Commercial General Liability Policy Carried no Weight in this Condo Action

By Don R. Sampen, published, Chicago Daily Law Bulletin
[April 18, 2017]

The 7th U.S. Circuit Court of Appeals, construing Illinois law, recently held that damages for breach of the implied warranty of habitability were not covered by a commercial general liability policy, since the warranty protection was limited to defective work.

The case is Allied Property & Casualty Insurance Co. v. Metro North Condominium Association, 2017 U.S. App. Lexis 4107 (7th Cir., March 8). Allied was represented by Don R. Sampen and Steven N. Novosad of Clausen Miller P.C. Craig G. Penrose of Laurie & Brennan LLP, represented the claimant, Metro North.

Metro North hired a developer to build a condominium in Chicago. The developer, which later became insolvent, subcontracted with CSC Glass and CSC Construction, collectively CSC, to install the windows. The windows leaked, leading to water damage to the structure and to unit owners’ personal property.

As a result, Metro North sued CSC and others for the damage. It sued for breach of the implied warranty of habitability. Later, it asserted a cause of action for negligence, but that count was dismissed with prejudice based on the statute of limitations.

Metro North eventually reached a settlement with CSC for $700,000, payable out of insurance proceeds. The settlement specified that it was not intended to compensate Metro North for the cost of repairing or replacing the defectively installed windows themselves, but rather only the resultant damage to other parts of the structure and to the unit owners’ personal property. CSC assigned its insurance rights to Metro North.

Allied insured CSC under a standard commercial general liability policy. The policy contained the typical exclusions, including the “your work” exclusion applicable to the insured’s own defective work and a contractual liability exclusion. When Allied learned of the settlement, it brought this declaratory action seeking a determination that its policy did not cover the settlement.

On cross-motions for summary judgment, the U.S. District Court agreed with Allied that it did not. Metro North brought this appeal.

Analysis

In an opinion by Judge Daniel A. Manion, the 7th Circuit affirmed. He observed that under Illinois law, the measure of damages for a breach of the implied warranty of habitability is the cost of repairing the defective conditions, here, the defectively installed windows themselves.

At the same time, Illinois courts have found that typical commercial general liability policies, like Allied’s, do not cover the cost of repairing the insured’s own defectively completed work.

This was the case here, Manion said, pointing to the “your work” exclusion. The terms of the settlement itself indicated that Metro North was not seeking the cost of repairing CSC’s defectively installed windows. And even apart from the exclusion, the warranty claim is based in contract, not tort, and is not covered by a standard commercial general liability policy for that reason, too.

He went on to note that the precise labeling of the claim against the insured is not always dispositive when determining coverage, but that coverage must still be consistent with some viable theory of recovery.

Here, the only theory in play at the time of the settlement was breach of the implied warranty of habitability, which did not give rise to coverage. Liability also could not have existed under a negligence theory, since a claim based on that theory had been dismissed with prejudice.

Nor would coverage exist, Manion observed, if CSC had assumed liability for damages to other parts of the building, apart from the windows, as part of the settlement. Coverage under those circumstances would have been excluded by the contractual liability exclusion.

Finally, Manion agreed with the district court that Metro North lacked standing to sue on behalf of the individual unit owners for damage to their personal property.

He noted that the Illinois Condominium Property Act authorized a condominium association to act in a representative capacity on behalf of unit owners in “matters involving the common elements or more than one unit” (765 ILCS 605/9.1(b)). But that did not extend to privately owned belongings that affected each owner separately.

The court, therefore, affirmed summary judgment in favor of Allied, finding that it had no duty to indemnify in connection with the settlement.

Key points

• Damages in Illinois for breach of the implied warranty of habitability are recoverable only for a contractor’s defective work and are not covered under a standard commercial general liability policy.
• The Illinois Condominium Act does not allow a condominium association to sue on behalf of unit owners for damage to privately owned belongings that affect each owner separately.