MARONDA HOMES, LLC v. MOTORISTS MUTUAL INSURANCE COMPANY

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

MARONDA HOMES, LLC, )

)

) 2:20-CV-01526-CCW

Plaintiff, )

)

v. )

)

)

MOTORISTS MUTUAL INSURANCE

)

COMPANY, )

)

Defendant.

MEMORANDUM OPINION AND ORDER

Before the Court is Defendant Motorists Mutual Insurance Company’s Motion to Dismiss.

ECF No. 5. For the reasons that follow, Defendant’s Motion will be GRANTED IN PART AND

DENIED IN PART.

I. Background

Plaintiff, Maronda Homes, LLC, filed its Complaint in the Court of Common Pleas of

Allegheny County, Pennsylvania, on September 9, 2020. ECF No. 1 at ¶ 1. Plaintiff served

Defendant on September 18, 2020, and Defendant timely removed the case pursuant to 28 U.S.C.

§ 1441 to this Court on October 9, 2020, invoking this Court’s diversity jurisdiction. See id. at ¶¶

2, 5, 16 and 18; 28 U.S.C. § 1332.

Plaintiff, a Pennsylvania LLC engaged in the construction and sale of homes, see ECF No.

1 at ¶¶ 10–12 and ECF No. 1-1 at ¶ 3, alleges that Defendant is obligated to defend and indemnify

it under an insurance policy (the “Policy”) issued to Frey Excavating (“Frey”), one of Plaintiff’s

subcontractors, and under which Plaintiff is named as an “additional insured.” See id. at ¶¶ 1–2.

In its Complaint, Plaintiff asserts three claims: (1) breach of contract; (2) breach of the implied

covenant of good faith and fair dealing; and (3) bad faith insurance practices under 42 Pa.C.S. §

8371. See ECF No. 1-1. Plaintiff is seeking monetary and declaratory relief. See id. at ¶ 1.

The alleged facts underlying this case are as follows: In 2017, Plaintiff entered into

contracts with two sets of future homeowners (“Homeowners”) for houses to be built in Plaintiff’s

Granite Ridge development in McDonald, PA. See ECF No. 1-1 at ¶¶ 3, 51–52. The homes were

constructed in 2017, and the homeowners closed on and took possession of the properties in

October and December 2017, respectively. See id. at ¶ 52. Within months of moving into their

new homes, however, Homeowners discovered cracking in the foundations and brickwork, which

was later linked to soil erosion/movement on the lots.1 See id. at ¶¶ 60, 62. Homeowners thereafter

sued Plaintiff in two, virtually identical, state court actions (the “Underlying Actions”), alleging

that unsuitable fill material and improper compaction of the lots by Plaintiff and its subcontractors

caused the damage to the homes. See id. at ¶¶ 53, 57–58, 60.

Homeowners commenced the Underlying Actions by filing Writs of Summons in April

2019. See id. at ¶ 53. Plaintiff notified Defendant of the Underlying Actions shortly thereafter,

informing Defendant that Homeowners “were asserting claims arising out of the Grading Services

at the Premises and provided information regarding the claims and the investigation performed to

date.” See id. at ¶¶ 54–55. In June, 2019, Defendant confirmed that Plaintiff was an “additional

insured” under the Policy, but, according to Plaintiff, did not give any indication of its coverage

position or issue any reservation of rights under the Policy. See id. at ¶ 56.

1 The cause of the earth movement on the properties is contested. Homeowners allege it was caused by use of

improper fill material and faulty soil compaction by Plaintiff and its subcontractors. ECF No. 1-1 at ¶ 60. Plaintiff,

on the other hand, argues that local mine subsidence is to blame. Id. at ¶ 63.

Then, in November 2019, Homeowners filed their complaints in the Underlying Actions,2

and Plaintiff tendered the claims to Defendant for coverage under the Policy. See id. at ¶ 59.

Defendant then informed Plaintiff that coverage for the damages alleged in the Underlying Actions

would be denied (1) pursuant to an exclusion to the Policy and/or (2) because Defendant did not

believe any “enforceable indemnity agreements between Maronda and Frey” existed. See id. at ¶¶

67, 71, and 73. According to Plaintiff, Defendant’s denial of coverage came without warning, see

id. at ¶¶ 66, 68. In response, Plaintiff threatened to pursue a coverage action to enforce its alleged

rights. See id. at ¶ 78. Apparently seeking to avoid litigation, Plaintiff, Defendant, and Frey

worked cooperatively to attempt to settle the Homeowners’ claims in the Underlying Actions. See

id. at ¶¶ 80–83. Those efforts ultimately proved unsuccessful, and this litigation followed. See id.

at ¶ 84–85.

In its Motion, Defendant argues that (1) “there are no factual allegations that trigger

coverage for Maronda as an ‘additional insured’ within the four corners of the Complaint[s]” filed

in the Underlying Actions; and (2) even if Plaintiff qualifies as an “additional insured,” an

exclusion to the Policy is established on the face of the complaints in the Underlying Actions and,

therefore, Plaintiff’s breach of contract claim (Count I) should be dismissed. See ECF No. 6 at

11–12. Under that exclusion, property damage will not be covered once the “work” has been

“completed” or “put to its intended use.” See id. at 4, 11–12. According to Defendant’s denial of

coverage letter, because the Underlying Actions allege that the damage did not “manifest” until

after the homeowners took possession of the homes, any of Plaintiff’s or Frey’s “work” was

complete and had been put to its intended use. See id. at 12–14. Defendant further argues that

2 Homeowner’s complaints in the Underlying Actions are virtually identical, aside from the specific dates that the

individual Homeowners entered into their contracts with Plaintiff and then took possession of the properties.

Compare ECF No. 5-1 with ECF No. 5-2.

Plaintiff’s claim for breach of the implied covenant of good faith and fair dealing (Count II) should

be dismissed because (1) it is duplicative of the breach of contract claim and (2) because there can

be no violation of the implied covenant where coverage is denied under the plain terms of the

Policy. See id. at 14–15. Finally, Defendant claims that Plaintiff’s bad faith insurance practices

claim (Count III) should be dismissed because its denial of coverage was based on a reasonable

interpretation of the Policy and applicable law. See id. at 16–17. In sum, Defendant’s Motion

hinges on the argument that an affirmative defense—the exclusion to the Policy—is clearly

established on the face of the complaints in the Underlying Actions. See id. at 17–18.

II. Standard of Review

A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of a claim. In reviewing

a motion to dismiss, the court accepts as true a complaint’s factual allegations and views them in

the light most favorable to the plaintiff. See Phillips v. Cty. of Allegheny, 515 F.3d 224, 228 (3d.

Cir. 2008). Although a complaint need not contain detailed factual allegations to survive a motion

to dismiss, it cannot rest on mere labels and conclusions. Bell Atl. Corp. v. Twombly, 550 U.S.

544, 555 (2007). That is, “a formulaic recitation of the elements of a cause of action will not do.”

Id. Accordingly, “[f]actual allegations must be enough to raise a right to relief above the

speculative level,” id., and be “sufficient to state a claim for relief that is plausible on its face.”

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). “The plausibility

standard is not akin to a ‘probability requirement,’ but it asks for more than the sheer possibility

that a defendant has acted unlawfully.” Id. (quoting Twombly, 550 U.S. at 556).

The United States Court of Appeals for the Third Circuit has established a three-step

process for district courts to follow in analyzing a Rule 12(b)(6) motion:

First, the court must “tak[e] note of the elements a plaintiff must

plead to state a claim.” Second, the court should identify allegations

that, “because they are no more than conclusions, are not entitled to

the assumption of truth.” Finally, “where there are well-pleaded

allegations, a court should assume their veracity and then determine

whether they plausibly give rise to an entitlement for relief.”

Burtch v. Milberg Factors, Inc., 662 F.3d 212, 221 (3d Cir. 2011) (quoting Santiago v. Warminster

Twp., 629 F.3d 121, 130 (3d Cir. 2010)).

As relevant here, “[w]here an insurer relies on a policy exclusion as the basis for its denial

of coverage and refusal to defend, the insurer has asserted an affirmative defense and, accordingly

bears the burden of proving such defense.” Canal Ins. Co. v. Underwriters at Lloyd’s London,

435 F.3d 431, 435 (3d Cir. 2006). “To prevail on a Rule 12(b)(6) motion to dismiss based on an

affirmative defense…a defendant must show that ‘the defense is “apparent on the face of the

complaint” and documents relied on in the complaint.’” Id. (quoting Bohus v. Restaurant.com,

Inc., 784 F.3d 918, 923 n.2 (3d Cir. 2015) (quoting Schmidt v. Skolas, 770 F.3d 241, 249 (3d Cir.

2014))). “Generally speaking, [courts] will not rely on an affirmative defense . . . to trigger

dismissal of a complaint under Rule 12(b)(6).” Victaulic Co. v. Tieman, 499 F.3d 227, 234–35 (3d

Cir. 2007).

III. Discussion

As noted above, federal jurisdiction in this case is based on diversity of citizenship under

28 U.S.C. § 1332(a). Accordingly, the Court will apply the substantive law of the forum state,

Pennsylvania, in resolving this Motion. See Spence v. ESAB Group, 623 F.3d 212, 216 (3d Cir.

2010) (noting that “as a federal court sitting in diversity, we are required to apply the substantive

law of the state whose law governs the action.”) (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64,

78 (1938)).

A few principles of Pennsylvania law regarding insurance contracts, recently summarized

by the Third Circuit, provide the framework for our opinion here:

First, a liability insurer’s duty to defend an insured and its duty to

indemnify are distinct, though related obligations. See Kvaerner

U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888, 896 n.7 (Pa.

2006). Both are creations of contract. See Donegal Mut. Ins. Co. v.

Baumhammers, 938 A.2d 286, 290–91 (Pa. 2007); Genaeya Corp.

v. Harco Nat. Ins. Co., 991 A.2d 342, 347 (Pa. Super. Ct. 2010).

Second, in the context of a declaratory judgment action to determine

an insurer's obligations, Pennsylvania courts consistently apply

what is known as the “four-corners rule.” See Lupu v. Loan City

LLC, 903 F.3d 382, 389–90 (3d Cir. 2018) (collecting cases). That

is, when a policyholder is sued, “an insurer's duty to defend is

triggered, if at all, by the factual averments contained in [the

underlying] complaint[.]” Kvaerner, 908 A.2d at 896; Am. &

Foreign Ins. Co. v. Jerry's Sport Ctr., Inc., 2 A.3d 526, 541 (Pa.

2010); Mut. Ben. Ins. Co. v. Haver, 725 A.2d 743, 745–46 (Pa.

1999) (“A carrier’s duties to defend and indemnify an insured in a

suit brought by a third party depend upon a determination of whether

the third party’s complaint triggers coverage.”); Ramara, Inc. v.

Westfield Ins. Co., 814 F.3d 660, 673 (3d Cir. 2016). And “[i]f the

allegations of the underlying complaint potentially could support

recovery under the policy, there will be coverage at least to the

extent that the insurer has a duty to defend its insured in the case.”

Ramara, 814 F.3d at 673; see Jerry's Sport Ctr., 2 A.3d at 541. If

triggered, the duty to defend also carries “a conditional obligation to

indemnify in the event the insured is held liable for a claim covered

by the policy.” Gen. Accident Ins. Co. of Am. v. Allen, 692 A.2d

1089, 1095 (Pa. 1997). Both duties are at issue until the underlying

“claim is confined to a recovery that the policy does not cover.” Id.

Third, because the duty to defend is “broader” than the duty to

indemnify, if a court determines that the former does not exist,

neither does the latter. See Kvaerner, 908 A.2d at 896 n.7; Ramara,

814 F.3d at 673.

Sapa Extrusions, Inc. v. Liberty Mutual Ins. Co., 939 F.3d 243, 249–50 (3d Cir. 2019).

Accordingly, in determining whether Plaintiff’s breach of contract claim (Count I) should be

dismissed, either because Plaintiff is not an “additional insured” within the context of the

Underlying Actions or because the completed work/intended use exclusion bars coverage, we will

look to the complaints in the Underlying Actions for the relevant factual allegations.

A. Defendant’s Motion will be Denied with Respect to Plaintiff’s Breach of

Contract Claim (Count I)

Defendant advances two arguments in favor of dismissal of Count I of Plaintiff’s

Complaint. Neither argument is availing; therefore, Defendant’s Motion with respect to Count I

will be denied.

1. The Underlying Actions Sufficiently Reference Frey to Trigger

Coverage for an “Additional Insured” under the Policy

First, Defendant contends that it did not breach the Policy by refusing to defend or

indemnify Plaintiff because the allegations in the Underlying Actions do not reference “Frey or

any part that Frey played in causing any alleged injury or damage” and, therefore, “there are no

factual allegations that trigger coverage for Maronda as an ‘additional insured’ within the four

corners of the Complaint[s].” ECF No. 6 at 11. In support, Defendant points out that both

“additional insured” provisions which might provide Plaintiff coverage under the Policy require

alleged injury or damage “be ‘caused, in whole or in part, by,’ ‘your acts or omissions’ or ‘those

acting on your behalf,’ where ‘you’ and ‘your’ are singularly defined on the Policy as the Named

Insured—Frey.” Id.

The problem for Defendant, though, is that the complaints in the Underlying Actions do

reference Frey, not by name but as an agent of Defendant, and allege damages caused by improper

fill and soil compaction on the subject lots. See, e.g., ECF No. 5-1 at ¶ 25 (“Defendant, through

its agents, failed to properly place and compact fill on the Lot”). Furthermore, Homeowners

incorporated into their allegations two engineering reports which identify Frey as the excavation

contractor at the Granite Ridge Development. See ECF No. 5-1 at ¶ 13 (attaching Ex. C, PS&R

House Distress Investig. Report) and ¶ 20 (attaching Ex. E, Report of Bodhan I. Czmola, P.E.).

Thus, because “[i]n ascertaining whether an insurer's duties are triggered under a policy, the

allegations in the underlying complaint are accepted as true and are construed in favor of the

insured,” Erie Ins. Exch. v. Costa Constr., No. 1516 WDA 2014, 2015 Pa. Super. Unpub. LEXIS

1288, at *7 (May 8, 2015) (citing Kvaerner, 908 A.2d at 896), and because the complaints in the

Underlying Actions point to Plaintiff and “its agents” (i.e. Frey, according to the reports attached

to and expressly relied on by the complaints), the allegations contained in the Underlying Actions

are sufficient to trigger coverage for Plaintiff as an “additional insured.” See also Am. & Foreign

Ins. Co. v. Jerry’s Sport Ctr., Inc., 2 A.3d 526, 541 (Pa. 2010) (“As long as the complaint ‘might

or might not’ fall within the policy's coverage, the insurance company is obliged to defend.

Accordingly, it is the potential, rather than the certainty, of a claim falling within the insurance

policy that triggers the insurer’s duty to defend.”).

2. Application of the Completed Work/Intended Use Exclusion is Not

Sufficiently Clear at this Stage of the Case to Warrant Dismissal

Second, Defendant argues that Count I should be dismissed because exclusions to the

Policy applicable to the relevant “additional insured” provisions bar coverage for damages

“occurring” after the named insured’s (here, Frey’s) work has been either (1) completed or (2) put

to its intended use. See ECF No. 6 at 11–13. Under Pennsylvania law, occurrence-based insurance

policies, like the one at issue here, are triggered when injury first manifests. Importantly,

“manifestation” is distinct from both the cause of an injury and the actual discovery of the injury.

Instead, “[a]n occurrence happens when the injurious effects of the negligent act first manifest

themselves in a way that would put a reasonable person on notice of injury.” D’Auria v. Zurich

Ins. Co., 507 A.2d 857, 861 (Pa. Super. Ct. 1986); see also City of Erie v. Guar. Nat’l Ins. Co.,

109 F.3d 156, 162–63 (applying D’Auria definition of “occurrence”). In other words, while

“manifestation” could occur contemporaneously with either the cause or discovery of an injury, it

may also occur some time after the act or omission that causes an injury but some time before the

injury is actually discovered. See D’Auria, 507 A.2d at 862.

In St. John, the Pennsylvania Supreme Court applied the “first manifestation rule”

articulated in D’Auria, holding that injury to a herd of dairy cows caused by improper installation

of a plumbing system, resulting in contamination to the herd’s water supply, “manifested” when

the cows first began exhibiting illnesses related to drinking contaminated water, not when the

farmer finally identified the contaminated water as the cause of the cows’ ill health. See Pa. Nat’l

Mut. Cas. Ins. Co. v. St. John, 106 A.3d 1, 17–18 (Pa. 2014). Of course, this date was also after

the faulty installation of the plumbing system. See id. at 3–4.

Significantly, for our purposes, the Pennsylvania Supreme Court’s decision in St. John

came after a jury trial had determined the relevant, material facts of the case. Id. at 4–5. This

procedural posture is important because determining when an injury “manifested…for purposes

of triggering coverage…present[s] mixed questions of law and fact.” Id. at 13. Accordingly,

“[w]hile identifying the timing and nature of physical injury requires fact finding by the trial court,

determining whether these physical injuries trigger coverage by manifesting themselves in a

manner that would put a reasonable person on notice of injury is a question of law.” Id.

Here, there has been no fact finding yet. The complaints in the Underlying Actions paint

a factual scenario that, read in the light most favorable to Plaintiff, is like that found in St. John.

That is, Homeowners discovered damage to their properties weeks or months after taking

possession of the residences. This was some time after the alleged improper placement and

compaction of fill material on the lots. Thus, although possible, it is not clear from the complaints

in the Underlying Actions that Homeowners’ discovery of the damage to their property coincided

with manifestation of the damage. Rather, discovery is needed to determine when “the injurious

effects of the negligent act[s] first manifest[ed] themselves in a way that would put a reasonable

person on notice of injury.” D’Auria, 507 A.2d at 861. Thus, Defendant’s Motion with respect to

Count I will be denied.

B. Plaintiff’s Claim for Breach of the Implied Covenant of Good Faith and Fair

Dealing (Count II) will be Dismissed

Plaintiff’s claim for breach of the implied covenant of good faith and fair dealing (Count

II) must be dismissed because “under Pennsylvania law, a ‘claim for breach of the implied

covenant of good faith and fair dealing is subsumed in a breach of contract claim.’” Davis v. Wells

Fargo, 824 F.3d 333, 352 (3d Cir. 2016) (quoting Burton v. Teleflex Inc., 707 F.3d 417, 432 (3d

Cir. 2013)). That is, a claim for breach of the implied covenant of good faith and fair dealing

“separate and distinct from a breach of contract claim” cannot be maintained because “the covenant

does nothing more than imply certain obligations into the contract itself.” Id. (quoting JHE, Inc.

v. SEPTA, No. 1790, 2002 Phila. Ct. Com. Pl. LEXIS 78, at *13 (May 17, 2002)); see also Tubman

v. USAA Cas. Ins. Co., 943 F.Supp.2d 525, 529 (E.D. Pa. 2013) (collecting cases).

As such, to the extent it purports to state a separate claim from Count I, Count II will be

dismissed as an independent cause of action because it merges with Plaintiff’s breach of contract

claim at Count I. Davis, 824 F.3d at 352 (“Because Davis cannot maintain an independent cause

of action for breach of the covenant of good faith and fair dealing under Pennsylvania law, that

claim should be dismissed and his arguments concerning bad faith should be addressed in

connection with his surviving breach of contract claim”); see also Tubman, 943 F.Supp.2d at 529

(noting that, although plaintiff could not maintain a separate claim for breach of the implied

covenant of good faith and fair dealing, “the claim may proceed under her breach of contract

claim”). Furthermore, because amendment of Count II would be futile—Pennsylvania law does

not allow for a plaintiff to maintain a claim for breach of the implied covenant of good faith and

fair dealing separate and apart from a breach of contract claim—Plaintiff will not be afforded leave

to amend.

C. Defendant’s Motion will be Denied with Respect to Plaintiff’s Claim for Bad

Faith Insurance Practices (Count III)

Finally, Defendant argues that Plaintiff’s claim for bad faith insurance practices under 42

Pa.C.S. § 8371 (Count III) should be dismissed because (1) if applicable, the completed

work/intended use exclusion to the Policy makes Defendant’s declination of coverage per se

reasonable and (2) even if Defendant incorrectly refused coverage, a reasonable basis exists under

Pennsylvania law and the Policy for its denial of coverage such that a statutory bad faith claim

cannot stand. See ECF No. 6 at 17. Because we have already concluded that application of the

completed work/intended use exclusion is not clear, we will address only whether Plaintiff has

sufficiently pled a claim for bad faith insurance practices under § 8371.

Two elements are necessary to state a claim for bad faith insurance practices: “(1) that the

insurer did not have a reasonable basis for denying benefits under the policy and (2) that the insurer

knew of or recklessly disregarded its lack of reasonable basis” in denying the claim. Rancosky v.

Wash Nat’l. Ins. Co., 170 A.3d 364, 365 (Pa. 2017) (adopting two-part test articulated in Terletsky

v. Prudential Property & Cas. Ins. Co., 649 A.2d 680 (Pa. Super. 1994)). Importantly, “[b]ad faith

claims are fact specific and depend on the conduct of the insurer vis a vis the insured.” Condio v.

Erie Ins. Exch., 899 A.2d 1136, 1143 (Pa. Super. Ct. 2006). Thus, while Plaintiff will be required

to prove its bad faith claim by “clear and convincing evidence,” Rancosky, 170 A.3d at 365, the

allegations in the Complaint—namely, that Defendant failed to investigate Plaintiff’s tender of the

claims, denied coverage despite cooperatively participating in attempts to settle the Underlying

Actions, and rejected settlement offers from Homeowners within the limits of the Policy, see ECF

No. 1-1 at ¶¶ 75–77, 80–84—are sufficient at this stage to survive Defendant’s Motion.

IV. Conclusion

For the foregoing reasons, Defendant’s Motion is hereby GRANTED IN PART AND

DENIED IN PART as follows:

1. With respect to Plaintiff’s claim for breach of the implied covenant of good faith and

fair dealing, Defendant’s Motion is GRANTED and Count II of the Complaint is

hereby DISMISSED;

2. With respect to Plaintiff’s claims for breach of contract (Count I) and bad faith

insurance practices (Count III), Defendant’s Motion is DENIED.

Defendant shall respond to Plaintiff’s Complaint on or before April 30, 2021.

DATED this 16th day of April, 2021.

BY THE COURT:

/s/ Christy Criswell Wiegand

CHRISTY CRISWELL WIEGAND

United States District Judge

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