Pa. Nat’l Mut. Cas. Ins. Co. v. River City Roofing, LLC, 2022 U.S. Dist. LEXIS 73676, 2022 WL 1185888 (E.D. Va. Apr. 21, 2022)
Shockoe Valley View Genesis, LLC (“Genesis”) contracted with Branch Builds, Inc. (“Branch”) for Branch to construct the Shockoe Valley Apartments (“Project”) in Richmond. Branch subcontracted with River City Roofing, LLC (“River City”) for all roofing and all aluminum and composition siding at the Project. River City warranted its materials and work, and agreed to make Branch an additional insured under a general liability (“GL”) insurance policy issued by Pennsylvania National Mutual Casualty Insurance Company (“Penn. National”). The Project was substantially completed in April 2017. In October 2017, Genesis reported that water damage was occurring in the building due to defects in the roof. Branch repaired and/or compensated Genesis for the damage. Branch then sued River City in state court for breach of contract, alleging that River City failed to construct the roof in accordance with the “plans, specifications and industry standards,” and demanded $3,000,000 in damages. Penn. National filed a declaratory judgment action in federal court, seeking an order stating that it had no duty to defend River City in the state court action.
The Court ruled that Penn. National had no duty to defend River City because there was no possibility that Penn. National would be obligated cover a judgment against River City for breaching its subcontract as alleged in Branch’s state court complaint and based on the GL policy. Virginia follows the Potentiality Rule, which requires an insurer to defend a policyholder when there is “any possibility” that a judgment against the policyholder would be covered by the policy. Under the Potentiality Rule, Virginia courts apply the Eight Corners Rule, which looks at the four corners of the complaint and the four corners of the insurance policy to assess whether there is a duty to defend. River City’s GL policy included coverage exceptions, qualifications. and exclusions. The GL policy only covered property damage if it was caused by an “occurrence” that took place in the “coverage territory.” The GL policy defined “occurrence” as an accident and excluded “property damage to [River City’s] work arising out of it or any part of it,” damage to “any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it,’” and damages River City was required to pay “by reason of the assumption of liability in a contract[.]” Branch’s complaint against River City alleged that Branch incurred damages caused by River City’s breach of contract, where River City did not construct the Project’s roof in accordance with the “plans, specifications and industry standards.” Branch also claimed River City was liable under the subcontract’s warranty provision. The Court concluded that Branch’s claims (and prospective damages) against River City were contractual in nature or allegedly arose from River City’s own defective work. Thus, the Court found that there was no possibility that Penn. National would be responsible for any judgment against River City resulting from Branch’s state court lawsuit and that Penn. National had no duty to defend River City.