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Court Finds Reservation of Rights Effective as to Successive Policies

Reaffirms That Scope of Coverage is Not Subject to Waiver, Foreseeable Damage to Third Party Property Is Not an Occurrence, and There Can Be No Bad Faith Where Coverage Is Debatable.

The United States District Court for the Middle District of Pennsylvania recently granted an insurer’s motion for judgment on the pleadings in an action for declaratory judgment, finding that (i) the insurer could not impliedly waive its right to deny coverage under a subsequent insurance policy, (ii) foreseeable damage to third-party property as a result of faulty workmanship was not a covered “occurrence” as defined by the policy, and (iii) there can be no bad faith where coverage is fairly “debatable.” Berkley Specialty Ins. Co. v. Masterforce Constr. Corp., No. 4:19-CV-01162, 2021 WL 254002 (M.D. Pa. Jan. 26, 2021).

In Berkley, the insurer sought a declaration that it owed no duty to indemnify its insureds with respect to a judgment rendered in an underlying Pennsylvania state action. In the underlying case, homeowners brought suit against Masterforce Construction Co., a roofing installation company, and its subcontractor after they began experiencing substantial leaks due to rain. After a two-day bench trial, the state court found in favor of the homeowners, holding that the roof was improperly installed and violated zoning regulations.

The insurer defended Masterforce Construction in the underlying action pursuant to a reservation of rights. The reservation of rights letter issued by the insurer, however, only referenced the first of two successive policies – the policy issued in 2012. The reservation of rights made no reference to the 2013 policy. The insureds argued that the insurer should be estopped from disclaiming coverage with regard to the 2013 policy, because it implicitly waived its rights to deny coverage by failing to reference that policy in the reservation of rights. The Middle District did not accept this argument, noting that “conditions going to the coverage or scope of a policy of insurance may not be waived by implication from the conduct or action of the insurer.” See Gemini Ins. Co. v. Meyer Jabara Hotels LLC, 231 A.3d 839, 851 (Pa. Super. Ct. 2020). The Court further held that the doctrine of waiver or estoppel “may not be used to affirmatively expand coverage under the insurance policies where none existed.”

As to the scope of available coverage, the Court, relying on Kvaerner and its progeny, reaffirmed that foreseeable damage to third-party property caused by faulty workmanship does not qualify as an “accident” sufficient to trigger insurance coverage.

Finally, the Court denied Masterforce Construction’s counterclaim against the insurer for bad faith, finding that the insurer properly denied benefits. The Court reaffirmed and reiterated that there could be no bad faith where the insurer had “a reasonable basis for denying benefits under the policy.”