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ALL AMERICA INS. CO. v. BROEREN RUSSO CONST.

September 14, 2000

ALL AMERICA INSURANCE COMPANY AND CENTRAL MUTUAL INSURANCE COMPANY, PLAINTIFFS,
V.
BROEREN RUSSO CONSTRUCTION, INC., DEFENDANT.



The opinion of the court was delivered by: McCUSKEY, District Judge.

    ORDER

On October 29, 1999, Plaintiffs, All America Insurance Company and Central Mutual Insurance Company, filed a Complaint for Declaratory Judgment (#1) against Defendant, Broeren Russo Construction, Inc. This case is now before the court for ruling on Plaintiffs' Motion for Judgment on the Pleadings (#6 and Plaintiffs' Motion to Strike Defendant's Affirmative Defenses (#8).

Following careful review, Plaintiffs' Motion for Judgment on the Pleadings (#6) is GRANTED. Plaintiffs' Motion to Strike Affirmative Defenses (#8) is also GRANTED.

I. FACTS

Plaintiffs' Complaint for Declaratory Judgment alleged that this court has jurisdiction over the action based upon diversity of citizenship (28 U.S.C. § 1332). All America Insurance alleged that it issued a policy to Defendant for Commercial General Liability Insurance for the policy period of February 28, 1993, to February 28, 1994. Central Mutual alleged that it issued a policy to Defendant for Excess Liability Insurance for the same policy period. On March 16, 1998, KDB III Enterprises, L.L.P. (KDB), filed a complaint against Defendant in the circuit court of Champaign County. Defendant tendered its defense to All America Insurance, and All America accepted the tender subject to a reservation of rights.

In their Complaint, Plaintiffs requested a declaration from this court that they have no duty to defend Defendant in the action pending in the circuit court of Champaign County. Plaintiffs argued they had no duty to defend because: (1) the claimed damage occurred before the first date of coverage; (2) there were no allegations of an occurrence or property damage in the underlying action as defined by the insurance policy; and (3) coverage is precluded by three separate exclusions contained in the policy. Furthermore, Plaintiffs argued that Defendant is collaterally estopped by the decision of this court in American Fire & Casualty Company v. Broeren Russo Construction, Inc., 54 F. Supp.2d 842 (C.D.Ill. 1999), from contending that an occurrence is alleged by the action pending in the circuit court of Champaign County.

Plaintiffs attached to their Complaint for Declaratory Judgment a copy of the insurance policy issued to Defendant. The policy issued by All America provided that "[t]his insurance applies to `bodily injury' and `property damage' only if (1) [t]he `bodily injury' or `property damage' is caused by an `occurrence' that takes place in the `coverage territory;' and (2)[t]he `bodily injury' or `property damage' occurs during the policy period." The policy defined occurrence as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Similarly, Central Mutual's excess insurance policy defined an occurrence as "an accident, or happening or event, or a continuous or repeated exposure to conditions which unexpectedly or unintentionally results in `bodily injury' or `property damage.'"

Plaintiffs also attached to their Complaint a copy of the underlying KDB complaint and attachments. In the underlying complaint, KDB alleged that Defendant entered into a contract on February 26, 1990, to furnish, install, and deliver an Exterior Insulation Finish System (System) during the construction of the Trade Centre South Building (Building) in Champaign, Illinois. The purpose of the System was to prevent water from leaking to the interior of the Building. The contract specified that Defendant was responsible for providing a proper and complete installation of the System. Work ceased on the Building in 1991, and KDB rented space in the Building to tenants. The System was warranted by Defendant for a period of one year. KDB alleged that water had leaked into the Building from the time tenants rented the Building to the present date. KDB alleged that' Defendant attempted to remedy the defective installation of the System but Defendant's efforts did not stop the leaking.

KDB further alleged that it entered into an agreement with Defendant in April 1995 to remedy the defective installation of the System. Defendant completed the remedial repair work on June 30, 1995. Defendant provided a 15-month warranty for the remedial work. KDB notified Defendant on May 29, 1996, that the remedial work did not stop the leaking. In this letter, KDB also stated that Defendant failed to repair the interior drywall and ceiling tile as agreed. KDB alleged that Defendant has made no further efforts to remedy the problem. KDB alleged that "Defendant has been and continues to be in breach of the Contract and the Agreement." KDB alleged that, "as a direct and proximate result of these breaches of contract by Defendant, [KDB] has incurred extensive structural and aesthetic damage to the exterior and interior" of the Building. KDB sought damages in the amount of $685,908.41 based on Defendant's breach of contract. KDB alleged that these damages were for money expended in its attempt to stop the leaking, the cost of complete and proper reinstallation of the System and related water damage repairs.

Two separate letters were issued by All America to Defendant to reserve its rights under the policy. The first of these was issued on June 2, 1998. In this letter, All America indicated that it was reserving its rights under the policy for the following reasons: (1) the policy applied to bodily injury and property damage only if such damage occurred during the policy period; (2) the policy excludes damage being claimed due to the insured's work product; and (3) "any other material reasons." The letter went on to state that All America did "not waive any of its rights or admit any obligation under the policy." A second reservation of rights letter was issued on October 27, 1999, this time by both All America and Central Mutual. This second letter more specifically enumerated the grounds on which Plaintiffs were reserving their rights under the policy, including reference to the policy provision which explains that coverage will be provided for bodily injury and property damage only if it is caused by an "occurrence."

In its answer, Defendant raised the affirmative defenses of waiver, estoppel, breach of duty of good faith and fair dealing, and laches due to Plaintiffs failure to specifically enumerate all policy defenses in the reservation of rights letter dated June 2, 1998. Defendant argued that by failing to delineate all potential policy defenses until the October 27, 1999, letter, Plaintiffs failed to exercise ordinary diligence and prejudiced the Defendant. Defendant argues this prejudice arose because it surrendered its right to select its own counsel and control its own defense.

On February 29, 2000. Defendant filed a Response to Plaintiffs' Motion for Judgment on the Pleadings. Defendant argued that American Fire involved different issues from the present case, thereby making collateral estoppel inappropriate. Specifically, Defendant contends that American Fire properly reserved its rights under the policy by reserving the "occurrence" issue in its first letter to Defendant dated April 30, 1998. Defendant further argues that because Plaintiffs failed to cite the "occurrence" provision in a reservation of rights letter until sixteen months after their initial reservation of rights letter, All America and Central ...


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