Seventh Circuit Enforces Products-Completed Operations Hazard Exclusion in Faulty Workmanship Coverage Dispute

The Seventh Circuit, applying Illinois law, held that a Products-Completed Operations Hazard exclusion in a commercial general liability policy precluded coverage for a construction defect suit.  The coverage dispute arose out of the alleged faulty workmanship by the developer-insured in connection with a condominium conversion project, which allegedly caused damage to the condominium owners’ personal property.

Following the construction of the condominiums, the condominium owners discovered water damage.  The board of the condominiums ultimately sued the developer, alleging faulty workmanship with respect to the construction of the exterior walls.  The board subsequently amended the complaint adding a negligence count.  Then, in its second amended complaint, the board alleged that the developer’s negligence caused damaged to personal property, as well as to the interior and exterior of the building.  Nautilus commenced this declaratory judgment action following the tender of the second amended complaint.  The board and developer subsequently settled the underlying action, which included an assignment to the Board of the developer’s rights against Nautilus.  The district court granted summary judgment in favor of Nautilus.

On appeal, the Seventh Circuit decided that the Products Completed Operations Hazard exclusion precluded coverage for the alleged damage to personal property (i.e., the only part of the underlying complaint that potentially satisfied the policy’s “occurrence” requirement).  The exclusion applied to, in pertinent part, “property damage” arising out of “your work” except for products still in “your physical possession” or work that had not yet been completed.  The exclusion deemed the insured’s work to be completed when, in pertinent part, “that part of the work done at a job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project.”

The court agreed that owners moving their personal property into the units indicated that the owners were putting the units to their intended use.  The court specifically rejected the developer’s argument that the exclusion was not triggered because the common areas of the building were not yet finished.  The Seventh Circuit explained:

… [I]t strains the English language to say that the intended use of one area of the building must subsume the intended use of another area.  Under any reasonable examination of the facts, the individual condominium units were intended to provide private living areas to their owners.  There was no evidence in this case that the inability to access certain common areas interfered use of any of the individual units.  … The board concedes that the residents had moved their personal property in the condominium units.  That unambiguously establishes that the intended use had begun by the time any destruction of personal property occurred because of the water leakage.

This decision is significant for those whose practice touches upon construction defect coverage.  The Seventh Circuit’s reasoning reveals that business risk exclusions can, indeed, limit insurers’ exposure to faulty workmanship claims.

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