Unspecified Alleged Personal Property Damage in Construction Defect Complaint Sufficient to Trigger Duty to Defend

The Illinois Appellate Court for the First District, in an opinion written by Justice Ellis with Justices McBride and Cobbs concurring, applying Illinois, reversed the Circuit Court’s ruling and held that the underlying complaint’s allegations against a contractor relating to damage to personal property constituted both  “property damage” and an  “occurrence.”  Thus, triggering the insurer’s duty to defend.

Metropolitan Builders, Inc. (“Metropolitan”) was the general contractor for a construction job on continuous properties in Chicago – 1907 Property, 1909 Property, and 1911 Property (the “Properties”).  During the construction, a wall adjoining 1907 Property and 1909 Property collapsed.  The amount of structural damage led the City of Chicago to demolish all three Properties after they were declared unsafe.  The owner of the building sought indemnification and reimbursement for the damages it suffered from its insurer, AIG Property Casualty Company (“AIG”).  AIG paid the owner “a sum of over $1,802,479.88 for repairs, demolition, construction, and other associated expenses arising from” the collapse.  AIG then sued Metropolitan for subrogation, the underlying suit.

The underlying suit alleged warranty and contract claims, as well as various tort claims against Metropolitan.  The various tort claims each alleged, “As a result of the aforementioned negligence, [the property owner] suffered losses including, but not limited to damage to [its] real and personal property.”

Metropolitan tendered the defense of the underlying suit to its commercial general liability (“CGL”) insurer, Certain Underwriters at Lloyd’s London, Subscribing to Certification No. RTS000275-4 (“Lloyd’s”).  Lloyd’s denied coverage and sought a declaration that it owed no duty to defend Metropolitan.  Lloyd’s argued that the allegations in the underlying complaint alleged neither “property damage” nor an “occurrence.”  The trial court found that the underlying complaint failed to allege an “occurrence” as defined by the policy.  Metropolitan appealed.

The Appellate Court first considered the purpose of CGL policies, finding that they “are intended to protect the insured from liability for injury or damage to the persons or property of others; they are not intended to pay the costs associated with repairing or replacing the insured’s defective work and product, which are purely economic losses.”  The Appellate Court then analyzed the definition of an “occurrence” or an “accident.”  Under Illinois law, there is no occurrence when a contractor’s defective workmanship necessitates removing and repairing work.  However, the Appellate Court noted that Illinois courts “have been careful to emphasize that when the underlying lawsuit against the insured contractor alleges damages beyond repair and replacement, and beyond damage to other parts of the same project over which that contractor was responsible, those additional damages are deemed to be the result of an ‘accident’.”

Next, the Appellate Court analyzed the meaning of “property damage” under the policy: “[P]hysical injury to tangible property, including all resulting loss of use of that property.”  Under Illinois law, “property damage” under similar CGL policy language, means the property’s appearance must be altered in some measurable way, but it must also be property beyond the contractor’s work product.

The underlying complaint alleged two different kinds of damages suffered by the property owner: “losses including, but not limited to, damages to both [the property owner’s] real and personal property.”  The Appellate Court agreed with Lloyd’s that the damage to the real property was not covered by the CGL policy because Metropolitan was the general contractor on the job, with overall responsibility for the renovation and conversion of the Properties.  The damages suffered by the property owner as to the real property was nothing but economic loss – the cost of repair and replacing the demolished buildings to fulfill the owner’s contractual expectations.  However, the Appellate Court found that the allegations of unspecific damage to personal property was enough to trigger coverage under the Lloyd’s policy.  “In sum, these admittedly vague references to damage to the property owner’s ‘personal property’ are enough to allege ‘property damage’ caused by an ‘occurrence’ under the Policy.  The allegations are enough to trigger the insurer’s duty to defend.”  Certain Underwriters at Lloyd’s London v. Metropolitan Builders, Inc., 2019 IL App (1st) 190517 (Dec. 18, 2019).