‘Occurrence’ Definition Gets Special Subcontractor Angle

By Don R. Sampen, published, Chicago Daily Law Bulletin April 30, 2019

The 1st District Appellate Court recently defined occurrence coverage for a subcontractor on a construction project in terms of damage beyond the subcontractor’s scope of work. The court also held that equitable contribution may be available as between insurers providing coverage for successive policy periods.

The case is Acuity Insurance Co. v. 950 West Huron Condominium Association, 2019 IL App (1st) 180743 (March 29). One of the insurers, Acuity Insurance Co., was represented by Leahy, Eisenberg & Fraenkel Ltd. Litchfield Cavo LLP represented the other insurer, Cincinnati Insurance Co.

The 950 West Huron Condominium Association sued general contractor Belgravia Construction Corp. for allegedly defective work on the association’s building envelope. Belgravia, in turn, brought a third-party action against its subcontractors, including Denk & Roche Builders Inc., or D&R, the carpentry subcontractor.

D&R tendered to Acuity and Cincinnati, both of which provided commercial general liability coverage to D&R for the relevant time period. Cincinnati’s coverage extended from January 2000 to June 2007. Acuity provided coverage from June 2007 through 2013.

Cincinnati accepted the tender, provided a defense, and eventually settled the action. Acuity denied coverage from the outset and filed the instant declaratory action.

It contended there was no coverage because of lack of an alleged occurrence. Cincinnati intervened in the coverage action and sought equitable contribution from Acuity.

The trial court granted summary judgment in favor of Acuity; Cincinnati brought this appeal.

Occurrence for subcontractor

In an opinion by Justice Mary L. Mikva, the 1st District reversed. She initially addressed the duty to defend. She observed that while commercial general liability policies provide coverage for “occurrences” or accidents, they do not insure a contractor for the cost of correcting its own construction defects. Rather, under cases such as Milwaukee Mutual Insurance Co. v. J.P. Larsen Inc., 2011 IL App (1st) 101316, such policies provide coverage for damage to something other than the insured’s project.

Thus, for a developer or general contractor, the insurer would look to determine whether the damage alleged is to property that is not a part of the overall construction project. But for a subcontractor, the “project” is limited to the scope of its work.

In that context, said Mikva, a complaint that alleges damage to a part of the construction project outside of the subcontractor’s scope of work, alleges an occurrence with respect to the subcontractor even though the complaint would not allege an occurrence from a developer’s or general contractor’s perspective.

In this case, the underlying complaint and third-party complaint alleged that D&R’s work caused or contributed to defects within the building envelope and interfered with usage of common elements and individual condominium units. These allegations, in Mikva’s view, sufficiently implicated damage beyond D&R’s scope of work and gave rise to the duty to defend.

Acuity, however, cited a bevy of cases in which Illinois courts held that the natural and ordinary consequences of poor work could not be regarded as an accident or occurrence. In response, Mikva distinguished the cases on the ground that they dealt with allegations against a developer, general contractor or other entity performing the only work at a given construction. They did not address a subcontractor’s allegedly poor work causing damage to other parts of the building.

Acuity also tried to distinguish Larsen and other cases cited by Mikva by contending that the controlling feature in such cases was the damage to personal property, and not necessarily damage to other parts of the construction project. Mikva rejected this point as well, pointing out that, while personal property may have been involved in the other cases, so were other parts of the building under construction.

Thus, according to Mikva, the “project” has to be viewed from the eyes of the subcontractor and alleged damage to work or property outside the subcontractor’s scope of work involves an occurrence. This is so even though such an allegation may not constitute an occurrence from the general contractor’s or developer’s perspective.

Equitable contribution

Cincinnati argued that both its policy and Acuity’s policy covered the same alleged damage, which entitled Cincinnati to equitable contribution.

Based on Home Insurance Co. v. Cincinnati Insurance Co., 213 Ill.2d 307 (2004), Acuity took the position that equitable contribution is available between two insurers only if both their policies cover the “same risk.” It further contended that the two policies here could not cover the same risk because they were issued for consecutive, not concurrent, policy periods.

Mikva resolved the issue in favor of Cincinnati. She said that for purposes of equitable contribution, two policies can share a sufficient identity of risk even if they do not have overlapping coverage periods. In support she relied on such a holding in the federal case of Liberty Mutual Insurance Co. v. Lumbermens Mutual Casualty Co., 525 F.Supp.2d 993 (N.D. Ill. 2007).

Here, moreover, the allegations triggered a duty to defend in both policies. So, Cincinnati was entitled to contribution.

The court, therefore, reversed the grant of summary judgment in favor of Acuity and remanded to allow Cincinnati to prove up the amount of contribution.

Key points

• An underlying complaint brought against a subcontractor alleging damage to the construction project outside of the subcontractor’s scope of work, sufficiently alleges an occurrence for purposes of triggering commercial general liability coverage, even if the damage alleged would not be an occurrence from a general contractor’s or developer’s perspective.
• Insurance policies need not necessarily be issued for concurrent policy periods to allow the issuer of one policy to cover the “same risk” as the issuer of another policy, such as to allow the issuer of the first policy contribution from the other policy issuer.