United States District Court, Eastern District of Pennsylvania
March 18, 1999
JERRY DAVIS, INC., PLAINTIFF,
MARYLAND INSURANCE COMPANY, DEFENDANT.
The opinion of the court was delivered by: Katz, Senior District Judge.
MEMORANDUM & ORDER
Plaintiff Jerry Davis, Inc. (JDI) seeks a declaration that its
insurer, Maryland Insurance Company (Maryland), is required under
its "Commercial General Liability" policy to indemnify it in a
lawsuit against it in state court. Before the court is Maryland's
motion to dismiss and plaintiff's response thereto.
JDI contracted with Nunzio Terra and Nufab Corporation, doing
business as Gothum, The New City (referred to collectively as
"Gothum"), to perform the electrical wiring work at a nightclub
Gothum was building. JDI did the work and arranged for a bonding
company to inspect it. The bonding company inspected and approved
the work. Gothum opened its nightclub, only to be shut down five
months later after an inspection by the City of Philadelphia's
Department of Licenses and Inspections revealed a series of
violations stemming from JDI's electrical work. Gothum was forced
to remain closed for six months while a new contractor did
extensive electrical work. Based on the financial hardship caused
by the closing and additional work, the owners were forced to
percentage of their interest in the nightclub, resulting in
further financial losses. See Compl.Ex. B ¶¶ 3-9.
Gothum filed suit against JDI and the bonding company in state
court. The complaint contains counts purporting to state claims
in negligence, breach of contract, fraudulent misrepresentation,
breach of implied warranties, and breach of express
warranties.*fn2 Upon notification of the suit, Maryland informed
JDI that it had no duty to defend or indemnify JDI in the case.
See Compl.Ex. C at 1. Among other reasons, Maryland explained,
"The allegations as contained in the Complaint do not fall within
the meaning of occurrence insured contract or property damage
which are defined in your policy." Id. at 6. JDI filed this
suit, seeking a declaration that Maryland is required to
indemnify it in the Gothum suit.
For the purposes of a 12(b)(6) motion to dismiss a complaint,
this court must accept as true all the allegations of fact in
plaintiff's complaint, must construe the complaint in the light
most favorable to plaintiff, and must determine whether, under
any reasonable reading of the pleadings, plaintiff may be
entitled to relief. See Nami v. Fauver, 82 F.3d 63, 65 (3d Cir.
The court's first step is to determine the scope of the
policy's coverage. The terms of the policy must be compared to
the nature of the allegations in the complaint to determine
whether, if the allegations are sustained, the insurer would be
obligated to bear the expense of the judgment. See Snyder
Heating Co., Inc. v. Pennsylvania Mfrs. Assoc. Ins. Co.,
715 A.2d 483, 484 (Pa.Super. 1998). In determining whether the claims
made by Gothum against JDI in the underlying lawsuit fall within
the policy and thus trigger Maryland's duty to defend and
indemnify, the court should look solely to the allegations of the
complaint in the underlying action. See, e.g., Pacific Indem.
Co. v. Linn, 766 F.2d 754, 760 (3d Cir. 1985) ("The obligation
to defend is determined solely by the allegations of the
complaint in the action."); Snyder Heating, 715 A.2d at 484
("The nature of the claim, rather than the actual details of any
injuries suffered by the insured, determines whether the insurer
is required to defend."); Scopel v. Donegal Mut. Ins. Co.,
698 A.2d 602, 605 (Pa.Super. 1997) ("[T]he nature of the allegations
contained in a complaint control.").
The court in Britamco Underwriters, Inc. v. Stokes,
881 F. Supp. 196 (E.D.Pa. 1995) summed up the relevant determination:
If there is a possibility that any of the underlying
claims could be covered by the policy at issue, the
insurer is obliged to provide a defense at least
until such time as those facts are determined, and
the claim is narrowed to one patently outside of
coverage. On the other hand, if there is no
possibility that any of the underlying claims could
be covered by the policy at issue, judgment in the
insurer's favor with regard to the duty to defend and
indemnification is appropriate.
Id. at 198.*fn3
JDI argues that Maryland has a duty to indemnify based on the
following policy language:
We will pay those sums that the insured becomes
legally obligated to pay as damages because of
"bodily injury" or "property damage" to which this
insurance applies. We will have the right and duty to
defend any "suit" seeking those damages. . . . This
insurance applies to "bodily injury" and "property
damage" only if . . . [t]he "bodily injury" or
"property damage" is caused by an "occurrence". . . .
Compl.Ex. A at 2 (policy Section IA ¶¶ 1(a), (b)). The policy
defines "occurrence" as "an accident, including continuous or
repeated exposure to substantially the same general harmful
conditions." Id. at 14 (policy Section V, ¶ 13).
Maryland argues that Gothum's claims in the underlying
complaint do not trigger Maryland's duty to defend or indemnify
because they do not stem from an event that qualifies as an
"occurrence" under the policy's definition and because the claims
fall under a particular policy exclusion.*fn4 Plaintiff's
response hangs its hat solely on the fact that Count One is a
negligence claim and does not address the other Counts; the court
will go further than that and consider each claim contained in
the underlying complaint.
Count Two: Breach of Contract
In Count Two, plaintiff Gothum alleges JDI breached the
parties' contract. See Compl. ¶ 12. Contract claims are not
covered by the policy. "The purpose and intent of such an
insurance policy [general liability policy] is to protect the
insured from liability for essentially accidental injury to the
person or property of another rather than coverage for disputes
between parties to a contractual undertaking." Redevelopment
Auth. of Cambria County v. International Ins. Co., 454 Pa. Super. 374,
685 A.2d 581, 589 (1996) (en banc). In fact, in Exclusion
(m) the policy contains a provision making this point explicit:
This insurance does not apply to "property damage" to
"impaired property" or property that has not been
physically injured, arising out of (1) A defect,
deficiency, inadequacy or dangerous condition in
"your product" or "your work"; or (2) A delay or
failure by you or anyone acting on your behalf to
perform a contract or agreement in accordance with
Ex. B. at 4 (policy Section IA ¶ 2(m)). In other words, the
policy explicitly states that the insurer does not have the
obligation to defend or indemnify when the insured is sued for
breach of contract.
In Toombs NJ Inc. v. Aetna Cas. & Surety Co., 404 Pa. Super. 471,
591 A.2d 304 (1991), the court examined and gave
effect to a similar policy exclusion. The Toombs court was
faced with an underlying complaint alleging that after complex
lease negotiations, the insured backed out of the finalized deal,
and the suit contained claims for breach of contract, detrimental
reliance, and conversion of architectural designs. The court gave
this explanation for why the policy did not provide coverage:
The recovery sought relates to a breach of contract,
not a tortious act. Appellants have not offered any
precedent that indicates that indemnification is
provided for such damages when a comprehensive
liability policy is purchased, and for good reason.
To allow indemnification under the facts presented
here would have the effect of making the insurer a
sort of silent business partner subject to great risk
in the economic venture without any prospects of
sharing in the economic benefit. The expansion of the
scope of the insurer's liability would be enormous
without corresponding compensation. There is simply
no reason to expect that such a liability would be
covered under a comprehensive liability policy which
has, as its genesis, the purpose of protecting an
individual or entity from liability for essentially
accidental injury to another individual, or property
damage to another's possessions, even if, perhaps,
the coverage of the policy has been expanded to cover
other non-bodily injuries that sound in tort.
Id. at 306; see also Snyder Heating Co., Inc. v. Pennsylvania
Mfrs. Assoc. Ins. Co., 715 A.2d 483, 487 (Pa.Super. 1998)
(reasoning that "[t]hese types of insurance policies involve
risks that are limited in nature; they are not the equivalent of
a performance bond on the part of the insurer," citing Ryan
Homes, Inc. v. Home Indem. Co., 436 Pa. Super. 342, 647 A.2d 939,
942 (1994)). Based on this exclusion, it is quite clear that the
breach of contract claim in Count Two does not trigger Maryland's
duty to defend or indemnify. Count One: Negligence or Breach of
In Count One, Gothum alleges that in fulfilling its contract to
"provide all the materials and labor necessary to supply the
various electrical conduits and wiring" at the property, Compl. ¶
3, JDI performed "faulty and defective electrical work." Id. ¶
7. The complaint then states, "As a direct and proximate result
of the defendants' negligence, the plaintiffs have suffered
damages. . . ." Id. ¶ 10.
The courts must look past the nominal title of the allegations
to the actual basis of the cause of action. That is, even if the
allegations at issue label the incident as a tort of negligence,
the court must examine the claim to determine if it is more
appropriately designated as a contractual claim. As the Superior
Court of Pennsylvania has explained, for a claim "to be construed
as a tort action, the wrong ascribed to the defendant must be the
gist of the action with the contract being collateral."
Redevelopment Auth. of Cambria County v. International Ins.
Co., 454 Pa. Super. 374, 685 A.2d 581, 590 (1996) (en banc); see
also Factory Market, Inc. v. Schuller Int'l, Inc., 987 F. Supp. 387,
394 (E.D.Pa. 1997) ("Under this test, a party cannot disrupt
the expectations of the parties by supplanting their agreement
with a tort action that claims that the party misperformed the
agreement in question.").
The Cambria case is particularly instructive. A township and
the Redevelopment Authority contracted that the Authority would
own and operate the town's water system, administer certain
funds, and provide the services necessary to supervise the
construction of improvements to the water system. The township
sued the Authority, the three-count complaint alleging that the
Authority had failed to perform properly its contractual duties,
had been negligent, and had been unjustly enriched. See id. at
583-84. Based on those allegations, the court ruled that the
insurer had no duty to defend or indemnify because, even though
the plaintiffs "employed negligence concepts in drafting
their complaint, it cannot be disputed that their claims arise
out of and are based upon duties imposed upon the [defendant]
solely as a result of the contract." Id. at 589.
The present case is similar to Cambria: In Count One, Gothum
makes the identical contract claim as it makes in Count Two but
uses the word "negligence." Although JDI attempts in its response
to the motion to describe the claim as one alleging that JDI
breached the duty of care owed by a contractor, that
characterization does not comport with either the form of the
pleading itself or the facts alleged therein. In fact, the
contract claim in Count Two does not allege any additional or
different facts from those in the "negligence" claim; instead, it
incorporates the negligence claim by reference and then
recharacterizes it as a breach of contract claim. That is the
appropriate designation, and the fact that the word "negligence"
is used in Count One is not enough to make that claim involve an
"occurrence" and trigger the policy's coverage provisions. As the
gist of the claim set forth in Count One is a contract claim, it
does not trigger coverage for the reasons discussed above with
regard to Count Two.
Counts Four and Five: Breach of Warranty
In Count Four, plaintiff Gothum asserts, "In contracting with
the plaintiffs to provide all the labor and materials necessary
to perform the required electrical work, defendant JDI made
certain implied warranties to the plaintiffs that such work and
materials would be reasonably fit for the purpose intended, i.e.
conforming with the relevant standards. . . ." Compl. ¶ 17.
Gothum further alleges that "JDI breached those warranties," and
that "[a]s a direct and proximate result of the defendant's
breach of implied warranties, the plaintiffs have suffered
damages." Id. ¶¶ 18, 19. In Count Five, Gothum makes a similar
claim that JDI breached express warranties "that the electrical
work provided by the defendant would conform to the blue prints."
Id. ¶ 21. Although in some contexts it is unclear whether
breach of warranty claims sound in contract or tort, see, e.g.,
Hahn v. Atlantic Richfield Co., 625 F.2d 1095, 1103 (3d Cir.
1980) (citing Dean Prosser in support of the court's statement
that such actions are "a freak hybrid born of the illicit
intercourse of tort and contract"); in the context of this
complaint against JDI it is clear that the breach of warranty
claims arise out of the contract between JDI and Gothum and are a
close relative of the breach of contract claim in Count Two. For
the same reasons that Count Two claim fails to trigger insurance
coverage, so do Counts Four and Five.
Count Three: Fraudulent Misrepresentation
In Count Three, plaintiff Gothum asserts that "JDI fraudulently
misrepresented to the plaintiffs that the electrical work it
completed conformed to the blue prints." ¶ 14. Under Pennsylvania
tort law, one element of fraudulent misrepresentation is, of
course, an intention to defraud. See Scaife Co. v.
Rockwell-Standard Corp., 446 Pa. 280, 285 A.2d 451, 454 (1971)
(listing the elements of fraudulent misrepresentation as
including a "fraudulent utterance" of a "misrepresentation" made
with "an intention by the maker that the recipient will thereby
be induced to act," as well as justifiable reliance and damages).
Intentional acts such as misrepresentation are not covered as an
occurrence under policies of liability insurance.*fn5 As the
Pennsylvania Supreme Court succinctly explained in Gene and
Harvey Builders, Inc. v. PMA Insurance Co., 512 Pa. 420,
517 A.2d 910, 913 (1986),
an intentional act cannot be a covered "occurrence" because "an
intentional act is not an accident (and only accidents are
covered)." Id. at 913; see also United States Fidelity & Guar.
Co. v. Korman Corp., 693 F. Supp. 253, 258 (E.D.Pa. 1988)
(holding that a count alleging misrepresentation is not covered
by a policy that defines "occurrence" as "accident").
Defendant correctly argues that it has no duty to defend or
indemnify plaintiff in the underlying state court action;
consequently, plaintiff's declaratory judgment action will be
dismissed. An appropriate Order follows.
AND NOW, this 18th day of, upon consideration of the Motion
to Dismiss of Defendant, and the response thereto, it is hereby
ORDERED that the said motion is GRANTED. The complaint is