Fed. N.D. IL / Construction Defect

$25M in Remedial Measures to Prevent Harm Not Property Damage

The United States District Court for the Northern District of Illinois, in an opinion by Judge Kendall applying Illinois law, granted summary judgment in favor of three insurers holding the insurers did not have a coverage obligation to a general contractor for a multimillion-dollar settlement award relating to the subcontractor insureds’ defective welds at Chicago’s O’Hare Airport. The policies at issue only covered actual “property damage” rather than the “economic losses” that the general contractor claimed in fixing the subcontractor’s defects. 

The dispute arose when the City of Chicago (the “City”) contracted with Walsh Construction Company (“Walsh”) as a general contractor to build a steel canopy at O’Hare International Airport. Walsh subcontracted with Carlo Steel Corporation (“Carlo”), and Carlo subcontracted with LB Steel for the manufacture and supply of steel elements. The Carlo-LB Steel subcontract contained an indemnity provision where LB Steel agreed to indemnify Carlo and Walsh “for bodily injury and property damage that arose from performance of the subcontract work.” Just a year after it contracted with Walsh, the City found cracks in the canopy welding and additional defective welding in one of LB Steel’s columns. In response to the LB Steel weld not conforming to standards, the City directed Walsh to install shoring around the defective column. 

The City sued Walsh alleging defective design and construction of the steel canopy, and it eventually added claims of breach of contract and contractual indemnity. The City and Walsh reached a settlement where Walsh agreed to pay the City $10 million “because of the likelihood that the City would have been successful in recovering damages” based on LB Steel’s deficient steel work. 

Walsh filed a third-party complaint against LB Steel for breach of contract and professional negligence. Walsh sought $10 million in damages based on the settlement with the City and “over $25 million to investigate and remediate LB Steel’s defective welds.” The circuit court ruled in favor of Walsh and awarded $27.5 million in damages, with a net judgment of $19 million. LB Steel filed for bankruptcy four days later. 

St. Paul and the two other LB Steel insurers then brought a declaratory judgment action against Walsh. The insurers argued they had no obligation to Walsh to satisfy the judgment against LB Steel. Walsh counterclaimed for breach of the duty to defend and bad faith. 

On cross-motions for summary judgment, Judge Kendall ruled in favor of LB Steel’s insurers. Judge Kendall held that the policies covered only “bodily injury” or “property damage” resulting from an “event” or “occurrence.” The St. Paul policies defined “property damage” as “physical damage to tangible property of others.” Travelers and Charter Oak policies only covered “physical injury to tangible property,” which meant “damage to tangible property causing an alteration in appearance, shape, color or in other material dimension.”  

Consequently, Walsh’s costs in repairing and replacing LB Steel’s defective steel parts did not constitute property damage. Judge Kendall viewed Walsh’s costs in remedying LB Steel’s defective steel parts as “purely economic losses.” Despite Walsh having to perform expensive testing and repairs to prevent the canopy from collapsing, the district court held that Walsh’s repairs to the defects avoided any damage to the City’s property. The insurer’s policy only covered the canopy’s actual property damage and not the potential for failure in the future. “Without evidence of property damage, Walsh cannot prevail by describing product defects as a ‘failure’ and repairs as ‘retrofitting.’” On April 5, 2023, Walsh filed an appeal to the Seventh Circuit. St. Paul Guardian Ins. Co. v. Walsh Constr. Co., 15 C 10324, 2023 WL 2375126 (N.D. Ill. Mar. 6, 2023).