Construction Defect – 7th Cir.: No Coverage for Cost of Repair Due to Defective Window Installation

The Seventh Circuit, applying Illinois law, ruled that an insurer had no duty to cover a subcontractor’s settlement with a condominium association relating to property damage caused by the subcontractor’s faulty window installation because the cost of repairing defectively completed work is not covered under standard commercial general liability (“CGL”) policies.

Metro North Condominium Association (“Metro North”), the governing body of a condo building in Chicago, filed suit against a number of its contractors and subcontractors for defective construction that caused various issues, including water infiltration due to defective window installation.  Subcontractors included CSC Construction, Inc. and CSC Glass, Inc. (collectively “CSC”).   Metro North alleged that, due to CSC’s “construction errors and omissions,” serious water damage to the building and the unit owners’ personal property occurred.  Metro North claimed that CSC was in breach of the implied warranty of habitability (“BIWH”).  Metro North also filed a negligence claim against CSC, but the negligence claim was dismissed due to the running of the statute of limitations.

Allied Property & Casualty Insurance Company (“Allied”) insured CSC under a CGL policy during the relevant time period.  Metro North and CSC entered into a settlement agreement for the underlying claim in which CSC agreed to pay Metro North $700,000 to be satisfied solely through the assignment of CSC’s rights under the Allied policy.  The settlement specified that the right to payment had to “aris[e] out of the claims asserted against CSC in the [underlying Illinois] Action or this Settlement thereof.”  At the time of settlement, Metro North’s claim for BIWH was the only claim remaining.  Allied sought a declaration that its policies did not provide coverage for the settlement.  Allied and Metro North filed cross-motions for summary judgment.  The district court found that the settlement damages were not covered under Allied’s policy and granted summary judgment for Allied.  Metro North appealed.

According to the Seventh Circuit, “[t]he measure of damages for a breach of the implied warranty of habitability is the cost of repairing the ‘defective conditions,’ here the defectively installed windows.”  Under Illinois law, CGL policies like Allied’s do not cover the cost of repairing the insured’s defectively completed work.   Moreover, the Allied policy has a “your work” exclusion which specifically excludes the cost of repairing CSC’s defective work.  Thus, the Seventh Circuit found that Allied’s policy did not cover the settlement damages for the BIWH claim.  The Seventh Circuit also found that, even if CSC assumed liability through the settlement for damages to other parts of the building besides the windows, coverage for those damages would be precluded under the policy exclusion for damages arising from contractual liability.  Finally, as to that portion of the settlement that related to damage to the unit owners’ personal property, the Seventh Circuit held that, under the Illinois Condominium Property Act, Metro North had no standing to assert those claims.  Consequently, Allied had no obligation to cover any portion of Metro North’s settlement with CSC: “the settlement damages for which CSC incurred liability do not fall within the coverage of Allied’s policy.  Because CSC did not become legally obligated to pay any sums to which the insurance applied, there is no duty to indemnify.” Allied Property & Casualty Insurance Co. v. Metro North Condominium Association, No. 15-cv-03925 (7th Cir.  Mar. 8, 2017).