No Coverage to Replace Defective Work

Settlement Agreement Contrary to Its Intent Eliminated Coverage

As I have opined in these pages taking an assignment from a tortfeasor to get the right to sue an insurer is not a wise or profitable course of action. Although insurance companies have assets sufficient to pay almost any damages against an insured those assets do not change the facts of the case or the wording of the policy. A plaintiff that is able to get a judgment against a person gives ups its rights to collect from the tortfeasor when it makes such an arrangement. Before taking such a course of action the plaintiff should first establish that the defendant’s only asset is the insurance  policy and that there is some potential for the defendant to have the right to collect under the policy.

In Allied Property & Casualty Insurance Company, et al v. Metro North Condominium Association, United States Court of Appeals, Seventh Circuit, 2017 WL 927789, No. 16-1868 (3/8/17) the parties failed to follow the two basic requirements.

FACTS

Allied Property and Casualty Insurance Company issued a commercial general liability policy insuring a subcontractor who worked on a multi-unit residential property owned by Metro North Condominium Association. In 2006 the Metro North property sustained extensive water damage caused by the subcontractor’s defective window installation. Metro North and the subcontractor reached a settlement in which the subcontractor assigned to Metro North its right to any insurance proceeds covering the damage. The subcontractor’s insurers (Allied and another insurer named AMCO) sued, seeking declaratory judgment that they were not required to cover the losses claimed in the settlement.

Over ten years ago, Metro North Condominium Association hired a developer to build a condominium in Chicago. The developer used two subcontractors, CSC Glass and CSC Construction (collectively called CSC), to install the building’s windows. CSC installed the windows defectively, and as a result the building sustained significant water damage following a rain storm in October 2006. The condominium unit owners also incurred personal-property damage.

In 2009 Metro North sued the developer in Illinois state court for more than $5 million in damages. The developer apparently turned out to be insolvent, and in 2013 Metro North filed a fourth amended complaint that added a claim against CSC for breach of the implied warranty of habitability. Metro North also brought a negligence claim against CSC, but that claim was dismissed with prejudice because it was filed after the statute of limitations had expired.

In 2015 Metro North and CSC reached a settlement in which Metro North dismissed its pending lawsuit. In exchange, CSC assigned to Metro North CSC’s rights to payment, if any, of up to $700,000 of insurance coverage from Allied Property & Casualty Insurance Company (“Allied”). At the time of the settlement, the only pending claim against CSC in the underlying lawsuit was Metro North’s claim for breach of the implied warranty of habitability. The settlement further specified that it was not intended to compensate Metro North for the cost of repairing or replacing CSC’s defectively installed windows, but rather for the resultant damage to the remaining parts of Metro North’s condominium and to the unit owners’ personal property. By so doing the drafters of the contract apparently failed to read the policy wording.

Allied insured CSC under a standard commercial general liability policy (CGL policy. The policy contained a number of exclusions identifying damages for which there was no coverage. Several provisions excluded coverage for damage to the particular part of the relevant property worked on by CSC, or for the cost of repairing or replacing CSC’s own defective work.

When Allied learned of CSC’s settlement, it sued Metro North in federal court, seeking a declaratory judgment that it was not liable for the damages claimed in the settlement.

ANALYSIS

In Illinois, an insurer has a duty to indemnify when the insured becomes legally obligated to pay damages in the underlying action that gives rise to a claim under the policy.

The Seventh Circuit was asked to determine whether Allied’s policy requires it to indemnify CSC (and hence CSC’s assignee, Metro North) for the damages claimed in CSC’s settlement. Allied has a duty to indemnify only if the damages stemming from the underlying claim that resulted in liability actually fall within the policy’s coverage. According to the settlement, Metro North’s claim for breach of the implied warranty of habitability is the only claim giving rise to CSC’s liability. Allied is only liable if the legally recoverable damages stemming from that claim are covered by the policy.

The measure of damages for a breach of the implied warranty of habitability is the cost of repairing the “defective conditions,” the defectively installed windows. Illinois courts have concluded that CGL policies like Allied’s do not cover the cost of repairing the insured’s defectively completed work. Illinois conclude that CGL policies are not intended to pay the costs associated with repairing or replacing the insured’s defective work and products because they are purely economic losses.

What is more, notwithstanding the limited recovery available for breach of the implied warranty of habitability, the settlement indicates to the destruction of the claims of Metro North, was not seeking the cost of repairing CSC’s defectively installed windows.

Breach of the implied warranty of habitability was the only legal theory in play at the time of the settlement. That theory does not allow for the recovery of damages covered by the policy.

Liability for the cost of remedying CSC’s defectively installed windows—which is the only cost for which CSC was liable based on Metro North’s only claim against it—is not covered under Allied’s policy.

Finally, Metro North lacks standing to sue on behalf of the individual unit owners for damage to their personal property. Accordingly, to the extent the damages identified in the settlement are premised on the unit owners’ loss of personal property, Metro North has no duty to indemnify for the additional reason that the damages do not arise from a claim on which Metro North had standing to recover.

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.

ZALMA OPINION

The plaintiffs in this case were hoist upon their own petard. They wrote, or agreed to, a settlement agreement that totally destroyed the right to seek indemnity from an insurance company who provided no coverage for the claims they assumed. Lawyers and litigants who do not read and understand an insurance policy before filing suit are doomed to failure.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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