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Traveler's Insurance Company v. Eljer Manufacturing

September 20, 2001

TRAVELER'S INSURANCE COMPANY ET AL. (GIBRALTER CASUALTY COMPANY), APPELLEE AND CROSS-APPELLANT
v.
ELJER MANUFACTURING, INC., ET AL., APPELLANT AND CROSS-APPELLEE



The opinion of the court was delivered by: Justice McMORROW

UNPUBLISHED

Docket Nos. 88407, 88410 cons.-Agenda 17-May 2001.

We are asked in this consolidated appeal to determine when indemnity coverage for "property damage" under excess comprehensive general liability insurance policies, issued between 1979 and 1990 by various insurance companies *fn1 (the insurers) to Eljer Manufacturing, Inc., Eljer Industries, Inc., United States Brass Corporation and Household International, Inc. (the policyholders), is triggered. The insurers filed four declaratory judgment actions in the circuit court of Cook County, seeking a declaration with respect to the insurers' obligations to indemnify the policyholders in thousands of underlying product liability claims filed by individuals alleging property damage arising out of the failure of the "Qest Qick/Sert II" (Qest) residential plumbing system. The Qest system was manufactured and sold by the policyholders, and was installed in buildings throughout the country during the policy periods. The circuit court of Cook County consolidated the insurers' declaratory judgment actions, and the parties thereafter filed cross-motions for partial summary judgment on the trigger-of-coverage issue. The circuit court granted summary judgment in favor of the insurers, and denied the cross-motion for summary judgment brought by the policyholders. The circuit court ruled, as a matter of law, that the insurers' duty to indemnify the policyholders for underlying "property damage" claims is triggered only when an actual leak in a Qest plumbing system occurs during the policy period. The circuit court explicitly rejected the argument advanced by the policyholders that "property damage" covered under the insurers' policies occurred during the policy period in which the Qest plumbing system was installed into a residence.

The appellate court reversed the circuit court's grant of summary judgment as to those insurance policies governed by New York law and issued prior to 1982, holding that the policy language did not require a leak to trigger coverage. With respect to those policies governed by Illinois law and issued after 1981, the appellate court determined that the circuit court correctly denied the policyholders' motion for summary judgment. However, the appellate court also found that the circuit court erred in granting summary judgment to the insurers with respect to the post-1981 policies. The appellate court concluded that the circuit court incorrectly held that "property damage" occurs, and coverage is therefore triggered, only at the time that a Qest system develops a leak. 307 Ill. App. 3d 872. We granted the policyholders' petitions for leave to appeal (177 Ill. 2d R. 315(a)), and consolidated these cases. For the reasons that follow, we affirm in part, reverse in part, and remand this cause to the circuit court for further proceedings.

BACKGROUND

Certain relevant facts giving rise to these consolidated actions are not in dispute. Between 1979 and 1990, United States Brass Corporation (U.S. Brass) manufactured and sold the components comprising a polybutylene plumbing system known as "Qest Qick/Sert II" (Qest). This plastic, hot/cold pressure residential plumbing system was sold to plumbing contractors who installed the system at construction sites, usually behind walls, or between floors and ceilings. Qest systems were installed in site-built homes, apartment buildings, and condominiums across the country until December 31, 1986. At that time, U.S. Brass ceased warranting the Qest system for use in site-built structures. However, U.S. Brass continued to manufacture and market the Qest system for mobile homes and prefabricated housing through 1990. It is estimated that between 500,000 and 750,000 housing units in the United States contain the Qest plumbing system. U.S. Brass is currently a wholly owned subsidiary of Eljer Manufacturing, Inc., which, in turn, is wholly owned by Eljer Industries, Inc. For a period of time relevant to this matter, U.S. Brass was a wholly owned subsidiary of Household International, Inc. As stated, these four corporate entities are the policyholders in the matter at bar.

According to an affidavit filed in the circuit court by Catherine E. Bracken, general counsel for U.S. Brass and senior counsel of Eljer Industries, Inc., as a result of certain alleged defects in the Qest plumbing system, product liability claims with respect to the Qest systems were first filed against U.S. Brass and its parent corporations in the early-1980s. These claims generally alleged that defects in the Qest system caused the system to leak, and sought recovery based upon theories of negligence, breach of warranty, strict tort liability, and, in some cases, fraud or misrepresentation. According to Bracken's affidavit, by the end of 1993, approximately 61,300 claims had been filed against U.S. Brass and its parent companies as a result of Qest system failures. Based upon the number of claims at that time, U.S. Brass estimated that approximately 4.6% of the Qest systems installed between 1979 and 1990 had experienced failures. Bracken averred that U.S. Brass and Eljer had made no subsequent estimates with respect to the projected failure rate of the Qest systems.

In her affidavit, Bracken further stated that several jury verdicts, in various jurisdictions across the county, have been entered against U.S. Brass and its parent corporations as a result of the Qest claims, "and thousands of other claims have been settled." *fn2 Kurt Nelson, outside counsel for U.S. Brass, stated in an affidavit submitted to the circuit court that almost all litigated claims involved residences which had experienced leaks in the Qest system. Nelson averred that these claims generally sought recovery for water damage to the housing structure, fixtures and personal property. In addition, damages were sought for expenses incurred in removing the Qest system from behind walls, floors and ceilings, and for diminution in the value of the building resulting from the presence of allegedly defective plumbing. According to Nelson, a minority of claims involved buildings that had not yet experienced leaks, but in which the homeowners, as a preventive measure, had removed the Qest systems. These claims sought recovery for the cost of replacing the Qest system as well as the diminution in value of the residences.

During the early 1990s, the four insurance coverage suits at issue in the appeal at bar were filed in the circuit court of Cook County. In May 1994, while these declaratory judgment actions were pending, U.S. Brass filed for bankruptcy protection in the United States Bankruptcy Court for the Eastern District of Texas. *fn3 Upon U.S. Brass' bankruptcy filing, proceedings in these Cook County coverage actions were automatically stayed. In June 1994, U.S. Brass filed in the United States Bankruptcy Court for the Northern District of Illinois a motion to transfer venue of these four coverage suits to the federal Bankruptcy Court for the Eastern District of Texas. However, the federal bankruptcy court for the Northern District of Illinois abstained from exercising jurisdiction and ordered these matters remanded to the circuit court of Cook County. The order of the bankruptcy court was affirmed by the United States District Court for the Northern District of Illinois (see U.S. Brass Corp. v. California Insurance Co., 198 B.R. 940 (N.D. Ill. 1996)) and the United States Court of Appeals for the Seventh Circuit (see In re United States Brass Corp., 110 F.3d 1261 (7th Cir. 1997)). On December 31, 1997, the bankruptcy stay was lifted by the United States Bankruptcy Court for the Eastern District of Texas. Thereafter, these declaratory judgment suits went forward in the circuit court of Cook County.

The circuit court consolidated the four suits into a single action seeking a declaration with respect to the triggering event for the insurers' duty to indemnify the policyholders for the underlying Qest liability claims. Throughout the period during which the policyholders manufactured and marketed the Qest system, the policyholders maintained multiple layers of comprehensive general liability (CGL) insurance. The excess CGL policies at issue in this appeal are "form following" policies which incorporate the terms and conditions of the policy in the layer of coverage below them, and which are only to be implicated once the underlying layers of coverage are exhausted. The relevant language contained in all of the excess CGL policies at issue in the matter at bar is identical, to the extent that all policies provide indemnity coverage for an "occurrence" resulting in third-party "property damage" which takes place during the respective policy period.

However, the policies differ with respect to the definition of "property damage," depending upon the years in which the policies were issued. The excess CGL indemnity policies in effect from 1979 through 1981 (pre-1982 policies) were negotiated and issued in New York to a New York predecessor corporation of Household International, Inc., the former parent corporation of U.S. Brass. These policies followed form to a first-layer umbrella policy issued by Highlands Insurance Company, and define "property damage" as an "injury to tangible property." The parties agree that New York law controls the interpretation of the pre-1982 policies.

The parties further agree that Illinois law controls the interpretation of the excess CGL indemnity policies issued after 1981 through 1990 (post-1981 policies). These policies were negotiated and issued in Illinois upon the move of U.S. Brass' parent corporation to this state, and followed form to a first-layer umbrella policy issued by Travelers Indemnity Company. The post-1981 policies define "property damage" as "physical injury to or destruction of tangible property." *fn4

The parties at bar dispute when the insurers' duty to indemnify the policyholders for underlying "property damage" claims is triggered. The insurers filed with the circuit court a motion for partial summary judgment on the trigger of coverage issue, arguing that under the language of the policies, indemnity coverage for Qest claims is triggered no earlier than the time at which a Qest system first leaks, and not at the time that the system was installed. According to the insurers, it is only those policies in effect at the time of the occurrence of a leak which give rise to their indemnification obligation. The policyholders filed a cross-motion for summary judgment, seeking a declaration that the very installation of the allegedly defective Qest system into a residential structure causes "property damage" within the meaning of the policies and, therefore, that indemnity coverage under the policies is triggered at the time of installation. In the alternative, the policyholders requested that the circuit court allow discovery on the issues raised by the parties' summary judgment motions.

On May 27, 1998, the circuit court issued a memorandum of opinion in which the court found that, as a matter of law, indemnity coverage under the policies is triggered upon the leak of a Qest system, because it is only at that time that a third-party experiences "property damage" within the meaning of the policy language. The circuit court further found that, as a matter of law, the installation of a Qest system did not constitute "property damage" within the meaning of the policies.

In addressing the coverage trigger issue with respect to the policies issued prior to 1982, the circuit court reviewed the New York decisions submitted by the parties, and concluded that "the reasoning of the New York courts clearly illustrates that the plain language of the policies calls for coverage upon the occurrence of an injury-in- fact." Therefore, the circuit court held that, under New York law, "the installation of the plumbing system is not the triggering event. The `occurrence' is the leak as that is when the `effects of exposure' actually result in damage to property."

With respect to the trigger of coverage under the post-1981 policies, the circuit court relied upon our appellate court's decisions in Diamond State Insurance Co. v. Chester-Jensen Co., 243 Ill. App. 3d 471 (1993), and Bituminous Casualty Corp. v. Gust K. Newberg Construction Co., 218 Ill. App. 3d 956 (1991). Applying the reasoning of these decisions, the circuit court held that the policy coverage is triggered at the moment there is a leak in a Qest system, and not upon installation of the system. In reaching this conclusion, the circuit court observed that CGL policies are "intended to protect the insured from liability for injury or damage to the person or property of others; they are not intended to pay the costs associated with repairing or replacing the insured's defective work and products, which are purely economic losses." Quoting from the Diamond State decision, the circuit court concluded that "[f]inding coverage for the cost of replacing or repairing defective work would `transform the policy into something akin to a performance bond.' "

On July 7, 1998, the circuit court entered an agreed order granting the insurers' motion for summary judgment on the trigger of coverage issue, denying the policyholders' cross-motion for summary judgment on the trigger of coverage issue, and directing entry of a declaratory judgment that "it is the leak of the Qest/Qick Sert II polybutylene plumbing system, and not the installation of the system, which will trigger coverage for property damage claims under the policies issued by the insurers in these cases."

On appeal, the appellate court affirmed in part and reversed in part the judgment of the circuit court. 307 Ill. App. 3d 872. The appellate court held that the circuit court erred in granting summary judgment to the insurers with respect to the coverage trigger issue under the pre-1982 policies. The appellate court observed that in Sturges Manufacturing Co. v. Utica Mutual Insurance Co., 37 N.Y.2d 69, 332 N.E.2d 319, 371 N.Y.S.2d 444 (1975), New York's highest court determined that the very installation of a defective component, other than a contaminant, could constitute "property damage" under policy language identical to that at issue in the cause at bar. The appellate court observed that, under Sturges, coverage for "property damage" under the pre-1982 policies could be triggered at the time of installation if it caused diminution in value to the residences in which the Qest system was installed in an amount in excess of the value of the Qest system itself. The appellate court further found, however, that since the record contained no evidence of whether, in fact, any diminution in value resulting from the presence of the Qest system in a residence exceeded the value of the Qest system itself, the circuit court correctly denied the policyholder's motion for summary judgment, in which the policyholders had argued that, as a matter of law, diminution in value within the meaning of the Sturges decision occurred upon the very installation of the Qest system. Finally, the appellate court held that, to the extent that the policyholders were requesting a declaration of the insurers' duty to indemnify, the relief they seek is "premature pending resolution of the underlying claims." 307 Ill. App. 3d at 887. Accordingly, the appellate court remanded this issue to the circuit court for further proceedings.

With respect to the excess CGL policies issued to the policyholders after 1981, the appellate court, applying Illinois law, rejected the argument advanced by the policyholders that indemnity coverage for "property damage" within the meaning of the policies was triggered upon the very installation of a Qest system into a structure. The appellate court therefore affirmed the circuit court's denial of the policyholders' motion for summary judgment on this issue. The appellate court concluded, however, that although coverage under the post-1981 policies is not triggered by the mere installation of a Qest system, it "can be triggered prior to the development of a leak if the replacement of the system necessitates actual physical damage to tangible property other than the Qest System itself." 307 Ill. App. 3d at 886. Thus, the appellate court determined that the circuit court erred in concluding that coverage under the post-1981 policies is only triggered upon a Qest system developing a leak, and also erred in granting summary judgment in favor of the insurers on this issue. Accordingly, the appellate court reversed the circuit court's grant of summary judgment to the insurers with respect to the post-1981 policies, and remanded the cause to the circuit court for further proceedings.

We allowed the policyholders' petitions for leave to appeal (177 Ill. 2d R. 315(a)), and consolidated the actions. We also allowed an amicus curiae brief to be filed by the Insurer's Year 2000 Roundtable in support of the insurers' position. In addition, the insurers were granted leave to file briefs as cross-appellants. On December 1, 2000, this court issued an opinion affirming in part and reversing in part the judgment of the appellate court. U.S. Brass, Eljer Manufacturing, Inc., and Eljer Industries, Inc., subsequently filed a petition for rehearing, which we allowed. 155 Ill. 2d R. 367.

ANALYSIS

The sole issue presented in this appeal concerns the construction of the "property damage" provision contained within the excess CGL indemnity policies issued to the policyholders by the insurers. In general, the insurers argue that "property damage" does not occur until a particular claimant's Qest system fails and leaks, causing water damage to the claimant's property. According to the insurers, this is the earliest possible moment that the duty to indemnify the policyholders is triggered. Conversely, the policyholders advance the argument that "property damage" within the meaning of the policies takes place at the time of the installation of the allegedly defective Qest system. Therefore, the policyholders contend, the insurers' duty to ...


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