Tuesday, October 22, 2013

CGL Insurance and Construction Defects in Illinois

Over the past few months I've had the opportunity through the Illinois State Bar Association on two occasions to provide continuing legal education presentations about commercial general liability (CGL) insurance and coverage of defective construction.  This can be a tricky area and the law can vary by jurisdiction; the Illinois line of governing cases differs from other States.

An insurance policy is essentially a contract between the insurer and the insured, consisting of 1) the declarations, 2) the insuring agreement, 3) conditions, 4) exclusions, and 5) endorsements.  In the CGL world, many insurers use a variation of a nationally standardized form.  One thing that trips folks up is that some of the endorsements seem to say there should be coverage for certain things (for example, defective work done by a subcontractor) and so the temptation is to put the cart before the horse.

In Illinois, you don't even get to the endorsements unless the court first finds there is potential coverage under the policy in general.  For that, based on the standard insuring agreement and conditions, there must be "an occurrence" that results in "property damage" (there is also coverage if there is an injury, but that is a different topic).  Coverage hinges on those two terms.  If there is no "occurrence" or no "property damage," their will be no coverage.

WHAT IS AN OCCURRENCE?

An Occurrence is typically defined in the policy as "an accident, including continuous or repeated exposure to substantially the same generally harmful conditions."  However, what constitutes an "accident" is not typically defined in the policy.

In the defective construction context this is crucial.  There is a long line of Illinois cases finding that defective work is not an "accident," reasoning that the contractor intended to do the work, whether it turned out to be defective or not.  See for example Monticello Ins. Co. v. Wil-Freds Constr., Inc., 277 Ill.App.3d 697, 661 N.E.2d 451 (2nd Dist. 1996).

In what may be the exception that proves the rule, the 4th District Appellate Court in Country Mutual Insurance Co. v. Carr, 372 Ill.App.3d 335, 867 N.E.2d 1157 (2007) found that there was an "accident" and therefore an "occurrence" in a case in which a contractor allegedly caused property damage by negligently backfilling around a residential basement.  In this case, the court said the real question in determining whether there was an accident, is whether the person performing the acts that led to the result intended or expected the result."  The court then found that the contractor did not intend the result, and therefore there was an accident.

WHAT IS PROPERTY DAMAGE?

Property damage at Illinois law is required to be more than merely repairing or replacing the defective work itself.  If their is no allegation of damage to property other than the work, there will likely be no coverage.  See for example Lyerla v. Amco Ins. Co., 536 F.3d, 684 (7th Circuit 2008).

PROCEDURE ISSUES

The legal procedure itself can be frustrating to the contractor insured in these cases.  The contractor submits a claim to the insurance company when she receives notice of a claim from a property owner.  Often this may be a lawsuit itself.  But the determination of whether there is coverage and hence whether the insurance company will provide an attorney to defend the contractor in the suit, depends on whether the plaintiff property owner has alleged an occurrence and property damage!  If the plaintiff did not do so, the insurance company will deny coverage and the contractor will be on her own to defend the case.  If the contractor contests the denial the insurance company will often file a separate suit asking the court to determine as a "declaratory judgment" whether the insurer has a duty under the policy to defend the suit.  So the unfortunate reality for the contractor is that her coverage is in some ways dependent on how well did the plaintiff's attorney draft the complaint.


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