Construction Defect

Construction Defect:  7th Cir. Finds Damage To Condominium Residents’ Property Caused By Poor Workmanship During Building Construction Not Covered.

The Seventh Circuit Court of Appeals, applying Illinois law, held that a developer’s poor workmanship in constructing a condominium was not an “occurrence” providing coverage for damage to the condominium itself.  Furthermore, while damages to the residents’ personal property potentially constituted an “occurrence” under the policies, the policies’ products-completed operations hazard exclusion applied to preclude such coverage where the construction was complete prior to the residents’ occupancy.

In 1998, a developer converted a vacant building into a condominium loft called the Regal Lofts.  In connection with the renovation, the developer purchased two insurance policies from Nautilus Insurance Company (“Nautilus”) covering the period from June 1998 to June 2000.  Construction was completed in 2000, and the Regal Lofts Condominium Association (“Association”) was formed to govern the common areas of the building.  As early as May 2000, homeowners became aware of water damage and water leakage issues in the building.  The Association hired an expert who determined that the exterior brick masonry was not fully waterproofed, as a result of inadequate restoration of the walls to a water-tight, serviceable condition.  Consequently, the Association sued the developer for damages to the building and to the residents’ personal property.  The developer tendered the case to Nautilus, who denied coverage.  The developer subsequently settled with the Association and assigned its rights against Nautilus to the Association.  Nautilus sued the Association, claiming that it had no duty to cover any damages.

Nautilus filed a summary judgment motion, arguing that the damage to the building did not constitute an “occurrence,” and the damage to personal property was excluded.  The Seventh Circuit agreed that the damage to the building did not constitute an “occurrence”:  “Illinois cases have held that damages that are the natural and ordinary consequences of faulty workmanship do not constitute an ‘occurrence’ or accident.’”  The court noted:  “Illinois courts require that for an incident to constitute an ‘occurrence’ or accident’ in the building construction context, there must be damage to something other than the structure….”

The Seventh Circuit also agreed that the damage to personal property was excluded by the products-completed operations hazard exclusion.  The exclusion removed from the scope of coverage property damage that occurred “away from the premises [the Developer] own[s] … and arising out of” the Developer’s product or work, but the policies continue to cover work that hasn’t yet been completed.  The Association argued that the water damage occurred before the building was complete, while Nautilus argued that once residents moved into the building, work was completed under the terms of the policies.  The court determined that the Developer’s work was completed in piecemeal as each resident took occupancy.  According to the court, because damage to a particular resident’s personal property could only have occurred after work was completed and a resident moved in, the products-completed operations hazard exclusion barred coverage.  Nautilus Ins. Co. v. Board of Directors of Regal Lofts Condominium Assoc., No. 12-1821 (7th Cir. August 21, 2014).

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