Recent Illinois Decision Fortifies Precedent that Construction Defects Fail to Trigger Occurrence under CGL Policies

By on May 10, 2016
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A recent decision in the United States District Court for the Northern District of Illinois slammed home standing precedent concerning whether a construction defect triggers an “occurrence” that would be covered under a commercial general liability (“CGL”) policy. In Allied Property & Casualty Insurance Co. v. Metro North Condominium Association, Judge Jorge Alonso granted the plaintiff’s motion for summary judgment and denied the defendant’s motion for summary judgment, essentially rejecting the argument that an underlying construction defect claim was covered under a CGL policy.

Allied Property arose from an underlying lawsuit in Cook County, Illinois, where Metro North Condominium Association (“Metro North”) sued the developer and various contractors and subcontractors of its condominium due to several defects in the construction, including, most notably, water infiltration. As part of its complaint, Metro North alleged that a window installation subcontractor breached its implied warranty of habitability when it defectively and improperly installed windows in the building, which led to severe water infiltration following a large rainstorm in October 2006. Allied Property & Casualty Insurance Co. (“Allied”) had issued a CGL policy to the window installer during the effective policy period, and Allied provided the contractor with an independent defense under a reservation of rights.

During the course of litigation, Metro North entered into a settlement with the window installation contractor for $700,000, the amount of which was to be satisfied “solely through the assignment…of all [its] rights to payment, if any, from Allied” under the applicable CGL policy. The policy required Allied to pay any amount its insured becomes legally obligated to pay “as damages because of…’property damage’…caused by an occurrence.” Allied then filed its motion for summary judgment in the Northern District of Illinois, seeking declaration that there was no coverage available with respect to Metro North’s settlement.

In arriving at its opinion, the Northern District had to delve into Illinois precedent. Specifically, the Illinois Appellate Court in 2011 held that “there is no occurrence when a subcontractor’s defective workmanship necessitates removing and repairing work,” but when the defective workmanship results in damage to something other than the construction project itself, there may be an occurrence (see Milwaukee Mutual Insurance Co. v. J.P. Larsen, Inc., 956 N.E.2d 524, 531 (Ill. App. Ct. 2011)).

Metro North’s claimed damages constituted approximately $2.1 million in damages caused by water infiltration to the common elements of the building, and just under $200,000 in damages to personal or other property. The court, in issuing its opinion, maintained Illinois’ longstanding precedent that a construction defect is not an “occurrence” that would trigger liability under a CGL policy because, here, the damages were the ordinary consequence of the contractor’s defective window installation. Specifically, the Northern District ruled that the severe bulk of the damages sought were not caused by an “occurrence,” but were rather the natural and ordinary consequence of faulty workmanship. In putting the nail in the coffin, the court held: “When a subcontractor who installs windows performs defective work, the natural and ordinary consequence is water infiltration that will damage the rest of the building. There is no accident, so there is no occurrence, so there is no coverage.”

The Allied Property holding is only the most recent cautionary tale for owners and contractors alike who are parties to a construction project in Illinois and who may not be able to realize coverage under a CGL policy for any resulting defect in the construction.

Filed under Commercial General Liability (CGL) Policy, Construction Defect

11th Circuit Interprets Post-1986 CGL Policy Under Florida Law

By on September 2, 2014
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In July 2014, the 11th U.S. Circuit Court of Appeals issued an unpublished decision interpreting the terms of a commercial general liability (CGL) policy in a construction defect dispute which, as a result of an endorsement, did not include a subcontractor exception with respect to the scope of “your work.”

According to the unpublished opinion in J.B.D. Constr., Inc. v. Mid-Continent Cas. Co. (MCC), 2014 U.S. App. LEXIS 13358 (11th Cir. Fla. July 11, 2014), in connection with a storm, certain project work proved to have been defectively installed, the result of which allowed water to penetrate the structure and damage completed work. In J.B.D., the 11th Circuit held that not only did the “your work” exclusion of the CGL policy support denial of claims made by the contractor for the cost to repair damage to its work, but it also supported denial of the contractor’s claim with respect to property damage that occurred as a result of its subcontractor’s defective work.

The Florida Supreme Court has yet to interpret a post-1986 CGL policy that does not include the subcontractor exception. However, in two consecutive opinions, the Florida Supreme Court did interpret a CGL policy to determine whether property damage to a contractor’s completed work caused by the defective work of subcontractors constituted an occurrence under a CGL policy, which was covered by the policy. Auto-Owners Ins. v. Pozzi Window Co., 984 So. 2d 1241 (Fla. 2008); U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007).

In J.S.U.B., the Florida Supreme Court considered a CGL policy that included the subcontractor exception. The J.S.U.B. court held that the costs to repair damage to property caused as a result of a subcontractor’s defective work is an occurrence and, therefore, a covered claim under a CGL policy. Insurers, contractors, developers and practitioners will be watching, if and when the Florida Supreme Court decides the issue addressed in J.B.D.

Worthy of note: In J.B.D., the insurer, MCC, determined after a claim was made that it had no duty to defend the contractor in the case. The 11th Circuit – citing Jones v. Fla. Ins. Guar. Ass’n, 908 So. 2d 435, 442–43 (Fla. 2005) – disagreed finding that MCC had a duty to defend under Florida law based upon the facts stated in the contractor’s complaint. The 11th Circuit found that “[e]ven if the facts in the complaint potentially bring the suit within policy coverage, an insurer may avoid the duty to defend if an exclusion applies to the face of the complaint.”

Based upon MCC’s conduct, the 11th Circuit held that MCC breached its duty to defend and remanded the case for a determination of J.B.D.’s damages, including consequential damages, from the time of tender through the conclusion of the case at the trial level.

Filed under Commercial General Liability (CGL) Policy, Construction Defect, Subcontractor Exception

Insurer Has No Duty to Defend Subcontractor That Installed Defective Tie Hooks

By on July 11, 2014

Gordon & Rees partner Arthur Schwartz and associate Steven R. Inouye recently wrote an Insurance Law Update that analyzes a California Court of Appeal decision that should be of interest to various construction-related entities, including owners, contractors and subcontractors.

In Regional Steel Corp. v. Liberty Surplus Ins. Corp., the court held that the insurer did not have a duty to defend a steel subcontractor because its installation of defective tie hooks did not constitute “property damage” under a commercial general liability (CGL) policy, even though the surrounding concrete needed to be demolished when the tie hooks were removed.

To read the article – “Building Code Violations Requiring Removal of Nonhazardous Materials Do Not Constitute ‘Property Damage’ Under CGL Policy” – click here.

Filed under Commercial General Liability (CGL) Policy, Defective Work or Material, Duty to Defend