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Third Circuit Takes a Deep Dive Into the "Four Corners" Rule and Whether Faulty Work Constitutes an "Occurrence" in Sapa Extrusions, Inc. v Liberty Mutual Ins. Co.

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In Sapa Extrusions, Inc. v. Liberty Mut. Ins. Co., 2019 WL 4384187 (3d Cir. Sept. 13, 2019), the United States Court of Appeals for the Third Circuit engaged in an exhaustive overview of Pennsylvania's "four corners" rule in assessing the duty to defend, and meticulously summarized the current state of Pennsylvania's "occurrence" case law through examination of three differing definitions of "occurrence" contained in multiple policies issued by several insurers.

The insured manufactured aluminum extruded profiles, formed by pushing a hot billet of aluminum alloy through a metal die with a hydraulic press. The metal extrusions were then pre-treated with a primer and topcoat prior to delivery to users. One user, a window/door manufacturer (Marvin) had a decades-long arrangement with the insured, whereby the insured supplied coated extrusions to be used as a component part that was incorporated into Marvin's aluminum clad windows and doors and related products. The incorporation process was permanent such that if an extrusion were defective, it could not be extracted and replaced; rather, an entirely new window or door would have to be replaced.

The insured agreed to certain coating specifications in its contract with Marvin. After an increase in complaints from Marvin customers that the aluminum parts of their windows or doors would oxidize or corrode, Marvin initiated an action against the insured in Minnesota federal court in 2010, alleging a failure to meet Marvin's coating specifications. In addition to asserting contractual and warranty-based claims against the insured, Marvin's Complaint included claims for negligent misrepresentation, unlawful trade practices, and fraud.

After nearly three years of discovery, the insured and Marvin cross-moved for summary judgment, but the Minnesota district court denied both motions based on the existence of genuine issues of material fact. The insured and Sapa thereafter settled for a large sum on the eve of trial in 2013.

The insured had maintained twenty-eight "occurrence" based CGL policies with various insurers. Each insurer to whom the insured tendered the underlying lawsuit disclaimed coverage based on the lack of an "occurrence." The insured then sued each insurer in Pennsylvania federal court for breach of contract and seeking a declaratory judgment to recover the costs of the underlying settlement with Marvin. The Pennsylvania federal court granted summary judgment in favor of the insurers, holding that Marvin's claims against the insured did not relate to an "occurrence" such that none of the insurers had a duty to indemnify the insured for the settlement.

On appeal, the Third Circuit observed that because the duty to defend is broader than the duty to indemnify under Pennsylvania law, the insurers would necessarily have no duty to indemnify for the insured's settlement with Marvin if they had no duty to defend in the first instance based on the allegations contained in Marvin's Complaint. The Court explained that Pennsylvania law dictates the strict application of the "four corners" rule in evaluating the duty to defend, permitting consideration of only the factual allegations contained in the underlying Complaint against the insured and terms of the insurance policy. Accordingly, the Court rejected the insured's attempt to inject extrinsic evidence pertaining to "the parties' knowledge at the time of settlement."

In applying the "four corners" rule, the Court observed that each of the liability policies required the establishment of an "occurrence" in order to potentially trigger coverage. The twenty-eight policies at issue variously defined "occurrence" so as to fit into three distinct categories: (1) The "Accident Definition;" (2) The "Expected/Intended Definition;" and (3) The "Injurious Exposure Definition."

With regard to those policies containing the "Accident Definition" of "occurrence," the Court relied upon the seminal Pennsylvania Supreme Court of Kvaerner Metals as well as the Third Circuit cases of CPB International and Specialty Surfaces for the proposition that the claims of faulty workmanship are not accidental and fortuitous. Because the factual allegations contained in the Marvin Complaint at their core related to faulty workmanship, the Court held that no "occurrence" was established so as to trigger those policies and affirmed the district court's ruling that those policies were not required to cover the underlying settlement.

The Court further noted, however, that unlike the "Accident Definition," the "Expected/Intended Definition" and "Injurious Exposure Definition" of "occurrence" injected a subjective intent standard relating to the standpoint of the insured that the district court did not take into account in issuing its ruling. Accordingly, the Third Circuit vacated that portion of the district court's ruling pertaining to the policies containing those definitions for further consideration.

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