Insurance News Flash - April, 2014 - Lewis Brisbois Bisgaard & Smith LLP

Insurance News Flash - April, 2014

In Harleysville Worcester Ins. Co. v. Paramount Concrete Inc., 11-CV-578 (D. Conn.), the United States District Court for the District of Connecticut held that when a defective product is incorporated into a third-party’s finished product, the resulting impairment constitutes an “occurrence” that causes “property damage” under a commercial general liability (“CGL”) policy. The court also concluded there were nineteen separate occurrences notwithstanding a single precipitating cause.

In the underlying case, R.I. Pools commenced a products liability lawsuit against Paramount, a manufacturer and supplier of shotcrete, after approximately nineteen pools built by R.I. Pools that incorporated Paramount's shotcrete cracked, causing extensive damage to the pools. Paramount had purchased a CGL insurance policy from Harleysville which policy obligated Harleysville to pay damages because of "property damage" caused by an "occurrence," which the policy defined as "an accident, including continuous or repeated exposure to substantially the same harmful conditions." The case went to trial and a jury returned a verdict in favor of R.I. Pools. Post trial, Paramount brought a declaratory judgment action seeking coverage for the loss. Harleysville, Paramount’s insurer, maintains that there is no coverage for this loss because there was no “occurrence” under the policy.

The court found that the where an insured "unintentionally sells a defective product that is incorporated into a third-party's finished product, the resulting impairment to the third-party's product" constitutes an "occurrence" that causes "property damage." Paramount's defective product caused harm to a larger system since the shotcrete, once it dried, became inextricably intertwined with other components such as rebar and coping, which combined to create finished pools. The defective shotcrete, in turn, caused cracking that resulted in the failure of those pools. Therefore, there was an occurrence under the CGL policy.

Notwithstanding Paramount’s habitually manufactured defective concrete, the court held that each damaged swimming pool was an individual occurrence. Even though the damages stemmed from one defective batch of shotcrete, there was a discrete harm caused each time it was used in a pool. As such, Harleysville must cover the costs of each separate injury to each individual pool.

Notably, the court also rejected the insurers’ attempts to rely on the “Your Product” and “Your Work” exclusions which preclude coverage for damages to the insured’s own product and for its own faulty workmanship respectively, finding that in both instances, Paramount’s product caused damages to the finished pools, which were property and work other than Paramount’s product.

Harleysville is instructive for its holding that coverage under a CGL policy is not triggered for an insured’s defective component product unless and until the defective part physically injures another component or the larger product. Harleysville also confirms that for the purposes of determining the number of occurrences, the occurrence is the event causing the actual injury, not the cause of the event.