Insurer Not Responsible For Subcontractor’s Underlying Settlement For Its Faulty Work

Metro North, the governing body of a condominium in Chicago, filed suit against the developer, multiple contractors and multiple subcontractors for defective construction that caused, among other issues, water infiltration. CSC Glass, one of the subcontractors, was issued a CGL policy by Allied Insurance and a commercial umbrella policy by AMCO, both effective from March 30, 2006 to March 30, 2007. Allied provided CSC a defense in the underlying matter under a reservation of rights.

Metro North entered into a settlement agreement with the CSC entities for “$700,000, to be satisfied solely through the assignment of all rights to payment, if any, from Allied under the policy issued to CSC by Allied, or rights under any other insurance policy issued to CSC as arising out of the claims asserted against CSC in the underlying lawsuit or this Settlement thereof.” Per the agreement, the settlement represented a “reasonable amount of a portion of the damages incurred by Metro North as caused in part by CSC’s alleged improper installation of the windows that caused damage to parts of the Building, other than the windows themselves, and damage to Metro North’s and its members personal property.”

The U.S. District Court for the Northern District of Illinois held that Allied and AMCO’s policies did not cover Metro North’s claim against CSC. The Court found that the damages Metro North sought included damage to personal property and for the cost of repairing parts of the building on which CSC did not work. The Court noted that the measure of damages available for breach of implied warranty of habitability is the cost of correcting the defective conditions. Therefore, there was no reasonable anticipation of liability or reasonable potential for the award of damages covered by the insurance policies.

The Court also ruled that there could be no recovery for damage to the personal property of unit owners, because the individual owners were not participants in the underlying litigation or in the settlement agreement. The Court also determined that a construction defect is not an “accident”, and as CGL policies only cover damage caused by an “occurrence” which is defined as an “accident”, they do not cover the natural and ordinary consequences of defective workmanship. Therefore, “when a contractor who installs windows performs defective work, the natural and ordinary consequence is water infiltration that will damage the building.” As written in the opinion, “There is no accident, so there is no occurrence, so there is no coverage.”

For more information contact Paul Daugherity (pdaugherity@clausen.com).