‘Personal’ Property Damage Allegation Triggers Defense Obligation

By Don R. Sampen, published, Chicago Daily Law Bulletin January 14, 2020

The 1st District Appellate Court recently held that an underlying construction defect complaint alleging damage generally to “real and personal property” sufficiently alleged an “occurrence” and “property damage,” giving rise to a duty to defend, even though the claim of real property damage alone would not have been sufficient.

The case is Certain Underwriters at Lloyd’s London v. Metropolitan Builders Inc., 2019 IL App (1st) 190517 (Dec. 18. 2019). The insured, Metropolitan, was represented by Tribler Orpett & Meyer P.C. Novak Law Offices represented the insurer, Certain Underwriters at Lloyd’s London.

Metropolitan was hired as general contractor for construction and renovation of three adjacent properties in Chicago. In 2016 after the work began, the structures on two of the properties collapsed, the city deemed the properties unsafe and ordered all the structures to be demolished.

The owner obtained recovery from its property insurer, and the property insurer, as subrogee, then sued Metropolitan, alleging warranty, contract and tort claims for deficient construction.

The underlying complaint also alleged that the property owner suffered losses, including but not limited to, damage to its real and personal property.

Metropolitan tendered to Lloyd’s, its commercial general liability carrier. Lloyd’s denied any obligation to defend because, in its view, the complaint alleged neither an “occurrence” nor “property damage,” both of which were necessary to trigger coverage under its policy. Lloyd’s also brought this declaratory action, seeking a determination of its coverage obligations.

On a motion for summary judgment, the trial court disagreed with Lloyd’s on “property damage,” but agreed that no “occurrence” was alleged and thus entered summary judgment in Lloyd’s favor.

Metropolitan took this appeal and Lloyd’s cross-appealed on the “property damage” issue.

‘Occurrence’ and ‘property damage’

In an opinion by Justice David W. Ellis, the 1st District reversed. He initially addressed the propriety of Lloyd’s cross-appeal. With Lloyd’s having obtained all the relief it sought in the trial court — summary judgment in its favor — Ellis found the cross-appeal not proper and that the court had no jurisdiction to hear it. Nevertheless, he further acknowledged Lloyd’s could raise the “property damage” issue on appeal in support of affirmance of the trial court decision.

Ellis then turned to the merits. He took the time to explain evolution of case law on commercial general liability coverage for property damage and interpretation of both “occurrence” and “property damage” in construction defect cases. He first observed that commercial general liability policies generally provide no coverage for a contractor’s defective work itself, which is considered to be mere “economic loss.”

That kind of loss, Ellis said, is more the role of a surety, which guarantees the contractor’s performance to the owner. On remedying the contractor’s defective performance, the surety can seek reimbursement from the contractor itself.

A commercial general liability insurer, on the other hand, has no such right against its insured. Its role is limited to protecting the insured from the liability claims of others.

As for what constitutes an “occurrence” under a commercial general liability policy, Ellis observed that the term is defined under the Lloyd’s policy, and in most policies, as an accident. An “accident,” in turn, is defined by the case law as an unforeseen event. A contractor’s defective work, which needs to be replaced, is not an accident.

It is not an accident, moreover, even when the defective work ends up damaging other work for which the contractor has responsibility, such as damage to other parts of the same project. Rather, according to Ellis, such damage is considered to be the natural and ordinary consequence of the faulty workmanship.

On the other hand, when the defective work is alleged to cause damage beyond the contractor’s own project, then an “occurrence” may be said to have taken place. Thus, for example, defective plumbing in itself would not constitute an “occurrence,” but if the defective plumbing causes damage to the homeowner’s furniture or other property, such would constitute an “occurrence.”

Ellis further explained that “property damage” has been construed in a manner consistent with “occurrence.” So, if the property alleged to be damaged is the contractor’s own work product, that would not constitute “property damage” for purposes of commercial general liability coverage. Only damage beyond the work product of the contractor constitutes “property damage” for which coverage is provided.

‘Personal’ property damage deemed sufficient

In this case, as noted, the underlying complaint alleged damage to both the property owner’s real and personal property. Ellis said he agreed with Lloyd’s that the alleged damage to real property was not covered by the commercial general liability policy. It was not covered because all the real property was under the responsibility of Metropolitan, as general contractor.

Thus, even if the damage extended to parts of the project on which Metropolitan was not currently working at the time of the collapse or demolition, it was still part of Metropolitan’s work, for which no coverage would be provided.

The claim of damage to the property owner’s “personal property,” however, Ellis said, would give rise to coverage. That claim triggers coverage because the owner’s personal property was beyond the scope of Metropolitan’s work.

The fact that the complaint did not specify what personal property was damaged, moreover, made no difference. Ellis cited case law holding that specific identification of damage to personal property is not necessary.

Finally, he observed that if an insured is entitled to a defense of any portion of an underlying complaint, the insured is entitled to a defense of the entire lawsuit. So, even though the vast majority of damages alleged appeared to relate to noncovered real property and the project itself, Lloyd’s had an obligation to defend the entire lawsuit.

Ellis emphasized, though, that the court’s decision went only to the duty to defend. The court expressed no opinion with respect to Lloyd’s indemnification obligation.

The 1st District, therefore, reversed in favor of Metropolitan.

Key points

• When a party receives all the relief it has sought in the trial court, it need not and should not file a cross-appeal simply because the grounds of relief did not include all those advocated before the trial court.
• A commercial general liability policy issued to a construction contractor and covering “property damage” caused by an “occurrence” is not triggered by allegations that the contractor negligently caused property damage to work or work product within the scope of the contractor’s own work project.
• A general allegation of property damage to an owner’s “personal” property can be sufficient to trigger a commercial general liability insurer’s obligation to defend a contractor insured.