UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

PENN AMERICA INSURANCE COMPANY, 

Plaintiff-Appellee,

v.

JOSEPH A. VALADE, d/b/a JAV,

Incorporated,  No. 01-1546 Defendant-Appellant,

and

EDMOND R. MCKEON, d/b/a Exterior

Wall Systems of North Carolina,

Defendant. 

Appeal from the United States District Court

for the Eastern District of North Carolina, at Wilmington.

James C. Fox, Senior District Judge.

(CA-00-48-7-F)

Argued: November 1, 2001

Decided: January 25, 2002

Before WILKINSON, Chief Judge, and WILKINS and

KING, Circuit Judges.

Affirmed by unpublished per curiam opinion. Judge Wilkins wrote an

opinion concurring in part and dissenting in part. 

COUNSEL

ARGUED: Maynard Moore Brown, JOHNSON & LAMBETH, Wilmington, North Carolina, for Appellant. Brian Orlando Beverly,
YOUNG, MOORE & HENDERSON, P.A., Raleigh, North Carolina,

for Appellee. 

Unpublished opinions are not binding precedent in this circuit. See

Local Rule 36(c). 

OPINION

PER CURIAM: 

On March 16, 2001, in this declaratory judgment proceeding relating to insurance coverage, the district court for the Eastern District of

North Carolina awarded summary judgment to Penn America Insurance Company ("Penn America"). Joseph A. Valade, doing business

as JAV, Incorporated ("JAV"), appeals the adverse ruling of the district court, maintaining that it erroneously ruled in favor of Penn

America. As explained below, we affirm the district court’s award of

summary judgment. 

I.

In January 1998, JAV entered into a contract with a townhouse

community in southeastern North Carolina, known as Pembroke at

Land Fall Townhouses Homeowners’ Association ("Pembroke"), to

remove synthetic stucco from several private homes at Pembroke and

replace it with a substance called synthetic hard-coat stucco. JAV

subcontracted to Edmond R. McKeon, doing business as Exterior

Wall Systems of North Carolina ("Exterior Wall"), the hard-coat

stucco work it had agreed to perform at Pembroke. After Exterior

Wall completed its stucco work, it was fully paid. 

Thereafter, JAV received complaints from Pembroke concerning

damage to Pembroke properties (the "Pembroke Damage") that had

occurred during the work subcontracted to Exterior Wall. JAV

demanded that Exterior Wall repair the Pembroke Damage, but Exterior Wall refused. As a result, in order to meet its contractual obliga2 PENN AMERICA INS. v. VALADE
tions to Pembroke, JAV repaired the Pembroke Damage caused by

Exterior Wall. 

Exterior Wall was the insured under a General Commercial Liability Policy (the "Policy") issued by Penn America, and the parties

agree that the Policy was in effect when Exterior Wall caused the

Pembroke Damage. When Exterior Wall refused to repair the properties, JAV notified Penn America, as Exterior Wall’s insurer, that it

possessed a claim against Exterior Wall for the Pembroke Damage.

Penn America investigated JAV’s claim, but denied coverage. 

In March 1999, JAV filed a lawsuit against Exterior Wall in North

Carolina state court (the "North Carolina Lawsuit"), alleging that it

was entitled to recover from Exterior Wall for the Pembroke Damage.

In March 2000, Penn America filed this declaratory judgment action

in the Eastern District of North Carolina. Penn America named both

Exterior Wall and JAV as defendants in the declaratory judgment proceeding, seeking a declaration that "Penn America has no duty to

defend Exterior Wall in [the North Carolina Lawsuit], and no obligation to indemnify Exterior Wall for any settlement or judgment for

damages arising out of the underlying civil action." On June 23, 2000,

the district court entered default judgment against Exterior Wall

because it had failed to answer or respond to Penn America’s complaint. In its default judgment, the court ruled that, under the Policy,

Penn America possessed no duty to defend or indemnify Exterior

Wall. The court decreed, by way of default, that Penn America was

relieved of any duty to defend Exterior Wall and had no obligation

to indemnify for any damages arising out of the underlying civil

action. Thereafter, on December 28, 2000, with JAV still a defendant

in the case, Penn America moved for summary judgment against JAV

maintaining that, under the Policy, it had no duty either to defend or

to indemnify in the North Carolina Lawsuit.* On March 16, 2001, the

*In seeking summary judgment against JAV, and in this appeal, Penn

America has never maintained that JAV was bound by the district court’s

default judgment against Exterior Wall. Indeed, as we point out in Part

II, infra, JAV was not bound by the default judgment because, as an

injured third party, it was entitled to defend on the merits in the declaratory judgment proceeding. Fed. Kemper Ins. Co. v. Rauscher, 807 F.2d

345, 355 (3rd Cir. 1986) (recognizing that "it would be anomalous to

hold that the [third parties] should not be given an opportunity to establish their case against [the insurer] because of a default which they could

not prevent"). 

PENN AMERICA INS. v. VALADE 3
district court granted Penn America’s summary judgment motion.

This appeal followed. 

II.

Penn America and JAV, the parties to this appeal, assert that we

possess jurisdiction to hear and decide it pursuant to 28 U.S.C.

§ 1291. Nevertheless, pursuant to Rule 12(h)(3) of the Federal Rules

of Civil Procedure, we are obligated to examine the question of subject matter jurisdiction "[w]henever it appears" it may be lacking.2

 5A

Charles Allan Wright & Arthur R. Miller, Federal Practice and Procedure § 1393 (2d ed. 1990 & Supp. 2001) (collecting cases). The posture of this appeal — an insurer (Penn America) maintaining a

declaratory judgment action against an injured third party (JAV) after

default judgment has been entered against the insured (Exterior Wall)

— creates the appearance that we may lack subject matter jurisdiction. We must therefore examine whether we possess jurisdiction over

this appeal. 

The Supreme Court, in Maryland Casualty Co. v. Pacific Coal &

Oil Co., 312 U.S. 270 (1941), determined that an "actual controversy"

exists between an insurer, on the one hand, and a third party injured

by the insured, on the other, when the insurer has initiated a declaratory judgment action against both its insured and the injured third

party seeking court determination of its obligations under an insurance policy. Id. at 273-74. We had occasion to apply the principle of

Maryland Casualty in our decision in Nautilus Insurance Co. v. Winchester Homes, Inc., 15 F.3d 371 (4th Cir. 1994). Writing for our

Court, Judge Phillips concluded as follows: 

[a] dispute between a liability insurer, its insured, and a third

party with a tort claim against the insured over the extent of

the insurer’s responsibility for that claim is an "actual controversy" . . ., even though the tort claimant has not yet

reduced his claim against the insured to judgment. 

2Under Rule 12(h)(3) of the Federal Rules of Civil Procedure: 

Whenever it appears by suggestion of the parties or otherwise

that the court lacks jurisdiction of the subject matter, the court

shall dismiss the action. 

4 PENN AMERICA INS. v. VALADE
Id. at 375 n.3. In so concluding, we recognized that the third party’s

interest in defining the scope of insurance coverage is independent of

the interest of the insured. When an insurer initiates a declaratory

judgment action against both an injured third party and its insured, the

injured third party acquires standing — independent of that of the

insured — to defend itself in the declaratory judgment proceeding.

Fed. Kemper Ins. Co. v. Rauscher, 807 F.2d 345, 353-56 (3rd Cir.

1986) (stating that injured third party "ha[s] standing to defend the

declaratory judgment action despite the absence of . . . the actual

insured"); Hawkeye-Sec. Ins. Co. v. Schulte, 302 F.2d 174, 177 (7th

Cir. 1962) ("It would be anomalous to hold here that an actual controversy exists between [an injured third party] and [an insurer] and yet

deny [the injured third party] the right to participate in the controversy."). In this regard, it would be anomalous not to permit the

injured third party an opportunity to present its case against the

insurer, which initially brought the declaratory judgment action, after

the insured defaulted.3

Accordingly, we are constrained to conclude that we possess subject matter jurisdiction over this appeal. The default judgment entered

by the district court against Penn America’s insured, Exterior Wall,

does not negate the case or controversy existing between the insurer,

Penn America, and the injured third party, JAV. Our jurisdiction

therefore arises pursuant to 28 U.S.C. § 1291, and we will proceed to

consider the merits of this appeal. 

III.

Pursuant to Rule 56(c) of the Federal Rules of Civil Procedure,

summary judgment is appropriate "if the pleadings, depositions,

answers to interrogatories, and admissions on file, together with the

affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter

of law." Morrel v. Nationwide Mut. Fire Ins. Co., 188 F.3d 218, 222

n.5 (4th Cir. 1999) (internal quotations and citations omitted). This

Court reviews de novo a district court’s award of summary judgment.

Id. In conducting such de novo review, "we consider the facts in the

light most favorable to the non-moving party." Id.

3

See supra note 1 and accompanying text. 

PENN AMERICA INS. v. VALADE 5
IV.

On appeal, JAV maintains that the district court committed reversible error in two specific respects. First, it contends that the court

erred by awarding Penn America summary judgment on the existence

of a duty under the Policy to defend Exterior Wall. Second, JAV

asserts that the district court erred by concluding that there were no

genuine issues of material fact regarding whether the claims alleged

in the North Carolina Lawsuit fell within the coverage provisions of

the Policy. We examine each of these contentions in turn.

A.

First, JAV contends that the district court incorrectly determined

that Penn America had no duty to defend Exterior Wall in the North

Carolina Lawsuit. Under North Carolina law,4 an insurer’s duty to

defend arises before the merits of the claim against the insured are

adjudicated, County of Guilford v. Nat’l Union Fire Ins. Co. of Pittsburgh, 422 S.E.2d 360, 363 (N.C. Ct. App. 1992). And an insurer’s

duty to defend is broader than its obligation to indemnify under the

terms of an insurance policy. Waste Mgmt. of Carolinas, Inc. v. Peerless Ins. Co., 340 S.E.2d 374, 377 (N.C. 1986). Moreover, an insurer

may possess a duty to defend its insured "even in an action in which

no damages are ultimately awarded." Bruce-Terminix Co. v. Zurich

Ins. Co., 504 S.E.2d 574, 578 (N.C. Ct. App. 1998). 

The courts of North Carolina utilize the "comparison test" to decide

if an insurer possesses a duty to defend its insured. Waste Mgmt., 340

S.E.2d at 378. Under the "comparison test," the allegations made in

the underlying complaint against the insured are compared to the policy provisions, and if the allegations represent a risk covered by the

insurance policy, the insurer possesses a duty to defend its insured. Id.

And, under North Carolina law, "any doubt as to coverage must be

resolved in favor of the insured." Duke Univ. v. St. Paul Fire &

Marine Ins. Co., 386 S.E.2d 762, 763-64 (N.C. Ct. App. 1990). 

4The parties agree that this insurance coverage dispute is governed by

the law of North Carolina. 

6 PENN AMERICA INS. v. VALADE
Penn America is obligated under the Policy only to "pay those

sums that the insured becomes legally obligated to pay as damages

because of . . . ‘property damage’ to which this insurance applies."

The Policy covers "‘property damage’ only if: . . . [t]he . . . ‘property

damage’ is caused by an ‘occurrence.’" An "occurrence" is then

defined to "mean[ ] an accident," but the Policy fails to define the

term "accident." 

The Supreme Court of North Carolina has long defined the term

"accident," in the context of a general liability insurance policy, as an

unforeseen, unexpected, unusual, or unprecedented consequence.

Waste Mgmt., 340 S.E.2d at 379; Tayloe v. Hartford Accident &

Indem. Co., 127 S.E.2d 238, 240-41 (N.C. 1962). In so doing, the

court has consistently focused on the expectation or foresight of the

insured, and it has determined that "potentially damaging events that

can be anticipated are not ‘occurrences’ within the meaning of the

policy." Waste Mgmt., 340 S.E.2d at 380. Accordingly, an "accident"

does not occur when property damage is caused by defective or poor

workmanship, because an insured should foresee and expect the

resulting damage. See Wm. C. Vick Constr. Co. v. Pa. Nat’l Mut. Cas.

Ins. Co., 52 F. Supp. 2d 569, 581-83 (E.D.N.C. 2000) (recognizing

that faulty workmanship does not constitute "accident" under General

Commercial Liability Policy).5

5The district court’s determination in Vick Construction that faulty

workmanship does not constitute an "accident" under North Carolina law

is consistent with authority from other jurisdictions. See generally Reliance Ins. Co. v. Magavero, 640 F. Supp. 84, 86 (D. Md. 1986) (stating

that "‘occurrence’ does not include the normal, expected consequences

of poor workmanship" and that "it still connotes the idea of ‘accident’"

which means "an event or condition occurring by chance or arising from

unknown or remote causes or lack of intention or necessity"); Indiana

Ins. Co. v. Hydra Corp., 615 N.E.2d 70, 73 (Ill. App. Ct. 1993) (determining no "accident" for cracks and loose paint caused by defective

installation of concrete flooring, and stating "[a]n accident is an unforeseen occurrence, usually of an untoward or disastrous character or an

undesigned sudden or unexpected event of an inflictive or unfortunate

character," and further observing that "[t]he natural and ordinary consequences of an act do not constitute an accident"). 

PENN AMERICA INS. v. VALADE 7
When the comparison test is applied here, i.e., the allegations in the

North Carolina Lawsuit are compared to the provisions of the Policy,

it is apparent that the allegations do not implicate a risk covered by

the Policy. JAV alleged in the North Carolina Lawsuit that Exterior

Wall, "in installing the conventional hard-coat stucco, damaged Pembroke at Landfall’s property including damage to driveways, patios,

chimneys, painted walls, stone walkways, slate roofs, air conditioners

and landscaping." JAV, however, made no allegations concerning

how the Pembroke Damage occurred, even though its counsel

acknowledged at oral argument that part of Exterior Wall’s work

included the effort customarily associated with cleaning up a worksite

following application of hard-coat stucco. 

In short, in order for the Pembroke Damage to be a covered risk

under the Policy, JAV was required to allege in the North Carolina

Lawsuit that Exterior Wall caused it and that it was the result of an

"accident." JAV failed, however, to make any such allegation. As

such, the district court did not err in deciding that Penn America possessed no duty to defend Exterior Wall in the North Carolina Lawsuit.

B.

JAV also maintains on appeal that the district court erred in awarding summary judgment to Penn America on the issue of indemnity,

asserting that a genuine issue of material fact existed concerning

whether the Pembroke Damage constituted an "occurrence" under the

Policy. Under the law of North Carolina, a party seeking coverage

under an insurance policy bears the burden of proving that any

claimed damage falls within the policy’s terms. Hobson Constr. Co.

v. Great Am. Ins. Co., 322 S.E.2d 632, 635 (N.C. Ct. App. 1984)

("We note that the insured . . . has the burden of bringing itself within

the insuring language of the policy."). This burden of proof remains

unchanged when the insurer initiates a declaratory judgment proceeding concerning its coverage obligations under an insurance policy. Id.

As such, JAV must forecast evidence sufficient to demonstrate a genuine issue of material fact on whether the Pembroke Damage was the

foreseen, expected, usual, or normal consequence of poor or defective

workmanship. Otherwise, such damage does not fall within the Policy’s indemnity provisions. 

8 PENN AMERICA INS. v. VALADE
In addition to its failure to allege in the North Carolina Lawsuit that

the Pembroke Damage was caused by an "accident," JAV did not

forecast any evidence to demonstrate a genuine issue of material fact

concerning whether such damage was the expected consequence of

defective or poor workmanship. As a result of this failure, the district

court correctly concluded that there was no genuine issue of material

fact regarding whether the Pembroke Damage was covered by the

Policy. Accordingly, the court did not err in awarding summary judgment to Penn America on the indemnity issue.6

V.

Pursuant to the foregoing, the district court’s award of summary

judgment to Penn America is affirmed.

AFFIRMED

WILKINS, Circuit Judge, concurring in part and dissenting in part: 

I concur in the part of the majority opinion affirming the grant of

summary judgment to Penn America on the indemnity claim. However, I dissent from the majority’s affirmance on the duty-to-defend

issue. 

Under North Carolina law, a liability insurer has a duty to defend

a lawsuit against its insured if, from the facts alleged in the complaint,

there is even a "possibility" that coverage could exist for some or all

of the potential liability from the suit. Waste Mgmt. of Carolinas, Inc.

v. Peerless Ins. Co., 340 S.E.2d 374, 377 n.2 (N.C. 1986); see Washington Housing Auth. v. N.C. Housing Auths. Risk Retention Pool,

502 S.E.2d 626, 629 (N.C. Ct. App. 1998) ("[T]he insured has a right

to a defense whenever the allegations show a potential that liability

6

In its appeal, Penn America also maintains that five Policy exclusions

bar coverage for the Pembroke Damage. These exclusions pertain to

"Damage to Property," "Damage to Your Product," "Damage to Your

Work," "Damage to Impaired Property Not Physically Injured," and "Recall of Products, Work, or Impaired Property." We need not analyze the

application of these exclusions because we have determined that the

Pembroke Damage does not fall within the scope of the Policy. 

PENN AMERICA INS. v. VALADE 9
will be established within the insurance coverage, and the complaint

contains no allegation of facts which would necessarily exclude coverage." (internal quotation marks omitted) (alteration in original)).

Moreover, "any doubt as to coverage must be resolved in favor of the

insured." Duke Univ. v. St. Paul Fire & Marine Ins. Co., 386 S.E.2d

762, 763-64 (N.C. Ct. App. 1990). 

Penn America’s policy obligated it to "pay those sums that the

insured becomes legally obligated to pay as damages because of . . .

‘property damage’ to which this insurance applies." J.A. 30. Coverage

is provided for "‘property damage’ only if: . . . [t]he . . . ‘property

damage’ is caused by an ‘occurrence.’" Id. The policy defines "occurrence" as "an accident," but it does not further define "accident." Id.

at 40. North Carolina courts have defined "accident" as "an unforeseen event, occurring without the will or design of the person whose

mere act causes it." Tayloe v. Hartford Accident & Indem. Co., 127

S.E.2d 238, 239-40 (N.C. 1962) (internal quotation marks omitted).

That an insured’s employee’s work product is substandard does not

transform that work into an "accident," as that term is employed here.

See Wm. C. Vick Constr. Co. v. Pa. Nat’l Mut. Cas. Ins. Co., 52 F.

Supp. 2d 569, 584-86 (E.D.N.C. 1999), aff’d, 213 F.3d 634 (4th Cir.

2000) (per curiam) (unpublished table decision). On the other hand,

that an unexpected event was proximately caused by an insured’s

employee’s negligence does not prevent it from constituting an "accident." See Waste Mgmt., 340 S.E.2d at 380 (holding that leaching of

contaminants into groundwater was an "accident" even though it was

allegedly proximately caused by the insured’s negligence). 

Here, the complaint in the North Carolina lawsuit is silent regarding the nature of the property damage caused by Exterior Wall, how

the damage occurred, and whether some or all of it occurred as the

result of an accident. The complaint alleges only that Exterior Wall,

"in installing . . . conventional hard coat stucco, damaged Pembroke

at Landfall’s property including damage to driveways, patios, chimneys, painted walls, stone walkways, slate roofs, air conditioners and

landscaping." J.A. 15. Thus, the complaint allows for the possibility

that at least some of the damage was the result of an accident. For

example, Exterior Wall might have been liable for damage that

occurred when a negligently placed bucket of stucco fell off of Exterior Wall’s scaffolding. Indeed, Penn America conceded at oral argu10 PENN AMERICA INS. v. VALADE
ment that a falling bucket would constitute an "accident" and that

damage from a falling bucket could be within the scope of JAV’s complaint. Because the allegations in the complaint do not expressly

negate the possibility that some of the damage resulted from an accident, I would hold that the district court erred in granting summary

judgment to Penn America on the duty to defend issue.

The majority’s decision to affirm is apparently based on JAV’s

concession at oral argument that Exterior Wall’s duties included

cleaning up the worksite after applying the stucco. See ante, at 8 (noting the concession). The majority appears to believe this fact is significant based on (1) an assumption that all of the damage for which

Exterior Wall could be held liable was caused by Exterior Wall’s failure to conduct an adequate clean-up, and (2) a conclusion that such

a failure would not constitute an "accident." The flaw in this analysis

is that the complaint does not allege that all of the damage was caused

by a failure to conduct an adequate clean-up, nor does it allege facts

from which that proposition would necessarily follow. Accordingly,

the complaint allows the possibility that some (if not all) of the damage for which Exterior Wall could be held liable was the result of a

covered occurrence. 

The majority’s decision may also be based on an assumption that

because Exterior Wall caused the damage in the course of performing

its work, any damage was necessarily the result of defective or poor

workmanship, rather than an accident. See ante, at 7 (noting that damage resulting from poor workmanship is not the result of an accident).

Such an assumption is unwarranted because the complaint does not

allege that all of the damage resulted from work intentionally performed by Exterior Wall. Rather, it leaves open the possibility that

some damage occurred as the result of an unforeseen event, as in the

example I have identified. 

Finally, the majority’s decision may be based on a belief that Penn

America had a duty to defend only a suit wherein the complaint specifically alleged that the damage was the result of an accident. See

ante, at 8-9 (stating that "in order for the Pembroke Damage to be a

covered risk under the Policy, JAV was required to allege in the

North Carolina Lawsuit that . . . it was the result of an accident"). In

that event, the majority has adopted an unduly restrictive reading of

PENN AMERICA INS. v. VALADE 11
North Carolina law. See Waste Mgmt. of Carolinas, Inc. v. Peerless

Ins. Co., 323 S.E.2d 726, 730 (N.C. Ct. App. 1984) (explaining that

when "the allegations in the complaint are broad, and uncertain as to

specific facts, the insured has a right to a defense whenever the allegations show a potential that liability will be established within the

insurance coverage" (internal quotation marks omitted)), rev’d on

other grounds, Waste Mgmt., 340 S.E.2d at 383.1

Regardless of the basis for the majority’s decision, I do not agree

that the district court correctly granted summary judgment to Penn

America on the duty-to-defend claim, and I respectfully dissent from

that portion of the majority opinion.

1

I also would hold that none of the policy exclusions cited by Penn

America eliminated its duty to defend this suit. 

12 PENN AMERICA INS. v. VALADE