Abbott Furnace Company ("Abbott") designs and manufactures annealing furnaces. Abbott purchased a general liability insurance policy from Erie Insurance Exchange (aEURoeErieaEUR?). In 1999, Abbott began contract negotiations with Innovative Magnetics, Inc. (aEURoeIMIaEUR?) to design and build furnaces for IMIaEUR(TM)s magnetic metallic laminations production. As these laminations are highly sensitive, IMI raised concerns with Abbott about the furnaceaEUR(TM)s design. Namely, IMI told Abbott that the furnace was for a specific use, and therefore, IMI required a certain design for the furnace. Abbott assured IMI that they had built several similar furnaces for one of IMIaEUR(TM)s primary competitors and that the competitor had never experienced any problems with the furnace. IMI purchased the furnace from Abbott. The furnace, however, later turned out to be defective with respect to IMIaEUR(TM)s specific needs. IMI then discovered that the furnaces designed by Abbott for IMIaEUR(TM)s competitors also had the same defect.

IMI filed suit against Abbott, claiming that Abbott had a duty to apprise IMI of the furnaceaEUR(TM)s design defects. Abbott settled with IMI and contacted Erie to request indemnification and defense. Erie denied their request, maintaining that none of IMIaEUR(TM)s claims triggered coverage. Specifically, Erie contended that coverage under its policy was only triggered in the event of an aEURoeoccurrence.aEUR? Because the only alleged damages claimed by IMI followed from an alleged breach of contract, no aEURoeoccurrenceaEUR? had been pled and, therefore, coverage was not triggered.

Erie filed a declaratory judgment action against Abbott and won a motion for summary judgment. The trial court relied on Kvaerner Metals v. Commercial Union Ins. Co., 589 Pa. 317, 908 A.2d 888 (2006), for the proposition that a third partyaEUR(TM)s complaint alleging only faulty workmanship and damage to insuredaEUR(TM)s work product does not trigger coverage under a standard commercial general liability policy. Abbott appealed, alleging that the furnace aEURoeactively malfunctionedaEUR? and damaged other IMI property, thereby triggering coverage.

The Superior Court reiterated that an insurer's duty under its policy is triggered by the language of the complaint against the insured and agreed with Abbott that provisions of a general liability policy provide coverage if the insuredaEUR(TM)s work or product actively malfunctions and causes injury to an individual or damage to anotheraEUR(TM)s property. However, the court, following Kvaerner, stated that contractual claims of poor workmanship do not constitute the active malfunction needed to establish coverage under a general liability policy. Therefore, the court must look to the language of IMIaEUR(TM)s complaint to determine if IMI pleaded a negligence claim that AbbottaEUR(TM)s furnace actively malfunctioned.

In its review of IMIaEUR(TM)s complaint, the court relied on PennsylvaniaaEUR(TM)s aEURoegist of the actionaEUR? doctrine. When a plaintiff alleges that the defendant committed a tort in the course of carrying out a contractual agreement, Pennsylvania courts examine the claim and determine whether the aEURoegistaEUR? of the claim is based in contract or tort. The important difference between a breach of contract claim and a breach of tort claim is that a contract claim arises out of aEURoebreaches of duties imposed by mutual consensus agreements between individualsaEUR? and a tort claim arises out of breaches of duties imposed by law as a matter of social policy.

While IMI did reference AbbottaEUR(TM)s negligence in their complaint, the gist of IMIaEUR(TM)s claim was that Abbott had a duty to inform IMI of the design defects experienced by IMIaEUR(TM)s competitor or, at least, had a duty to not design the furnace in the identical or a similarly defective manner. The court stated, aEURoeThis claim arose from the mutual agreement between the parties regarding the specifically requested purpose and design of the furnace.aEUR? In other words, IMI specifically told Abbott what it needed and for what purpose the furnace would be used, and IMIaEUR(TM)s damages were caused by AbbottaEUR(TM)s contractual breach in failing to design a furnace according to IMIaEUR(TM)s requested needs and uses. The court concluded that aEURoethe claim should be limited to a contract claim because the partiesaEUR(TM) obligations are defined by the terms of the contract, and not by the larger social policies embodied by the law of torts.aEUR? As the claim against Abbott was contractual in nature, coverage under ErieaEUR(TM)s commercial general liability policy was precluded.

The gist of the Superior Court's decision in Abbott is the court will look at the essence of the cause of action advanced, not whether the claims are brought under a theory of negligence, in determining whether there is an "occurrence" sufficient to trigger coverage.

Joanna is an attorney at MDWCG in the firm's Philadelphia, Pennsylvania, and can be reached at (215) 575-2603 or jdbuchanico@mdwcg.com.