Insurers Defeat Contractor’s Bid for Coverage Over O’Hare Project

By Don R. Sampen, published, Chicago Daily Law Bulletin, July 9, 2024

The 7th U.S. Circuit Court of Appeals, relying on the lack of “property damage,” recently held that a subcontractor’s insurers had no coverage obligation to a general contractor for construction defects.

The case is St. Paul Guardian Insurance Co. v. Walsh Construction Co., 99 F.4th 1035 (7th Cir. April 29). The insurers — St. Paul Guardian Insurance Co., Charter Oak Fire Insurance Co. and Travelers Property Casualty Co. of America — were represented by Karbal, Cohen, Economou, Silk & Dunne of Chicago. Goodman Law Group of Chicago represented the general contractor, Walsh.

In 2003, the city of Chicago hired Walsh to manage the construction of a canopy and curtain wall system at O’Hare International Airport. As part of the project, Walsh entered into a subcontract with Carlo Steel Corporation, which entered into a sub-subcontract with LB Steel LLC to fabricate and install steel columns to support the wall and canopy.

In accordance with its contractual obligations, LB Steel listed Walsh as an additional insured on its commercial general liability insurance policies.

Several years into the project, the city discovered cracks in the welds of the steel columns and sued Walsh for breach of contract. Walsh tendered to LB Steel’s insurers to defend, but they declined. Walsh eventually settled with the city, filed a third-party action against LB Steel, and obtained a $19 million judgment. LB Steel filed for bankruptcy.

The judgment, however, was partially reversed by the state appellate court, following which Walsh reached a bankruptcy settlement with LB Steel providing for some cash and a $24 million unsecured claim against LB Steel’s bankruptcy estate.

In 2015, LB Steel’s insurers filed the instant case seeking a declaration that they owed no coverage obligation to Walsh for the underlying city claim or the bankruptcy settlement. Walsh counterclaimed, asking for indemnification under the policies, its cost of defense, and bad-faith sanctions under 215 ILCS 5/155. The district court found in favor of the insurers and Walsh took this appeal.

Analysis

In an opinion by Judge John Z. Lee, the 7th Circuit affirmed. He initially addressed whether the policies covered the construction deficiencies claimed by the city. He found they did not because the policies covered only damage to property other than LB Steel’s.

The St. Paul policy did so explicitly, defining “property damage” as “physical damage to tangible property of others.” The Charter Oak and Travelers policies contained a “your product” exclusion, which excluded coverage for damage to “your product” defined as goods or products manufactured or sold by “you,” meaning LB Steel.

Walsh, moreover, failed to identify any cracks or deficiencies in any parts of the canopy other than the columns installed by LB Steel. While Walsh argued that the cracks in the columns gave rise to the potential for the canopy itself to collapse, Lee relied on Traveler’s Insurance Co. v. Eljer Mfg., Inc., 197 Ill. 2d 278 (2001), for the proposition that an increased potential for future property damage does not itself constitute property damage.

Preventive measures taken by Walsh to repair the columns before they caused damage to other parts of the canopy system, also did not give rise to coverage, according to Lee.

He further distinguished Pittway Corp. v. American Motorists Insurance Co., 56 Ill. App. 3d 338 (1977), where the fact that defective component parts had been so integrated into a larger structure that the structure as a whole could be said to have been damaged. Not so here, Lee wrote, because the damage to the columns did not require the entire canopy to be taken down and rebuilt.

In sum, Walsh had not suffered any covered losses because its damages were limited to LB Steel’s own defective work.

Turning to the duty to defend, Lee relied principally on the eight-corners rule, thereby focusing on whether the city’s underlying complaint contained factual allegations that potentially fell within coverage. He found that the complaint “does not give even the slightest suggestion that LB Steel’s defective welds might have caused damage to other parts of the canopy system.”

Lee acknowledged that some broad boiler-plate type allegations in the complaint might arguably be construed to encompass damage to non-LB Steel components of the structure. But he concluded that Illinois law does not permit the court to speculate about possible factual scenarios that are absent from the claim itself.

Thus, even though the duty to defend is broader that the duty to indemnify, Lee found that the insurers had no duty to defend Walsh in the underlying action.

Absent a duty to defend or indemnify, moreover, Lee likewise rejected Walsh’s claim for bad faith damages under Section 155.

The court therefore affirmed in favor of the insurers.

Key Point

Where a liability insurance policy excludes coverage for damage to a named insured’s own property, and only the named insured’s property has been damaged due to defects, the policy does not afford coverage for an additional insured on the policy in the absence of policy language otherwise.