Archive for December 2011

Score One for the Insured: Insurer’s Duty to Defend Triggered Based on Alleged Construction Defects

December 1, 2011

The Illinois Appellate Court has found that construction defect-related property damage at a condominium project constituted an “occurrence” within the meaning of the insurer’s Commercial General Liability (CGL) policy, thereby triggering the insurer’s duty to defend.  Interestingly, the court also held that such damage was not simply an uninsurable economic loss.

In Milwaukee Mutual Ins. Co. v. J.P. Larsen, Inc., N0. 1-10-1316 (Ill. App. Ct. Aug. 15, 2011), plaintiff Milwaukee Mutual Insurance Company (Milwaukee) provided Larsen with a CGL policy.  In March 2003, Weather-Tite, Inc. (Weather-Tite) hired Larsen as a subcontractor to apply sealant to windows installed by Weather-Tite in a condominium building called Prairie District Homes (PDH).  The windows subsequently leaked and caused water damage.  PDH filed a complaint against Weather-Tite for breach of express and limited warranties.  Weather-Tite in turn filed a third-party complaint against Larsen alleging that Larsen was liable for contribution as a joint tortfeasor.  Weather-Tite and Larsen both tendered defenses to Milwaukee Insurance.

Milwaukee denied both defense tenders from Weather-Tite and Larsen, finding that there was no coverage under the CGL policy where the complaints alleged only construction defects and not “property damage” or an “occurrence” within the terms of the policy.  The trial court granted Milwaukee summary judgment as to Weather-Tite, but denied a summary judgment motion as to Larsen.  The appeal to the Appellate Court followed.

To determine whether Milwaukee has a duty to defend Larsen under the parties’ CGL policy, the court focused on the definition of two key terms within the insurance policy:  (1) “Property damage” was defined as a “physical injury to tangible property, including all resulting loss of use of that property.  All such loss of use shall be deemed to occur at the time of the physical injury that caused it, or loss of use of tangible property that is not physically injured.”  All such loss of use shall be deemed to occur at the time of the ‘occurrence’ that caused it.  (2) “Occurrence” was defined by the policy as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

In its complaint, PDH alleged that due to faulty construction, the condominium property’s common elements, individual condominium units and unit owners’ personal property were all damaged.  PDH alleged that it would have to make repairs to correct the design and/or construction defects in the amount of $4 million to $8 million, and further claimed that the costs associated with “property damage” suffered by the individual unit owners were in addition to that sum.

In evaluating whether there was “property damage,” the court looked to the language of the CGL policy.  The policy stated “[the insured] are not intended to pay the costs associated with repairing or replacing the insured’s defective work and products, which are purely economic losses.”  The court noted that “although the damages to the common elements, individual units and personal property were not expressly described, we must construe the pleadings liberally to allow for coverage, or, at least, the potential for coverage.”  The court found that the damages alleged were not intangible or merely associated with the repair or replacement of the faulty window caulking and sealant.  The court therefore held that the pleadings sufficiently alleged “property damage” within, or at least potentially within, the definition of the insurance policy.

Lastly, the court considered whether the “property damage” resulted from an “occurrence” within the meaning of the CGL policy.  In its complaint PDH alleged that Larsen’s negligent workmanship caused an accident in the form of significant and continuing water leakage throughout a building not constructed by Larsen.  The court held that the pleadings properly alleged liability and damages that exceeded merely window sealant and caulking defects, thus, the court concluded that an “occurrence” was sufficiently pled, triggering Milwaukee Insurances’ duty to defend the third party action.

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