The apartment complex was completed in late 2010 or early 2011. The owner, Washington Street Associates V, L.P., sold it for $77.7 million, $3.3 million less than the asking price. Blaming Mega's workmanship for the value diminution, Merion and Washington sued Mega in a Pennsylvania state court, alleging violations of the subcontracts and certain implied warranties. For damages, they asked for the difference between the complex's asking and sale prices.

Mega filed a coverage suit against its insurers in New Jersey, claiming that they had to defend it against the Pennsylvania suit. Mega argued that New Jersey law applied because:

- It had entered into two commercial general liability (“CGL”) insurance policies in New Jersey;

- It had performed its contractual duty to pay premiums in New Jersey;

- It was incorporated in New Jersey; and

- Its two CGL insurers were licensed to do business in New Jersey.

The parties filed cross-motions for summary judgment.

Rejecting Mega's argument that New Jersey law governed, the U.S. District Court for the District of New Jersey applied Pennsylvania law, granted the insurers' motions, and denied Mega's.

Mega appealed to the First Circuit.

The Differing Law on “Occurrence”

In Pennsylvania, the definition of “accident” required to establish an “occurrence” under a CGL policy “cannot be satisfied by claims based upon faulty workmanship.” See Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888, 899 (Pa. 2006) (emphasis added).

The law is essentially the opposite in New Jersey: Consequential harm caused by a subcontractor's “negligent work” can be a coverage-triggering “accident” under a CGL policy. See Cypress Point Condo. Ass'n v. Adria Towers, LLC, 143 A.3d 273, 288 (N.J. 2016).

The First Circuit's Decision

The circuit court affirmed, rejecting Mega's contention that the district court should have applied New Jersey law to this case rather than Pennsylvania law.

In its decision, the First Circuit explained that a district court sitting in diversity has to look to the choice-of-law rules of the state in which it is sitting. Therefore, it continued, New Jersey's choice-of-law rules govern in this case.

Under those rules, the question is whether Pennsylvania and New Jersey law differ on a “point in issue” – which, as noted above, they do.

The First Circuit then observed that, when facing a conflict, New Jersey courts apply the Restatement (Second) of Conflict of Laws. The starting point for choice-of-law disputes involving liability insurance coverage, Restatement § 193, states that the law of the state that the parties understood to be the “principal location of the insured risk” governs unless some other state has a “more significant relationship” to the case under Restatement § 6. An insured risk – that is, an “activity” that is the “subject matter of the insurance” – is “principally located” in a state if it occurs there during a “major portion of the insurance period,” the circuit court said.

It then reasoned that the insured risk in this case – Mega's construction work – took place in Pennsylvania during much of the relevant coverage period:

During that time Mega worked alongside other contractors to construct the 300+-unit apartment complex in Pennsylvania. “Accidents” with potential to cause “property damage” at this project were going to occur at the construction site in Pennsylvania, not in New Jersey. Thus the parties reasonably understood Pennsylvania to be the insured risk's principal location. Pennsylvania law governs unless New Jersey has a more significant relationship under Restatement § 6.

The First Circuit ruled that New Jersey did not have a more significant relationship to the insured risk's principal location than Pennsylvania for purposes of Section 6.

The circuit court pointed out that Mega claimed that its insurers had to “defend and indemnify it against a lawsuit filed in Pennsylvania, by two Pennsylvania companies” that alleged “Pennsylvania causes of action” and sought damages “for the loss in value from the sale of property located in Pennsylvania” that allegedly was caused by “faulty work done in Pennsylvania, under subcontracts entered into in Pennsylvania.”

Pennsylvania's relationship to this dispute was “the more significant one,” the First Circuit ruled. Because faulty-workmanship claims did not fall within the definition of an “accident” required to establish an “occurrence” under a CGL policy in Pennsylvania, Mega's coverage claims failed as a matter of law, the First Circuit concluded.

The case is Mega Construction Corp. v. XL America Group, No. 16-2639 (3d Cir. April 11, 2017). Attorneys involved include John J. Pribish, Esq., Pribish Reiss, Princeton, NJ, for Plaintiff-Appellant. Louis R. Moffa, Jr., Esq., Montgomery McCracken Walker & Rhoads, Cherry Hill, NJ, Glenn F. Rosenblum, Esq., Montgomery McCracken Walker & Rhoads, Philadelphia, PA, for Defendant-Appellee Seneca Specialty Insurance Co. Frank E. Borowsky, Jr., Esq., Michael A. Field, Esq., Borowsky & Borowsky, Shrewsbury, NJ, Erin M. McDevitt-Frantz, Esq., McMahon DeGulis, Cleveland, OH, for Defendants-Appellees Travelers Casualty & Surety Co. of America, Travelers Casualty Insurance Co. of America. Joanna L. Crosby, Esq., Matthew R. Major, Esq., Wilson Elser Moskowitz Edelman & Dicker, Florham Park, NJ, for Defendant-Appellee Allianz Insurance Group. Kevin P. Sullivan, Esq., Tressler, Newark, NJ, Katherine E. Tammaro, Esq., Wilson Elser Moskowitz Edelman & Dicker, Florham Park, NJ, for Defendant-Appellee XL America Group. John T. Coyne, Esq., McElroy Deutsch Mulvaney & Carpenter, Morristown, NJ, for Third Party.

Learn more: N.J. Supreme: Insurer Must Cover Claims That Subcontractor's Negligence Damaged Insured Property