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Amco Insurance Co. v. Northern Heritage Builders, LLC

United States District Court, N.D. Illinois, Eastern Division

March 31, 2015




Plaintiff, AMCO Insurance Co. ("AMCO"), filed a complaint for a declaratory judgment that it owes no duty to defend or indemnify its insured, Northern Heritage Builders, LLC ("Northern"), against the underlying construction defect subrogation lawsuit filed in the Circuit Court of Cook County, Law Division, captioned American Family Mutual Insurance Co. a/s/o Michael McGrath v. Northern Heritage Builders, LLC, et al, Case No.12 L 11528, and that American Family has no rights under the policy. Both Northern and American Family counterclaimed, asserting that AMCO has a duty to defend and indemnify Northern and American Family, as assignee, in the underlying lawsuit. AMCO and American Family have filed cross-motions for summary judgment [45, 49]. For the reasons stated herein, the Court finds AMCO had no duty to defend and no duty to indemnify American Family.


The following facts are not in dispute. AMCO Insurance Company is an Iowa corporation authorized to issue insurance policies in Illinois. AMCO issued certain policies to Northern Heritage Builders, an Illinois company. American Family Mutual Insurance Company is an insurance company authorized to issue policies of homeowners insurance in Illinois. Michael McGrath owns a house at 1848 North Orchard Street in Chicago. McGrath and Northern entered an oral contract for Northern to serve as the general contract or builder overseeing the construction of the McGrath house. Northern subcontracted the masonry on the house to Rapciak Construction Company. The porous block used by Rapciak allowed water to infiltrate the house. McGrath and his family moved to a rental property while the house was being repaired.

State Court Lawsuit - McGrath v. Northern Heritage Builders

McGrath filed a lawsuit in the Circuit Court of Cook County against Northern, Case No. 07 L 8252. The court dismissed McGrath's negligence claim against Northern based on the Moorman Doctrine, finding that the "alleged physical damage to personal property and household goods and contents' appears to have directly resulted from [McGrath's] disappointed commercial expectations rather than a dangerous event." (AMCO's L.R. 56.1 Statement of Facts, Dkt. 47 at ¶ 9). The jury trial began on February 8, 2011. Prior to closing arguments, both McGrath and Northern agreed to the following stipulation: "This case does not include any claim of damage to the finished aspects of the home at 1848 Orchard including any materials or repairs related to the drywall, furring wood strips, insulation, vapor barriers or any other internal aspects of the home." ( Id. at ¶ 22). On February 17, 2011, the jury returned a verdict in favor McGrath and against Northern in the amount of $601, 570.50.

Federal Court Lawsuit #1 - McGrath v. American Family Insurance Co.

On March 19, 2007, McGrath sued American Family Insurance Company, the carrier of his homeowners' insurance policy, seeking a declaratory judgment that American Family's policy provided coverage, and further alleging breach of contract and damages under Section 155 of the Illinois Insurance Code for unreasonable and vexatious claims handling. At summary judgment McGrath argued that "interior water damage to an insured dwelling" was covered under the American Family policy. McGrath claimed "interior water damage, " "damage to the interior of the dwelling, " "building components interior of the exterior brick walls." On April 29, 2008, Judge Moran entered summary judgment against American Family, finding that American Family owed coverage and the case proceeded to trial on damages. The jury awarded the McGraths $1, 130, 680.16. The jury award was broken down as follows: tarping: $10, 551; demolition: $41, 420; moving expenses: $6, 280.64; rent: $35, 000; rental utilities: $5, 874.02; personal property storage: $6, 840; electronics connection: $6, 280.64; closet removal: $787.50; interior repairs: $984, 072. (American Family's Response to AMCO's 56.1 Statement, Dkt. 51 at ¶ 30). American Family subsequently settled with the McGraths.

State Court Subrogation Lawsuit - American Family v. Northern

In October 2012, American Family filed a subrogation lawsuit against Northern in the Circuit Court of Cook County, Law Division, American Family Mut. Ins. Co. a/s/o Michael McGrath v. Northern Heritage Builders, LLC, et al., Case No. 12-L-11528 ("the underlying complaint"). American Family alleged that it is subrogated by the equity and by law to the claim of McGrath for alleged property damage at 1848 N. Orchard to the extent of the payments made by American Family to McGrath for the subject property damage ($1, 130, 680.16) under the policy of homeowners insurance American Family issued to McGrath. According to the underlying complaint, McGrath hired Northern as general contractor for the exterior shell of the McGrath residence.

In that same complaint, American Family alleges that in July or August 2006, McGrath discovered certain defects in the construction of the exterior of the McGrath residence that allowed water and moisture to penetrate the exterior wall and to become trapped within the walls. According to the complaint, the water intrusion damages "building components interior of the exterior wall construction as well as interior property separate and apart from the exterior wall construction." The underlying complaint further alleges that McGrath incurred damages for alternative living expenses, debris removal and expenses incurred to protect the undamaged portions of the McGrath residence. Federal Court Lawsuit #2 - AMCO v. Northern

AMCO filed a declaratory judgment lawsuit against Northern in Federal Court before Judge Virginia Kendall, seeking a finding that AMCO had no duty to defend or indemnify Northern in the state court lawsuit filed by McGrath against Northern for, among other things, negligence, faulty workmanship, and breach of contract. Judge Kendall entered summary judgment finding that AMCO had a duty to defend until the parties' stipulation, but AMCO had no duty to indemnify Northern for the judgment entered in that case.

The AMCO Policies

AMCO issued both a primary Commercial General Liability ("CGL") policy and an umbrella CGL policy to Northern. The policies cover amounts Northern becomes obligated to pay as a result of "property damage" caused by an "occurrence" during the policy period. Both policies provide the same ...

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