7th Cir. / “Damage-to-Property” Exclusion and Bad Faith

Affirms summary judgment to insurer in grain silo explosion case

The Seventh Circuit affirmed a trial court ruling that policyholder West Side Salvage Inc. (“West Side”) was not entitled to seek bad faith damages from RSUI Indemnity Co. (“RSUI”) for its alleged failure to properly protect its interests by settling an underlying claim against it.  West Side was contracted to perform repairs by ConAgra Foods Inc. (“ConAgra”) on a grain silo elevator that exploded seriously injuring three workers and damaging the silo.  In affirming, the Seventh Circuit disagreed with the trial court’s finding that the underlying suit itself was within the scope of the RSUI policy, and thus, the insurer could not be liable for bad faith.

West Side and ConAgra were sued by the workers for their injuries.  ConAgra asserted a cross-claim against West Side for property damage caused by the explosion.  West Side was held solely liable for the explosion after a jury trial and an appeal to the Seventh Circuit.  West Side sued RSUI for failure to settle within policy limits, but the coverage case was dismissed without prejudice.  Later, RSUI and West Side settled the injured workers claims, but the settlement did not address ConAgra’s $3M property damage judgment.  West Side then instituted a coverage action against RSUI asserting that the insurer should have settled the property damage claim earlier.

RSUI, which provided West Side with an $11M excess general liability policy, provided a defense to West Side for the workers’ claims and the ConAgra property damage claim after its primary insurer, Colony Insurance, tendered its $1M in limits.  West Side later filed a bad faith action against RSUI for bad faith in not settling ConAgra’s property damage claim.  The District Court rejected RSUI’s claim that the underlying case was not covered due to a “damage-to-property” exclusion in the policy.  However, the District Court found that RSUI did not commit bad faith because West Side could not demonstrate that there was an offer to settle “all claims” against it “at the same time there (was) a reasonable likelihood the insured will face liability exceeding the policy limits.”  The District Court entered summary judgment to RSUI and West Side appealed.

The Seventh Circuit affirmed on a different basis, finding that the “damage-to-property” exclusion in the RSUI policy precluded coverage.  The exclusion applied to “that particular part of real property on which you … [are] working directly or indirectly.”  In the underlying personal injury case, the workers alleged that ConAgra had not properly maintained the silo and had ignored warning signs that the grain was discolored and was warm leading to the grain exploding.  West Side had successfully argued to the trial court that the exclusion did not apply because it was only working on removing the grain from the silo, and thus, only damage to the grain was excluded.

Applying Illinois law, the Seventh Circuit disagreed with the trial court’s finding that the exclusion did not apply.  Citing Pekin Insurance Co. v Willett, 301 Ill.App.3d 1034  (Ill. App. Ct. 1998), it held that the fact that West Side was only working on the grain itself when the explosion occurred was “immaterial” because the exclusion did not only apply to “the precise area being worked on if the work performed was poor.”  The court then held that the property damage was “caused by poor workmanship.”  A contrary reading would “undermine the basic premise of the damage-to-property exclusion: that general liability policies are not intended to protect the insured from the normal risks of its business.”

West Side argued that RSUI could still be held liable for bad faith failure to settle the property damage claim, even if it was not covered under the policy, because RSUI controlled its defense.  The court rejected the argument citing Illinois law which permits an insurer to defend under a reservation of rights.  The court also noted that West Side was provided independent counsel to protect its interests by Colony Insurance due to the RSUI reservation of rights.  Finally, the court rejected West Side’s argument that RSUI could still be held liable because the $3M property damage award was the consequential damage of its bad faith failure to settle the workers’ claims reasoning that “West Side and RSUI privately settled West Side’s claims that RSUI failed to settle the injured worker’s claims.  West Side’s argument that it is now entitled to consequential damages from that claim is without merit.”

In conclusion, the Seventh Circuit affirmed summary judgment to RSUI on the basis of the damage-to-property exclusion.  As such, it “need not reach the merits” of the bad faith failure to settle claim.  West Side Salvage Inc. v. RSUI Indemnity Co., No. 16-3928 (7th Cir. Dec. 18, 2017).