United States District Court holds insurer has duty to defend allegation of defective product

Michael Ladas alleged in a suit against IMS that it had manufactured non-compliant and defective components of a product made for the United States army, in violation of the federal False Claims Act.  (What that product was, as well as other facts, has been redacted from the publicly available version of the court's opinion.)  The underlying suit eventually settled, after IMS had spent more than $400,000 in legal fees. 

IMS had sought coverage from its insurer, All America.  All America denied a duty to defend or indemnify.  In Innovative Mold Solutions, Inc. v. All America Ins. Co., Inc., 2016 WL 3814774 (D. Mass. 2016), the United States District Court held that All America had violated its duty to defend.

Because of the redactions it is somewhat difficult to follow the court's analysis.  The first question before it was whether the damage alleged was covered property damage.  The issue was whether the damage was to property that belonged to someone other than IMS, since faulty workmanship to an insured's own product is not covered.  The court held that there was a duty to defend because the underlying complaint alleged that faulty epoxy potentially caused damage to components that were supplied by other entities.

The next issue was whether the underlying complaint alleged an occurrence within the meaning of the policy.  All America argued that IMS changed the composition and application of epoxy, which was an intentional act and not an occurrence.  IMS asserted that the injury was an occurrence because it had not intended the injury.  The court agreed with IMS.

Finally, the court held that the faulty workmanship exclusions did not apply.  Exclusion j(6) does not apply to property damage included in the products-completed operations hazards, which means that it does not apply to property damage that occurs away from premises owned or rented by the insured.  The other faulty workmanship exclusions do not apply to damage to property owned by someone other than IMS.