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Lagestee-Mulder, Inc v. Consolidated Insurance Company

November 8, 2011


The opinion of the court was delivered by: Judge Feinerman


Plaintiff Lagestee-Mulder, Inc., filed this diversity suit against Defendant Consolidated Insurance Company, alleging that Consolidated breached its duty to defend Lagestee in a state court action brought by Crown Centre LLC, the owner of a new commercial building on which Lagestee had served as general contractor. Crown Centre LLC v. The Shalvis Group P.C., No. 07 L 710 (Cir. Ct. Will Cnty., Ill.). Lagestee filed a third-party complaint in state court seeking indemnification and/or contribution from its subcontractor, Frontrunner Glass & Metal Inc., which had installed the building's windows and doors. Frontrunner was a named insured under a Consolidated policy, and Lagestee was an additional insured. Lagestee and Frontrunner both tendered their respective defenses to Consolidated. Consolidated accepted Frontrunner's tender under a reservation of rights; Consolidated did not immediately respond to Lagestee, and it ultimately denied coverage after Lagestee settled with Crown. The parties here have filed cross-motions for summary judgment. There are no material factual disputes requiring a trial. Because Consolidated had no duty to defend Lagestee, Consolidated's motion is granted and Lagestee's motion is denied.

The parties agree that Illinois law governs. The Seventh Circuit recently summarized Illinois law as it pertains to the interpretation of insurance policies:

In Illinois, insurance policies are contracts; the general rules governing the interpretation and construction of contracts govern the interpretation and construction of insurance policies. Illinois courts aim to ascertain and give effect to the intention of the parties, as expressed in the policy language, so long as doing so does not contravene public policy. In doing so, they read the policy as a whole and consider the type of insurance purchased, the risks involved, and the overall purpose of the contract. If the policy language is unambiguous, courts apply it as written. Policy terms that limit an insurer's liability are liberally construed in favor of coverage, but only when they are ambiguous, or susceptible to more than one reasonable interpretation.

Clarendon Nat'l Ins. Co. v. Medina, 645 F.3d 928, 933 (7th Cir. 2011) (citations omitted). Although ambiguities are construed in the insured's favor, "a court will not search for ambiguity where there is none." Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 860 N.E.2d 307, 314 (Ill. 2006); see also Native Am. Arts, Inc. v. Hartford Cas. Ins. Co., 435 F.3d 729, 732 (7th Cir. 2006). "[I]n construing a policy, governing legal authority must . be taken into account as well, for a policy term may be considered unambiguous where it has acquired an established legal meaning." Ace Am. Ins. Co. v. RC2 Corp., 600 F.3d 763, 766 (7th Cir. 2010) (internal quotation marks omitted). "Insurers have the burden of proving that an exclusion applies. Insureds, in turn, have the burden to prove that an exception to an exclusion restores coverage." Santa's Best Craft, LLC v. St. Paul Fire & Marine Ins. Co., 611 F.3d 339, 347 (7th Cir. 2010) (citation omitted).

"To determine whether an insurer has a duty to defend its insured, [the court] compare[s] the factual allegations of the underlying complaint . to the language of the insurance policy. If the facts alleged in the underlying complaint fall within, or potentially within, the policy's coverage, the insurer's duty to defend arises." Amerisure Mut. Ins. Co. v. Microplastics, Inc., 622 F.3d 806, 810 (7th Cir. 2010) (citations and internal quotation marks omitted). An insurer may decline to defend a lawsuit only when "it is clear from the face of the underlying complaint that the allegations set forth . fail to state facts to bring a case within, or potentially within, the coverage of the policy." Swiderski Elecs., 860 N.E.2d at 315; see also Lyerla v. AMCO Ins. Co., 536 F.3d 684, 688 (7th Cir. 2008). That is, "an insurer has no duty to defend unless the underlying claim contains explicit factual allegations that potentially fall within policy coverage." Microplastics, 622 F.3d at 810. "Both the policy terms and the allegations in the underlying complaint are liberally construed in favor of the insured, and any doubts and ambiguities are resolved against the insurer." Id. at 811 (internal quotation marks omitted). The insurer has a duty to defend "even if only one of several theories of recovery alleged in the complaint falls within the potential coverage," and even if some or all of the allegations in the underlying complaint are "groundless, false, or fraudulent." Swiderski Elecs., 860 N.E.2d at 315.

Consolidated's policy is a standard commercial general liability ("CGL") policy. Doc. 64-4. It provides coverage for "property damage" caused by an "occurrence" during the "policy period." Id. at 8. The policy defines "property damage" as "[p]hysical injury to tangible property, including all resulting loss of use of that property" or "[l]oss of use of tangible property that is not physically injured." Id. at 23. The policy defines "occurrence" as "an accident, including continuous and repeated exposure to substantially the same general harmful conditions." Id. at 22. Although the policy does not define "accident," Illinois courts understand the term to mean "an unforeseen occurrence, usually of an untoward or disastrous character or an undesigned, sudden, or unexpected event of an inflictive or unfortunate character." Lyerla, 536 F.3d at 688-89 (internal quotation marks omitted).

The rules governing application of these CGL policy provisions in the context of construction defect suits are settled. Where the underlying suit alleges damage to the construction project itself due to a construction defect, there is no coverage; by contrast, where the underlying suit alleges that the construction defect damaged something other than the project itself, there is coverage. See id. at 689 ("Illinois courts have reasoned that damage to a construction project resulting from construction defects is not an 'accident' or 'occurrence' because it represents the natural and ordinary consequences of faulty construction"; Milwaukee Mut. Ins. Co. v. J.P. Larsen, Inc., __ N.E.2d __, 2011 WL 3612281, at *6-7 (Ill. App. Aug. 15, 2011); CMK Dev. Corp. v. West Bend Mut. Ins. Co., 917 N.E.2d 1155, 1164-66 (Ill. App. 2009); Viking Constr. Mgmt., Inc. v. Liberty Mut. Ins. Co., 831 N.E.2d 1, 10-18 (Ill. App. 2005) (Burke, J.); Monticello Ins. Co. v. Wil-Freds Constr., Inc., 661 N.E.2d 451, 455-57 (Ill. App. 1996); see generally Microplastics, 622 F.3d at 811-13; Wausau Underwriters Ins. Co. v. United Plastics Grp., Inc., 512 F.3d 953, 956-58 (7th Cir. 2008). As the Appellate Court of Illinois noted in surveying the decided cases, there is coverage where the underlying suit alleges that a construction defect caused damage to "a homeowner's furniture, clothing and antiques," "cars in the parking garage built by the insured," and "carpets, upholstery, [and] drapery in schools constructed by the insured," but there is no coverage where the underlying suit alleges that a construction defect caused "a sag in the house, a leak and cracks in the footing and walls," "water damage to the basement, damaged concrete work, and cracked floors," or "collapse of a masonry wall, due to inadequate bracing." CMK Dev., 917 N.E.2d at 1164 (internal quotation marks and citations omitted, first and third sets of brackets in original).

In Wil-Freds Construction, for example, the underlying complaint alleged "water damage to the lobby of the office building and basement underneath the lobby; [and] interior water damage caused by water penetration of the roof." 661 N.E.2d at 452. The court observed that if the underlying plaintiff "had sued [the contractor] for the water damage suffered by cars in the parking garage, . there can be little doubt that [the insurer] would be required to defend [the contractor] under the CGL policy, because there would have been negligent manufacture that results in 'an occurrence.'" Id. at 457 (internal quotation marks omitted). However, because the underlying plaintiff alleged only damage "to the project itself," the court held that "no coverage exists." Ibid. (citing Hamilton Die Cast, Inc. v. U.S. Fidelity & Guar. Co., 508 F.2d 417, 420 (7th Cir. 1975)) (internal quotation marks omitted).

Crown's state court complaint brings four claim against Lagestee: (1) breach of construction contract; (2) breach of contractor's warranty for materials, equipment and construction services; (3) breach of contractor's call back warranty; and (4) breach of contractor's call back warranty after completion. Doc. 64-8. It does not matter that Crown's claims all sound in contract. Under Illinois law, "[t]he insured's coverage and right to a defense depend not on the legal theories stated by the claimant in the underlying dispute, but on the factual allegations." Microplastics, 622 F.3d at 815. The suggestion "that the [underlying] complaint must explicitly identify the claim that is within the [policy] coverage represents an unduly narrow reading of Illinois law, and the court should not simply look to the particular legal theories pursued by the claimant, but must focus on the . conduct on which the lawsuit is based." Id. at 815-16 (internal quotation marks omitted, second set of brackets in original).

The "conduct" alleged in Crown's complaint concerns various alleged deficiencies in materials Lagestee used during construction, various alleged shortcomings in Lagestee's workmanship, and various alleged defects in the building as constructed. Doc. 64-8 at ¶¶ 41-43, 51, 61, 69-72. To support is position on coverage, Lagestee points to Crown's allegations regarding water infiltration:

15. CROWN began to experience water infiltration problems at numerous wall locations during the later stages of construction of the Crown Centre.

16. CROWN . and [Lagestee] began an investigation of certain defective conditions of the Crown Centre which included but was not limited to attempting to correct the water infiltration problems.

60. CROWN discovered the defects in the work which included but is not limited to water infiltration into the Crown Centre before substantial ...

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