The opinion of the court was delivered by: KATZ
Plaintiff Baldt, Incorporated manufactured and sold anchor chains to the Diamond M. Company for Diamond M's two offshore oil rigs. When Diamond M complained that the anchor chains broke apart during use, Baldt sued in Delaware state court for a declaratory judgment and Diamond M filed a counterclaim. The counterclaim complained of four instances when the anchor chains separated because of improper welding. It also complained of the risk of future separations of the anchor chains, and possible injury to life or property. Baldt had a comprehensive General Liability Insurance Policy with the defendant, the American Universal Insurance Company. After American took the position that it was not required under the policy to defend the counterclaim or to indemnify Baldt for the subsequent settlement with Diamond M, Baldt sued the defendant for its failure to defend and indemnify. The parties have filed and argued cross-motions for summary judgment on the duty to defend issue. Both sides agree that there is no genuine issue of material fact and that this issue should be decided on the existing record.
I find that under this insurance policy American Universal Insurance Company had the obligation to defend Baldt against counterclaims asserted by Diamond M in the lawsuit in Delaware state court.
The insurance policy stated:
The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of . . . property damage to which this insurance applies, caused by an occurrence and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such . . . property damage.
The policy defines an "occurrence" as "an accident including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured."
When the allegations in a counterclaim state a claim which may potentially fall within the policy's coverage, the insurer must defend. Charter Oak Fire Insurance Company v. Sumitomo Marine and Fire Insurance Co., Ltd., 750 F.2d 267 (3d Cir.1984); Cadwallader v. New Amsterdam Casualty Co., 396 Pa. 582, 152 A.2d 484 (1959). If American must defend any of Diamond M's claims, it must defend all of them. C. Raymond Davis & Sons, Inc. v. Liberty Mutual Insurance Company, 467 F. Supp. 17 (E.D.Pa.1979).
Diamond M's counterclaim does allege an accident resulting in property damage and therefore satisfies the requirement of an "occurrence." The policy defines "property damage" to include "loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period." The counterclaim asserts that Diamond M lost revenues from the operation of its rigs while anchor chains were exchanged.
The question is not whether Diamond M's claims were based on a breach of contract theory or a negligence theory, but whether the claims alleged an "occurrence." Barber v. Harleysville Mutual Insurance Company, 304 Pa.Super. 355, 450 A.2d 718 (1982). Although the policy excludes liability assumed by the insured under any contract or agreement except as "incidental contract," incidental contracts include "any contract or agreement relating to the conduct of the named insurer's business."
The defendant also argues that it had no duty to defend because of two exclusions in the policy. Exclusion M(2) states that the policy does not apply
to loss of use of tangible property which has not been physically injured or destroyed resulting from . . . (2) the failure of the named insured's products or work performed by or on behalf of the named insured to meet the level of performance, quality, fitness ...