Appellate Court's decision. Wilkin II makes clear that property damage under the type of insurance contracts involved in the present case is the damage to other parts of the structure or the contents of the structure. Even the costs of repairing or replacing an insured's products that have been incorporated in the structure are only measures of monetary compensation; "property damage" as used in the policies is the asbestos contamination or, in the present case, the occurrence of water damage. Following Wilkin II, the repair and replacement costs related to the defective Qest Systems would be measures of compensation for the water damage, which is the actual property damage as that term is used in the insurance policies. Since, in Wilkin II, the repair and replacement costs could be associated with asbestos-contamination, it was unnecessary to determine if repair and replacement costs could be measures of other types of property damage as well.
Having identified water damage as an event that constitutes property damage under the insurance policies, the trigger for insurance coverage can more readily be identified. Under the general rule, it is the occurrence of property damage that must fall within the policy period. Water damage does not occur until pipes leak. Therefore, in the "leaker" cases, the applicable policy is the one in effect at the time the water leaks and causes damage to the structure or contents of the structure. As indicated by Wilkin II, related repair or replacement costs, and presumably diminution in value expenses as well, are measures of the amount of compensatory damages, but the water damage to the property is the actual property damage. Even if repairs were not done until a later period of time or the diminution in value was not recognized until later, the covered damages represented by those costs are considered to have occurred at the time of the actual leaks. Such a holding is consistent with the plain language of the policy which covers "physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom."
This holding is consistent with New York law. Greenlee v. Sherman, 142 A.D.2d 472, 536 N.Y.S.2d 877, 880-81 (3d Dept. 1989), for example, makes clear that fire damage to a structure is distinct from damage to the defective product that caused the fire and that the fire damage occurs at the time the other property is physically injured by the fire, not when the defective product is physically injured. Water damage to a homeowner's walls, mattress, or other property is clearly physical injury to tangible property and thus clearly is property damage. Similar to fire damage to a structure or its contents occurring at the time the property burns, water damage to a structure or its contents occurs when the property becomes wet; it does not occur when the Qest System is first installed. As was pointed out in Greenlee, 536 N.Y.S.2d at 881, with regard to the defective furnace involved in that case and the ability to prevent a fire, if the defective plumbing system had been repaired before leaks occurred, no water damage would have ever occurred. Therefore, the water damage was not inevitable and, even if progressive deterioration occurred within the policy period, water damage could still have been prevented. Water damage cannot be considered to have occurred until property gets wet.
Eljer argues that property damage occurs from the moment the Qest System is installed because deterioration of the system begins the moment the system is installed and this constitutes physical injury to tangible property.
The problem with this argument is that the deterioration of the pipe is not itself covered property damage. While deterioration of the Qest System itself may very well constitute physical injury to tangible property that occurs within a policy period, such property damage is excluded from coverage under various exclusions contained in the policies. Coverable property damage does not occur until the system deteriorates to the point that it causes damage to other parts of the structure or contents of the structure as is indicated by the discussion of exclusions contained in Wilkin II, slip op. at 10-11.
Eljer relies on cases that it contends hold to the contrary. In Ohio Casualty Insurance Co. v. Bazzi Construction Co., 815 F.2d 1146 (7th Cir. 1987) (Illinois law), it was held that defective design or improper pouring of concrete for the second floor of a parking garage constituted property damage under a comprehensive general liability policy like that involved in the present case. In Bazzi, there was not merely damage to and defects in the insured's own work, but also damage to the structural integrity of the entire building. See id. at 1147-48. Bazzi was expressly distinguished from other cases that involved damage solely to the product or work of the insured. See id. at 1148. The present situation is distinguishable because, prior to any leaks, there is no damage to other parts of the structure and the structural integrity of the building is still sound. Once leaks occur, however, the structural integrity of the residential unit may very well be threatened or the building may be essentially uninhabitable because the water system cannot be used without causing further damage.
Eljer also relies on W.E. O'Neil Construction Co. v. National Union Fire Insurance Co. of Pittsburgh, 721 F. Supp. 984 (N.D. Ill. 1989). That case involved defective steel mesh inside the concrete of a four-level parking garage that caused cracks in the floors and walls throughout the garage. It was held that the damage to the structure, but not the defective mesh, was property damage under an insurance policy containing the same language as is involved in the present case. Contrary to Eljer's reliance on O'Neil, this case does not support Eljer's position since it holds that defects in the insured's product do not constitute property damage. O'Neil states the general rule that "Where a defective product manufactured or installed by the insured has been integrated with someone else's property, it is clear that damage to that property as a whole, excluding the cost of repairing or replacing the defective part, constitutes property damage." Id. at 991 (emphasis added). O'Neil makes clear that the defect in the product itself is not property damage. Id. at 992 (quoting Hamilton Die Cast, Inc. v. United States Fidelity & Guaranty Co., 508 F.2d 417, 419-20 (7th Cir. 1975) (applying Ohio law, but assuming Ohio law is consistent with Illinois law)).
Just as there were cracks in the parking garage in O'Neil, leaks in and water damage from a residential unit's Qest System would constitute damage to the overall structure.
Two Illinois Appellate Court cases pre-dating the form contract language involved in the present case involved incorporation of defective parts in a larger product. See Pittway Corp. v. American Motorists Insurance Co., 56 Ill. App. 3d 338, 370 N.E.2d 1271, 1275, 13 Ill. Dec. 244 (2d Dist. 1977); Elco Industries, Inc. v. Liberty Mutual Insurance Co., 46 Ill. App. 3d 936, 361 N.E.2d 589, 5 Ill. Dec. 266 (1st Dist. 1977). As was stated in Pittway, 370 N.E.2d at 1274, "we have found what we conclude to be a majority position which holds the term 'property damage' includes tangible property which has been diminished in value or made useless irrespective of any actual physical injury to the tangible property." Both cases, however, involved a definition of property damage as being "injury to or destruction of tangible property." Thus, in those cases, "injury to . . . tangible property" could constitute property damage, whereas the present case requires, under the general rule, "physical injury to . . . tangible property." Nevertheless, a more recent Illinois case involving the same contract language as in the present case holds that Elco and Pittway are still controlling law. See Marathon Plastics, Inc. v. International Insurance Co., 161 Ill. App. 3d 452, 514 N.E.2d 479, 484-86 (4th Dist. 1987), leave to appeal denied, 119 Ill. 2d 559, 522 N.E.2d 1246 (1988). This court must defer to the Illinois Appellate Court on issues of Illinois law unless there is good reason to believe and persuasive data that the Illinois Supreme Court would reject the holdings of the appellate courts. See First Comics, Inc. v. World Color Press, Inc., 884 F.2d 1033, 1038 (7th Cir. 1989), cert. denied, 493 U.S. 1075, 110 S. Ct. 1123, 107 L. Ed. 2d 1030 (1990); Peeler v. Village of Kingston Mines, 862 F.2d 135, 137 (7th Cir. 1988); Sommers v. 13300 Brandon Corp., 712 F. Supp. 702, 704 (N.D. Ill. 1989).
To the extent Elco and Pittway hold that physical injury to tangible property is not necessary for there to be property damage, those two cases are distinguishable because they involve different contract language. This holding of these two cases, however, has been largely incorporated into the language of the policies involved in this case. The exception incorporates this holding, though it only covers loss of use without physical injury, not mere diminution in value without physical injury. Marathon indicates that diminution in value can itself be property damage and apparently relies on the general rule of the policies, not the exception.
514 N.E.2d at 485. Given the plain language of the policy that physical injury is required
and in light of Wilkin II's discussion of the exclusions, there is persuasive evidence that repair costs, replacement costs, and diminution of value are not property damage under the general rule, nor even measures of property damage, absent physical injury to tangible property.
There is, however, another aspect of property damage that involves physical injury to tangible property and which is not inconsistent with the holding in Wilkin II. Liberty concedes that where repair or replacement of the insured's product requires damaging other parts of the structure in order to perform the replacement or repair, this damage to other parts of the structure constitutes property damage. See Elco, 361 N.E.2d at 591-92. In the present case, the breaking of walls, floors, and ceilings that must be done in order to have access to repairing or replacing the Qest System constitutes property damage. As regards the leaker cases, this type of property damage does not occur until after the leaks have occurred. Thus, the date of coverage for the damage would not be any earlier than it is when measuring it by the date of leaks. In any event, under the policies, covered damages for the leaker cases is covered by the policy in effect at the time leaks or water damage occurred and also by the policy in effect at the time repair or replacement work was performed.
The question still remains as to what policy covers damages in the non-leaker cases. In the cases where repairs or replacement work was performed, the policies in effect at the time that work was performed would provide coverage just as in the non-leaker cases. The non-leaker cases, however, can also fall under the exception. If, prior to leaks occurring, a residential unit's plumbing system could not be used out of fear that it would begin to leak and cause further damage, there would be loss of use without physical injury to tangible property. Under the exception, coverage would be in effect at the time of the occurrence, not the time of any physical injury. The policies define occurrence as "an accident including continuous or repeated exposure to conditions."
The continuous exposure to the defective plumbing system is the occurrence. See Wilkin II, slip op. at 7. Since exposure occurs from the time the Qest System is first installed in the residential unit, that is when the occurrence begins. Although property damage in the form of loss of use does not happen until later, the terms of the policy expressly provide that such property damage will be deemed to have occurred at the time of the occurrence. Any non-leaker claims for loss of use without physical injury are covered by the policy in effect at the time of installation and any subsequent policies in effect while the exposure continues.
See Raymark, 514 N.E.2d at 165.
Liberty argues that the non-leaker cases should be considered to occur at the time the owner becomes aware the Qest System is defective. Liberty relies on Bob Evans Farms, Inc. v. Excellent Builders, Inc., No. 84 C 506 (N.D. Ill. July 27, 1986). Using awareness or discovery as the measuring point, however, is not appropriate. First, the language of the insurance policy does not include any direct incorporation of a discovery rule. See American Home Products Corp. v. Liberty Mutual Insurance Co., 748 F.2d 760, 764 (2d Cir. 1984) (New York law); Dow Chemical, 724 F. Supp. at 481. Second, the rationale for using such a measure is inapplicable or inconsistent with Illinois law. Bob Evans does not expressly set forth the rationale for its ruling, but relies on two cases. See Mraz v. Canadian Universal Insurance Co., 804 F.2d 1325, 1328 (4th Cir. 1986); American Home Assurance Co. v. Libbey-Owens-Ford Co., 786 F.2d 22, 29-30 (1st Cir. 1986). Mraz involved leakage of hazardous waste. The court chose the date of discovery because determining the date of first leakage was difficult, if not impossible. Such a rationale is inapplicable to the non-leaker cases because here the date of installation or repair is a better documented and more readily determinable date than the date the owner discovered or should have discovered the Qest System was defective.
American Home does not expressly set forth a rationale, but it cites two cases. One of the cases does not set forth a rationale. See Bartholomew v. Insurance Co. of North American, 502 F. Supp. 246 (D.R.I. 1980), aff'd sub nom., Bartholomew v. Appalachian Insurance Co., 655 F.2d 27 (1st Cir. 1981). Also, Bartholomew involved the reverse situation where the insured wanted the occurrence to be later so that he could make a claim under new coverage. The other case relied on by American Home sets forth a rationale. United States Fidelity & Guaranty Co. v. American Insurance Co., 169 Ind. App. 1, 345 N.E.2d 267, 271 (1976), involved damage to a structure from spalling bricks. The court held that the covered property damage was damage to the structure, not damage to the bricks themselves. Thus, replacement of the bricks was not covered, but the diminished value of the building caused by the fading brick was covered. The court reasoned, therefore, that the time at which the fading became noticeable measured whether the property damage fell within the coverage period. Such reasoning implicitly relies on diminution in value as being the property damage. This court has held, however, that diminution in value is not itself property damage; it is only a possible measure of compensation for property damage. While it is perfectly reasonable to presume that property values drop at the same time the defective nature of the product is discovered, such a rationale is not appropriately applied in this case because the drop in value of the structure is not itself property damage or an occurrence and, under the insurance policies, it is property damage that must fall within the policy period under the general rule or an occurrence that must fall within the policy period under the exception. For the foregoing reasons, Bob Evans's discovery rule will not be followed.
IT IS THEREFORE ORDERED that:
(1) The intervening complaint of "plaintiff-intervenor" Travelers Indemnity Company of Illinois ("Travelers") is dismissed for lack of subject matter jurisdiction.
(2) Travelers is granted leave to intervene as a defendant-intervenor if a motion so to do is filed within five days of the date of this order. The Clerk of the Court is directed to amend the docket to redesignate Highlands as a defendant-intervenor.
(3) Travelers' motion to supplement the record is denied.
(4) Each party's motion for summary judgment is granted in part and denied in part.
(5) The Clerk of the Court is directed to enter a final declaratory judgment on all pending claims as follows: "Whereas Household Manufacturing, Inc. n/k/a Eljer Manufacturing, Inc. ("Eljer"), Liberty Mutual Insurance Company, and Highlands Insurance Company have requested a declaration as to the policy period within which certain claims related to the Qest Qick/Sert II residential polybutylene system ("Qest System") fall under the various policies of insurance issued by the other parties to Eljer and its predecessor corporations, it is hereby declared that: (1) all covered claims for water damage are covered by the policy or policies in effect at the time the water damage occurred; (2) all covered claims for loss of use of structure as a result of leaks in the Qest system is covered by the policy in effect at the time the leak occurred; (3) all covered claims for repairing or replacing the Qest System are covered by the policy or policies in effect at the time the repair or replacement work is performed; (4) all covered claims where no leaks have occurred at the residential unit but where there has been a loss of use of property are covered by the policy or policies in effect from the time the Qest System was first installed until the unit's plumbing system was repaired or replaced."