A Breach-Of-Warranty Claim Leads To Coverage
September 21, 2011
The 1st District Appellate Court recently held that allegations of breach of warranty against a contractor, which provided the basis for the contractor's third party complaint against a subcontractor for contribution, gave rise to an insurer's duty to defend the subcontractor. Milwaukee Mutual Insurance Co. v. J.P. Larsen, Inc. No. 1-10-1316, 2011 WL 3612281 (1st Dist. Aug. 15, 2011).
The insurer, Milwaukee, was represented by Neal R. Novak and Reid J. Rozen of the Novak Law Offices. James A. Smith and Arnold M. Flank, from Chicago and Northbrook, respectively, represented the subcontractor, J.P. Larsen.
Background
In 2003, Weather-Tite, a contractor, hired Larsen as a subcontractor to apply sealant to windows installed by Weather-Tite in connection with work being performed for the PDH Condominium Association. In 2008, PDH filed an amended complaint against, among others, Weather-Tite for breach of express and implied warranties arising from the work.
Both warranty counts against Weather-Tite alleged that Weather-Tite failed to properly install the window system, including proper sealant, and that PDH experienced severe water damage due to the faulty construction. PDH further alleged damage to the common elements and individual units within the condominium association and that PDH would be required to make repairs to correct the defects costing between $4 million and $8 million.
In 2009, Weather-Tite filed a third-party complaint against Larsen alleging that, in the event PDH was successful with its breach of warranty claims, Larsen was liable for contribution as a joint tortfeasor. The third-party complaint also alleged that Larsen was in breach of contract for failing to add Weather-Tite as an additional insured to its commercial general liability (CGL) policy.
Trial Court Action
Weather-Tite and Larsen both tendered defenses to Milwaukee, the CGL insurer for Larsen. Milwaukee denied coverage on the ground that the complaint and third-party complaint alleged only construction defects and not "property damage" and because of the absence of an alleged "occurrence."
Milwaukee filed a complaint for declaratory judgment to determine its coverage obligations in 2009. On cross motions for summary judgment the trial court granted Milwaukee's motion as to Weather-Tite, but denied its motion as to Larsen. The court also granted Larsen's motion as to Milwaukee. Milwaukee filed this appeal.
Property Damage
In an opinion by Justice Bertina E. Lampkin, the 1st District affirmed. She first considered whether the allegations in the third-party complaint against Larsen alleged property damage. She noted that CGL policies are not intended to pay the costs associated with repairing or replacing the insured's defective work or products and should not be treated as something akin to a performance bond.
Nevertheless, in this case the complaint against Weather-Tite alleged that due to the faulty construction, the condominium common elements and individual unit owners' properties were damaged and these allegations were imputed against Larsen by way of the third-party complaint in which Larsen was alleged to be a joint tortfeasor based on negligence.
Lampkin said these allegations had to be construed liberally to allow for coverage, even though the damages to the common elements and individual units were not expressly described. So construing them, she indicated that the damages alleged were not merely for construction defects or the cost to repair the faulty window caulking and sealant, but for damages in addition to such costs.
She further took note of Milwaukee's argument that the allegations against Larsen were all based in contract and that Milwaukee therefore had no duty to defend.
She countered that the allegations in the third-party complaint repeatedly stated that Larsen negligently completed the job for which it was hired. Thus, according to Lampkin, although identified as a cause of action for contribution, the allegations sounded in negligence.
She also observed that allegations based on contract have resulted in the duty to defend as long as the damage is not to the actual property the insured was working on but, rather, is to other property caused by the insured's work product. She concluded, therefore, that the third-party complaint alleged property damage.
Occurrence
Lampkin also considered whether the third-party complaint alleged property damage resulting from an "occurrence." Milwaukee argued that it did not because the defects alleged were the natural and ordinary consequence of faulty workmanship and the resulting damage was not caused by an accident.
Lampkin found, however, that under Illinois case law damage to something other than the project itself does in fact constitute an "occurrence." Here the PDH complaint alleged continuing water leakage into the common elements and residential units. This property damage was imputed to Larsen and the underlying pleadings therefore could be construed as alleging that Larsen's negligent workmanship caused an accident in the form of significant and continuing water leakage. Based on these circumstances, Lampkin concluded that an "occurrence" was pleaded.
The court, therefore, affirmed summary judgment in favor of Larsen.
Key Point
A third-party complaint for contribution against an insured/third party defendant, based on breach-of-warranty claims against the third-party plaintiff, can give rise to a duty to defend where the breach-of-warranty claims involve property damage and an occurrence.
