Evidence of Damage to Claimant’s Property Wrongfully Excluded

By Don R. Sampen, published, Chicago Daily Law Bulletin, February 9, 2021

The 7th U.S. Circuit Court of Appeals, reversing a grant of judgment on the pleadings for an insurer, recently held that an insured was entitled to demonstrate that the underlying plaintiff was seeking to recover for property damage arising from an occurrence, and not just damage to the insured’s defective product.

The case is Federated Mutual Insurance Co. v. Coyle Mechanical Supply Inc., 983 F.3d 307 (7th Cir., Dec. 22, 2020). The insurer, Federated, was represented by Lewis Brisbois Bisgaard & Smith LLP of Chicago. HeplerBroom LLC of St. Louis represented Coyle.

The underlying plaintiff, Prairie State Generating Company, sued Coyle in state court in connection with high-pressure steam valves Coyle sold to Prairie for its electric-generation facility. Leakage occurred following installation of some of the valves, causing Prairie to remove them and purchase replacement valves.

Prairie sued Coyle for breach of contract and related causes of action. After suit was filed, Coyle sought coverage from Federated, its liability insurer. Federated’s policy provided coverage for property damage caused by an occurrence, or accident, including loss of use. Federated denied coverage and brought the instant action seeking a declaration of rights and obligations.

Federated took the position that Prairie’s lawsuit did not involve property damage or an occurrence but merely defective products sold by Coyle. Following Coyle’s answer, Federated moved for judgment on the pleadings. It also moved to stay discovery. Coyle opposed both motions, arguing that the motion for judgment was premature and that discovery was necessary.

During a telephonic hearing on the motion to stay discovery, Prairie’s counsel stated that Prairie was not making a claim of loss of use in the underlying lawsuit. At the same time, however, counsel stated that Prairie was seeking damages for replacing the valves and for an intersecting pipe that was damaged.

Subsequently, Coyle moved for leave to file a supplemental brief in opposition to the motion for judgment on the pleadings based on the evidence that came to light at the discovery hearing. It later sought leave to file a second supplemental brief based on evidence adduced in the underlying case concerning adequacy of the valves. The court denied both motions.

The court eventually also granted Federated’s motion for judgment on the pleadings, finding that there was no property damage because Prairie only sought damages for the repair and replacement of Coyle’s defective products. In the process the court relied in part on the statement of Prairie’s counsel at the discovery hearing that Prairie was not seeking damages for loss of use. Coyle took this appeal.

Analysis

In an opinion by Judge Amy J. St. Eve, the 7th Circuit reversed. She initially observed that the same standards apply to a motion for judgment on the pleadings as a motion to dismiss, and that the only difference between the two is timing. That is, a motion for judgment on the pleadings comes after the defendant files an answer, and the motion to dismiss comes before.

Both are subject to the requirement that, if matters outside the pleadings are presented and not excluded, the motion is to be treated as one for summary judgment. In that case, all parties must be given an opportunity to present relevant evidence.

The district court here, St. Eve wrote, initially erred by failing to allow Coyle to file supplemental briefs because, under the court’s own local rules, such were permissible if there was a change in the law or facts.

The district court’s second error was in failing to convert Federated’s motion to one for summary judgment. In fact, in granting Federated’s motion, the district court itself relied on certain facts outside the pleadings — Prairie’s statement that it was not seeking damages for loss of use — while at the same time ignoring other portions of the discovery hearing transcript that Coyle’s motion to supplement the record sought to introduce.

St. Eve found, moreover, that Coyle was prejudiced by these errors. It was prejudiced because it sought to introduce a fact issue that foreclosed judgment as a matter of law. The fact issue was whether Prairie sought damages for physical injury to its own property, namely, the intersecting piping damaged as a result of the defective valves.

St. Eve observed that Illinois courts draw a distinction between costs involving the repair or replacement of the insured’s own defective work or product, which are purely economic in nature and not covered as property damage; versus costs arising when an insured causes damage to things other than its own work or product, which may be covered as property damage.

Unlike the defectiveness of the insured’s own work or product, St. Eve wrote, damage beyond that work is not necessarily foreseeable and thus may arise from an accident or occurrence.

Here, if Prairie sought damages from Coyle for physical injury to its own property, which was what Coyle attempted to establish, then Prairie’s damages potentially fell within the scope of the policies, and Federated would have a duty to defend. Consequently, the district court deprived Coyle of a meaningful opportunity to establish a basis for coverage.

The 7th Circuit therefore found for Coyle and reversed the grant of judgment on the pleadings.

Key point

On an insurer’s motion for judgment on the pleadings based on the absence of property damage and occurrence, an insured’s evidence that the underlying claimant is seeking to recover for damage to the claimant’s own property caused by the insured is admissible in support of potential coverage.