Hercon Construction, Inc. v. Arrowhead Systems, Inc.
2023-CA-1249
Ky. Ct. App.Mar 21, 2025Background
- Thomas Young contracted with Hercon Construction, Inc. to apply PermaCrete, a stucco-like material, to his residence in Kentucky in 2006, based on representations from Quality Systems Inc. (QSI).
- Young alleged Hercon’s negligent application caused visible, immediate, and irreparable property damage to unprotected portions of the residence, leading Young to terminate Hercon and later D&S Construction, both recommended by QSI.
- Young filed suit in 2010, alleging breach of contract, negligence, fraud, and other related claims against QSI, Hercon, and D&S, later seeking declaratory relief against insurers Penn National (QSI’s insurer) and Zurich (successor to Hercon’s insurer, MCC).
- The key legal dispute centered on whether commercial general liability (CGL) policies issued by Penn National and Zurich required the insurers to defend and indemnify their insureds against Young’s allegations.
- The trial court, applying Tennessee law, held that the damages alleged did not constitute an "occurrence" under the policies, granting summary and declaratory judgment for the insurers.
- On appeal, the Court of Appeals affirmed, emphasizing that the alleged damages were foreseeable and directly caused by the insured’s own work.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether damages constituted an "occurrence" under CGL policies | Damages to the home from faulty application were physical property damage caused by an accident (occurrence) | Damage from the insured’s own faulty work was foreseeable, not accidental, thus not an occurrence | No "occurrence"; damages were plainly foreseeable from insured’s actions and not covered |
| Duty to defend and indemnify | Insurers obligated to defend and indemnify for alleged negligent/faulty work | Insurers owe no duty since alleged damages are not the result of an occurrence | Insurers have no duty to defend or indemnify; no coverage triggered by alleged acts |
| Application of Tennessee law | No challenge; parties accepted Tennessee law applies | Affirmed Tennessee law governs coverage interpretation | Tennessee law correctly applied by the trial court |
| Relevance of alleged misrepresentations | Misrepresentations should independently trigger coverage as occurrences | Claims against QSI are derivative of Hercon’s workmanship, not independent occurrences | Misrepresentations do not constitute occurrences; no coverage |
Key Cases Cited
- St. Paul Fire & Marine Ins. Co. v. Torpoco, 879 S.W.2d 831 (Tenn. 1994) (duty to defend is broader than duty to indemnify under Tennessee law)
- Travelers Indem. Co. v. Moore & Assocs., 216 S.W.3d 302 (Tenn. 2007) (negligent construction can trigger coverage as an occurrence when resulting damage is unexpected or unforeseen)
- Dempster Bros., Inc. v. United States Fid. & Guar. Co., 388 S.W.2d 153 (Tenn. Ct. App. 1964) (any doubt about coverage must be resolved in favor of the insured)
- Naifeh v. Valley Forge Life Ins. Co., 204 S.W.3d 758 (Tenn. 2006) (insurance contracts must be fairly construed by their ordinary meaning)