NESHAMINY CONSTRUCTORS, INC. v. FEDERAL INSURANCE COMPANY et al
MEMORANDUM. ( SIGNED BY HONORABLE TIMOTHY J. SAVAGE ON 6/21/12. ) 6/21/12 ENTERED AND COPIES E-MAILED.(gn, )
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
NESHAMINY CONSTRUCTORS, INC.
FEDERAL INSURANCE COMPANY and
THE CHUBB CORPORATION
June 21, 2012
In this insurance coverage dispute, the parties have filed cross motions for summary
judgment. The plaintiff, Neshaminy Constructors, Inc., (“Neshaminy”) contends that the
defendant, Federal Insurance Company (“Federal”), breached its insurance contract and
denied Neshaminy’s claim under the insurance policy in bad faith. It argues that the
undisputed facts demonstrate that the claim was covered by the policy. Federal counters
that the loss was not covered and was specifically excluded by the policy language.
The threshold question is whether the loss was covered. If it was, then the issue
is whether Federal acted in bad faith in denying the claim. On the other hand, if the loss
was excluded, Federal did not breach the contract and could not have acted in bad faith.
The facts are undisputed. The parties disagree what the policy language means.
Neshaminy contracted with the New Jersey Department of Transportation to
reconstruct the transit bridge on Tuckahoe Road, Route 557, in Estell Manor, New Jersey.
As a result of defective concrete forms, the bridge’s beams constructed by Neshaminy
were damaged, requiring repairs which resulted in cost overruns and delays. The defective
concrete forms were designed and supplied by EFCO Corporation, Neshaminy’s subcontractor.
Neshaminy submitted a claim under the inland marine insurance policy, which
Federal had issued.
Relying on two policy exclusions, Federal denied the claim.
Neshaminy brought this action for breach of the insurance contract and for bad faith.
For the purpose of determining whether there was coverage, the material facts are
undisputed. The project caused damage to the bridge’s beams. The losses were caused
by the concrete forms defectively designed by Neshaminy’s subcontractor. Neshaminy
was covered by an inland marine insurance policy issued by Federal during the relevant
period. The policy included exclusions for claims arising out of a design defect, and those
arising out of faulty or defective workmanship, materials, maintenance or construction.
Absent these exclusions, the losses are otherwise covered. Thus, we must determine
whether the exclusions apply.
The interpretation of an insurance contract is a question of law. Am. Auto. Ins. Co.
v. Murray, 658 F.3d 311, 320 (3d Cir. 2011) (citations omitted). The issue of whether a
claim is within a policy's coverage or barred by an exclusion may be decided on a motion
for summary judgment. Bishops, Inc. v. Penn Nat’l Ins., 984 A.2d 982, 989 (Pa. Super. Ct.
2009) (quoting Nationwide Mut. Ins. Co. v. Nixon, 682 A.2d 1310, 1313 (Pa. Super. Ct.
A court must give effect to the plain language of the insurance contract read in its
entirety. Am. Auto Ins. Co., 658 F.3d at 320 (citation omitted). When the policy language
is ambiguous, the provision must be construed in favor of the insured. Id. (quoting Med.
Protective Co. v. Watkins, 198 F.3d 100, 104 (3d Cir. 1999)); 401 Fourth St., Inc. v.
Investors Ins. Grp., 879 A.2d 166, 174 (Pa. 2005) (citing Mohn v. Am. Cas. Co. of Reading,
326 A.2d 346, 352 (Pa. 1974)). Contract language is ambiguous if it is reasonably
susceptible to more than one construction and meaning. 401 Fourth St., Inc., 879 A.2d at
171 (quoting Madison Constr. Co. v. Harleysville Mut. Ins. Co., 735 A.2d 100, 106 (1999)).
However, policy language may not be stretched beyond its plain meaning to create an
ambiguity. Trizechahn Gateway LLC v. Titus, 976 A.2d 474, 483 (Pa. 2008).
The insured has the initial burden of establishing coverage under the policy. State
Farm Fire & Cas. Co. v. Estate of Mehlman, 589 F.3d 105, 111 (3d Cir. 2009). Conversely,
when the insurer relies on a policy exclusion as the basis for denying coverage, it has the
burden of proving, by uncontradicted facts, that the exclusion applies. Id.; Mistick, Inc. v.
Nw. Nat. Cas. Co., 806 A.2d 39, 42 (Pa. Super. Ct. 2002). Policy exclusions are strictly
construed against the insurer. Nationwide Mut. Ins. Co. v. Cosenza, 258 F.3d 197, 207 (3d
Cir. 2001) (citing Selko v. Home Ins. Co., 139 F.3d 146, 152 n.3 (3d Cir. 1998)).
Federal issued Inland Marine Insurance Policy No. 0663-68-53, effective November
1, 2009 through November 1, 2010. The Open Installation Floater provides coverage for
physical loss or damage to “project works.” It provides:
We will pay for direct physical loss or damage to project works
caused by or resulting from a peril not otherwise excluded, not
to exceed the applicable Limit Of Insurance for Project Works
shown in the Declarations.1
The policy defines “project works” as “materials, supplies, machinery and equipment
Open Installation Floater 3 (em phasis om itted).
which you own, or which are owned by others and for which you are legally liable, to be
used in and become a permanent part of the construction, reconstruction, erection,
expansion, fabrication, renovation or repair of an insured installation project.”2
The policy excluded coverage for certain claims. Among the exclusions are the
workmanship and materials exclusion and the defect-in-design exclusion.
workmanship and materials exclusion states: “This insurance does not apply to loss or
damage (including the cost of correcting or making good) caused by or resulting from faulty
or defective workmanship, materials, maintenance or construction.”3 The design exclusion
reads: “This insurance does not apply to loss of or damage caused by or resulting from
error, omission or deficiency in design, plan, specification or surveying.”4
Neshaminy does not dispute that the loss was caused by a defect in design, and
faulty workmanship and materials. It argues that the language of both exclusions is
ambiguous because it does not specifically define “to whom the exclusion applies,” leaving
three possible interpretations. The three interpretations, according to Neshaminy, are that
the exclusion applies to defects, and faulty workmanship and materials, caused by: (1) only
Neshaminy; (2) only by suppliers or subcontractors; or (3) by both Neshaminy and its
suppliers or subcontractors.
Neshaminy argues that because the purported ambiguity was created by Federal,
the drafter of the policy, the exclusion must be construed in favor of Neshaminy, the
insured, and against Federal. In that instance, according to Neshaminy, the provision must
Open Installation Floater 18 (em phasis om itted).
Open Installation Floater 11.
Open Installation Floater 6.
be interpreted to apply only to defects and designs by the insured, and does not apply to
those made by third parties, such as suppliers and contractors.
The fact that the provisions do not identify who is responsible for the defect does
not help Neshaminy. On the contrary, the omission of a limitation on the scope of the
exclusions supports the conclusion that all design and faulty workmanship defects – no
matter who made them – are excluded from coverage. The relevant exclusions apply to
the cause of the damage to the project, not who caused the damage.
unambiguous language of the exclusions includes within their scope losses caused by any
design defect or any faulty workmanship and materials.
Construing the exclusions strictly against Federal does not permit us to rewrite the
policy terms. The language is plain and unambiguous. The only reasonable interpretation
is that the exclusions apply to losses or damages caused by design defects and to faulty
workmanship and materials resulting from the acts or omissions of anyone, including either
the insured or its suppliers and subcontractors.
Neshaminy argues that this interpretation frustrates its reasonable expectations and
results in illusory coverage.
The guiding principle in interpreting an insurance contract is to effectuate the
reasonable expectations of the insured. Reliance Ins. Co. v. Moessner, 121 F.3d 895, 903
(3d Cir. 1997) (citations omitted); Safe Auto Ins. Co. v. Berlin, 991 A.2d 327, 331 (Pa.
Super. Ct. 2010) (citation omitted). Under Pennsylvania law, even if the terms of the
insurance contract are clear and unambiguous, the insured’s reasonable expectations may
prevail over the express terms of the contract. Bensalem Twp. v. Int'l Surplus Lines Ins.
Co., 38 F.3d 1303, 1309 (3d Cir.1994); see also Safe Auto Ins. Co., 991 A.2d at 331 (“[A]
court’s decision to look beyond the policy language is not erroneous under all
circumstances.” (citation omitted)). Nonetheless, the language of the insurance contract
serves as the best evidence of the parties’ reasonable expectations. Safe Auto Ins. Co.,
991 A.2d at 332 (quoting Allstate Ins. Co. v. McGovern, No. 07-2486, 2008 WL 2120722,
at *2 (E.D. Pa. May 20, 2008)).5
Despite the absence of language limiting the scope of the workmanship and
materials and defect-in-design exclusions, Neshaminy argues that it had a reasonable
expectation that the exclusions apply only to it, not its subcontractors.
interpretation, Neshaminy could avoid the exclusions simply by relying on subcontractors
to complete the project, requiring Federal to cover the cost of damages caused by
subcontractors selected and overseen by Neshaminy. Neshaminy’s proffered expectation
is based on an unreasonable interpretation of the unambiguous exclusions.
Illusory Coverage Doctrine
Neshaminy also argues that interpreting the relevant exclusions to extend to the
W e acknowledge that, at tim es, the Pennsylvania Superior Court has ruled out the use of the
reasonable expectations doctrine when the insurance contract is clear and unam biguous. See Regis Ins. Co.
v. All Am. Rathskeller, Inc., 976 A.2d 1157, 1166 n.11 (Pa. Super. Ct. 2009) ("However, an insured m ay not
com plain that his or her reasonable expectations were frustrated by policy lim itations which are clear and
unam biguous.") (citations and quotations om itted); Millers Capital Ins. Co. v. Gambone Bros. Dev. Co., 941
A.2d 706, 717 (Pa. Super. Ct. 2007) ("An insured, however, m ay not com plain that its reasonable expectations
have been frustrated when the applicable policy lim itations are clear and unam biguous."). If we were to follow
this approach, the reasonable expectations inquiry would be at an end because the relevant exclusions are
clear and unam biguous. However, based on the Superior Court's m ore recent statem ent of the doctrine in
Safe Auto Insurance Co., 991 A.2d at 331, we shall determ ine whether Nesham iny's expectations are
work of its subcontractors would render its coverage under the policy illusory. The
Pennsylvania Supreme Court implicitly recognized the existence of the illusory coverage
doctrine in 401 Fourth St., Inc., 879 A.2d at 174 n.3. A coverage provision is illusory when
it is negated by an exclusion under a reasonable set of circumstances. Great N. Ins. Co.
v. Greenwich Ins. Co., No. 05-635, 2008 WL 2048354, at *4 (W.D. Pa. May 12, 2008); see
also 401 Fourth St., Inc., 879 A.2d at 174 n.3 (holding that coverage would be rendered
illusory and contrary to the intent of the parties if an exclusion was interpreted to negate
a coverage provision).
Neshaminy argues that the entire policy is illusory because the exclusions “would
exclude damage or loss resulting from every act that can be done by anyone in connection
with a construction project.”6 This argument is contradicted by the policy coverage. The
policy covers several enumerated fortuitous events that are not the result of deficiency in
design or faulty or defective workmanship and materials. Neshaminy’s illusory coverage
argument is without merit.
Soon after Neshaminy presented its claim to Federal, the latter put Neshaminy’s
subcontractor, EFCO on notice of a potential subrogation claim.7 Neshaminy reads this
letter as an admission by Federal that Neshaminy’s claim was covered under the policy.
It contends that the later denial of the claim was made on the basis of a bad faith
Reply Mem . of Pl. 2.
Pl.’s Cross Mot. for Partial Sum m . J. Ex. G, at 1.
unreasonable interpretation of the policy. In other words, Neshaminy argues that Federal
sought a way to avoid paying the claim.
The policy language, not the insurer’s initial reaction to a claim before an
investigation is concluded, controls. By sending a prophylactic subrogation letter to a third
party, Federal did not waive its rights under the policy. Nor did it reform the contract.
Because there is no coverage under the contract for Neshaminy’s claim, there can
be no bad faith. Therefore, we shall grant summary judgment in favor of Federal.
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