December 1, 2000
TRAVELERS INSURANCE COMPANY ET AL. (GIBRALTAR CASUALTY COMPANY, APPELLEE AND CROSS-APPELLANT),
ELJER MANUFACTURING, INC., ET AL., APPELLANTS AND CROSS-APPELLEES.
The opinion of the court was delivered by: Justice Heiple
Agenda 17-September 2000.
This appeal arises out of four actions for declaratory judgment filed in the circuit court of Cook County by numerous insurance companies against Eljer Manufacturing, Inc., U.S. Brass Corporation, and Household International, Inc. (the policyholders). After the cases were consolidated, both the insurers and the policyholders moved for partial summary judgment. The circuit court granted the insurers' motion and denied the policyholders' motion. The appellate court reversed the summary judgment entered in favor of the insurers. 307 Ill. App. 3d 872. We granted leave to appeal.
From 1979 to 1990, the policyholders manufactured and sold a residential plumbing system known as Qest, which was installed in homes throughout the country. After the systems were installed, thousands of homeowners filed claims in various jurisdictions against the policyholders and other defendants involved in the manufacturing process, alleging that leaks in the systems caused extensive damage to their homes. Many of these claims have been settled. In addition, some homeowners whose systems did not leak filed claims seeking reimbursement for the cost of replacing the systems and the resulting diminution in the value of their homes.
Several insurers filed the instant actions in Illinois seeking a declaration of their duty to indemnify the policyholders for damage caused by the plumbing systems. The circuit court consolidated the suits. The insurers moved for partial summary judgment, contending that they have no duty to indemnify the policyholders for claims by homeowners whose systems did not leak during the policy period. The policyholders moved for summary judgment on this issue as well, contending that property damage covered under the insurers' policies occurred at the time the systems were installed. The circuit court granted the insurers' motion and denied the policyholders' motion, ruling that property damage for purposes of coverage under the insurers' policies does not occur until a system leaks.
On appeal, the appellate court noted that the insurers issued two different types of policies at different times to the policyholders. 307 Ill. App. 3d at 877. The court held that for the policies governed by New York law and issued before 1982, no leak was required to trigger coverage, but for the policies governed by Illinois law and issued after 1981, coverage was triggered only when a system actually leaked or when a homeowner caused damage to his property in the process of removing a nonleaking system. 307 Ill. App. 3d at 880-87. The appellate court accordingly reversed the trial court's entry of summary judgment for the insurers. 307 Ill. App. 3d at 887.
The facts relevant to our analysis are uncontested by the parties. The insurers issued various policies of excess liability coverage to the policyholders from 1979 to 1990, the years in which the policyholders manufactured the Qest plumbing system. All of the policies provide coverage for "property damage" occurring during the policy period. The policies issued for periods before 1982 are governed by New York law and define "property damage" as "injury to tangible property." The policies issued for periods after 1981 are governed by Illinois law and define "property damage" as "physical injury to or destruction of tangible property."
The construction of an insurance policy is a question of law. Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 108 (1992). In construing the policy, the court must ascertain the intent of the parties to the contract. Outboard Marine, 154 Ill. 2d at 108. If the words in the policy are unambiguous, a court must afford them their plain, ordinary, and popular meaning. Outboard Marine, 154 Ill. 2d at 108. An insurer's duty to indemnify arises only when the claimed loss or damage actually falls within the policy's coverage. Outboard Marine, 154 Ill. 2d at 128.
The insurers who issued policies for periods before 1982 contend that the appellate court erred in holding that the mere installation of the Qest system in a home constitutes "injury to tangible property" under New York law. The policyholders respond that under New York law the incorporation of a defective product into a larger entity can constitute injury to tangible property. The policyholders are correct.
"When one product is integrated into a larger entity, and the component product proves defective, the harm is considered to be harm to the entity to the extent that the market value of the entity is reduced in excess of the value of the defective component [citation]." Sturges Manufacturing Co. v. Utica Mutual Insurance Co., 37 N.Y.2d 69, 72-73, 332 N.E.2d 319, 322, 371 N.Y.S.2d 444, 447 (1975). This holding by New York's highest court, interpreting an insurance policy with language identical to the policy in the instant case, remains the law of New York to this day. Therefore, if the installation of a potentially defective Qest plumbing system caused a diminution in a home's value which was greater than the value of the Qest system itself, injury to tangible property occurred under the policies governed by New York law. The trial court thus erred in granting summary judgment to the insurers who issued policies for periods before 1982.
Next, the policyholders who held policies for periods after 1981 contend that the circuit and appellate courts erred in holding that, under Illinois law, the mere installation of the Qest systems did not constitute "physical injury to tangible property" within the meaning of the policies. The policyholders are mistaken. Affording the unambiguous terms of the policy their plain, ordinary, and popular meaning, no "physical injury to tangible property" occurred when the Qest systems were installed in homes which did not experience leaks. Although owners of such homes may understandably be alarmed at reports that the failure rate of the Qest system is as high as 5% to 10%, they nevertheless have suffered no "physical injury to tangible property" if their systems have not leaked. The circuit court therefore did not err in granting summary judgment to the post-1981 insurers.
The appellate court, however, erred in holding that coverage under the post-1981 policies may be triggered when a home is physically damaged by a homeowner in the process of replacing a nonleaking Qest system. Insurance coverage extends only to fortuitous occurrences. Mattis v. State Farm Fire & Casualty Co., 118 Ill. App. 3d 612, 621 (1983). Damage caused by a homeowner replacing a system which has not leaked does not constitute physical injury to tangible property arising from a covered occurrence under the policies.
The circuit court's grant of summary judgment is reversed as to the pre-1982 insurers and affirmed as to the post-1981 insurers. The appellate court's judgment is affirmed, with the exception of its holding concerning the voluntary removal of a nonleaking system, which is reversed. The cause is remanded to the circuit court.
Appellate court judgment affirmed in part and reversed in part; circuit court judgment affirmed in part and reversed in part; cause remanded.
JUSTICE RATHJE, concurring in part and dissenting in part:
I agree with the portion of the majority opinion regarding the pre-1982 policies to which New York law applies. I disagree, however, with the portion of the majority opinion regarding the post-1981 policies to which Illinois law applies.
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