The Illinois Appellate Court Confirms That “Property Damage” and “Occurrence” Requires Damage Beyond The Insured’s Scope Of Work, But Even A Vague Allegation Of Damage Outside The Insured’s Work Triggers The Duty To Defend
In a recent opinion, the Appellate Court of Illinois, First District, has provided useful guidance to general liability carriers facing construction defect claims on the “occurrence” and “property damage” requirements, and on determining the duty to defend. Certain Underwriters at Lloyd's London v. Metropolitan Builders, Inc.; & AIG Property Casualty Company, 2019 IL App (1st) 190517. The court confirmed that a CGL policy is potentially triggered in suits over faulty workmanship, only where there is at least a possible allegation of damage to property other than the insured’s overall scope of work, even where the underlying complaint alleges both tort and contract causes of action. However, the court also found that an insurer’s duty to defend is triggered by even vague references to third party property damage, so long as there is any possibility that the underlying plaintiff is legally permitted to recover those damages.
Metropolitan was the general contractor for a renovation project involving three contiguous properties in Chicago. During construction, a wall adjoining two of the structures collapsed causing structural damage, which ultimately led the City of Chicago to declare all three of the structures unsafe and demolish them.
The owner of the properties sought indemnification from AIG, its property insurer. AIG paid the owner and sued Metropolitan in subrogation. AIG alleged warranty and contract claim, as well as tort claims alleging that Metropolitan’s negligence damaged the owner’s “real and personal property.”
Metropolitan tendered the defense of the AIG lawsuit to its CGL insurer, Lloyd’s. Lloyd’s denied coverage and filed a declaratory judgment action. Lloyd’s moved for summary judgment, arguing that the underlying lawsuit failed to allege “property damage” or an “occurrence” as required in the CGL policy.
The Appellate Court first observed that its analysis should be driven by the overall purpose of CGL policies, and noted that CGL policies are not intended to pay the costs associated with the repair or replacement of the insured’s defective work, which are purely economic loss. The court repeated the common refrain that to hold otherwise would transform a CGL policy into a performance bond. The court reasoned that if CGL policies covered faulty workmanship, the insured would reap an unfair double recovery—it would be paid once by the property owner to perform the work, and again by the insurer to replace the faulty work.
The court noted that “occurrence” is defined in part an “an accident,” which would suggest that all that is required is a sudden or unexpected disastrous event. The court, however, returned to what it found to be the purpose of CGL coverage and held that the repair or replacement of the insured’s poor work product is not an accident. The court went on to give several examples illustrating the determination of when the “occurrence” requirement is met, ultimately reasoning that if the property allegedly damaged is part of the same construction project and part of the insured’s overall responsibility, then there is no “occurrence.” However, if the damage extends to other property, not part of the insured’s work product, CGL coverage is potentially triggered.
The court also analyzed the “property damage” requirement, and extended the same reasoning as to the overall purpose of CGL coverage used in analyzing the interpretation of “occurrence.” The court noted prior opinions that limited “property damage” to property other than the insured’s work, although it did not discuss cases where “property damage” has been interpreted to mean simply a change to the physical characteristics of property. The court held that the “property damage” requirement is met if the property’s appearance is altered in a measurable way—so long as the property is something other than the insured’s work product.
Turning to the facts of the present case, the court noted that Metropolitan had overall responsibility for the renovation of all three properties, and its faulty workmanship allegedly led to the collapse and ultimate demolition of these properties. Therefore, the court held that the damage to real property (even that part on which Metropolitan was not currently working) was not “property damage” and the destruction of the properties was not caused by an “occurrence.” The court reached a different conclusion as to the allegation of damage to the building owner’s personal property, which was not part of the project, and therefore, did fall within policy coverage.
The court observed that the underlying complaint provided no information whatsoever about the personal property, but rejected Lloyd’s argument that the vague and passing reference was insufficient to trigger coverage. The court reasoned that in order to defeat a duty to defend, it must be clear from the face of the complaint that there are no facts that bring the claim potentially within coverage. The court held that the allegation of damage to personal property of the building owner did not clearly fall outside of coverage.
Lloyd’s also argued that AIG’s complaint could not include damage to the personal property of the owner because AIG failed to allege that it paid the owner for any damage to personal property, and therefore, that damage could not be part of AIG’s subrogation claim. The court noted that the underlying complaint was vague on this point, but that it could not rule out the possibility that AIG was subrogated to the building owner for damage to personal property. Thus, under what the court termed Illinois’ “lenient” duty to defend standard, Lloyd’s was required to defend based on the reference to personal property.
This case is support for the notion that regardless of the cause of action (breach of contract versus negligence), the only relevant inquiry when analyzing the existence of “property damage” and an “occurrence” in construction defects claims under Illinois law is whether the damage extends beyond the scope of the insured’s work. If there are no allegations of damage beyond the work itself—regardless of whether the insured actually performed operations or not—then the “property damage” and “occurrence” requirements in a standard CGL are not met. It is worth noting that this case also makes clear that a general contractor’s work includes the entire construction project for the purposes of determining coverage. However, this decision also highlights the fact that Illinois has a very low bar to triggering the duty to defend. Even a vague or passing reference to damage outside of the insured’s scope of work is enough. Carriers are cautioned to carefully analyze the factual allegations to see if there is any possibility of covered allegations before denying a duty to defend in construction defect cases.
If you have any questions about this recent decision or wish to discuss further, please feel free to contact John A. Husmann: (312) 762-3254, firstname.lastname@example.org