Third Circuit Court of Appeals Concludes “Soup to Nuts” Policy Does Not Include Faulty Workmanship Coverage

Earlier this month, in Frederick Mutual Insurance Company v. Hall, the U.S. Court of Appeals for the Third Circuit concluded that coverage for faulty workmanship claims is “simply not the kind of coverage insurance agents and insurance companies expect to provide” to construction industry professionals “unless the insured explicitly requests such coverage.” 2018 U.S. App. LEXIS 31666, at *9 (3d Cir. Nov. 8, 2018). In Hall, a stone masonry contractor was sued by its customer for causing over $350,000 in property damage resulting from “substandard and defective work” performed on the customer’s residence. The insurer sought a declaration that it owed neither a defense nor indemnity for those damages because, under Pennsylvania law, the policy did not cover property damage caused by faulty workmanship.

The federal district court in Hall found that the policy “unambiguously excluded coverage for the faulty workmanship claims” in the underlying action. However, the court denied the insurer relief on the basis that a question of fact remained about whether the insured “reasonably expected” the policy to cover faulty workmanship claims. When the stone masonry contractor bought coverage from the insurer, he asked for a “maximum,” “soup to nuts” liability policy which he claimed he expected to include faulty workmanship coverage. The Third Circuit rejected the insured’s argument and the district court’s application of the “reasonable expectations” doctrine to override the policy’s plain, unambiguous coverage. According to the Third Circuit, the insured’s claim that he expected faulty workmanship coverage when asking for “soup to nuts” coverage “is no more reasonable than if a purchaser of auto insurance expected his policy to cover repairs if his car breaks down. . . .”

The Third Circuit warned about the application of the “reasonable expectations” doctrine in future similar cases as it could negatively impact the insurance market in Pennsylvania: “If we were to allow an insured to override the plain language of a policy limitation anytime he or she was dissatisfied with the limitation by simply invoking the reasonable expectations doctrine, the language of insurance policies would cease to have meaning and, as a consequence, insurers would be unable to project risk. The inability to project risk would dissuade insurers from doing business in the Commonwealth and the net result would be an increase in premiums for consumers. We refuse to set such a deleterious sequence of events into motion.” 2018 U.S. App. LEXIS 31666, at *9 (quoting Millers Capital Ins. Co. v. Gambone Bros. Dev. Co., 941 A.2d 706, 717-18 (Pa. Super. Ct. 2007), appeal denied, 963 A.2d 471 (Pa. 2008)).

Property damage caused by faulty workmanship does not, under established Pennsylvania law, constitute an “occurrence” under standard CGL policies. As Hall demonstrates, however, there are ongoing attempts to “override” that law by arguing that there was an expectation of faulty workmanship coverage when the policy was purchased. But, as the Third Circuit observed, insureds must “explicitly” request that unique type of coverage to be able, if at all, to invoke the “reasonable expectations” doctrine later on.

If you have questions or would like more information, please contact Timothy A. Carroll (; 215.864.6218).