Specialty Surfaces International, Inc. v. Continental Casualty Co.

PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 09-2773

SPECIALTY SURFACES INTERNATIONAL, INC.,
doing business as SPRINTURF, INC;
EMPIRE AND ASSOCIATES, INC.,
Appellants

v.

CONTINENTAL CASUALTY CO.

On Appeal From the United States District Court
For the Eastern District of Pennsylvania
(D.C. Civil Action No. 2-08-cv-02089)
District Judge: Hon. John P. Fullam

Argued February 25, 2010
 Before: CHAGARES, STAPLETON, and
LOURIE,* Circuit Judges

(Opinion Filed: June 8, 2010)

Timothy P. Law (Argued)
Reed Smith
2500 One Liberty Place
1650 Market Street
Philadelphia, PA 19103
Attorney for Appellants

Jay I. Morstein (Argued)
DLA Piper US
6225 Smith Avenue
Baltimore, MD 21209
and
Ronald P. Schiller
Hangley, Aronchick, Segal & Pudlin
One Logan Square
18th & Cherry Streets - 27th Floor
Philadelphia, PA 19103
Attorneys for Appellee

OPINION OF THE COURT

*
Hon. Alan D. Lourie, United States Circuit Judge for the
Federal Circuit, sitting by designation.

2
STAPLETON, Circuit Judge:

Appellants Specialty Surfaces International, Inc.
(“Specialty Surfaces”) and Empire and Associates, Inc.
(“Empire”) (collectively, “Sprinturf”) appeal from a summary
judgment entered by the District Court in favor of appellee
Continental Casualty Company (“Continental”). The Court
granted summary judgment after concluding that Pennsylvania
law applied to the insurance coverage issue presented in this
case and that Continental had no duty under Pennsylvania law
to defend the appellants against claims asserted in a California
lawsuit.

I. Facts and Procedural Background

Specialty Surfaces is a Pennsylvania corporation with a
principal place of business in Wayne, Pennsylvania. Empire is
a California corporation with a principal place of business in
Wayne, Pennsylvania. Empire is a wholly owned subsidiary of
Specialty Surfaces, and together, doing business as Sprinturf,
they manufacturer and sell synthetic turf for athletic playing
fields. Continental, which is licensed to do business in both
California and Pennsylvania, issued an insurance policy to
Specialty Surfaces. Empire was covered by the policy as an
additional named insured. The policy covered the period from

3
October 1, 2005, through October 1, 2006, and had a per
occurrence limit of $1,000,000 and a general aggregate limit of
$2,000,000. The parties agree that the insurance policy was in
effect at the time of the events at issue in the underlying lawsuit
and that it covered Sprinturf’s activities in California.

In Specialty Surfaces’ policy, Continental agreed to “pay
those sums that the insured becomes legally obligated to pay as
damages because of ‘bodily injury’ or ‘property damage’ to
which this insurance applies.” JA 541. Further, Continental
agreed that it had “the right and duty to defend the insured
against any ‘suit’ seeking those damages.” Id. The contract of
insurance applied to “‘bodily injury’ and ‘property damage’ only
if . . . [t]he ‘bodily injury’ or ‘property damage’ is caused by an
‘occurrence’ . . . .” Id. “Property damage” is defined in the
policy as “[p]hysical injury to tangible property, including all
resulting loss of use of that property,” and an “occurrence” is
defined as “an accident, including continuous or repeated
exposure to substantially the same general harmful conditions.”
Id. at 552-53.

At issue here is whether Continental had a duty to defend
Sprinturf in a lawsuit filed in the Superior Court of California.
According to the allegations in the amended complaint, Shasta
Union High School District (“Shasta”) hired Trent Construction
as a general contractor on an approximately $3,000,000 project
involving the construction and installation of synthetic turf
football fields and all weather tracks at four District schools.

4
Trent Construction then hired Empire as a subcontractor to
provide and install synthetic turf fields manufactured by
Specialty Surfaces and to install drainage systems in the fields.
The general contractor, Trent Construction, prepared the base
for each field, and Empire installed a drainage system, provided
by Airfield Systems, LLC (“Airfield”), including an
impermeable liner, and the synthetic turf over the base. As part
of the contract, Shasta required Trent Construction and each of
the subcontractors to provide warranties for each of the four
fields. Pursuant to this requirement, Sprinturf provided an
eight-year warranty for each of the four fields.

Shasta initially filed a suit against Specialty Surfaces and
Airfield. Shasta’s factual allegations about the fields included
the following:

Commencing within one year after acceptance of
the Project, the synthetic turf systems installed on
the Project began to exhibit defects in materials
and workmanship, which have since worsened.
All the fields have experienced failures of the
subdrain system under the synthetic turf,
including splits in the subsurface impermeable
membrane and inadequate sealing thereof. As a
direct result, water has leaked from the subdrain
system into the subgrade, dirt has washed from
the subgrade into the subdrain system, the
subgrade has settled and the soil stabilizer has

5
 remulsified. Consequently, the fields have
developed depressions and unstable playing
surfaces, and the fields fail to drain properly
under the synthetic turf. In addition, the synthetic
turf material can be torn by hand and is not
sufficiently strong for the uses guaranteed under
specifications Section 2537, Paragraph 1.02A.

JA 605-06. Further, Shasta alleged that Specialty Surfaces,
doing business as Sprinturf, breached the terms of the warranties
by failing “to make good the aforementioned defects in
materials and workmanship in a timely fashion.” JA 607.
Shasta claimed that it would have to pay a significant sum to
replace the synthetic turf and the drainage system in each of the
fields.

Specialty Surfaces provided Continental with notice of
the lawsuit and requested coverage. Continental disclaimed
coverage, explaining that the policy only covered an
“occurrence” causing “property damage.” Continental stated
that the commercial general liability policy did not cover
Shasta’s claim because “[t]he allegations are solely poor
workmanship and/or product” and “[a]ny damage that your
company can be responsible for would be for improper
installation or a defect in the product itself.” JA 1465–69.

Shasta then filed an amended complaint. Specialty
Surfaces remained a defendant, and Empire was added as a

6
defendant. The allegations as to the conditions of the fields
remained identical to those in the original complaint, but Shasta
included additional legal claims. In addition to breach of
warranty claims against Specialty Surfaces and Empire, Shasta
added a claim for negligence against Empire, Trent
Construction, and Airfield. The relevant allegations are as
follows:

45. Defendants Trent, Empire & Associates,
[and] Airfield . . . at all relevant times owed the
District duties of care including the duties to
design, supply, supervise the correct installation
and/or correctly install a suitable turf and subdrain
system in compliance to the contract documents.

46. Said Defendants breached said duties of care
by failure to investigate, test, and design and
supply a suitable and compatible subdrain system
and impermeable liner in compliance to the
contract documents, failure to supervise the
installation and install the supplied system
properly and in a workmanlike manner, failure to
provide adequate training and instructions to the
installers and failure to conduct sufficient
investigations and inspections to ensure the
proper design, manufacture and installation of the

7
 synthetic drain system.

47. As a proximate result of said breaches of duty
of care, the installed turf and subdrain system has
failed, damaging the subdrains, the impermeable
liner and the subgrade underneath, and the seams
of the synthetic turf system are failing. . . .

JA 619. Thus, this claim alleges that Empire’s negligence led
to damage to the turf, the subdrain system, the liner, and the
subgrade.

After the amended complaint was filed, Continental
agreed to defend Specialty Surfaces in the California action,
subject to a reservation of rights. Continental stated that it
agreed to provide a defense because the amended complaint
alleged that negligence resulted in damage to the base below the
playing fields and the drainage system. Subsequently,
Continental also agreed to defend Empire as an additional
named insured.

Continental, however, continued to refuse to reimburse
Sprinturf for its expenses in defending itself before Continental
received notice of the amended complaint. It also declined to
pay Sprinturf’s defense counsel the $430 per hour rate he
charged. Continental offered to pay $200 an hour to Sprinturf’s
counsel or to provide Sprinturf with different counsel.
Eventually, Sprinturf changed counsel as a result.

8
 Sprinturf then commenced this action in the District
Court for the Eastern District of Pennsylvania seeking a
declaratory judgment that Continental had a duty to defend and
to indemnify against any liability in Shasta’s suit. Sprinturf
moved for partial summary judgment on the issue of when
Continental was required to provide for its defense. Sprinturf
contended that Continental was required to provide a defense
when it received notice of Shasta’s original complaint because
the Shasta complaint alleged property damage to another party’s
work product. In response, Continental filed a cross-motion for
summary judgment, arguing that Sprinturf could not establish
that it was required to defend or indemnify it based on the
allegations in either of the Shasta complaints. Specifically,
Continental argued that the property damage alleged in the
Shasta complaints was not caused by an “occurrence” covered
under the policy and, in the alternative, that policy exclusions
applied to the type of damage alleged.

The District Court entered summary judgment in favor of
Continental. It first concluded that Pennsylvania law applied to
the issue of coverage under the insurance contract. The Court
then determined that all of the claims in Shasta’s lawsuit,
including the negligence claims, were based on “allegations of
faulty workmanship and failure to comply with the contract
documents, which are not accidents.” JA 6. Accordingly, the
Court held that the alleged property damage had not been caused
by an “occurrence” and that Continental had no duty to defend
Sprinturf under Pennsylvania law.

9
 Sprinturf filed a timely notice of appeal.1

II. Choice of Law

The parties agree that the choice of law rules of the
forum state, Pennsylvania, apply when a federal court is sitting
in diversity. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S.
487, 496 (1941). Further, they agree that Pennsylvania applies
a “flexible rule which permits analysis of the policies and
interests underlying the particular issue before the court” and
directs courts to apply the law of the state with the “most interest
in the problem.” Hammersmith v. TIG Ins. Co., 480 F.3d 220,
227 (3d Cir. 2007) (quoting Griffith v. United Air Lines, Inc.,
203 A.2d 796, 805–06 (Pa. 1964)); see Budtel Assocs., LP v.
Continental Cas. Co., 915 A.2d 640, 644-45 (Pa. Super. Ct.
2006) (holding that the Griffith choice of law rule applied in the
contract law context). In applying this rule, if confronted with
a true conflict, we first consider each state’s contacts with the
contract as set forth in the Restatement (Second) of Conflict of

1
The District Court had jurisdiction pursuant to 28 U.S.C.
§ 1332. We have jurisdiction pursuant to 28 U.S.C. § 1291. We
exercise plenary review over a District Court’s choice of law
analysis, see Thabault v. Chait, 541 F.3d 512, 535 (3d Cir.
2008), and its decision to grant summary judgment, see State
Farm Fire & Cas. Co. v. Estate of Mehlman, 589 F.3d 105, 110
(3d Cir. 2009).

10
Laws. See Hammersmith, 480 F.3d at 231; Compagnie des
Bauxites de Guinee v. Argonaut-Midwest Ins. Co., 880 F.2d 685,
688-89 (3d Cir. 1989); Melville v. Am. Home Assurance Co.,
584 F.2d 1306, 1311 (3d Cir. 1978). We then “weigh the
contacts on a qualitative scale according to their relation to the
policies and interests underlying the [relevant] issue.” Shields
v. Consol. Rail Corp., 810 F.2d 397, 400 (3d Cir. 1987).

We must first determine whether there is a true conflict
between the relevant laws of California and Pennsylvania.
Hammersmith, 480 F.3d at 230. A “‘deeper [choice of law]
analysis’ is necessary only if both jurisdictions’ interests would
be impaired by the application of the other’s laws.” Id.
(emphasis in original) (quoting Cipolla v. Shaposka, 267 A.2d
854, 856 (Pa. 1970)). When both states’ interests would be
harmed by the application of the other state’s law, there is a
“true conflict,” and we must engage in the contacts and interests
analysis to determine which state’s law should apply. Id. at 230-
31.

A. Actual Conflict

No relevant conflict has been identified in the laws of
California and Pennsylvania with respect to when an insurer has
a duty to defend an insured. In both jurisdictions, an insurance
policy like that before us would be construed to impose a duty
to defend if the facts alleged in support of a claim, taken as true,
hold the potential for the imposition of a liability for which the

11
insured would be entitled to be indemnified under the policy.
Sprinturf, however, in addition to arguing that it is entitled to
coverage under Pennsylvania law, insists that there is a conflict
between the laws of California and Pennsylvania with respect to
whether the facts alleged by Shasta hold that potential – i.e.,
whether the alleged property damage results from an
“occurrence” within the meaning of the policy.

We first consider the law of Pennsylvania. In Kvaerner
Metals Division of Kvaerner U.S., Inc. v. Commercial Union
Insurance Co., 908 A.2d 888 (Pa. 2006), the Supreme Court of
Pennsylvania was asked to decide whether a claim of faulty
workmanship could constitute an “occurrence” under
commercial general liability policies. The policies at issue
defined an “occurrence” as an “accident, including continuous
or repeated exposure to substantially the same or general
harmful conditions.” Id. at 897 (quoting the insurance policy).
Because there was no definition of accident in the policies, the
Supreme Court used a dictionary definition, observing that
“[t]he key term in the ordinary definition of ‘accident’ is
‘unexpected’” and that “[t]his implies a degree of fortuity that
is not present in a claim for faulty workmanship.” Id. at 898.
The Court there held:

We hold that the definition of “accident”
required to establish an “occurrence” under the
policies cannot be satisfied by claims based upon
faulty workmanship. Such claims simply do not

12
 present the degree of fortuity contemplated by the
ordinary definition of “accident” or its common
judicial construction in this context. To hold
otherwise would be to convert a policy for
insurance into a performance bond. We are
unwilling to do so, especially since such
protections are already readily available for the
protection of contractors.

Id. at 899 (footnotes omitted). Kvaerner’s holding was limited
to claims of damage to the work product itself. Id. at 900. It left
open the question of whether damage to property other than the
work product itself resulting from faulty workmanship might
constitute property damage caused by an “occurrence” under a
commercial general liability policy.

In Millers Capital Insurance Co. v. Gambone Bros.
Development Co., 941 A.2d 706, 713 (Pa. Super. Ct. 2007), the
parties disputed whether an insurer had a duty to defend against
claims for damages to property arising out of faulty
workmanship. Specifically, the complaint alleged that faulty
workmanship in constructing the exteriors of homes led the
stucco exteriors to fail and resulted in “ancillary and accidental
damage caused by the resulting water leaks to non-defective
work inside the home interiors.” Id. The insureds conceded
that, under Kvaerner, the damages to the exteriors of the homes
was not caused by an “occurrence” but argued that the damage
to the interior of the homes was nevertheless caused by an

13
“occurrence” because the rainfall constituted an “occurrence.”

The Superior Court rejected this proposition. Based on
Kvaerner, the Court held “that natural and foreseeable acts, such
as rainfall, which tend to exacerbate the damage, effect, or
consequences caused ab initio by faulty workmanship also
cannot be considered sufficiently fortuitous to constitute an
‘occurrence’ or ‘accident’ for the purposes of an occurrence
based [commercial general liability policy].” Id.

In Nationwide Mutual Insurance Co. v. CPB
International, Inc., 562 F.3d 591 (3d Cir. 2009), this Court
addressed whether under Pennsylvania law consequential
damages resulting from faulty workmanship constituted an
“occurrence” under a commercial general liability policy. In
that case, the insured had sold a contaminated product which the
purchaser had thereafter utilized with resulting damage to other
property owned by the purchaser. We held that the resulting
damage was not property damage caused by an “occurrence”
because the purchaser’s use was foreseeable and not fortuitous.
In so holding, we determined that Gambone had persuasively
predicted the view that the Supreme Court of Pennsylvania
would take. Id. at 597 (“[O]pinions of intermediate appellate
state courts are not to be disregarded by a federal court unless it
is convinced by other persuasive data that the highest court of
the state would decide otherwise.” (quoting Nationwide Mut.
Ins. Co. v. Buffetta, 230 F.3d 634, 637 (3d Cir. 2000)). Because
the Supreme Court of Pennsylvania has not subsequently issued

14
a contrary opinion, we must follow the determination of the
CPB International panel. Thus, we must decline Sprinturf’s
invitation to reject Gambone and we accept both it and CPB
International as accurately reflecting Pennsylvania law.

Based on Kvaerner, Gambone and CPB International, we
conclude that Pennsylvania law interprets “occurrence” based
coverage like that provided to Sprinturf in accordance with its
literal text. In order for a claim to trigger coverage, there must
be a causal nexus between the property damage and an
“occurrence,” i.e., a fortuitous event. Faulty workmanship, even
when cast as a negligence claim, does not constitute such an
event; nor do natural and foreseeable events like rainfall.

Having so concluded, we now turn to California law to
see if it conflicts with our understanding of Pennsylvania law.
Sprinturf insists that the Supreme Court of California’s decision
in Geddes & Smith, Inc. v. Saint Paul-Mercury Indemnity Co.,
334 P.2d 881 (Cal. 1959), demonstrates such a conflict. In that
case, a building contractor had ordered 760 aluminum doors,
jambs, and associated hardware for use in constructing housing.
After installation, defects appeared in virtually all the doors.
The contractor sued the supplier alleging breach of warranty and
negligence, and the supplier demanded that its insurer defend
the contractor’s suit. Under the policy, the insurer was
committed to indemnify the insured for “all sums . . . the insured
. . . become[s] obligated to pay by reason of liability imposed .
. . because of injury to or destruction of property, including the

15
loss of use thereof, caused by accident.” Id. at 883. It was
undisputed that injury to or destruction of the doors themselves
were expressly excluded.

The Court held that the supplier’s liability arising from
the damage to the houses caused by the defective doors was
within the policy coverage. It reasoned as follows:

Defendant contends that there was no
injury to or destruction of property caused by
accident. No all-inclusive definition of the word
‘accident’ can be given. It has been defined as ‘a
casualty something out of the usual course of
events, and which happens suddenly and
unexpectedly and without design of the person
injured.’ It “includes any event which takes place
without the foresight or expectation of the person
acted upon or affected by the event.” ‘Accident,
as a source and cause of damage to property,
within the terms of an accident policy, is an
unexpected, unforeseen, or undesigned happening
or consequence from either a known or an
unknown cause.’ The door failures were
unexpected, undesigned, and [unforeseen]. They
were not the result of normal deterioration, but
occurred long before any properly constructed
door might be expected to wear out or collapse.
Moreover, they occurred suddenly.

16
Id. at 884 (citations omitted).

We agree that there is a conflict between Geddes and the
Pennsylvania case law we have described. The Geddes Court
would not have decided Gambone and CPB International in the
same way the courts applying Pennsylvania law did. We note at
the outset, however, the character of the issue involved and the
conflict. In each instance, the issue before the Court was one of
contract interpretation – i.e., the meaning of “occurrence” and
“accident” as used in the policy. While reaching different
conclusions, the courts in each instance resolved the issue by
seeking to determine the intent of the parties to the policy based
on its text.

B. True Conflict

We also agree with Sprinturf that a “true conflict” exists
because the interests of both California and Pennsylvania would
be adversely affected to some degree by application of the other
state’s law. Hammersmith, 480 F.3d at 231. California has an
interest in whether the potential liability in the California
litigation is covered, given that the property damage alleged is
damage to a California school district and that one of the insured
parties is a California corporation. Pennsylvania also has an
interest in having its law apply to an insurance policy issued in
Pennsylvania by a company licensed to do business in
Pennsylvania to two companies that have their principal place of
business in Pennsylvania. Pennsylvania has an interest in

17
having its law applied even if the insurer is not a Pennsylvania
company. Cf. Hammersmith, 480 F.3d at 232 (“New York’s
interests are also implicated even though the insurer . . . is not a
New York resident. There is no evidence that New York
intended its . . . rule to protect only resident insurers, rather than
all insurers doing business in the state of New York.” (emphasis
in original)). Therefore, we conclude that a true conflict exists,
and we must therefore conduct an analysis of each state’s
contacts with the contract of insurance and its interests in having
its law applied to the question at hand.

C. Contacts and Their Relation to the Policies and
Interests Underlying the Relevant Issue

We begin the Pennsylvania choice of law analysis by
examining each state’s contacts with the contract at issue under
the Restatement (Second) of Conflict of Laws, “bearing in mind
that ‘[w]e are concerned with the contract of insurance’ and not
the underlying tort,” Hammersmith, 480 F.3d at 232-33 (quoting
McCabe v. Prudential Prop. & Cas. Ins. Co., 514 A.2d 582, 586
(Pa. Super. Ct. 1986)).

Section 193 of the Restatement (Second) of Conflict of
Laws addresses casualty insurance policies such as this one.
Section 193 states:

The validity of a contract of fire, surety or
casualty insurance and the rights created thereby

18
 are determined by the local law of the state which
the parties understood was to be the principal
location of the insured risk during the term of the
policy, unless with respect to the particular issue,
some other state has a more significant
relationship under the principles stated in § 6 to
the transaction and the parties, in which the local
law of the other state will be applied.

Restatement (Second) of Conflict of Laws § 193 (emphasis
added). Section 193 does not apply to the insurance policy
issued to Sprinturf because there was no principal place of
insured risk. See Hammersmith, 480 F.3d at 233 (holding that
there was no principal place of insured risk where the policy
covered the insured subsidiaries in over twenty states and
internationally). The undisputed evidence in the record
establishes that the policy was not limited to a specific state or
project, that Sprinturf performed work nationally, and that the
insurance company anticipated that it would cover risks outside
of Pennsylvania. Although Empire, an additional named
insured, performed work only in California, there was no
principal location of insured risk in this policy.2

2
In an argument raised for the first time in its reply brief,
Sprinturf argues that Comment f. to § 193 suggests that it
weighs in favor of applying California law. Even if this
argument had not been waived, we would be unable to agree.
Comment f. applies to a situation in which there are multiple,

19
 When § 193 does not apply to the policy in question, we
look next to the contacts listed in § 188(2) of the Restatement
(Second) of Conflict of Laws to determine which state has
greater contacts with the contract at issue. Hammersmith, 480
F.3d at 233; Compagnie des Bauxites de Guinee, 880 F.2d at
690. These factors include: “(a) the place of contracting, (b) the
place of negotiation of the contract, (c) the place of
performance, (d) the location of the subject matter of the
contract, and (e) the domicile, residence, nationality, place of
incorporation and place of business of the parties.” Restatement
(Second) of Conflict of Laws § 188(2). Section 188(2) directs
that “[t]hese contacts are to be evaluated according to their
relative importance with respect to the particular issue.” Id.

In this case, the first and second factors, the place of
contracting and negotiation, favor the application of
Pennsylvania law because the parties agree that the insurance

site specific risks and the policy includes state specific forms for
each risk. See St. Paul & Marine Ins. Co. v. Building Constr.
Enters., Inc., 526 F.3d 1166, 1168 (8th Cir. 2008). It advises
that, with regard to this sort of policy, courts will likely consider
treating the policy “as if it involved [separate] policies” and
interpret each policy with regard to the law of the state in which
the particular risk is located. Restatement (Second) of Conflict
of Laws § 193 cmt. f. The policy at issue here is a commercial
general liability policy, and, as discussed above, there was no
site specific risk identified in the policy.

20
policy was negotiated, issued, and delivered in Pennsylvania.

The third factor, the place of performance, requires
greater examination. Pursuant to the contract of insurance,
Sprinturf was obligated to pay premiums to Continental, and,
thus, it performed where it paid the premiums. See, e.g.,
Armotek Indus., Inc. v. Employers Ins. of Wausau, 952 F.2d 756,
761 (3d Cir. 1991). Although Continental argues that this factor
favors Pennsylvania law, the record does not reflect where the
premiums were paid. Accordingly, we are unable to determine
where Sprinturf performed its contractual obligations. Its
principal place of business, however, was in Pennsylvania, and
there is no reason to believe that premiums were paid in
California.

For its part, Continental promised to defend or indemnify
Sprinturf if certain events occurred, and thus it performs under
the contract of insurance where it is required to defend or pay
benefits to Sprinturf. In this instance, Continental’s duty to
defend, if required by the policy, was to be performed in
California. Therefore, one of the places of performance was
California. See Hartford Underwriters Ins. Co. v. Found.
Health Servs., Inc., 524 F.3d 588, 596 (5th Cir. 2008)
(concluding that the insurer’s performance took place where it
defended the underlying lawsuits); cf. Northern Ins. Co. of N.Y.
v. Allied Mut. Ins. Co., 955 F.2d 1353, 1360 (9th Cir. 1992)
(observing that the promise to provide a defense was one of the
two “essential promises” the insurer made in a liability policy).

21
 The fourth factor, “location of the subject matter of the
contract,” does not favor the application of either California or
Pennsylvania law because the policy provided nationwide
coverage to Sprinturf, and thus there is no identifiable location
for the risk insured by the contract.

Next, we examine the domicile, residence, place of
incorporation, and place of business of the parties. Both
Specialty Surfaces and Empire have their principal place of
business in Pennsylvania. Specialty Surfaces is also
incorporated in Pennsylvania. Although Empire is incorporated
in California, this contact is of lesser consequence because “a
corporation’s principal place of business is a more important
contact than the place of incorporation. . . .” Restatement
(Second) of Conflict of Laws § 188 cmt. e. Continental is
incorporated in Illinois and licensed to do business in both
California and Pennsylvania. Because both of the insured
parties have their principal place of business in Pennsylvania
and Continental’s place of incorporation is neutral, this factor
favors the application of Pennsylvania law.

Finally, we “must weigh these contacts on a qualitative
scale according to their relation to the policies and interests
underlying” the relevant issue on which there is a conflict – the
coverage issue. Shields, 810 F.2d at 400. We note at the outset
that, while California and Pennsylvania reach different
conclusions on this specific issue, there are no conflicting
governmental interests behind the positions of the two

22
jurisdictions. Neither jurisdiction has expressed a governmental
interest favoring or disfavoring the disputed coverage. Both
recognize the right of the negotiating parties to allocate risks of
this kind for themselves and affirm the governmental interest in
enforcing the agreement that they reach regarding that matter.
The conflict before us is thus unlike conflicts between state laws
regarding the validity of particular contract provisions, conflicts
based on differing views on regulatory issues, or conflicts
regarding issues where state law supplements the agreement of
the parties by filling gaps left by the parties. Where, as here, the
sole interest of both jurisdictions is in enforcing the intent of the
parties, we believe Pennsylvania’s choice of law rules would
favor giving primary weight to the jurisdiction providing the
context in which the decision making parties negotiated their
agreement. Accordingly, in this case, we believe that the place
of contracting, the place of negotiation, and the parties’
principal places of business are the most important contacts
when determining which state’s law should be applied. In short,
Pennsylvania law was the context in which the parties
negotiated and expressed the agreement they had reached.
While Empire was a California corporation, it was a non-
participating beneficiary of its parent’s negotiations and its
business was conducted from Pennsylvania.

Contrary to Sprinturf’s argument, we believe that the
place of performance of any duty on the part of Continental to
defend the underlying lawsuit is entitled to relatively little
weight. The state in which a claim is filed and Continental is

23
required to defend a lawsuit is not significantly related to the
coverage question at issue here. This is not a case in which the
disputed issue relates to extra-contractual requirements imposed
by the forum state regarding the manner in which a duty to
defend must be executed. Rather, the issue is the intent of the
parties when they allocated risks in the policy. This distinction
is well illustrated by the Fifth Circuit’s decision in Foundation
Health Services. The underlying suit there had been filed in
Mississippi and, under Mississippi law, an insurer defending an
insured under a reservation of rights is required to provide
independent counsel to the insured. The Court held that
Mississippi law governed the “narrow issue” of whether the
insurer was required to provide independent counsel. In doing
so, however, it stressed that the case before it was materially
different from the typical case involving only contract
interpretation:

We recognize that the place of contracting
and place of negotiation are often relevant to
disputes involving contract interpretation.
Further, we acknowledge that, to some extent,
whether Hartford has a duty to provide
independent counsel to Magnolia is related to the
scope of Hartford’s contractual duty to defend.
However, this case is different from the typical
contract interpretation case. Typically, a duty to
defend provision can be interpreted without
reference to where the underlying “defending” is

24
 taking place, because the task of pure contract
interpretation merely requires the court to
ascertain the parties’ intent from the language of
the contract itself and, at times, the circumstances
surrounding formation of the contract. See One
South, Inc. v. Hollowell, 963 So.2d 1156, 1162
(Miss. 2007) (discussing contract interpretation
principles). This case is different because the
issue of whether Hartford owed a duty to provide
Magnolia with independent counsel is closely
connected to the court where the “defending” took
place. The court where a case is tried has a
substantial interest in preventing conflicts of
interest. In other words, the court where a claim
is tried has little interest in whether an insurer’s
duty to defend is triggered under an insurance
contract, but it does have a significant interest in
whether independent counsel is provided to avoid
a conflict of interest.

524 F.3d at 595-96. The comments to the Restatement (Second)
of Conflict of Laws observe that “the place of performance can
bear little weight in the choice of the applicable law when . . . at
the time of contracting it is either uncertain or unknown . . . .”
Restatement (Second) of Conflict of Laws § 188(2) cmt. e.
Here, the parties did not know at the time of contracting where
Continental might be called upon to defend Sprinturf, as
Sprinturf operated nationwide. Thus we give the place of

25
performance less weight in our analysis.

Moreover, even if we were to accept Sprinturf’s
argument that the place of performance should be given greater
weight in this dispute, Pennsylvania still has more significant
contacts with this contract of insurance than California. Indeed,
California had only limited contacts with the insurance contract
until Shasta was allegedly harmed and the lawsuit was filed in
California. See Hammersmith, 480 F.3d at 232-33 (“‘We are
concerned with the contract of insurance’ and not the underlying
tort.” (quoting McCabe, 514 A.2d at 586)).

Based on the foregoing, we conclude that Pennsylvania
has a far greater interest in having the coverage issue determined
in accordance with its law than California has in having that
issue determined in accordance with California law.
Accordingly, we will determine the coverage issue based on
Pennsylvania law.

In reaching this conclusion, we are not unmindful of
Sprinturf’s insistence that a contrary result is dictated by our
decision in American Contract Bridge League v. Nationwide
Mutual Fire Insurance Co., 752 F.2d 71 (3d Cir. 1985). We
conclude that American Contract Bridge League is not binding
on our panel for at least two reasons.

In January of 1985, a panel of this Court issued an
opinion applying Pennsylvania choice of law rules in a suit

26
involving a dispute over an insurer’s duty to defend. See
American Contract Bridge League, 752 F.2d at 74-75. The case
involved two insurance policies, one of which was negotiated,
issued, and delivered in Tennessee and issued to an entity with
its principal place of business in Tennessee. The underlying
lawsuit involved a Pennsylvania plaintiff, alleged that the harm
occurred in Pennsylvania, and was filed in Pennsylvania. In the
federal litigation, the parties disagreed about whether the policy
required the insurer to defend the insured against claims made
in the underlying lawsuit. The opinion resolved the choice of
law issue with the following brief analysis:

In Griffith v. United Air Lines, 416 Pa. 1,
203 A.2d 796 (1964), the Pennsylvania Supreme
Court adopted a flexible choice-of-law rule which
permits an “analysis of the policies and interests
underlying the particular issue before the court”
and a determination of which jurisdiction is most
intimately concerned with the outcome of the
litigation. Id. at 21, 22, 203 A.2d 796.

Both Nationwide and Aetna are licensed to
do business in Pennsylvania. The Livezey suit has
been brought in Pennsylvania and involves the
Pennsylvania Contract Bridge Association, as
well as several Pennsylvania residents. The harm
alleged in the Livezey suit occurred in
Pennsylvania. Clearly, under Pennsylvania’s

27
 “policy, interests and contacts test,” it is
Pennsylvania law which should be applied to
resolve the present controversy.

752 F.2d at 74–75.

While our opinion makes clear that there was a dispute as
to the insurer’s duty to defend and “as to which state law should
be applied to the issues in [this] case,” id. at 74, it does not
identify how those state laws differed in a relevant manner, and
one can accordingly not determine the issue as to which there
was a conflict. Most importantly for present purposes, the
opinion does not address any coverage issue turning on a dispute
as to the intent of the contracting parties. As a result, there is no
holding relevant to the issue before us.

However, even if American Contract Bridge League had
held that the place of the harm giving rise to the tort liability and
the forum of the underlying tort suit should be given controlling
weight in determining the law to be applied in determining
coverage from the intent of the contracting parties, we would
not consider ourselves bound by its holding.

When a federal court sitting in Pennsylvania exercising
diversity jurisdiction is faced with a choice of law question,
generally it must predict how the Supreme Court of
Pennsylvania would decide the question. See Erie R.R. Co. v.
Tompkins, 304 U.S. 64, 78-80 (1938); Buffetta, 230 F.3d at 637.

28
In making such a prediction, a federal court follows relevant
decisions of the Pennsylvania Supreme Court and gives “due
regard, but not conclusive effect” to decisions of the state’s
lower courts. See Buffetta, 230 F.3d at 637. In situations like
the one before us, where the case said to be controlling is
twenty-five years old, a federal court cannot properly determine
the precedential value of that case without considering whether
there have been relevant developments in the state case law
during the intervening period. Nationwide Ins. Co. of
Columbus, Ohio, v. Patterson, 953 F.2d 44, 46 (3d Cir. 1991)
(“[W]hen we are applying state law we are, of course, free to
reexamine our state law interpretation based on subsequent
decisions” of the state courts.).

Since the decision in American Contract Bridge League
was issued in 1985, the Pennsylvania Superior Court has
decided a line of cases in which it applied Pennsylvania choice
of law rules to determine which state’s law governed
interpretation of a contract of insurance. See, e.g., Budtel
Assocs., 915 A.2d at 643-45; Hughes v. Prudential Lines, Inc.,
624 A.2d 1063, 1066 n.2 (Pa. Super. Ct. 1993); McCabe, 514
A.2d at 585-86. In each of these cases, the Superior Court
consistently emphasized that Pennsylvania’s choice of law rules
were concerned with examining the states’ contacts with the
contract of insurance, not the tort involved in the underlying
suit. See Budtel Assocs., 915 A.2d at 643; Hughes, 624 A.2d at
1066 n.2; McCabe, 514 A.2d at 585-86. While the Supreme
Court of Pennsylvania has not spoken on this issue, we believe

29
that the cases decided by Pennsylvania’s intermediate courts of
appeals in the twenty-five year period after the decision in
American Contract Bridge League constitute intervening
authority. This intervening authority suggests that the panel in
American Contract Bridge League was mistaken if it predicted
that the Pennsylvania Supreme Court in a case turning on
interpretation of an insurance policy would apply the of law of
the state where the tort occurred and the tort lawsuit was filed
instead of the law of the state with the most significant contacts
with the contract of insurance. Following the guidance of the
Pennsylvania Superior Court, we predict that the Pennsylvania
Supreme Court would decide that Pennsylvania law applied to
this coverage dispute.

III. Duty to Defend

Under Pennsylvania law, “[a] carrier’s duty to defend and
indemnify an insured in a suit brought by a third party depends
upon a determination of whether the third party’s complaint
triggers coverage.” Kvaerner, 908 A.2d at 896 (citing Mut.
Benefit Ins. Co. v. Haver, 725 A.2d 743, 745 (Pa. 1999)). We
examine only the allegations in the complaint when determining
whether the insurance company must defend the insured. We
now turn to the question of whether the allegations in the
original complaint or the amended complaint triggered coverage
under the policy issued to Sprinturf.

A. Original Complaint

30
 Continental did not have a duty to defend Sprinturf when
it received notice of the original complaint in the California
litigation. Shasta alleged in the original complaint only that
Specialty Surfaces breached its contract with the school district
by failing “to make good . . . defects in materials and
workmanship in a timely fashion.” JA 607. As earlier noted,
we predicted in CBP International that a breach of contract
claim could not constitute an “occurrence” in a commercial
general liability policy under Pennsylvania law. See 562 F.3d at
598 (“We are, therefore, confident that the Supreme Court of
Pennsylvania would conclude that an underlying claim alleging
breach of contract would not trigger coverage under a
[commercial general liability] policy.”); see also Pa. Mfrs.
Assoc. Ins. Co. v. L.B. Smith, Inc., 831 A.2d 1178, 1181 (Pa.
Super. Ct. 2003) (“Pennsylvania law does not recognize the
applicability of a general liability policy to breach of contract
and breach of warranty claims.”); Redevelopment Auth. of
Cambria County v. Int’l Ins. Co., 685 A.2d 581, 592 (Pa. Super.
Ct. 1996) (en banc). Accordingly, Continental did not have a
duty to defend Specialty Surfaces after receiving notice of the
original complaint.

B. Amended Complaint

Neither was Continental required by the policy to defend
Sprinturf after it received notice of the amended complaint. In
the amended complaint, Shasta alleged that Empire was
negligent in designing, manufacturing and installing a suitable

31
and compatible subdrain system and impermeable liner in
compliance to the contract documents. As a result, Shasta
alleged that there was damage to the synthetic turf, the
impermeable liner, the subdrain system, and the subgrade.

Continental was not required to defend Sprinturf because
the allegations in the amended complaint do not support a
determination that any damage was caused by an “occurrence.”
Any damages to Empire’s own work product based on Empire’s
alleged negligence are claims of damage based on faulty
workmanship. Because they are not caused by an accident,
under Kvaerner, they are not a covered “occurrence” under the
insurance policy. See 908 A.2d at 889-90.

Sprinturf, however, argues that the damage to the
subgrade, which was prepared by Trent Construction, was
accidental, and thus constitutes a covered occurrence. This
argument is foreclosed by the Superior Court’s decision in
Gambone, in which the Court rejected a similar argument made
by the insured. There, the insured alleged that there was
“ancillary and accidental damage” caused by water leaks that
resulted from faulty workmanship. 941 A.2d at 713. The
insured argued that the water damage to the non-defective work
constituted an occurrence under the policy. Relying on
Kvaerner, the Superior Court rejected the argument that the
damage caused by water leaks resulting from faulty
workmanship was an occurrence. The Court observed that the
Kvaerner Court’s emphasis on the “degree of fortuity”

32
“suggested that natural and foreseeable acts, such as rainfall,
which tend to exacerbate the damage, effect, or consequences
caused ab initio by faulty workmanship also cannot be
considered sufficiently fortuitous to constitute an ‘occurrence’
or ‘accident’ . . . .” Id. Thus, damages that are a reasonably
foreseeable result of the faulty workmanship are also not
covered under a commercial general liability policy. Id. at 713-
14; see also CBP International, 562 F.3d at 596-97.

Here, Shasta alleged that Empire installed the subdrain
system, the impermeable liner, and the synthetic turf. In
addition to defects in Empire’s work product, Shasta alleged that
“as a direct result” of the problems with the subdrain system,
“water has leaked from the subdrain system into the subgrade,
dirt has washed from the subgrade into the subdrain system, the
subgrade has settled and subgrade soil stablilizer has
remulsified. Consequently, the fields have developed
depressions and unstable playing surfaces . . . .” JA 615. Thus,
the amended complaint alleges that the damage to the subgrade
was caused by water leaks that resulted from the faulty
workmanship. But water damage to the subgrade is an entirely
foreseeable, if not predictable, result of the failure to supply a
“suitable” impermeable liner or properly install the drainage
system. Thus, as in Gambone, this damage is not “sufficiently
fortuitous to constitute an ‘occurrence’ or ‘accident.’” 941 A.2d
at 713.

Sprinturf insists that Gambone is distinguishable from

33
our case because the plaintiffs there did not allege damage
beyond the structure of the house, which was the work product
of the insured. This argument, however, ignores that the
Gambone Court, following Kvaerner, clearly focused on
whether the alleged damage was caused by an accident or
unexpected event, or was a foreseeable result of the faulty
workmanship when deciding whether the policy covered the
damage. Here, water damage to the subgrade was a foreseeable
result of the failure to supply a suitable liner or “to ensure the
proper design, manufacture and installation of the synthetic turf
and subdrain system.” JA 619. Accordingly, we believe the
District Court properly predicted that the Pennsylvania Supreme
Court would decide that Continental did not have a duty to
defend Sprinturf in the California litigation. It follows that
Continental had no duty to indemnify Sprinturf.

IV. Conclusion

For these reasons, we conclude that Pennsylvania law
applies to this insurance coverage dispute and that Continental
had no duty to defend Sprinturf under its commercial general
liability policy. Therefore, we will affirm the judgment of the
District Court.

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