Erie Ins. Exchange v. Little Ducklings Daycare, et ( 2017 )

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NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
ERIE INSURANCE EXCHANGE IN THE SUPERIOR COURT OF
PENNSYLVANIA
v.
LITTLE DUCKLINGS DAY CARE
ASSOCIATES, LP, LITTLE DUCKLINGS
DAYCARE GP LLC AND LITTLE
DUCKLINGS DAYCARE & PRESCHOOL,
MARYANN C. TOLSON AND RICHARD
TOLSON, ANN MARIE DELUCA AND
MICHAEL DELUCA, THE ESTATE OF
CARMEN NERI AND MICHAEL G. NERI,
APPEAL OF: THE ESTATE OF CARMEN
NERI, AND MICHAEL G. NERI
No. 168 EDA 2017
Appeal from the Judgment Entered December 22, 2016
In the Court of Common Pleas of Philadelphia County
Civil Division at No(s): June Term, 2015, No. XX-XXXXXXX
BEFORE: BENDER, P.J.E, BOWES AND SHOGAN, JJ.
MEMORANDUM BY BOWES, J.: FILED SEPTEMBER 27, 2017
Michael G. Neri, individually, and in his capacity as Executor of the
Estate of Carmen Neri (collectively “Landlord”), appeals from the December
22, 2016 grant of summary judgment in favor of Erie Insurance Exchange
(“Erie”) in this insurance coverage dispute.1 We affirm.
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1
An estate cannot commence an action in its own name. The personal
representative of the estate brings the action in his official capacity on behalf
of the estate.
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Erie filed the within declaratory judgment action on June 19, 2015,
seeking a declaration that it did not owe the Little Ducklings Daycare and
Preschool LLC (the “Daycare”), its members and their spouses (collectively
“Underlying Defendants”), a duty to defend or indemnify in the underlying
action captioned Neri, et al v. Hatzold, et al, No. 3335 May Term 2014,
Philadelphia (“Underlying Case”). The trial court granted summary judgment
in favor of Erie, and Landlord filed the within appeal.
Since the insurance policy and the pleadings in the Underlying Case
govern the scope of coverage, we glean the relevant facts from those
documents. On March 1, 2010, the Daycare entered into a five-year lease
(“Lease”) with Landlord for the premises located at 7820 Frankford Avenue
in Philadelphia. Daycare members and sisters, Maryann C. Tolson and Ann
Marie DeLuca, executed the Lease on behalf of the LLC. The Lease provided,
inter alia, that Daycare was obligated to purchase commercial general
liability insurance on an occurrence basis, verify that it had obtained such
coverage, and provide proof of same to Landlord by providing a copy of the
declaration page “naming Landlord as an additional insured thereunder.”
Daycare complied and purchased the Erie Ultraflex occurrence-based
commercial general liability policy that is the subject of the instant dispute.
The Lease identified Maryanne L. and Thomas Hatzold, their parents, as
guarantors (“Guarantors”) on the Lease, and they executed a written lease
guaranty agreement (“Guaranty”) the same day.
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Subsequently, the Daycare defaulted on the rent and Landlord
threatened to exercise available remedies under the Lease and Guaranty.2
However, on September 1, 2011, in lieu of exercising those remedies,
Landlord entered into a Forbearance Agreement (“Forbearance Agreement”)
with the Daycare, the Guarantors, and Michael DeLuca, husband of LLC
member Ann Marie DeLuca. The parties stipulated therein that the rent was
$30,744 in arrears. However, beginning in September 2011, the arrearages
would be satisfied by Mr. DeLuca, a master carpenter, who would make
improvements to the home of Mary T. Neri, Landlord’s mother, “until the
Rent Arrearages are paid in full.” Forbearance Agreement, Article 2.3.
Under the terms of the Forbearance Agreement, “[t]he nature, scope, extent
and cost of the Improvements, and the value of any and all services
performed by DeLuca, shall be determined by the mutual consent of the
Landlord and DeLuca[,]” but neither Landlord nor the homeowner would pay
DeLuca for his services. Id. DeLuca would have to look exclusively to the
Daycare or Guarantors for payment or compensation. Id. at 2.4.
The Forbearance Agreement also provided that, when the forbearance
period terminated either by default or expiration, “the Landlord may take
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2
Section 19 of the Lease defined default and remedies for default available
to Landlord including termination, acceleration of the balance of the rent, re-
entry and re-leasing of the property, confession of judgment, any other
remedies existing at law or in equity.
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any enforcement action against the [Daycare] and the Guarantors to collect
the Rent Arrearages.” Id. at 2.5. Landlord also advanced $7,100 to Mr.
DeLuca to purchase construction materials for the anticipated improvements
to the his mother’s home.
Landlord filed the Underlying Case against Daycare, Guarantors, the
DeLucas and the Tolsons on March 23, 2015. Landlord pled in count I of his
complaint that the Daycare breached the Lease by failing to pay rent when
due, and leveled the same allegation against Guarantors at count II. Count
III contained allegations that Mr. DeLuca’s negligent performance of the
home improvements, specifically failing to install the proper windows,
properly account for the $7,100 advance, finish the improvements, and
properly secure a patio roof, which allegedly resulted in additional damage to
Mary Neri’s home, constituted a breach of the Forbearance Agreement by all
of the Underlying Defendants, and Landlord sought damages representing
the amount of the outstanding rent.
In addition, and most importantly for purposes of this appeal, Landlord
pled a count in negligence. He alleged that he relied on the “skill, judgment
and good faith of Defendant, Michael DeLuca, in making the home
improvements contemplated by the Forbearance Agreement,” and that
damage to the Neri residence resulted from the negligence and gross
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negligence of the Underlying Defendants. Complaint at ¶58.3 The remaining
counts contained allegations of intentional torts of conversion, bad faith,
fraud and deceit, and conspiracy. Erie defended the Underlying Case under
a reservation of rights pending a final decision in this case.
After Erie filed the within declaratory judgment action, none of the
Underlying Defendants filed a responsive pleading to Erie’s complaint.
Consequently, Erie was granted a default judgment against them. However,
Landlord filed a timely answer and new matter, Erie filed preliminary
objections to Landlord’s new matter,4 and after the court overruled those
preliminary objections, Erie filed a reply to new matter.
Erie subsequently filed a motion for summary judgment against
Landlord on two independent bases: first, that the Daycare, the Tolsons, and
the DeLucas were not “insureds” for the claims pled in the Underlying
Complaint; and second, that the pleadings did not allege an “occurrence”
that would trigger coverage under the Policy. The trial court entered
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3
In the Underlying Case, Landlord is seeking damages for both breach of
contract and negligence based upon faulty workmanship and property
damage to the home of Mary T. Neri. Mary T. Neri is not a plaintiff in the
Underlying Case.
4
Erie pled that Landlord was not an insured under the policy and had no
standing to assert a bad faith action against the insurer. Erie also alleged
that Landlord did not plead a valid assignment to pursue a bad faith claim,
and, furthermore, it defended its coverage position as reasonable and
supported by legal authority.
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summary judgment in favor of Erie on the latter theory: that the Underlying
Complaint did not allege an occurrence that would trigger coverage under
the commercial general liability insurance policy issued by Erie to Little
Ducklings Daycare. Consequently, the insurer had no duty to defend or
indemnify Underlying Defendants on the underlying claim.
Landlord timely appealed and presents eight questions for our review:
[1] Whether the trial court erred because it improperly
reconsidered and reversed its prior order which had overruled
Erie’s Preliminary Objections?
[2] Whether the trial court erred because the issue of which
persons and/or entities are insured under the Erie Policy, and
whether as individuals, a partnership, a limited liability company
or other entity, are disputed questions of fact that have yet to
be determined?
[3] Whether the trial court erred because it concluded that the
damage to the property in question, was to the insured’s “work
product” (which consists of the operation of a daycare and
preschool) and, therefore, not covered under the Erie Policy,
rather than constituting damage to the property of another,
which the court expressly found would be covered under the
Erie Policy?
[4] Whether the trial court erred because it failed to recognize
that the Forbearance/Indemnity Agreement at issue is an
“insured contract” under the Erie Policy?
[5] Whether the trial court erred because it failed to recognize
that the Erie Policy covers liability for property damage because
the insured assumed the tort liability of another in an insured
contract regardless of whether said damage was the result of an
occurrence?
[6] Whether the trial court erred because its holding, i.e., that
the Erie Policy covered property damage only if said damage
was the result of an “accident,” contradicted, modified or
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altogether nullified the explicit coverage that the insured had
purchased for property damage occurring under an insured
contract?
[7] Whether the trial court erred because negligence can be
considered an “occurrence” under the Erie Policy and
Pennsylvania law?
[8] Whether the trial court erred because it failed to recognize
that some or all of the damage to the property in question was
caused by the continuous or repeated exposure to substantially
the same harmful conditions, thereby constituting an
“occurrence” under the Erie Policy and Pennsylvania law?
Appellant’s brief at 9-10.
Landlord is challenging the trial court’s grant of summary judgment in
favor of Erie herein. In reviewing the grant of summary judgment, our
scope of review is plenary.
Accordingly, we must consider the order in the context of the
entire record. Our standard of review is the same as that of the
trial court; thus, we determine whether the record documents a
question of material fact concerning an element of the claim or
defense at issue. If no such question appears, the court must
then determine whether the moving party is entitled to judgment
on the basis of substantive law. Conversely, if a question of
material fact is apparent, the court must defer the question for
consideration of a jury and deny the motion for summary
judgment. We will reverse the resulting order only where it is
established that the court committed an error of law or clearly
abused its discretion.
Am. Nat'l Prop. & Cas. Cos. v. Hearn, 93 A.3d 880, 883 (Pa.Super. 2014)
(quoting Grimminger v. Maitra, 887 A.2d 276, 279 (Pa.Super. 2005)
(quotations omitted). We “view the record in the light most favorable to the
non-moving party, and all doubts as to the existence of a genuine issue of
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material fact must be resolved against the moving party.” Evans v.
Sodexho 946 A.2d 733, 739 (Pa.Super. 2008) (quotation omitted).
The issue herein is whether the insurer had a duty under a commercial
general liability policy issued to the Daycare to defend and indemnify the
Daycare and others in the underlying suit brought by the Landlord. Such a
duty depends upon whether the third party's complaint triggers coverage
under the policy. Kvaerner Metals Div. of Kvaerner U.S., Inc. v.
Commercial Union Ins. Co., 908 A.2d 888, 896 (Pa. 2006). The court
resolves the question of coverage. Am. & Foreign Ins. Co. v. Jerry’s
Sport Ctr., Inc., 2 A.3d 526 (Pa. 2010). That determination involves the
construction of an insurance policy and the scope of coverage, which is a
matter of law in a declaratory judgment action. Am. Nat’l Prop. & Cas.
Cos., supra. The following principles apply:
When interpreting an insurance policy, we first look to the terms
of the policy. When the language of the policy is clear and
unambiguous, we must give effect to that language. However,
when a provision in the policy is ambiguous, the policy is to be
construed in favor of the insured. Also, we do not treat the
words in the policy as mere surplusage and, if at all possible, we
construe the policy in a manner that gives effect to all of the
policy's language.
We then compare the terms of the policy to the allegations in the
underlying complaint. It is well established that an insurer's
duties under an insurance policy are triggered by the language of
the complaint against the insured. In determining whether an
insurer's duties are triggered, the factual allegations in the
underlying complaint are taken as true and liberally construed in
favor of the insured. It does not matter if in reality the facts are
completely groundless, false or fraudulent. It is the face of the
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complaint and not the truth of the facts alleged therein. In
addition, an insurer's duty to defend ... is broader than the duty
to indemnify. If an insurer does not have a duty to defend, it
does not have a duty to indemnify. However, both duties flow
from a determination that the complaint triggers coverage.
Indalex Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 83 A.3d
418, 421 (Pa.Super. 2013) (citations and quotation marks omitted).
An insurance company owes an obligation to defend its insured
“whenever the complaint filed by the injured party may potentially come
within the policy’s coverage.” Id. at 425. The goal of construction is to
ascertain the intentions of the parties as manifested in the terms of the
policy and to give effect to language that is clear and unambiguous. Pa.
Nat'l Mut. Cas. Ins. Co. v. St. John, 106 A.3d 1 (Pa. 2014); 401 Fourth
Street v. Investors Insurance Co., 879 A.2d 166, 170 (Pa. 2005).
Our standard of review in a declaratory judgment action is
limited to determining whether the trial court clearly abused its
discretion or committed an error of law. We may not substitute
our judgment for that of the trial court if the court's
determination is supported by the evidence. Additionally, [w]e
will review the decision of the lower court as we would a decree
in equity and set aside the factual conclusions of that court only
where they are not supported by adequate evidence. The
application of the law, however, is always subject to our review.
Peters v. Natl. Interstate Ins. Co., 108 A.3d 38, 42 (Pa.Super. 2014)
(quoting Erie Ins. Grp. v. Catania, 95 A.3d 320, 322 (Pa.Super. 2014)).
Preliminarily, we offer the following observations. Erie issued the
commercial general liability policy to Little Ducklings, a daycare and
preschool located at 7820 Frankford Avenue in Philadelphia. The issue
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herein is whether Erie has a duty under the Policy to defend and/or
indemnify the Daycare, the Tolsons, the DeLucas, and the Guarantors in the
Underlying Case commenced by Landlord for unpaid rent and damages
caused by unworkmanlike repairs to another property performed by
someone with no ownership interest in the Daycare. The underlying case
has nothing to do with childcare or accidents or occurrences on the Daycare
premises. Rather, it involves contract and tort claims for allegedly faulty
workmanship performed by Mr. DeLuca, the husband of one of the Daycare
partners, at the home of Mary T. Neri. Mr. DeLuca, a master carpenter,
undertook the renovations pursuant to the Forbearance Agreement to offset
the Daycare’s rental arrearages.
We are mindful that the reasonable expectations of the parties
ultimately guide our construction of the insurance contract. The parties to
the insurance contract could not have reasonably expected that the Policy
would provide coverage for damages related to renovations undertaken by
the husband of a partner of the Daycare at a site unconnected to the
Daycare. Against this backdrop, we address Landlord’s issues.5
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5
Landlord does not challenge the trial court’s ruling that Erie had no duty to
defend or indemnify the Underlying Defendants on the breach of contract
claims arising from the Lease, Guaranty, and the Forbearance Agreement.
We would also note that relief sought in the nature of unpaid rent does not
fall within the coverage of the Policy.
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First, Landlord challenges the trial court’s ability to grant summary
judgment in favor of Erie. He contends that the trial court conclusively
rejected Erie’s coverage position when it overruled Erie’s preliminary
objections to Landlord’s new matter, and that the trial court was bound by
its earlier decision that the underlying claims did not trigger coverage.
Appellant’s brief at 23. Although Landlord concedes a motion for summary
judgment is not limited to the pleadings, as is the case with preliminary
objections, he maintains the coverage issue was “settled” at the preliminary
objection stage since there was no discovery conducted and the record was
not supplemented with admissions or affidavits.
Erie characterizes Landlord’s argument as one implicitly invoking the
coordinate jurisdiction rule as a bar to the court reexamining an issue, and
contends that the argument is meritless for five reasons. First, Erie
maintains that the argument is waived since Landlord did not raise the rule
in opposition to summary judgment. Pa.R.A.P. 302(a). Erie also directs our
attention to Meyer-Chatfield Corp. v. Bank Fin. Servs. Group, 143 A.3d
930, 938 n.4 (Pa.Super. 2016), where this Court held that hinting at such an
argument in a motion for reconsideration is insufficient to preserve the issue
for appeal.
Second, Erie points out that the preliminary objections were limited to
Landlord’s assertions of bad faith that were pleaded as new matter, not to
the underlying issue of coverage. Third, Erie relies upon Salerno v. Phila.
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Newspapers, Inc., 546 A.2d 1168, 1170 (Pa.Super. 1988), in support of its
contention that the coordinate jurisdiction rule is inapplicable where, as
here, the same judge ruled on both the preliminary objections and the
summary judgment motion. Fourth, Erie argues the rule does not apply
between orders overruling preliminary objections and orders granting
summary judgment, even when the record is unchanged. K.H. v. Kumar,
122 A.3d 1080, 1092 (Pa.Super. 2015). Finally, Erie contends that the trial
court erred when it overruled its preliminary objections. Landlord, in
response, disavows any reliance upon the coordinate jurisdiction rule, but
offers no legal authority or factual support for his contention that the earlier
decision overruling preliminary objections to new matter alleging bad faith
was conclusive of the issue of whether coverage was triggered at the
summary judgment stage.
We agree with Erie that the coordinate jurisdiction rule does not
operate on the facts herein to preclude the same trial court from re-visiting
an issue addressed by its earlier ruling. Furthermore, the preliminary
objections were directed at Landlord’s standing and allegations that Erie was
acting in bad faith that could bar Erie’s claims “in whole or in part,” and
coverage was not implicated. Hence, we find no merit in Landlord’s claim
that summary judgment was foreclosed based on the earlier disposition of
preliminary objections to new matter.
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Next, Landlord contends that it was “clear error” for the trial court to
conclude that Mr. DeLuca was an insured under the Policy.6 He argues that,
assuming arguendo that the Daycare was an LLC as he pled, the spouses of
members of an LLC would not be insureds. Furthermore, he posits that if
the Daycare was insured as a partnership, as suggested by the declarations,
the spouses of partners were not insureds unless the claim arose from the
conduct of the daycare business. Landlord points out that even the Daycare
rejected the latter position.
At first blush, Landlord appears to be suggesting that Mr. DeLuca was
not an insured under either scenario and that the trial court erred in so
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6
Landlord pled that Little Ducklings was an LLC. The Erie Policy provides:
1. If you are designated in the Declarations as
a. An individual, you and your spouse are insureds, but
only with respect to the conduct of a business of which you
are the sole owner.
b. A partnership or joint venture, you are an insured. Your
members, your partners, and their spouses are also
insureds, but only with respect to the conduct of your
business.
c. A limited liability company, you are an insured. Your
members are also insureds, but only with respect to the
conduct of your business. Your managers are insureds, but
only with respect to their duties as your managers.
Erie Policy, Section II 1., at 7.
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finding. We are puzzled by Landlord’s position because the trial court’s
finding that Mr. DeLuca was an insured under the Policy appeared to be a
favorable one, and Landlord failed to explain how he was aggrieved by the
ruling. However, Landlord then hypothesizes that Mr. DeLuca might be an
insured under the Policy as a “volunteer.”7 We glean from Landlord’s
statement of the issue, together with his meandering argument, that his real
contention is that Mr. DeLuca’s status presented a genuine issue of material
fact that precluded the grant of summary judgment.
Landlord offers no support for the proposition that Mr. DeLuca’s status
presents an issue of fact rather than law. Furthermore, Landlord fails to
offer any discussion or analysis as to how coverage was affected by Mr.
DeLuca’s status. Since Landlord did not develop his argument on this issue,
it is waived. See Karn v. Quick & Reilly, Inc., 912 A.2d 329, 336
(Pa.Super. 2006) (“[A]rguments which are not appropriately developed are
waived”).
In his third issue, Landlord alleges that the trial court erred in
concluding that the property damage to the Neri residence was not covered
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7
Assuming Mr. DeLuca was a volunteer worker as Landlord pled in the
Underlying Case, he would only be an insured “while performing duties
related to the conduct of [the insured’s] business.” Erie Policy, Section II
2(a). Furthermore, a volunteer would not be insured for property damage to
property “over which physical control is being exercised for any purpose by
you, any of your ‘employees,’ volunteer workers . . .” Id. at 2 (2)(b).
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because it was damage to the insured’s “work product.” He contends that
the Daycare’s work product consisted of operation of a daycare and
preschool, and that the damage to the property of another was covered.
Landlord’s corresponding argument in his brief, however, is devoted to the
Policy’s language regarding property damage for which an insured has
assumed liability in an insured contract, which is implicated in his fourth,
fifth, and sixth issues. We find Landlord’s third issue waived as stated. To
the extent it is subsumed in the other issues, we will address it in that
context.
Landlord acknowledges that the Policy does not generally provide
coverage for breaches of contract. However, he argues that the exclusion
for breach of contract does not apply to liability for damages “[a]ssumed in a
contract or agreement that is an ‘insured contract,’” and contends that the
Forbearance Agreement is such a contract. An insured contract is defined as
“That part of any other contract or agreement pertaining to your business . .
. under which you assume the tort liability of another party to pay for “bodily
injury” or “property damage” to a third person or organization. Tort liability
means a liability that would be imposed by law in the absence of any
contract or agreement.” Erie Policy, Section V. Definitions, 9f., at 11.
Landlord relies upon this provision as providing for coverage for his
intentional tort claims of conversion, conspiracy, bad faith and breach of the
covenant of good faith and fair dealing, and fraud and deceit.
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Landlord alleges that the parties to the insurance contract reasonably
would have expected that there would be insured contracts such as the
Forbearance Agreement, and that Erie agreed to defend and indemnify such
claims. He argues further that the Forbearance Agreement pertains to “[the
named insured’s] business,” and contains language whereby the named
insured assumes the liability of another. Landlord construes the Forbearance
Agreement as an agreement by the Daycare to indemnify and hold Landlord
harmless from DeLuca’s damage to property, and he urges us to give effect
to the intent of the parties as indicated by the clear language of the
Forbearance Agreement.
Erie counters first that policy exclusions and exceptions are irrelevant
if no occurrence is alleged, as was the case herein. In other words, unless
there is ostensible coverage, Erie would not have us reach the exclusions
and exceptions. Second, Erie argues that the Forbearance Agreement was
not an insured contract. An “insured contract,” according to Erie, is a
defend-and-hold–harmless provision. In order to fall within the definition,
the named insured, i.e., the Daycare, would have had to agree to assume
the tort liability of DeLuca, and the Forbearance Agreement contains no such
agreement. Furthermore, Erie contends that even an insured contract
provision would not apply to the claims made by Landlord against the
Daycare, the DeLucas, the Tolsons, or the Hatzolds, but only to claims of
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third parties who sued Landlord for damages for personal injury or property
damage due to DeLuca’s negligent workmanship.
The unambiguous language of the Policy supports Erie’s interpretation
of an insured contract. In the September 1, 2011 Forbearance Agreement
between Landlord, Tenant, Guarantors, and Michael DeLuca, Landlord agreed
to forbear from exercising his rights and remedies for default of the Lease in
return for home improvements to be performed by Michael DeLuca at the
home of Mary T. Neri. The home improvements were characterized as an
alternate manner and mode of paying the rental arrearages due under the
Lease. Forbearance Agreement, Article 2.3. The Forbearance Agreement
provided further that, upon the termination or expiration of the forbearance
period, “the Landlord may take any enforcement action against [Daycare]
and the Guarantors to collect the Rent Arrearages.” Id. at Article 2.5.
Landlord’s correspondence to the Daycare and DeLuca dated November 18,
2013, is consistent with that Agreement. Landlord advised its tenant and
Mr. DeLuca that they were in default of Article 4 of the Forbearance
Agreement, that the Agreement was terminated due to Mr. DeLuca’s failure
to undertake and finish the improvements and to provide the Landlord with a
proper accounting of the $7,100 advanced, and that the rent arrearages
were immediately due and payable.
Conspicuously absent in the Forbearance Agreement is any agreement
by the Daycare, DeLuca and the Guarantors to assume liability to Landlord
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for property damage tortiously caused to the Neri residence by DeLuca. The
Agreement provides only that the Daycare and Guarantors would indemnify
and hold Landlord and homeowner harmless in the event the latter were
sued for liability arising out of any occurrence in or at the Neri residence or
DeLuca’s occupancy or use of that residence. The Underlying Defendants
agreed to “indemnify, defend, save and hold Landlord and the Homeowner
and their respective attorneys, agents and representatives, harmless against
and from all suits, actions, liabilities . . . arising out of any occurrence in or
at the Premises or the occupancy or use by DeLuca of the Premises . . .
(c) any act, omission or negligence on the part of DeLuca
or any of his agents, contractors, servants, employees, licensees
or invitees or of any other persons or occupants of the Premises
or the public; or
(d) any failure on the part of DeLuca to keep, observe and
perform any of the terms, covenants, agreements, provisions,
conditions or limitations contained in this Agreement on DeLuca’s
part to be kept, observed and performed.
Forbearance Agreement at 3, ¶3.2.
Thus, while there is insured contract language in the Forbearance
Agreement, the Underlying Case does not implicate that provision. The
Underlying Case does not involve indemnification of Landlord for claims
asserted against him or the homeowner by third parties arising out of an
occurrence or use of the Neri premises by DeLuca. Furthermore, the
inapplicable insured contract provision does not provide coverage for the
intentional torts pled. The Policy exclusion for property damage “expected
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or intended from the standpoint of the insured” governs and rules out
coverage for intentional torts. Policy Section I(2). Thus, there is no merit in
Landlord’s claim that coverage is supplied under the insured contract
provision.
Finally, Landlord alleges that the trial court erred in finding that there
was no accident or occurrence pled in the Underlying Complaint that would
trigger coverage. Landlord pled that Underlying Defendants “owed Plaintiffs
a duty, inter alia, to perform the home improvements contemplated thereby
in an honest, professional and expeditious manner and without damaging
the subject home or property.” Underlying Complaint, ¶ 51, at 9. He
alleges that the Underlying Defendants allegedly breached the Forbearance
Agreement by failing to order and install appropriate windows, account for
the $7,100 advance, complete the improvements, and secure a section of
patio roof. The latter purportedly resulted in damage to the roof and
supporting structures. Landlord incorporated those same allegations in
support of his negligence and intentional tort claims against the Underlying
Defendants.
The trial court concluded that the pleadings in the Underlying
Complaint did not allege an accident to which the policy applies. “Rather,
the underlying action alleges facts seeking redress for defendants’ breaches
of the lease agreement, the guaranty agreement and Forbearance
Agreement[,]” and general liability policies do not apply to breach of contract
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claims. Trial Court Opinion, 12/5/16, at 7. Specifically, the court
determined that the first three counts of the complaint were for breach of
contract, not accidental injury, and Erie had no duty to defend or indemnify.
As to the negligence claims for Mr. DeLuca’s work, the court found that these
averments concerned property damage to the work product itself, which was
excluded under the terms of the Policy.8 Id. at 8.
Landlord argues first that coverage under the Policy is not limited to
accidents. In support thereof, he points to the provision imposing liability
for property damage caused by tortious conduct under insured contracts and
claims that such an interpretation would nullify the express language of the
Policy. He maintains further that negligence can be an “occurrence” under
the Erie Policy and Pennsylvania law, and that Mr. DeLuca’s negligence,
which was neither expected nor intended, constituted an occurrence.9
In support thereof, Landlord directs our attention to Barber v.
Harleysville Mutual Insurance Co., 450 A.2d 718 (Pa.Super. 1982),
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8
The trial court characterized the allegations of Mr. DeLuca’s negligence in
the performance of the home improvement work as property damage arising
from poor workmanship to the work product itself. The court reasoned that
to permit coverage on the facts alleged “would convert Erie’s policy into a
performance bond” that guaranteed the work, rather than a liability policy
intended to insure against accidents. Trial Court Opinion, 12/5/16, at 8. In
conclusion, the trial court found that Erie had no duty to defend the insureds
against claims of faulty workmanship, and certainly no duty to indemnify.
9
The Policy excludes coverage for property damage “expected or intended
from the standpoint of the insured.” Erie Policy, Section I, 2a.
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where this Court acknowledged that a counterclaim alleging property
damage flowing from insured contractor’s breach of a construction contract
could be accidental and neither intended or expected, and perhaps be
covered under a liability policy. In that case, the insurer was required to
defend the counterclaim. In short, Landlord contends that allegations that
property damage resulted from Mr. DeLuca’s negligent performance of his
contractual obligations “could easily involve an accident that DeLuca neither
expected nor intended to have occurred.” Appellant’s brief at 33.
Finally, Landlord assails the trial court’s conclusion that the damage to
the Neri residence was to the product itself and thus, excluded. Landlord
points to the Policy language defining an “occurrence” as “an accident,
including continuous or repeated exposure to substantially the same general
harmful conditions.” Erie Policy, § V, ¶13. Landlord alleges that, although
Mr. DeLuca did not perform any improvements to the interior of the Neri
residence, that property became “exposed to harmful conditions, resulting in
tens of thousands of dollars in damage to the property,” namely mold.
Complaint, ¶ 52(e).
Erie counters that the Underlying Complaint seeks redress for breach
of contract, which is not an “occurrence” that would trigger coverage under
the Policy. Erie relies upon Redev. Authority of Cambria County v. Int’l
Ins. Co., 685 A.2d 581, 589-90 (Pa.Super. 1996) (en banc), where the
Authority was sued for breach of contract and negligence in its operation and
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improvement of a municipal water system. The Authority sought a defense
from its general liability insurer, and the trial court ruled that the insurer had
a duty to defend. This Court reversed, finding that despite the negligence
allegations in the complaint, the claims were based upon breach of duties
imposed under the contract that were not an accident or occurrence
contemplated within the policy. We recognized that the purpose of a general
liability policy was to protect the insured from liability for accidental injury to
person or property, not for breach of contract or breach of warranty.
Erie focuses our attention on the Supreme Court’s decision in
Kvaerner, supra, as well as our more recent decisions in Millers Capital
Ins. Co. v. Gambone Bros. Development Co., Inc., 941 A.2d 706(Pa.Super. 2007) and Erie Insurance Exchange v. Abbott Furnace Co.,
972 A.2d 1232 (Pa.Super. 2009). This Court held therein that claims of
negligence due to faulty workmanship of a contract do not constitute an
occurrence. Missing was the “degree of fortuity contemplated by the
ordinary definition of ‘accident.’” Kvaerner, at 899. Erie points out that the
definition of occurrence herein is nearly identical to the definition in
Kvaerner.
Erie’s duty to defend and/or indemnify its policyholder against a suit
by a third party is based on whether the underlying complaint triggers
coverage. Gambone, supra. The Erie Policy obligates the insurer to “pay
those sums that the insured becomes legally obligated to pay as damages
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because of . . . ‘property damage’ to which this insurance applies.” Erie
Policy, Section I–Coverages 1.a, at 1. The insurance “applies to ‘bodily
injury’ and ‘property damage’ only if: 1) The ‘bodily injury’ or ‘property
damage’ is caused by an ‘occurrence’ that takes place in the ‘coverage
territory.’” Id. at 1.b. An “occurrence” is defined as “an accident, including
continuous or repeated exposure to substantially the same general harmful
conditions.” Id. at Section V. Definitions, at 12. Excluded from coverage is
damage caused by faulty workmanship to the work product itself. Id. at
Section I, 2. Exclusions, j.
The declaration sheet of the Erie Policy provides for coverage at “the
stated address of the named insured,” namely the Daycare and preschool
premises. Erie Policy Declarations. It also states that the insurance applies
to the premises described in the supplemental declarations, which does not
include the Neri residence. The insured operation is listed as a daycare and
preschool.
We agree with Erie that Landlord’s underlying claims for Mr. DeLuca’s
failure to complete work and faulty workmanship is a contract dispute at its
core. See Kvaerner, supra. The Forbearance Agreement itself cements
that conclusion as it defines home improvements performed by Mr. DeLuca
as the “payment of rent arrearages” owing by the LLC and the individual
guarantors. Forbearance Agreement, Article 2.3. Notably, Mr. DeLuca’s
alleged failure to complete the work or perform it in a workmanlike manner
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constituted default under the Forbearance Agreement, and upon default, the
rent arrearages became due.10 The damages alleged to have occurred to the
Neri residence were “a direct and proximate result of Defendants’ breach of
the Forbearance Agreement.” Underlying Complaint, ¶54. In short, the
home improvement work was a contractual undertaking intended to
compensate Landlord for unpaid rent.11
Nor did Landlord allege facts in the underlying complaint suggesting a
“continuous or repeated exposure . . . to harmful conditions.” Contrary to
Landlord’s representation, he did not plead that mold resulted from any
negligent repairs to the Neri home. See e.g. Indalex Inc., supra (where
insured’s windows and doors were defectively designed and manufactured,
____________________________________________
10
Default was defined as either an occurrence of default under the lease,
death or incapacity of Guarantors or DeLuca, or “a) The failure by DeLuca to
undertake or finish the Improvements at the Premises as provided for in this
Agreement.” Forbearance Agreement Article 4.1(a). Upon default, the rent
arrearages would immediately become due.
11
Although our courts have not adopted the gist of the action doctrine in the
insurance coverage context, it would seem to foreclose Landlord’s claims for
negligent workmanship and intentional torts herein. In Indalex Inc, v.
Nat’l Union Fire Ins. Co., 83 A.3d 418 (Pa.Super. 2013) (quoting Reardon
v. Allegheny College, 926 A.2d 477, 486 (Pa.Super. 2007), this Court
noted that the doctrine forecloses tort claims “(1) arising solely from the
contractual relationship between the parties; (2) when the alleged duties
breached were grounded in the contract itself; (3) where any liability stems
from the contract; and (4) when the tort claim essentially duplicates the
breach of contract claim or where the success of the tort claim is dependent
on the success of the breach of contract claim.”
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causing water to leak into homes and cause mold, cracked walls, and
personal injury, constituted an occurrence).
In addition to the foregoing, Erie reasserts its alternative basis for
summary judgment, which the trial court rejected. We find it persuasive and
affirm on this basis as well. Landlord pled that the Daycare was an LLC.
The Policy declarations identified it as a partnership. Erie contends that,
regardless of whether the Policy covered the Daycare as an LLC or a
partnership, the Tolsons and DeLucas were not insureds under the Policy for
the home improvements at the Neri residence as that was not work
associated with the conduct of the Daycare. The trial court disagreed, and
concluded that default under the Forbearance Agreement was related to the
daycare operation because the Agreement was calculated to “allow the
business to remain a going concern.” Trial Court Opinion, 12/5/16, at 6.
However, the trial court ultimately found no coverage because even if
though Mr. DeLuca was an insured, claims of faulty workmanship to the Neri
residence were allegations of damage to the insured’s work product and
excluded from coverage.
We agree with Erie that the home improvements Mr. DeLuca
performed were not “the conduct of” the insured Daycare, as that term was
used in the Policy. A daycare and preschool provides childcare. The home
renovation work performed at the Neri residence by Mr. DeLuca to offset
rental arrearages was too attenuated from childcare to make him an insured
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under the Policy for that work. This is especially true where the “nature,
scope, extent and cost of the Improvements . . . shall be determined by the
mutual consent of the Landlord and DeLuca.” Forbearance Agreement,
Article 2.3, at 2.12
Hence, we agree with Erie that it was not obligated to provide a
defense to Mr. DeLuca or the rest of the Underlying Defendants for claims
that did not involve the operation of the Daycare as a daycare, and we affirm
the grant of summary judgment in favor of Erie on this additional basis.
Judgment affirmed.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 9/27/2017
____________________________________________
12
One could argue that this language in the Forbearance Agreement
contemplated a contractual arrangement between Mr. DeLuca and Landlord.
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