Do Not Pass Go, Do Not Collect Hundreds of Thousands of Dollars: Seventh Circuit Parses Through Insured’s Gamesmanship to Find No CGL Coverage for Settlement of Faulty Workmanship Claim
In Allied Property & Casualty Insurance Co. v. Metro North Condominium Ass’n, No. 16-1868, 2017 U.S. App. LEXIS 4107 (March 8, 2017), the Seventh Circuit found coverage unavailable for a settlement of a lawsuit against a subcontractor alleged to have improperly installed windows at a condominium building. The court’s holding, in essence, was that the bases for the settlement were inconsistent with the claims against the subcontractor, and the only such viable claims could not possibly have been covered under the subject CGL policy.
The coverage dispute arose when a developer for a condominium hired two subcontractors, CSC Glass and CSC Construction (collectively CSC), to install windows. Sometime thereafter, due to the defective construction of the windows, the building sustained significant water damage, and the unit owners also sustained damage to their personal property. After the developer was deemed insolvent, the Metro North Condominium Association amended its complaint to add claims for a breach of the implied warranty of habitability and negligence against CSC. Importantly, the negligence claim was dismissed with prejudice as untimely.
Metro North and CSC ultimately settled the remaining claim in exchange for a dismissal of the lawsuit. As part of the settlement, CSC assigned to Metro North the right to recover proceeds from, in pertinent part, its CGL insurer, Allied Property & Casualty Insurance Company. In addition, the settlement agreement noted that Metro North was not to be compensated for the cost of repairing the defective windows, but rather the resultant property damage sustained by Metro North and the unit owners. Upon learning of the settlement, Allied initiated a declaratory judgment action in Illinois federal court contending it did not have the duty to indemnify CSC or its assignee Metro North. Following cross-motions for summary judgment, the district court granted judgment in favor of Allied.
The Seventh Circuit agreed. First, the court focused on the significance of the only pending claim at the time of the settlement, i.e., the breach of the warranty of habitability. Under Illinois law, recovery for a breach of the warranty of habitability claim is limited to the cost of repairing the defective conditions. Hence, since Illinois law is settled that CGL policies do not cover damage to the insured’s own work, the only remaining claim in the underlying lawsuit could never be covered. Moreover, the Seventh Circuit noted that standard CGL policies do not cover claims based on the implied warranty of habitability because they are contract claims. In addition, to the extent the settlement agreement contended CSC was liable for damages beyond repairing the defective windows, the contractual liability exclusion would bar coverage. Last, although the settlement agreement and the underlying lawsuit sought to recover for personal property losses sustained by the unit owners, Metro North lacked standing to sue on behalf of the individual unit owners, pursuant to Illinois law. Accordingly, Allied did not have the duty to indemnify Metro North in relation to damage suffered by the unit owners.
This decision is a useful reminder that insurers owe indemnity to their policyholders based upon the actionable or viable claims remaining in a complaint, not some hypothetical version or earlier version of the complaint. As the Seventh Circuit explained succinctly, “… [C]overage must still be consistent with some viable theory of recovery before a duty to indemnify can arise.”