Federal courts in Illinois continue the trend of finding no coverage for defective construction workmanship claims under commercial general liability policies. In Auto-Owners Ins. Co. v. Assurance Co. of America, Case No. 07 C 4454, 2008 U.S. Dist. LEXIS 60444 (Aug. 8, 2008), the United States District Court for the Northern District of Illinois applied two “business risks” exclusions to find that there was no coverage for a construction mishap that resulted in an order of demolition of the claimants’ entire house by the City of Chicago. That case and another federal decision by the Seventh Circuit, issued around the same time and discussed in a prior newsletter, Lyerla v. AMCO Ins. Co., 536 F.3d 684 (7th Cir. 2008) (finding no coverage because underlying defective construction complaint alleging faulty workmanship did not allege “property damage”), show that federal courts here follow the line of Illinois appellate court decisions narrowly restricting coverage for construction claims under CGL policies to cases involving injuries to persons or damage to property other than the construction project at issue.
The underlying construction project was part of the redevelopment of a home. Auto-Owners’ insured was a subcontractor which had been hired by the general contractor to demolish the home’s interior and to strengthen the frame of the house. As part of the frame strengthening, the subcontractor was going to replace the “sill plate,” a one-and-one-half inch wooden plate that sat at the top of the foundation. To do this, the subcontractor was required to lift the house an inch to an inch-and-a-half off its foundation, using floor jacks throughout the basement to raise up the building. In the course of that effort, the home slid off its foundation, causing catastrophic damage to the home’s structure and ultimately resulting in the City of Chicago ordering the demolition of the house.
The subcontractor was an insured under a general liability policy issued by Auto-Owners that covered damages and had a duty to defend the subcontractor against claims for “bodily injury” and “property damage” caused by an “occurrence.” The court looked at two “business risks” exclusions in Auto-Owners’ policy, exclusions j(5) and j(6). Exception j(5) excluded damage to the “particular part” of property on which the subcontractor was “directly or indirectly” performing operations if the damage arose from those operations, and exclusion j(6) excluded damage to the “particular part” of property that must be restored because the subcontractor’s work was incorrectly performed on it.
Auto-Owners denied coverage, arguing that the damage to the house was damage to the particular part of property on which the subcontractor had performed defective work and thus fell within exclusions j(5) and j(6) in the policy.
The district court found that the decision was controlled by the Illinois appellate court decision in Pekin Ins. Co. v. Willett, 301 Ill. App. 3d 1034 (2d Dist. 1999). In that case, the policyholder had contracted to empty a swimming pool, paint it, and fill it with water and necessary pool chemicals so that it was ready for use. However, after the pool was painted, but before it was filled, a heavy rainstorm caused the pool to push out of the ground, damaging the pool. One of the arguments made by the contractor was that the insurer owed a duty to defend because the underlying complaint did not allege that the contractor’s work on the surface of the pool damaged the pool. The Illinois appellate court rejected that argument, finding that similar “business risks” exclusions applied to property damage caused by poor workmanship.
Finally, the district court noted that its decision effectuated the purpose of commercial general liability policies, citing Illinois appellate court decisions finding that CGL coverage is intended to protect insureds against liability for injury or damage to the person or property of others and not against the costs of repairing or replacing their own faulty workmanship. Finding that the subcontractor sought coverage for its defective work, and not for damage to any other property, the district court granted Auto-Owners’ motion for judgment on the pleadings and denied the subcontractor’s motion for summary judgment.
