United States District Court, S.D. Illinois
MEMORANDUM AND ORDER
J. PHIL GILBERT, District Judge.
This matter comes before the Court on plaintiff Auto Owners Insurance Company's ("Auto Owners") motion for summary judgment (Doc. 27), to which defendants John Hagler and Sue Hagler (collectively, "the Haglers") have responded (Doc. 41). The Court also considers Auto Owners' motion for default judgment against defendant Ron McCulley (Doc. 38).
I. Summary Judgment Standard
Summary judgment must be granted "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a); see Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Spath v. Hayes Wheels Int'l-Ind., Inc., 211 F.3d 392, 396 (7th Cir. 2000). The reviewing court must construe the evidence in the light most favorable to the nonmoving party and draw all reasonable inferences in favor of that party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986); Chelios v. Heavener, 520 F.3d 678, 685 (7th Cir. 2008); Spath, 211 F.3d at 396.
All parties who have appeared agree to the relevant facts in this case.
Auto Owners issued an insurance policy number XXXXXX-XXXXXXXX-XX to McCulley to insure his mobile home installation business. The policy covered the period from June 9, 2004, to June 9, 2005 ("04-05 Policy") and included commercial general liability ("CGL") coverage, products completed operation hazard ("PCOH") coverage, and builder's risk coverage. Auto Owners also issued McCulley insurance policy number XXXXXX-XXXXXXXX-XX for the period from September 21, 2005, to September 21, 2006 ("05-06 Policy"). That policy included CGL coverage and PCOH coverage. Because the policies appear to be similar in the material respects, the Court may refer to them collectively on occasion using the singular term, "the Policy."
The dispute at the center of this case arose after the Haglers purchased a modular home from Altamont Manufactured Homes LLC ("Altamont") in April 2004. As part of the purchase agreement, Altamont was responsible for delivering and setting up the home. It hired McCulley to install the parts of the modular home at the home site into one home. McCulley installed the component parts of the home, and the Haglers moved into the home in September 2004. At some point, the home developed various problems such as sagging floors, cracks in the walls, bowing walls and separation of cabinets and the fireplace from the walls to which they were attached. The Haglers believed these problems were due to McCulley's failure to install the home in a workmanlike manner. In July 2006, they filed suit in the Circuit Court for the Third Judicial Circuit, Bond County, Illinois, against McCulley and others, alleging that McCulley breached the installation contract and violated the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1 et seq. See Hagler v. McCulley, No. 06-L-9. The Haglers amended their complaint in the underlying action several times, finally settling on the Fourth Amended Complaint. That pleading asserts against McCulley only a cause of action for negligence. McCulley tendered its defense to Auto Owners, which is defending him under a reservation of rights.
In the case currently before this Court, Auto Owners seeks a declaration that it owes McCulley neither a defense nor indemnification in the underlying action. Auto Owners believes the Policy does not cover the Haglers' underlying suit because the damage to the Haglers' modular home did not qualify as an "occurrence" or as "property damage" as defined in the Policy. It further argues coverage is excluded by the "your product/your work" and "impaired property" exclusions and that the loss is not covered by the "products completed operations hazard" coverage or "builder's risk" coverage. The Haglers maintain the Policy covers the damage to their home allegedly caused by McCulley's negligence.
The Court will address each of Auto Owners' arguments in turn to resolve this case.
When the Court exercises diversity jurisdiction, as it is doing in this case, it must apply state substantive law and federal procedural law. Windy City Metal Fabricators & Supply, Inc. v. CIT Tech. Fin. Servs., Inc., 536 F.3d 663, 670 (7th Cir. 2008) (citing Erie R.R. v. Tompkins, 304 U.S. 64 (1938)). When applying state substantive law, the Court must apply the law as it believes the highest court of the state would apply it if it were hearing the issues. State Farm Mut. Auto. Ins. Co. v. Pate, 275 F.3d 666, 669 (7th Cir. 2001). When the highest state court has not spoken on an issue, the federal court must give great weight to decisions of intermediate appellate courts unless there are persuasive reasons to believe the highest court would rule differently. Id.
Under Illinois law, which all parties agree applies to this action, an insurer has an obligation to defend its insured in an underlying lawsuit if the complaint in the underlying lawsuit alleges facts potentially within the coverage of the insurance policy, even if the allegations end up being groundless, false or fraudulent. General Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods Co., 828 N.E.2d 1092, 1098 (Ill. 2005). To determine if the underlying suit alleges a situation potentially within the insurance coverage, the Court compares the complaint to the relevant provisions of the insurance policy. Id. If any theory of recovery in the underlying complaint falls within the insurance coverage, the insurer will have a duty to defend. Id.
The underlying complaint in this case alleges McCulley was negligent when he transported, delivered, assembled, constructed and installed the modular home the Haglers had purchased from Altamont. Specifically, the Haglers allege McCulley slid the home onto its foundation without using the proper equipment, failed to use the appropriate support mechanisms to support the home, failed to property attach the home to the support mechanisms, and damaged the roof and wiring. As a consequence, the home has settled and sagged, causing components of the home to become insecure and/or to malfunction, and the Haglers will be forced to expend over $110, 000 to repair the home.
The critical question in this case is whether the allegations in the underlying lawsuit fall within the Policy's coverage, which requires interpreting the Policy. Under Illinois law, interpretation of an insurance policy, even an ambiguous policy, is a matter of law. Crum & Forster Managers Corp. v. Resolution Trust Corp., 620 N.E.2d 1073, 1077 (Ill. 1993); River v. Commercial Life Ins. Co., 160 F.3d 1164, 1169 (7th Cir. 1998). In interpreting a policy, the Court must attempt to effectuate the parties' intention as expressed by the policy. Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 860 N.E.2d 307, 314 (Ill. 2006). If the policy is unambiguous, the Court must construe it according to the plain and ordinary meaning of its terms. Id. On the other hand, if the policy is ambiguous, the Court must construe all ambiguities in favor of the insured and against the insurer, who drafted the policy. Id. In making the comparison, the Court must give the policy and the complaint a liberal construction in favor of the insured. Country Mut. Ins. Co. v. Carr, 867 N.E.2d 1157, 1160 (Ill.App.Ct. 2007). Generally, the insured bears the burden of proving the claim is covered under a policy's grant of coverage, and the insurer bears the burden of proving an exclusion applies. Addison Ins. Co. v. Fay, 905 N.E.2d 747, 752 (Ill. 2009).
Before turning to the question of whether the underlying complaint alleges a situation potentially covered by the Policy's grant of coverage and/or excluded by the Policy's exclusions, the Court finds it helpful to take a closer look at what is involved in installing a modular home. First of all, modular homes are long-term residences that are built in a factory almost to completion using the same building materials used in conventionally built houses. National Modular Housing Council, Modular Home, http://www.modularcouncil.org/mc/mod_home.asp (last visited May 8, 2015); National Modular Housing Council, The Modular Advantage: Understanding Today's Modular Home 2, http://www.modularcouncil.org/mc/ (follow "Understanding Today's Modular Home" hyperlink) (last visited May 8, 2015). They are assembled in component parts - rooms or groups of rooms - that are able to be transported over the road to the site where the home will be installed.
At the site, the modular home installer prepares the site for the installation by clearing obstructions, ensuring proper clearances, open ground spaces and terrain grade and prepares the foundation for the modular units to be set. National Modular Housing Council, Builder's Guide to Modular Home Set-Up & Completion 2-3, www.modularcouncil.org/mc/admin/template/brochures/70temp.pdf (last visited May 8, 2015). The installer then detaches a modular unit from the shipping mechanism, prepares the appropriate surface of the module - the marriage wall - for joining together with another module, lifts the unit onto the foundation, and then secures the unit to the foundation. Id. at 4. The process is then repeated for the other module(s) that will form the completed house, with the installer drawing each subsequent module to an earlier set one using a hand-operated cable winch puller - commonly called a come-along - before it is firmly set on the foundation. Id. at 4-5. The modules are then bolted together, and the roof is set, joined and finished with shingles and gable walls. Id. at 5. When all modules are set, the installer sheaths the entire house, secures the roof center beams, levels the floors, seals the marriage wall connections, and connects the plumbing and electrical systems of the modules. Id. 5-6; see, e.g., Modular Home Installation video, https://www.youtube.com/watch?v=o3u8kqTfYik (last visited May 6, 2015); Sneak Peek At How A Modular Home is Installed (New Jersey Modular Homes) video, https://www.youtube.com/watch?v=AKiLvLAXRWo (last visited May 5, 2015).
Much interior finishing such as hanging cabinets and installing fireplaces can occur at the factory. See, e.g., Modular Direct, Assembly Line Tour, http://www.modulardirect.com/modular-home-pictures/Assembly-Line-Tour/ (last visited May 8, 2015). Further interior finishing by the installer is often limited to the marriage wall areas and involves completing the trim, drywall and floor finishing in that area. See, e.g., ExpressModular.com, Understanding the Process, http://www.expressmodular.com/understand_process.php (follow "Finishing Your Home" hyperlink) (last visited May 8, 2015). Other installers perform more extensive interior finishing work that may include installing interior doors, cabinets or fireplaces. See National Modular Housing Council, Builder's Guide to Modular Home Set-Up & Completion 7-8, www.modularcouncil.org/mc/admin/template/brochures/70temp.pdf (last visited May 8, 2015); JB Custom Homes, Modular Home Building, http://www.jbcbuilding.com/custom-homes/modular-homes.html, (last visited May 8, 2015) ("Generally, the exterior and interior finishing material of the home is installed at the factory, though it doesn't have to be."). The Haglers' complaint in the underlying Bond County case does not specify the extent of McCulley's undertaking with respect to finishing the interior of their modular home.
With this background information in mind, the Court turns to the question of whether the Haglers' underlying complaint alleges a cause of action potentially covered by the Policy.
The Policy states that it "applies to... property damage' only if... the... property damage' is caused by an occurrence' that takes place in the coverage territory; and... [that] occurs during the policy period." 04-05 CGL Policy at 1, § I, Cov. A, ¶ 1.b (Doc. 2-3 at 11); 05-06 CGL Policy at 1, § I, Cov. A, ¶ 1.b (Doc. 2-6 at 6). The Policy further defines an "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." 04-05 CGL Policy at 13, § V, ¶ 9 (Doc. 2-3 at 23); 05-06 CGL Policy at 13, § V, ¶ 9 (Doc. 2-6 at 18). It does not, however, define "accident." Leaving the question of "property damage" for later discussion, the Court turns to whether there was an occurrence.
Auto Owners asserts that the complaint in the underlying lawsuit does not allege events that amount to an "occurrence." In support of this position, it points to Illinois cases holding that an "accident" means "an unforeseen occurrence, usually of an untoward or disastrous character or an undesigned, sudden, or unexpected event of an inflictive or unfortunate character." Stoneridge Dev. Co. Inc. v. Essex Ins. Co., 888 N.E.2d 633, 650 (Ill.App.Ct. 2008) (internal citations and quotations omitted); accord Nautilus Ins. Co. v. Board of Dir. of Regal Lofts Condo. Assoc., 764 F.3d 726, 731 (7th Cir. 2014); see also State Farm Fire & Cas. Co. v. Tillerson, 777 N.E.2d 986, 990 (Ill.App.Ct. 2002); Monticello Ins. Co. v. Wil-Freds Constr., Inc., 661 N.E.2d 451, 455 (Ill.App.Ct. 2006). Those cases hold that the "natural and ordinary consequences of an act do not constitute an accident." Stoneridge, 888 N.E.2d at 651 (internal citations and quotations omitted); accord Regal Lofts, 764 F.3d at 731; see also Tillerson, 777 N.E.2d at 990; Wil-Freds, 661 N.E.2d at 455. Auto Owners argues that the ...