Arrowhead Systems, LLC (f/K/A Arrowhead Systems, Inc.) v. Hercon Construction, Inc.
2023-CA-1503
Ky. Ct. App.Mar 21, 2025Background
- Thomas Young contracted with Hercon Construction, Inc. to apply PermaCrete, a stucco-like product, to his residence based on representations from Quality Systems Inc. (QSI), which also supplied the product.
- After incomplete and substandard application by Hercon, Young hired D&S Construction for further work; both contractors allegedly performed unsatisfactorily and damaged various parts of the residence.
- Young filed suit in Kentucky state court alleging multiple contract and tort claims against QSI, Hercon, and D&S, later amending the complaint for additional claims and parties, including insurers.
- Both QSI and Hercon were covered under commercial general liability (CGL) policies from Pennsylvania National Mutual Insurance and Zurich American Insurance, respectively, who denied coverage or the duty to defend based on the nature of alleged damages.
- The trial court, applying Tennessee law, granted summary judgment in favor of the insurers, ruling no "occurrence" as defined by the policies triggered coverage; Young and Hercon appealed from these judgments and related orders.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether property damage from faulty application of PermaCrete was an "occurrence" under CGL policies | Damage resulted from contractor error, should be covered | Damage was foreseeable and not accidental, thus not covered | No "occurrence"; damages were the result of foreseeable, intentional acts by Hercon |
| Whether insurers had a duty to defend or indemnify | Policies obligate defense and indemnity for physical property damage | No duty as alleged acts are not "accidental" under policies | No duty to defend or indemnify due to absence of "accident" or "occurrence" |
| Applicability of Tennessee law to interpretation | Not directly contested on appeal | Not directly contested on appeal | Tennessee law applicable per lower court’s choice of law analysis |
| Whether QSI’s derivative liability triggers coverage | QSI’s alleged misrepresentations/ supervision failures qualify | QSI not the contractor and not performing work itself; liability is derivative, not direct under policy | No coverage for QSI; alleged conduct did not constitute a covered occurrence |
Key Cases Cited
- St. Paul Fire & Marine Ins. Co. v. Torpoco, 879 S.W.2d 831 (Tenn. 1994) (explains scope of insurer’s duty to defend under Tennessee law)
- Dempster Bros., Inc. v. United States Fid. & Guar. Co., 388 S.W.2d 153 (Tenn. Ct. App. 1964) (doubts about coverage resolved in favor of insured)
- Travelers Indem. Co. v. Moore & Assocs., 216 S.W.3d 302 (Tenn. 2007) (defines "occurrence" and "accident" under Tennessee CGL policies; controlling on whether faulty workmanship constitutes an occurrence)
- Naifeh v. Valley Forge Life Ins. Co., 204 S.W.3d 758 (Tenn. 2006) (standards for insurance contract interpretation)