Courts in Illinois continue to build the already large body of cases regarding coverage for defective defect claims. Recent cases further define when an insured is entitled to coverage where the underlying claims assert defects in construction and the scope of the target tender doctrine.
The developer in CMK Development Corp, v. West Bend Mut. Ins. Co., 395 IlL App. 3d 830, 917 N.E.2d 1155 (1st Dist. 2009), sued its insurer, West Bend, after that insurer refused to defend it against a homeowner's claim alleging defective workmanship in construction of a residence. In a statement of claim filed as part of an arbitration, the homeowners alleged that they did not receive the home that they had bargained for and asserted counts for breach of contract, breach of implied warranties, and misrepresentation. The insurer denied coverage, the underlying case settled, and the developer sued the insurer.
The trial court found that one of the underlying defects, scratches on a bathtub and toilet bowl, alleged potentially covered property damage caused by an occurrence, which triggered West Bend's duty to defend. On appeal, the appellate court held that the scratched property, as well as damaged outdoor concrete work and water-damaged cork flooring, did not allege potentially covered property damage caused by an occurrence and found that the insurer had no duty to defend.
A federal court in another case, however, found that an insurer was not entitled to summary judgment on the duty to defend and the duty to indemnify in Western World Ins. Co. v. Penn-Star Ins. Co., No. 07-cv-604-JPG, slip op., 2009 WL 1605909 (S.D. Ill June 8, 2009), a demolition case. In that case, the insured contractor demolished a building under a contract with the City of East St. Louis, Illinois. The contractor destroyed part of a wall. When it discovered that it was a common wall with another building, it stopped the work.
The building's first party insurer repaired the damage and then brought a subrogation suit against the contractor and the city, asserting negligence and inverse condemnation. The contractor tendered the suit to its insurer, Western World, which denied coverage because the claim did not allege an "occurrence" and based on several exclusions, and filed a declaratory judgment action.
The issue in the declaratory judgment action was whether Western World was required to defend the contractor or to indemnify it for the settlement amount. The court looked at cases discussing "occurrence" and noted that the determination depended upon whether the insured intended or expected the result of its act, not the act itself. The federal court found that the underlying complaint alleged a potential "occurrence" because, while the contractor intended to demolish the wall at issue, it did not intend that demolition to damage the adjoining building. The court further found that certain exclusions, including the damage to property business risks exclusion, did not require summary judgment for the insurer.
The case of State Auto Property &Cas. Ins. Co. v. Springfield Fire & Cas. Co., 394 IlL App. 3d 414 (4th Dist. 2009), involved the scope of an insured contractor's right to target tender and deselect insurance policies covering it. The contractor obtained a general liability insurance policy from State Auto that provided that it was primary coverage, except where the insured was covered by any other fire, extended coverage, business risk, installation risk or similar coverage for "your work." The contractor later obtained additional insurance coverage from Springfield Fire covering a specific insurance project. Two persons were injured on the project, and both sued the contractor for damages for such injuries.
The contractor tendered the underlying claims to State Auto and advised that insurer that it was deselecting Springfield Fire and looking to State Auto as the sole insurer to defend and indemnify it. Neither insurer questioned that there was coverage, but State Auto sued seeking a declaration regarding the insured's right to deselect Springfield Fire and target tender to it despite its other insurance provision. The trial court upheld the contractor's right to deselect Springfield Fire and to target tender to State Auto, and an appeal followed.
The appellate court discussed target tender decisions and noted that whether the insured was the named insured was significant because the rationale for permitting deselection is based on whether the insured paid the premium or negotiated for the contractual right to be named on another's policy. The court found that the insured contractor was entitled to deselect Springfield Fire in the case at bar because it had paid for both policies. The court further found that State Auto's other insurance provision did not supersede the contractor's right to deselect the Springfield Fire policy because the contractor had never triggered that policy because it deselected it.
Another appellate court came to a consistent decision in River Village 1. LLC v. Central Ins. Cas., _ Ill App. 3d-----.J919 N.E.2d 426, (1st Dist. 2009). There, the general contractor was insured by Harleysville Insurance Company and, pursuant to a subcontract with a drywaller, was named as an additional insured on the subcontractor's policy issued by Central Insurance Companies. The subcontract, however, did not specify whether the coverage was to be primary or excess. The Central policy had another insurance provision which made that policy excess over any other available insurance unless a contract specifically required that it be primary coverage. An employee of the subcontractor was injured and sued the general contractor, which then tendered the claim to the subcontractor and advised the subcontractor that it was instructing Harleysville, its own insurer, not to respond or provide coverage until the Central policy was exhausted.
Central did not respond and the general contractor tendered the claim to Central directly two more times. The general contractor then sued Central for breach of contract, seeking a defense. Central responded and filed a counterclaim for declaratory judgment against the general contractor. The underlying claim settled and was paid by Harleysville. The parties in the declaratory judgment action filed cross-motions for summary judgment, and the trial court ultimately found in Central's favor.
On appeal, the appellate court discussed cases determining the interplay between the target tender doctrine and other insurance provisions, noting that the right to target tender can depend upon whether the policies provide different types of coverages, meaning primary versus excess, and that the target tender doctrine could only be invoked when the policies paid on the same basis. The court found that, based on the other insurance provision in the Central policy, the case at bar involved primary and excess coverage since the Central provision rendered that policy excess unless a contract specifically required that it be primary. The court reasoned that the Harleysville policy, having paid the underlying settlement, was other valid insurance, and that the Central policy was excess to that policy because there was no contract requiring it to provide coverage on a primary basis.
A contractor's struggle for coverage for contractors under general liability policies continues in Illinois. Based on these policies, it looks like a contractor has the right to determine which policy responds to a loss under some circumstances as long as the contractor can first establish that there is coverage for a defective construction loss.
There is an appeal pending before the Illinois Supreme Court on River Village 1. LLC v. Central Ins. Cas., 919 N.E.2d 426, (1st Dist. 2009), for the March 2010 term.
