No Cover for Faulty Workmanship

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Breach of Contract is not an Occurrence

In American Home Assurance Company v. Superior Well Services, Inc., No. 22-1498, United States Court of Appeals, Third Circuit (May 31, 2023) American Home Assurance Co. (“American Home”) appealed the District Court’s order grant of summary judgment for policy holder Superior Well Services, Inc. (“Superior”).

BACKGROUND - The Underlying State Law Claim

U.S. Energy contracted with Superior for hydraulic fracking services to extract natural gas from wells owned by U.S. Energy. In November 2007, Superior notified its insurance provider, American Home, about the potential claim for damage to wells. In February 2008, American Home agreed to provide Superior with defense counsel, but it also sent Superior a letter reserving its right to contest insurance coverage.

U.S. Energy sued Superior alleging that Superior had damaged 97 of its wells. After trial the jury found that Superior breached the contract by failing to perform services with reasonable care, skill and diligence. The jury found Superior had damaged 53 of the 97 wells and specified that Superior “fail[ed] to perform its contract with U.S. Energy in a workman like manner” and that this “failure” was “a substantial factor in causing damage to the U.S. Energy wells[.]” Accordingly, it awarded U.S. Energy $6.16 million, a figure that was increased to approximately $13.18 million after the state court tabulated interest.

THE DISPUTE BETWEEN SUPERIOR AND AMERICAN HOME

Superior’s policy provided coverage for “property damage” arising out of an “occurrence.” 

American Home sued seeking a declaratory judgment that Superior’s policy does not indemnify Superior for any damages that might be awarded to U.S. Energy and which were caused by Superior’s breach of contract.

DISCUSSION

The definition of “accident” required to establish an “occurrence” under the policies cannot be satisfied by claims based upon faulty workmanship. To hold otherwise would be to convert an insurance policy into a performance bond. 

The Third Circuit reversed the District Court’s summary judgment order and remanded the case to the District Court with instructions to enter judgment for American Home.

ZALMA OPINION

The key to every liability insurance policy is that for coverage to apply the loss must be fortuitous, that is, it must be neither expected nor intended by the insured and must fit within the generally understood meaning of the term “accident.” Under no definition of fortuity is faulty workmanship by the insured. 

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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