation Numbers: 609 F.3d 223, 2010 U.S. App. LEXIS 11620, 2010 WL 2267197

Judges: Chagares, Stapleton, Lourie

Filed Date: 6/8/2010

Precedential Status: Precedential

Modified Date: 11/5/2024

Authorities (20)

Griffith v. United Air Lines, Inc. , 416 Pa. 1 ( 1964 )

Pennsylvania Manufacturers' Ass'n Insurance v. L.B. Smith, ... , 2003 Pa. Super. 322 ( 2003 )

Shields, Arnett L. v. Consolidated Rail Corporation v. ... , 810 F.2d 397 ( 1987 )

nationwide-insurance-company-of-columbus-ohio-v-marcie-patterson-marcie , 953 F.2d 44 ( 1991 )

nationwide-mutual-insurance-company-v-rosetta-miriello-buffetta , 230 F.3d 634 ( 2000 )

Erie Railroad v. Tompkins , 58 S. Ct. 817 ( 1938 )

Scott Hammersmith v. Tig Insurance Company (w.d. Of Pa. ... , 480 F.3d 220 ( 2007 )

Thabault v. Chait Ex Rel. Estate of Chait , 541 F.3d 512 ( 2008 )

Virginia J. Barry Melville v. American Home Assurance ... , 584 F.2d 1306 ( 1978 )

Nationwide Mutual Insurance v. CPB International, Inc. , 562 F.3d 591 ( 2009 )

Klaxon Co. v. Stentor Electric Manufacturing Co. , 61 S. Ct. 1020 ( 1941 )

Hughes v. Prudential Lines, Inc. , 425 Pa. Super. 262 ( 1993 )

Budtel Associates, LP v. Continental Casualty Co. , 2006 Pa. Super. 370 ( 2006 )

Northern Insurance Company of New York, Plaintiff-Appellee-... , 955 F.2d 1353 ( 1992 )

Hartford Underwriters Insurance v. Foundation Health ... , 524 F.3d 588 ( 2008 )

State Farm Fire & Casualty Co. v. Estate of Mehlman , 589 F.3d 105 ( 2009 )

St. Paul Fire & Marine Insurance v. Building Construction ... , 526 F.3d 1166 ( 2008 )

compagnie-des-bauxites-de-guinee-a-delaware-corporation-v , 880 F.2d 685 ( 1989 )

Millers Capital Insurance Co. v. Gambone Bros. Development ... , 2007 Pa. Super. 403 ( 2007 )

american-contract-bridge-league-v-nationwide-mutual-fire-insurance-company , 752 F.2d 71 ( 1985 )

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