Nautilus Insurance Company v. Raatz et al

Filing 205

MEMORANDUM Opinion and Order Signed by the Honorable Edmond E. Chang on 6/29/2012:Mailed notice(slb, )

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
NAUTILUS INSURANCE COMPANY,

)
)
Plaintiff,
)
)
v.
)
)
BENJAMIN RAATZ; HAYLEY MULTER
)
RAATZ; KATHLEEN C. CHAVEZ;
)
GABRIEL CHAVEZ; 1034 WEST ALTGELD )
LLC; ALTGELD PROPERTIES, LLC;
)
JEFFREY FUNKE; and FUNKE
)
DESIGN/BUILD, LLC,
)
)
Defendants.
)

No. 08 C 06182
Judge Edmond E. Chang

MEMORANDUM OPINION AND ORDER
Plaintiff Nautilus Insurance Company brought this diversity suit against
Defendants seeking a declaratory judgment that Nautilus has no duty to defend Jeffrey
Funke (and the businesses named after him) in a state-court action brought by
Benjamin and Hayley Raatz (with counterclaims filed by Kathleen and Gabriel Chavez
and a business named after Altgeld Street in Chicago).1 The parties have filed crossmotions for summary judgment. R. 165 (Nautilus’s motion); R. 168, R. 173, R. 178
(responses and cross motions by Defendants). For the reasons explained below,
Nautilus’s motion [R. 165] is granted, and Defendants’ motions are denied.

1

Citation to the record is “R.” followed by the docket entry. This Court has diversity
jurisdiction under 28 U.S.C. § 1332. The Third Amended Complaint, R. 46, alleged the
citizenship of two of the LLC defendants as if they were corporations. R. 46 ¶¶ 6-7. The Court
required Nautilus to allege the citizenship of the LLCs’ members, Wise v. Wachovia Sec., LLC,
450 F.3d 265, 267 (7th Cir. 2006). R. 142. In a status report on jurisdiction, R. 147, Nautilus
properly established that all of the defendants are citizens of Illinois–and reiterated that
Nautilus is a citizen of Arizona—so the Court has jurisdiction over this case.

I.
The facts are drawn from the parties’ Local Rule 56.1 statements, viewing them
as necessary in the light most favorable to the non-movant. R. 167 (Nautilus); R. 170
(Altgeld); R. 172 (Raatzes).2 The defendants can be divided into three groups: “Altgeld”
refers to the Altgeld LLCs and the Chavezes; “Funke” refers to Funke individually and
his companies; and “the Raatzes” refers to the two individual Raatz defendants.
A.

The State-Court Action
1.

The State-Court Complaint’s Allegations

This case stems from a state court action in the Circuit Court of Cook County:
Raatz v. Chavez et al., 07 L 14084. The named defendants in that case include all of the
defendants in this case, but the Raatzes did not bring suit directly against Nautilus.
R. 167 ¶ 1; R. 167, Exh. A. Altgeld filed a counterclaim against Funke for breach of
contract and contribution. Id. ¶¶ 14-15.

2

Funke adopted the responses of Altgeld and the Raatzes. R. 178. It is worth noting that
several of Nautilus’s responses to Defendants’ Local Rule 56.1 statements fail to properly
dispute proposed findings of fact. See e.g., R. 181 ¶ 41 (“Nautilus denies each and every
allegation contained in Paragraph 41. Defendants have entirely misrepresented Ms.
Nechamkin’s testimony.”) Local Rule 56.1(b)(3)(B) requires an opposing party to “in the case
of any disagreement” make “specific references to” supporting materials. In this paragraph and
several others, see, e.g., ¶¶ 40-45, Nautilus fails to cite to supporting portions of the record, and
the Seventh Circuit has “routinely held that a district court may strictly enforce compliance
with its local rules regarding summary judgment motions.” Schmidt v. Eagle Waste &
Recycling, Inc., 599 F.3d 626, 630 (7th Cir. 2010) (affirming district court’s decision to deem
admitted proposed findings of fact when opposing party “failed to follow the local rule for
making and opposing proposed findings of fact for summary judgment . . . .”). As such, to the
extent Nautilus has failed to comply with Rule 56.1 in its opposition to proposed findings of
fact, those facts are deemed admitted.

2

The complaint in that case alleges the following: in July 2006, Altgeld (Kathleen
Chavez was acting on its behalf) entered into an agreement with the Raatzes to sell the
Raatzes a piece of property on which there would be new construction. Id. ¶ 5. Altgeld
contracted with Funke to serve as architect and general contractor for the construction.
Id. On October 12, 2006, the closing date, the Raatzes raised various concerns about
incomplete construction. Id. As a result, the parties entered into a “Work Completion
Agreement” that required deficient work to be completed by a certain date. R. 167-2 ¶
22. Many of the defects were not corrected by the requisite date, and the Raatzes
discovered numerous other defects as they lived in the home after the closing on
October 12, 2006. Id. ¶¶ 23-24. These defects are memorialized in two expert
evaluation reports that were commissioned by the Raatzes: one issued on June 1, 2007,
and “a second and more comprehensive report” prepared on or about November 26,
2007. Id. ¶ 25. The last inspection that factored into a part of these reports occurred
on October 23, 2007. R. 167 ¶ 9. Regarding the June evaluation report, the state-court
complaint notes that the defects in that evaluation report “include, but are not limited
to” a variety of damages. R. 167-2 ¶ 25. The state-court complaint then alleges that
“none of the Defendants have paid or otherwise compensated Plaintiffs for or otherwise
remedied the aforementioned deficiencies.” Id. ¶ 28 (emphasis added). The state-court
complaint moves on to laying out its various claims, without adding any relevant
factual allegations as to the damage to the property. R. 167-2.

3

2.

Demands for Repair

On January 16, 2007, the Raatzes sent Funke a letter alleging that Funke’s
failures to rectify problems “constitute[] a material breach of our agreement,” and
threatening that “[i]f these items are not completed . . . within the next 30 days, we will
bar your workers from our home, retain other firms to complete the items, and bill you
for the work done.” R. 167 ¶ 17.3 This was followed by an email from the Raatzes to
Funke reiterating their disappointment and noting that “[i]t was only when we got so
frustrated and wrote you a threatening letter that you started to pick things up and
work on it again.” Id. ¶ 19. Then, on June 18, 2007, an attorney sent a letter to Funke
and Altgeld demanding that they “honor the warranty commitments, complete the
work and repair any defects immediately . . . .” Id. ¶ 21. The letter included one of the
expert evaluation reports outlining various defects in the construction. Id. The letter
closed with the warning that “[w]hile [the Raatzes] do not want to pursue filing suit
. . . they stand ready, willing and able to do so . . . .” Id. (emphasis added in statement
of facts removed). An additional letter from the Raatzes’ attorney was sent on or
around July 19, 2007, noting that the Raatzes “have notified [] and made claim against
[Altgeld, the Chavezes, Funke, and his company] for various construction or design
deficiencies . . . .” Id. ¶ 24. Similar letters demanding repair and threatening legal
action followed on August 22, 2007 and October 10, 2007. Id. ¶¶ 27-30. Notably,

3

The letter was also sent to Altgeld, R. 167 ¶ 17, but this fact is of no consequence, as
explained below, because it is only Funke who needs to have knowledge of claims and damages
to prohibit insurance coverage.

4

Defendants did not make any other demands before the state court case was filed on
December 18, 2007, R. 167-1 at 1.
B.

The Nautilus Insurance Policy

Funke entered into an insurance policy with Nautilus sometime on or before
November 20, 2007. R. 167, Exh. R-1 at 3 (the policy was countersigned on that date).
The “policy period” for the policy is November 2, 2007 through November 2, 2008. Id.
There are two parts of the policy that are at the crux of the parties’ dispute.
First is a “General Change Endorsement.” R. 167, Exh. R-2 at 46. The
endorsement affected by the relevant “General Change Endorsement” is an exclusion
that was originally a part of the insurance contract for “all work performed prior to
11/02/2007.” Id. at 27. The General Change Endorsement reads in relevant part that
“In consideration of an additional premium of $250.00, it is . . . agreed and understood
[that] . . . form CG2134 (01/87) Exclusion - Designated Work Stating ‘All work
performed prior to 11/02/2007’ is deleted from the policy in its entirety.” Id.
The second crucial part of the insurance agreement is a provision entitled
“insuring agreement”—the parties also refer to it as the “known loss provision,” but
given the forthcoming discussion Illinois’s “known loss doctrine,” the Court will refer
to the part of the insurance policy pertaining to known losses as the “insuring
agreement.” In relevant part, the agreement provides that “[t]his insurance applies . . .
only if: * * * (2) [t]he [damage] occurs during the policy period; and (3) [p]rior to the
policy period, no insured . . . knew that the [damage] had occurred, in whole or in part.
If such an [insured] knew, prior to the policy period, that the [damage] occurred, then
5

any continuation, change or resumption of such [damage] during or after the policy
period will be deemed to have been known prior to the policy period.” R. 167 ¶ 36. As
to when an insured “knows” of damage, “[damage] will be deemed to have been known
to have occurred at the earliest time when any insured * * * (2) [r]eceives a written or
verbal demand or claim for damages because of the [damage]; or (3) [b]ecomes aware
by any other means that [damage] has occurred or has begun to occur. Id.4 In other
words, this provision required Nautilus to defend suits based on damage that flows
from construction defects which first occurred after the inception of the policy. R. 170
¶ 41.5
II.
Summary judgment must be granted “if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law.” Fed. R. Civ. P. 56(a). Rule 56 “mandates the entry of summary
judgment, after adequate time for discovery and upon motion, against a party who fails

4

Although knowledge of the damages by the insured is an element that must be satisfied
before the “insuring agreement” precludes coverage, Defendants do not argue that Funke
lacked knowledge of the damages and claims. Instead, Defendants focus their arguments on
when the damages at issue in the state-court case occurred.
5

Interpretation of an insurance contract under Illinois law is a question of law that is,
generally speaking, appropriately resolved at summary judgment. West Suburban Bank of
Darien v. Badger Mut. Ins. Co., 141 F.3d 720, 723-724 (7th Cir. 1998). Here, there need not be
any in-depth analysis and interpretation of the contract, because the language of the contract
is not susceptible to multiple meanings, see Benedict v. Fed. Kemper Life Assurance Co., 759
N.E.2d 23, 26-27 (Ill. App. Ct. 2001), and the parties all concede that the interpretation
described in the text above applies. R. 180 at 7 (Nautilus); R. 187 at 1-2 (Altgeld); R. 188 at 3-4
(Raatzes). Furthermore, Defendants, believing that Nautilus could not rely on the “insuring
agreement” as a basis for this declaratory judgment action, did not argue that there should be
a contrary interpretation.

6

to make a showing sufficient to establish the existence of an element essential to that
party’s case, and on which that party will bear the burden of proof at trial.” Celotex
Corp. v. Catrett, 477 U.S. 317, 322 (1986). All facts, and any inferences to be drawn
from them, must be viewed in the light most favorable to the non-moving party. Wis.
Cent., Ltd. v. Shannon, 539 F.3d 751, 756 (7th Cir. 2008).
III.
Defendants correctly note that there is generally a thumb on the scales in favor
of the insured when deciding whether an insurance provider has a duty to defend. R.
187. To determine whether an insurer has a duty to defend, the Court looks to the
allegations of the underlying complaint, that is, the complaint against the insured.
U.S. Fiderlity & Guar. Co. v. Wilkin Insulation Co., 578 N.E.2d 926, 930 (Ill. 1991). “If
the underlying complaints allege facts within or potentially within policy coverage, the
insurer is obliged to defend its insured . . . .” Id. (emphasis in original). Moreover, the
insurance policy and underlying complaint must be construed liberally in the favor of
the insured. Id. As noted above, the interpretation of the insurance policy is not
disputed by the parties here, and so this is a relatively straightforward application of
the policy’s coverage to the factual allegations in the state-court complaint. As
explained below, despite the broad duty to defend, and despite liberal construction in
favor of the insured, the allegations in the state-court complaint do fall outside of the
Nautilus insurance policy, and so Nautilus need not defend. Moreover, even if Nautilus
has waived its ability to rely on the “insuring agreement” to justify its declination of
the duty to defend, Illinois’s known loss doctrine mandates the same conclusion.
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A.

Waiver

Defendants’ initial argument is that Nautilus cannot rely on the “insuring
agreement” to decline coverage because Nautilus has purportedly premised its
declaratory judgment action solely on Illinois’s “known-loss doctrine.” R. 169 ¶ 2. The
argument cites to both the structure of the complaint and testimony given by a
Nautilus employee. Both arguments fail.
Defendants first point to the complaint in the present case. R. 46. The first 24
paragraphs set out the relevant facts, and then before continuing on, there is a caption
entitled, “Grounds for Declaratory Judgment - Known Loss Doctrine.” R. 46 at 9.
Defendants contend that this evidences Nautilus’s intention to rely only on the known
loss doctrine, and so Nautilus cannot now rely on the provisions in the “insuring
agreement” to decline defense. R. 169 ¶¶ 2-3.
This is too cramped a reading of the complaint and too broad a reading of what
works a waiver in litigation. Generally, waiver occurs only when there is a clear and
unequivocal relinquishment of a right. Heller Int’l Corp. v. Sharp, 974 F.2d 850, 861
(7th Cir. 1992). To be sure, Nautilus’s decision to use the heading “Grounds for
Declaratory Judgment - Known Loss Doctrine” was unnecessary, but it was just
that—a heading—and does not change the fact that Paragraph 24 of the complaint
block-quotes the relevant language of the “insuring agreement” on which Nautilus now

8

relies in its motion for summary judgment. Relying on the heading to find waiver is
unwarranted and parses too closely a mere guidepost to read the complaint.6
Defendants’ second waiver argument relies on the deposition testimony of
Nautilus’s “Senior Litigation and Coverage Specialist,” Amy Nechamkin. R. 169 ¶¶ 4-5.
Defendants argue that the witness “testified repeatedly that Nautilus is seeking
Declaratory Judgment solely on the basis of the Known Loss Doctirne, and not under
any terms of the insurance policy.” Id. ¶ 4. But that overstates Nechamkin’s testimony.
For example, when asked to confirm that the known loss doctrine was “the only basis
alleged in [the complaint] for declaratory judgment,” she responded “well, it does – as
stated, yes, but it does include the insuring agreement that says, we’ll pay sums to
which this insurance applies, but we do not have an obligation to defend a suit to which
this insurance does not apply.” R. 170-1 at 57 (emphasis added).
It is true that, three transcript-lines later, Nechamkin testifies that it is correct
that there is no “basis to decline the claim . . . pursuant to any of the policy terms….”
R. 170-1 at 57. But that is not the end of the deposition. When asked if the “insuring
agreement” could or would apply to this case, Nechamkin answered that it would.
Id. at 95-96. And when asked if Nautilus has made any claim that the “insuring
agreement” would be a basis for denial of coverage, Nechamkin responds: “the answer
is in our third amended complaint in which we’re relying upon the known loss doctrine

6

The Raatzes’ response brief argues that the complaint lacks “any citation” to the
known-loss provision, R. 173 at 12, yet Paragraph 24 of the complaint is a block quotation of
the known-loss provision.

9

in that document[,] we have not asserted the other ones, any other defenses to
coverage.” Id. at 96. Moreover, in one final effort to pin down Nechamkin, she was
asked “to the best of your recollection . . . the only defense to coverage in this case has
been . . . the known loss doctrine?” Id. at 97. Rather than simply answering “yes,”
Nechamkin answered “[a]s reflected in the third amended complaint for declaratory
judgment.” Id. This final statement brings the potential grounds for declining coverage
back to the third amended complaint, which includes the block-quotation of the
relevant part of the “insuring agreement.” There was no waiver of that basis to decline
coverage.
B.

The “Insuring Agreement” Justifies Declination of Defense

Having resolved the waiver arguments and concluded that Nautilus can rely on
the insuring agreement’s provisions, it is time to decide whether these provisions do
in fact permit Nautilus to decline defense. The answer is yes. The damage caused by
the construction and design defects falls outside of the Nautilus policy because all of
the alleged damage to the property occurred before November 2, 2007, and Funke had
knowledge of the damage and claims at that time.
Indeed, in their initial response briefs, Defendants did not even make any
arguments as to the effect of the “insuring agreement” on this case; they put all their
eggs in the waiver basket. Later, in their last set of briefs (the replies), Defendants do
address the “insuring agreement,” but largely give away their case when they concede
that “[t]he provisions that have been cited indicate that damages reasonably
anticipated and flowing from damages that predated the policy are not covered.” R. 187
10

at 7. Defendants do not argue (nor could they) that Funke lacked notice of the Raatzes
claims before the policy period, nor that damages occurring before the policy period are
covered by the insurance policy—the unambiguous terms of the insuring agreement
foreclose the latter argument. Instead, Defendants argue that Nautilus does not know
when the damages alleged in the state-court complaint occurred, and so summary
judgment is inappropriate. R. 188 at 8-9. On the contrary, an examination of the statecourt complaint, even when construed in the insured’s favor, demonstrates that all of
the alleged damages occurred before November 2, 2007.
The state-court complaint alleges that, at the closing (on October 12, 2006), work
was either incomplete or defective, and it was identified in the Work Completion
Agreement. R. 169-2 ¶ 21. The problems were not completed or fixed in a workmanlike
manner. Id. ¶ 23. Further, additional design and construction defects had been found
after the Raatzes moved into the home. Id. ¶ 24. The Raatzes commissioned two expert
evaluation reports on the deficiencies and defects. Id. ¶ 25. The first report “lists
several of the . . . defects, deficiencies and issues with the exterior of the house alone.”
Id. These defects and deficiencies include, but are not limited to the enumerated
problems outlined in the complaint. Id. Several times, the Raatzes requested “the
defects and deficiencies be corrected, replaced, or repaired.” Id. ¶ 26. “[T]he violations,
construction defects, deficiencies and issues relating to both interior and exterior” were
brought to Defendants’ attention on and before July 19, 2007. Id. (emphasis added).
The complaint then alleges that the “aforementioned” deficiencies have not been

11

rectified. Id. ¶ 28. Nowhere does the state-court complaint allege that the Raatzes
continue to discover new damage, or that they are discovering new deficiencies.7
Defendants cite specifically to Paragraph 29 of the state-court complaint for
support.8 That paragraph alleges that as a result of the defective work “Plaintiffs
suffered other property damage.” R. 167-2 ¶ 29. As with the previous paragraphs, that
statement is followed by a representative, but not limiting, list of damaged property.
Id. But nothing in Paragraph 29 suggests that these are new damages, or are any
different from “the damages” or “the aforementioned damages” referenced throughout
the state-court complaint. Defendants’ argument requires much more than
construction in their favor; it requires a too-strained reading of the complaint. Just as
the Court will not strain to find ambiguity in the insurance policies’ terms, which are
construed in the insured’s favor, State Auto. Mut. Ins. Co. v. Kingsport Dev., LLC, 846
N.E.2d 974, 980 (Ill. App. Ct. 2006), the Court should not strain to find ambiguity in
the state-court complaint.

7

In fact, in the July 19, 2007 letter from the Raatzes’ attorneys, the attorneys imply that
the Raatzes have found the totality of the problems, and were then engaging in a calculation
of the estimated costs to remedy the defects. R. 167, Exh. K at 3. The letter notes that it
includes a listing of “both interior and exterior warranty items,” and that the Raatzes were in
the process of obtaining estimates to rectify the problems identified in the building evaluation
report of Alexander & Associates. Id. The only reference to future, potential damage is the
statement that “water leaking into the house is a serious problem and must be remedied before
the weather worsens.” Id. But the damage from a water leak would flow from the original
defect that allowed the water to leak in the first place; it would not be a new defect covered by
the policy.
8

This argument is actually found in the section arguing that the Illinois known-loss
doctrine does not preclude coverage, R. 167 at 3, but, as is explained below, the Illinois knownloss doctrine and the “insuring agreement” operate in a very similar way, and so the argument
is equally applicable here.

12

The complaint focuses on a fixed set of damages—“the damages”—that were
identified by two expert evaluations (the last home inspection leading to an expert
evaluation occurred before November 2, 2007), and those are the damages that the
Raatzes complained of to Funke and Altgeld. Indeed, Funke and his subcontractors
were denied access to the property by late August 2007. R. 167 at 26. The fact that
Nautilus has “no personal knowledge” as to when the damages in the underlying
complaint occurred, R. 188 at 9, is irrelevant. What matters are the allegations in the
complaint, U.S. Fidelity & Guar. Co., 578 N.E.2d at 930, and the allegations in the
complaint can only be read to concern damages incurred before November 2, 2007.
C.

The Known Loss Doctrine Also Permits Declination of Defense

There is another ground for finding in Nautilus’s favor: the known loss doctrine.
This doctrine provides that where an insured knows of a loss or has evidence of a
probable loss at the time an insurance policy begins, the loss is not covered by the
policy. Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204, 1210 (Ill.
1992).
In Outboard, the insured alleged that its insurer was required to defend against
suits filed by government agencies for water pollution from the insured’s facility. Id.
at 1211. The policy was issued after the insured received an administrative order from
the Environmental Protection Agency confirming the contamination. Id. The insurer
argued, and the Illinois Supreme Court agreed, that the insurer did not have to defend
the action because the contamination constituted a known loss, because the insured
had knowledge that it was releasing hazardous material into the environment. Id. The
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justification for this rule is simple: insurance is based on contingent risks; if the
insured knows or has reason to know of an actual loss when it purchases insurance,
there is no longer any mere risk of loss—what would have been a contingent loss is
probable or known. Id. at 1210. And presumably insurers generally do not insure
against known losses.
Defendants make two arguments as to why the known loss doctrine does not
apply in this case. First, the Raatzes argue that the known loss doctrine is inapplicable
when an insurance policy contains a known-loss provision, R. 173 at 11—like the one
in the “insuring agreement.” For support, the Raatzes cite one case, from the Southern
District of New York discussing New Jersey law. Travelers Cas. and Surety Co. v.
Dormitory Auth. State of N.Y., 732 F. Supp.2d 347, 362 (S.D.N.Y. 2010). New Jersey
has a common law doctrine that operates like Illinois’s known loss doctrine. Id.
Travelers held that the common law concept of “known-loss” is read into insurance
policies to reflect a public-policy judgment that an insured should not be able to
purchase insurance for losses already incurred. Id. Travelers then held that the
common-law concept of “known loss” does not apply when a contract has its own
known-loss provision. Id. But the Raatzes do not cite any Illinois cases in support of
their argument that Illinois would similarly constrain its known loss doctrine. And
although the common-law known loss doctrine is similar to the known-loss provision,
the doctrine and the provision are not incompatible. The known-loss provision applies
specifically to known “property damage,” whereas the known loss doctrine applies more
generally to known or substantially-probable losses.
14

Defendants’ second argument against the known loss doctrine’s applicability
here is by Altgeld. As noted above, Altgeld argues that Paragraph 29’s reference to
“other property damage” is a sufficient allegation that damage occurred after the
issuance of the insurance policy, and that Nautilus “does not know if all such damages
occurred before the inception of the policy.” R. 169 at 4; R. 187 at 2-5. But it bears
repeating that what Nautilus knew or did not know is irrelevant; what matters are the
allegations of the state-court complaint.9 And, as discussed above, the state-court
complaint is susceptible to only one reading, and that is that the Raatzes are seeking
compensation for damages incurred or that began before issuance of the insurance
policy. If the Raatzes had continued to find new damages and defects in their property,
it would have been a simple allegation to make, and the absence of that simple
allegation speaks volumes. For the same reasons that the “insuring agreement”
supports Nautilus’s declination of coverage, so too does the known loss doctrine support
noncoverage.
D.

Removal of the “Prior Work” Exclusion

In a final effort to argue that the known loss doctrine is inapplicable, Defendants
contend that removal of a “prior work” exclusion provision creates a question of fact,
because the removal suggests that the parties intended to cover known losses, and

9

This applies similarly to Altgeld’s argument that Nautilus should be estopped because
it failed to investigate the claim or “to inquire about the allegations of the complaint or any
other facts of the claim.” R. 169 at 6. Even if Nautilus had engaged in inquiries, they would not
have affected anything. The allegations of the state court complaint would still be the
allegations of the state court complaint, and they would still be what ultimately matters when
determining whether Nautilus has a duty to defend.

15

when the parties intend a known loss to be covered, then the known loss doctrine is
inapplicable, Outboard Marine Corp., 607 N.E.2d at 1210. R. 169 at 9-11. There are
two problems with this argument as a basis to resist summary judgment.
First, this argument would only dispense with the known-loss doctrine basis to
decline coverage; it would not disturb the conclusion that the “insuring agreement”
precludes coverage and defense. Second, removal of the “prior work” exclusion does not
expand the scope of coverage to the degree Defendants argue, such that it can be said
that the damages in this case were intended to be covered even though they were
known losses. As explained next, the two problems with this argument are related,
because it is the policy’s “insuring agreement” that makes the removal of the “prior
work” exclusion a relatively minor event with minimal effect on coverage.
The removal of the “prior work” provision can be reconciled with the insuring
agreement. Assume for a moment that Funke negligently installed a water pipe before
November 2, 2007, with no knowledge that he, or one of his employees, had improperly
installed the pipe. If that water pipe burst on November 2, 2007, and the “prior work”
provision was part of the insurance policy, then Nautilus would have no duty to defend
a claim for damages stemming from the water pipe bursting—the “work,” the
installation of the pipe, would have occurred before November 2, 2007 and would be
excluded from the policy by the “prior work” provision. But if the same scenario played
out, and the “prior work” provision was not part of the insurance agreement, then
Nautilus would have to defend that claim, because the damage would have occurred
during the policy period and none of the insureds would have had knowledge of the
16

damage before the policy period began. Thus, the “prior work” provision operated as
a broader exclusion of coverage than the limitations in the insuring agreement. Thus,
Defendants’ argument that the removal of the “prior work” provision created a genuine
issue of material fact fails because the coverage limitations outlined in the “insuring
agreement” and known loss doctrine continued to apply with full effectiveness.
IV.
The insuring agreement and the known loss doctrine both independently provide
grounds for Nautilus to deny coverage of the state-court claims. Nautilus’s motion for
summary judgment [R. 165] is granted: it is declared that Nautilus has no duty to
defend or to indemnify Defendants against the Raatz lawsuit. Defendants’ motions for
summary judgment [R. 168, 173, 178] are denied.
ENTERED:
___________________________
Honorable Edmond E. Chang
United States District Judge
DATE: June 29, 2012

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