Governmental-action Exclusion Applied to ‘Indirect’ Damage

By Don R. Sampen, published, Chicago Daily Law Bulletin, October 3, 2023

In a case of first impression, the 3rd District Appellate Court recently held that an insured’s property damage accidentally caused by a contractor hired by a municipality to demolish a building on an adjacent lot was not covered by the insured’s commercial property policy.

The case is McCann Plumbing, Heating & Cooling v. Pekin Insurance Co., 2023 IL App (3d) 190722 (Aug. 23). The insured, McCann, was represented by Spiros Law P.C. of Danville. Pretzel & Stouffer Chtd. of Chicago represented the insurer, Pekin.

In 2018, the Village of Onarga, Illinois, declared a building located on a lot adjacent to McCann’s commercial premises as unsafe and unsanitary. The village then ordered the building demolished.
During the course of the demolition work, the contractor hired by the village destroyed a portion of McCann’s building on the next-door lot. McCann then sought coverage under its commercial property policy issued by Pekin.

That policy contained a “governmental action” exclusion for property damage “caused directly or indirectly” by, among other things, “[s]eizure or destruction of property by order of governmental authority.” Upon McCann’s tender, Pekin denied coverage relying in part on the governmental action exclusion, and McCann brought the instant coverage action. Following cross-motions for summary judgment, the trial court found in favor of Pekin, and McCann appealed.

Analysis

In an opinion by Justice Adrienne Albrecht, the 3rd District affirmed. She noted that McCann focused primarily on the “by order of government authority” language in the government action exclusion.

McCann further contended that the village’s demolition order only sanctioned damage to the adjacent building and not its own. Therefore, according to McCann, “by order of governmental authority” did not include McCann’s property and the exclusion did not apply.

In Albrecht’s view, however, the “directly or indirectly” language in the exclusion should be the focus of attention. By construing the exclusionary language as a whole, moreover, she said the exclusion would apply so long as the destruction to the insured’s property occurred as the result of an order of governmental authority.

So reading the policy, Albrecht wrote that the plain meaning of the exclusion unambiguously supported the conclusion that the damage incurred by McCann’s property was an indirect result caused by the destruction of property ordered by governmental authority.

Since the village had ordered the demolition of the next-door property, moreover, McCann’s loss stemmed from the village’s demolition order and therefore fell under the governmental action exclusion.

The court therefore affirmed in favor of Pekin.

Key Point

An insured’s property damage growing out of the demolition of other property ordered by a governmental entity is “indirectly” caused by order of governmental authority for purposes of an exclusion applicable to such damage.