No “Occurrence” When Damage to “Work”
September 2, 2014
Poor workmanship that causes damage to itself is invariably uninsurable. Liability insurance is intended only to provide coverage for damage to persons or property caused by the insured to others or the property of others. In Nautilus Ins. Co. v. Board of Directors of Regal Lofts Condominium Ass'n, No. 12–1821, 2014 WL 4100701 (C.A.7 [Ill.]Aug. 21, 2014) a condominium board, Regal Lofts Condominium Association, appealed the grant of summary judgment in a declaratory judgment action filed by Nautilus Insurance Company. The condominium board argued that water damage to individual units, the product of poor construction by the developer, should be covered by policies issued to the developer by the Nautilus.
In 1998, a group of individuals and corporations formed a limited liability company, 1735 W. Diversey, LLC (the Developer), to renovate a vacant building in Chicago. (Among those who formed the Developer were individuals Ronald Shipka, Sr., Ronald Shipka, Jr., and John Shipka, who were also named as insureds in the Developer's various insurance policies (collectively referred to as the Developer.)
The Developer intended to convert a vacant building into a condominium called the Regal Lofts. It did so, completely gutting the five-story building and refitting it with residential units. In connection with this renovation, the Developer purchased two commercial lines policies from Nautilus Insurance Company. The first policy covered the period from June 1998 through June 1999, and the second, June 1999 to June 2000. The two insurance policies in question, identical for all purposes of this litigation, cover bodily injury and property damage liability.
The policies contain three exclusions that are relevant to this matter. First, the policies exclude property damage to “that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the 'property damage' arises out of those operations.” Another exclusion takes out of the scope of coverage property damage to “that particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it.” Lastly, both policies contain an endorsement entitled “Exclusion—Products–Completed Operations Hazard.” As the name may suggest, this endorsement provides that “[t]his insurance does not apply to 'bodily injury' or 'property damage' included within the 'products-completed operations hazard,' “a term that is structured slightly differently in the two policies, despite reflecting identical content. Both policies define that the exclusion encompasses “all 'bodily injury' and 'property damage' occurring away from premises you own or rent and arising out of 'your product' or 'your work' except: (1) Products that are still in your physical possession; or (2) Work that has not yet been completed or abandoned.”
The construction of Regal Lofts was completed in 2000. The Regal Lofts Condominium Association (the Board) was formed to govern the common areas of the building, and on July 27, 2000, the Developer transferred control of the condo association to an elected board of individual unit owners, though it still owned eleven units. As early as May 2000, however, one homeowner was aware of water damage issues in the building. In November 2000, another homeowner complained that water had been leaking into his unit—whenever it rained—for at least two months. In 2005, the Board hired a building consulting firm to survey the building and investigate the cause of the leakage. The firm noted that the exterior brick masonry walls were not fully waterproofed, as evidenced by water leakage, buildup of efflorescence in the interior surfaces of the brick walls, and spalling (breaks and cracks) in some of the walls. The consulting firm concluded that the deteriorated conditions had likely developed over many years, even prior to the condominium conversion, but that the present water penetration was the result of inadequate restoration of the walls to a water-tight, serviceable condition.
Thereafter began a series of litigation. The Board sued the Developer in Illinois state court on behalf of the individual homeowners. The six-count complaint alleged, inter alia, that the Developer had failed to properly construct the exterior walls and that the structural defects required rebuilding or repair. Shortly after this suit was first filed, the Developer tendered the matter to Nautilus and requested that the insurance company indemnify the Developer and defend against the lawsuit. Nautilus denied coverage under both policies. The Board amended its initial complaint to add a count of negligence; the Developer tendered this amended complaint, but Nautilus again denied coverage. The Board again amended the complaint to detail with more specificity the Developer's alleged negligence. This second amended complaint was the first time that the Board alleged that the Developer's negligence had caused damages to personal property within the building, in addition to the interior of the building and the building itself. Nautilus again denied coverage.
The district court granted summary judgment in favor of Nautilus. The court held that the water damage at question in the underlying action was not an “occurrence” under Nautilus's policies because Illinois law interpreting insurance contracts provides that damage to a construction project resulting from faulty workmanship is not an “accident.” It also held that the products-completed operation hazard exclusion clearly applied to the personal property damage alleged in the second amended complaint and that there was no genuine issue of material fact regarding this issue. Given these facts, the district court concluded that Nautilus had no duty to defend or indemnify the Developer in the state court matter.
While the policies do not define the term “accident,” in interpreting insurance policies, Illinois courts have defined “accident” as an unforeseen occurrence, usually of an untoward or disastrous character or an undesigned, sudden, or unexpected event of an inflictive or unfortunate. Nautilus pointed out, and the Board did not seriously dispute, that the allegations in the original and first amended complaint in the underlying action involved only damage to the building itself, nothing more. It was not until the second amended complaint that personal property damage was alleged, and thus there was an alleged “occurrence” that could potentially come within the scope of Nautilus's policy language.
The district court also concluded that the personal property damage alleged in the Board's second amended complaint fell within the policies' products-completed operations hazard exclusion, and thus failed to give rise to a duty to defend or indemnify by Nautilus.
The second amended complaint in the state court action alleges that the Developer sold individual condominium units to homeowners represented by the Board and that damage occurred to the personal property of these individual homeowners, who had moved the personal property into their units. The Third Circuit concluded that the district court correctly surmised that the owners' moving of their personal property into the units indicates that the owners were putting the condominium units—at least the ones that had been completed and sold—to their intended use, thereby taking those units out of the scope of coverage under the completed operations exclusion. It strains the English language to say that the intended use of one area of the building must subsume the intended use of another area. Under any reasonable examination of the facts, the individual condominium units were intended to provide private living areas to their owners. There was no evidence in this case that the inability to access certain common areas interfered with the intended use of any of the individual units. The completed work exclusion clearly applies to the damage incurred on those premises.
The court concluded that the residential units in question had been completed and that any personal property damage sustained therein was excluded by the completed products exclusion.
Editor's Note: Insurance for damages to a structure can be purchased with different coverages and limitations. In this case the developer fell afoul of law in the state of Illinois that damage to a structure built by the insured is not an “occurrence” but is, rather, a cost of doing business. If the construction is defective it is not due to an accident and does not damage property of any person other than the developer. Further, by not acquiring coverage for damages that may occur after completion of the structure the developer lost its right to coverage for property damage or bodily injury after the operations of the developer was completed.