Lagestee-Mulder, Inc. v. Indiana Insurance Company

Filing 78

MEMORANDUM Opinion and Order Written by the Honorable Gary Feinerman on 11/8/2011.Mailed notice.(jlj)

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
LAGESTEE-MULDER, INC.,
Plaintiff,
vs.
CONSOLIDATED INSURANCE COMPANY,
Defendant.

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09 C 7793
Judge Feinerman

MEMORANDUM OPINION AND ORDER
Plaintiff Lagestee-Mulder, Inc., filed this diversity suit against Defendant Consolidated
Insurance Company, alleging that Consolidated breached its duty to defend Lagestee in a state
court action brought by Crown Centre LLC, the owner of a new commercial building on which
Lagestee had served as general contractor. Crown Centre LLC v. The Shalvis Group P.C., No.
07 L 710 (Cir. Ct. Will Cnty., Ill.). Lagestee filed a third-party complaint in state court seeking
indemnification and/or contribution from its subcontractor, Frontrunner Glass & Metal Inc.,
which had installed the building’s windows and doors. Frontrunner was a named insured under a
Consolidated policy, and Lagestee was an additional insured. Lagestee and Frontrunner both
tendered their respective defenses to Consolidated. Consolidated accepted Frontrunner’s tender
under a reservation of rights; Consolidated did not immediately respond to Lagestee, and it
ultimately denied coverage after Lagestee settled with Crown. The parties here have filed crossmotions for summary judgment. There are no material factual disputes requiring a trial.
Because Consolidated had no duty to defend Lagestee, Consolidated’s motion is granted and
Lagestee’s motion is denied.

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The parties agree that Illinois law governs. The Seventh Circuit recently summarized
Illinois law as it pertains to the interpretation of insurance policies:
In Illinois, insurance policies are contracts; the general rules governing the
interpretation and construction of contracts govern the interpretation and
construction of insurance policies. Illinois courts aim to ascertain and give
effect to the intention of the parties, as expressed in the policy language, so
long as doing so does not contravene public policy. In doing so, they read
the policy as a whole and consider the type of insurance purchased, the risks
involved, and the overall purpose of the contract. If the policy language is
unambiguous, courts apply it as written. Policy terms that limit an insurer’s
liability are liberally construed in favor of coverage, but only when they are
ambiguous, or susceptible to more than one reasonable interpretation.
Clarendon Nat’l Ins. Co. v. Medina, 645 F.3d 928, 933 (7th Cir. 2011) (citations omitted).
Although ambiguities are construed in the insured’s favor, “a court will not search for ambiguity
where there is none.” Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 860 N.E.2d 307, 314 (Ill.
2006); see also Native Am. Arts, Inc. v. Hartford Cas. Ins. Co., 435 F.3d 729, 732 (7th Cir.
2006). “[I]n construing a policy, governing legal authority must … be taken into account as
well, for a policy term may be considered unambiguous where it has acquired an established
legal meaning.” Ace Am. Ins. Co. v. RC2 Corp., 600 F.3d 763, 766 (7th Cir. 2010) (internal
quotation marks omitted). “Insurers have the burden of proving that an exclusion applies.
Insureds, in turn, have the burden to prove that an exception to an exclusion restores coverage.”
Santa’s Best Craft, LLC v. St. Paul Fire & Marine Ins. Co., 611 F.3d 339, 347 (7th Cir. 2010)
(citation omitted).
“To determine whether an insurer has a duty to defend its insured, [the court] compare[s]
the factual allegations of the underlying complaint … to the language of the insurance policy. If
the facts alleged in the underlying complaint fall within, or potentially within, the policy’s
coverage, the insurer’s duty to defend arises.” Amerisure Mut. Ins. Co. v. Microplastics, Inc.,
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622 F.3d 806, 810 (7th Cir. 2010) (citations and internal quotation marks omitted). An insurer
may decline to defend a lawsuit only when “it is clear from the face of the underlying complaint
that the allegations set forth … fail to state facts to bring a case within, or potentially within, the
coverage of the policy.” Swiderski Elecs., 860 N.E.2d at 315; see also Lyerla v. AMCO Ins. Co.,
536 F.3d 684, 688 (7th Cir. 2008). That is, “an insurer has no duty to defend unless the
underlying claim contains explicit factual allegations that potentially fall within policy
coverage.” Microplastics, 622 F.3d at 810. “Both the policy terms and the allegations in the
underlying complaint are liberally construed in favor of the insured, and any doubts and
ambiguities are resolved against the insurer.” Id. at 811 (internal quotation marks omitted). The
insurer has a duty to defend “even if only one of several theories of recovery alleged in the
complaint falls within the potential coverage,” and even if some or all of the allegations in the
underlying complaint are “groundless, false, or fraudulent.” Swiderski Elecs., 860 N.E.2d at
315.
Consolidated’s policy is a standard commercial general liability (“CGL”) policy. Doc.
64-4. It provides coverage for “property damage” caused by an “occurrence” during the “policy
period.” Id. at 8. The policy defines “property damage” as “[p]hysical injury to tangible
property, including all resulting loss of use of that property” or “[l]oss of use of tangible property
that is not physically injured.” Id. at 23. The policy defines “occurrence” as “an accident,
including continuous and repeated exposure to substantially the same general harmful
conditions.” Id. at 22. Although the policy does not define “accident,” Illinois courts understand
the term to mean “an unforeseen occurrence, usually of an untoward or disastrous character or an
undesigned, sudden, or unexpected event of an inflictive or unfortunate character.” Lyerla, 536
F.3d at 688-89 (internal quotation marks omitted).
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The rules governing application of these CGL policy provisions in the context of
construction defect suits are settled. Where the underlying suit alleges damage to the
construction project itself due to a construction defect, there is no coverage; by contrast, where
the underlying suit alleges that the construction defect damaged something other than the project
itself, there is coverage. See id. at 689 (“Illinois courts have reasoned that damage to a
construction project resulting from construction defects is not an ‘accident’ or ‘occurrence’
because it represents the natural and ordinary consequences of faulty construction”; Milwaukee
Mut. Ins. Co. v. J.P. Larsen, Inc., __ N.E.2d __, 2011 WL 3612281, at *6-7 (Ill. App. Aug. 15,
2011); CMK Dev. Corp. v. West Bend Mut. Ins. Co., 917 N.E.2d 1155, 1164-66 (Ill. App. 2009);
Viking Constr. Mgmt., Inc. v. Liberty Mut. Ins. Co., 831 N.E.2d 1, 10-18 (Ill. App. 2005) (Burke,
J.); Monticello Ins. Co. v. Wil-Freds Constr., Inc., 661 N.E.2d 451, 455-57 (Ill. App. 1996); see
generally Microplastics, 622 F.3d at 811-13; Wausau Underwriters Ins. Co. v. United Plastics
Grp., Inc., 512 F.3d 953, 956-58 (7th Cir. 2008). As the Appellate Court of Illinois noted in
surveying the decided cases, there is coverage where the underlying suit alleges that a
construction defect caused damage to “a homeowner’s furniture, clothing and antiques,” “cars in
the parking garage built by the insured,” and “carpets, upholstery, [and] drapery in schools
constructed by the insured,” but there is no coverage where the underlying suit alleges that a
construction defect caused “a sag in the house, a leak and cracks in the footing and walls,”
“water damage to the basement, damaged concrete work, and cracked floors,” or “collapse of a
masonry wall, due to inadequate bracing.” CMK Dev., 917 N.E.2d at 1164 (internal quotation
marks and citations omitted, first and third sets of brackets in original).
In Wil-Freds Construction, for example, the underlying complaint alleged “water damage
to the lobby of the office building and basement underneath the lobby; [and] interior water
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damage caused by water penetration of the roof.” 661 N.E.2d at 452. The court observed that if
the underlying plaintiff “had sued [the contractor] for the water damage suffered by cars in the
parking garage, … there can be little doubt that [the insurer] would be required to defend [the
contractor] under the CGL policy, because there would have been negligent manufacture that
results in ‘an occurrence.’” Id. at 457 (internal quotation marks omitted). However, because the
underlying plaintiff alleged only damage “to the project itself,” the court held that “no coverage
exists.” Ibid. (citing Hamilton Die Cast, Inc. v. U.S. Fidelity & Guar. Co., 508 F.2d 417, 420
(7th Cir. 1975)) (internal quotation marks omitted).
Crown’s state court complaint brings four claim against Lagestee: (1) breach of
construction contract; (2) breach of contractor’s warranty for materials, equipment and
construction services; (3) breach of contractor’s call back warranty; and (4) breach of
contractor’s call back warranty after completion. Doc. 64-8. It does not matter that Crown’s
claims all sound in contract. Under Illinois law, “[t]he insured’s coverage and right to a defense
depend not on the legal theories stated by the claimant in the underlying dispute, but on the
factual allegations.” Microplastics, 622 F.3d at 815. The suggestion “that the [underlying]
complaint must explicitly identify the claim that is within the [policy] coverage represents an
unduly narrow reading of Illinois law, and the court should not simply look to the particular legal
theories pursued by the claimant, but must focus on the … conduct on which the lawsuit is
based.” Id. at 815-16 (internal quotation marks omitted, second set of brackets in original).
The “conduct” alleged in Crown’s complaint concerns various alleged deficiencies in
materials Lagestee used during construction, various alleged shortcomings in Lagestee’s
workmanship, and various alleged defects in the building as constructed. Doc. 64-8 at ¶¶ 41-43,

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51, 61, 69-72. To support is position on coverage, Lagestee points to Crown’s allegations
regarding water infiltration:
15. CROWN began to experience water infiltration problems at numerous wall
locations during the later stages of construction of the Crown Centre.
16. CROWN … and [Lagestee] began an investigation of certain defective
conditions of the Crown Centre which included but was not limited to attempting
to correct the water infiltration problems.
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60. CROWN discovered the defects in the work which included but is not limited
to water infiltration into the Crown Centre before substantial completion of
[Lagestee’s] work at the Project.
Doc. 64-8 at ¶¶ 15-16, 60. According Lagestee, these allegations create the possibility of
coverage, thus triggering Consolidated’s duty to defend:
[Crown] clearly alleged that water had infiltrated the building. The policy defines
“property damage” as “physical injury to tangible property ….” Under Illinois
law, “tangible property suffers a ‘physical’ injury when the property is altered in
appearance, shape, color or in other material dimension.” Water infiltration alters
tangible property in such ways. At a minimum, the pleadings leave open the
possibility of coverage.
Doc. 65 at 6 (citations omitted, ellipses in original).
The dispositive question under Illinois law is whether Crown’s complaint alleges water
damage to anything other than the building itself. It does not. Although the complaint alleges
“water infiltration,” it makes no reference to the kind of damage (if any) caused by the
infiltration. Lagestee maintains that an attachment to Crown’s interrogatory answers in state
court “clarif[ies] that water was infiltrating into the building at the windows and doors.” Doc. 64
at ¶ 15. But the attachment—a letter from an expert hired by Crown to identify problems with
Lagestee’s work—merely confirms that the building was susceptible to water leakage, and does
not identify anything that actually suffered water damage. Doc. 64-9 at 13-15.
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It is true that the underlying complaint does not disavow the proposition that the water
infiltration damaged something other than the building itself. However, the mere possibility that
such damage occurred does not trigger a duty to defend under Illinois law. The Seventh Circuit
made this point clear in Microplastics. The insured, a company called Microplastics,
manufactured “insert molding components, which are plastic pieces used to manufacture various
mechanical devices.” 622 F.3d at 808. Microplastics sold the components to Valeo, which
“used them to manufacture automobile door latch assemblies that [Valeo] sold to automobile
manufacturers.” Ibid. Litigation ensued, with Valeo alleging that Microplastics’ components
were defective; Valeo claimed that “Microplastics is liable to Valeo for the costs charged to
Valeo associated with the defects,” but did not specify the nature of the defects. Id. at 811.
Microplastics tendered its defense to Amerisure, citing the “property damage” provision in its
policy; Amerisure declined coverage and sought a declaration of non-coverage. Id. at 809-10.
The Seventh Circuit framed the issue as follows: “The problem presented here is whether
the insurer has a duty to defend the insured when the unhappy buyer makes only general
allegations for costs incurred as a result of the defective products, without explicitly disavowing
any claim for damage to property other than the defective products themselves.” Id. at 808. Put
another way, because Valeo’s “general allegations d[id] not logically foreclose the theoretical
possibility that … property beyond the defective products” had been damaged, the question was
whether that “theoretical possibility [was] enough to trigger the duty to defend under a CGL
policy.” Id. at 811-12. Microplastics answered the question “yes,” noting that the “costs”
sought by Valeo might arise from circumstances where Microplastics’ parts “caus[ed] the [car]
buyers’ property in trunks to spill onto the roadways” or “allowed water to leak into the
passenger or trunk areas, causing damage to property stored in the vehicles.” Id. at 812. The
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Seventh Circuit disagreed, explaining that “[t]he duty to defend applies only to facts that are
explicitly alleged; it is the actual complaint, not some hypothetical version, that must be
considered.” Ibid. (internal quotation marks omitted). Because Valeo’s claims “made no
specific allegation of ‘property damage’” and “did not allege, or even suggest, that [Valeo’s
costs] have any relation to ‘property damage,’” and because the record contained “no support …
for Microplastics’ theory that [Valeo’s] costs are related to damage to consumers’ personal
property,” the court held that Amerisure had no duty to defend. Id. at 812-13. The Seventh
Circuit concluded: “While we are required to construe the underlying claim liberally and to
resolve doubts in favor of coverage for the insured, we are not permitted simply to speculate
about possible factual scenarios that are absent from the claim itself.” Id. at 814 (internal
citation omitted). The same result obtains here.
Lagestee offers an alternative argument, contending that because Consolidated accepted
Frontrunner’s tender of its defense against Lagestee’s third-party claims, and because Lagestee’s
third-party claims were derivative of Crown’s claims against Lagestee, Consolidated was
obligated to defend Lagestee. Lagestee supports its submission with internal Consolidated
emails reflecting Consolidated’s conclusion that Lagestee’s third-party claims alleged property
damage, and also with excerpts from the depositions of the email correspondents, who stood by
their view that Frontrunner was owed a defense.
One might think that Lagestee is arguing estoppel—that Consolidated, having decided
that Lagestee’s third-party claims against Frontrunner alleged property damage, is estopped from
disputing that Crown’s claims against Lagestee did so as well. But Lagestee makes clear that
this is not its argument. Doc. 73 at 3 (“Another red herring is Consolidated’s contention that just
because it defended and indemnified Frontrunner, it is not estopped from denying coverage for
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Lagestee-Mulder. But that is not Lagestee-Mulder’s theory.”). Lagestee instead argues that an
insurer’s “duty of good faith” means that “it cannot treat claims from an additional insured
different than claims from an insured, absent a valid reason.” Doc. 68 at 5. The two cases that
Lagestee cites for this proposition do not support it. The first, Great Lakes Dredge & Dock Co.
v. Commercial Union Assurance Co., 2002 WL 31133095 (N.D. Ill. Aug. 19, 2002), mentions in
passing the court’s “assumption that an insurer carrying out its contractual responsibilities in
good faith would have treated its named insured and additional insured equally,” id. at *1
(emphasis added); this was an assumption only, and no Illinois law was cited. The cited portion
of the second case, UNR Indus., Inc. v. Am. Mut. Liab. Ins. Co., 92 B.R. 319, 336 (N.D. Ill.
1988), does not mention additional insureds at all.
In any event, Consolidated has articulated a valid reason for accepting Frontrunner’s
tender but not Lagestee’s. Doc. 72 at 10. As shown above, allegations of property damage in a
construction defect case trigger an insurer’s duty to defend so long as the damaged property is
something other than what the insured was responsible for building. Consolidated points out that
Lagestee, as the contractor, was responsible for the whole building, and that there was no
indication that water infiltration had damaged anything other than the building. Frontrunner, by
contrast, was a subcontractor whose responsibilities were limited to the building’s windows and
doors. Consolidated reasonably could have concluded that its insureds’ different scopes of work
warranted disparate responses to their tenders: While water damage to parts of the building other
than the windows and doors did not qualify as “property damage” as far as Lagestee was
concerned, such damage fell outside the scope of Frontrunner’s subcontractor work and thus
qualified as “property damage” as far as Frontrunner was concerned.

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Lagestee would not prevail even if Consolidated had no reason for the differential
treatment. Because Consolidated had no duty to defend Lagestee as a matter of law, if
Frontrunner and Lagestee were identically situated, that would mean only that Consolidated
provided Frontrunner with a gratuity, defending it in Crown Centre absent any legal obligation
to do so. The duty of good faith imposed on insurers did not require Consolidated to extend to
Lagestee the same gratuity it provided to Frontrunner. See Pekin Ins. Co. v. Home Ins. Co., 479
N.E.2d 1078, 1080 (Ill. App. 1985) (“a bad faith claim” lies only “when an insured has acted in a
vexatious, unreasonable, or outrageous manner towards its insured parties”). To the contrary, as
Lagestee itself repeatedly argued, “[a]ll that matters is whether, based upon the allegations of the
underlying pleadings, there was a potential that the ‘property damage’ occurred.” Doc. 68 at 6;
see also id. at 4 (“the only analysis this Court must undertake is whether there was the potential
of coverage … based on the underlying pleadings”); ibid. (“The only issue is whether the duty to
defend existed … , based on the allegations in the underlying pleadings.”); id. at 7 (“All that is
relevant is what was alleged, or not alleged.”); Doc. 73 at 5 (“The only relevant question is
whether the underlying pleadings precluded the possibility of coverage.”). Comparing the
Crown Centre pleadings to the Consolidated policy through the lens of Illinois law yields the
conclusion that there was no potential for coverage of Crown’s claims against Lagestee, and thus
no duty to defend.
One final note before closing. Earlier in this litigation, the court allowed Lagestee to
conduct discovery regarding Consolidated’s decision to accept Frontrunner’s tender. 2010 WL
4781461 (N.D. Ill. Nov. 17, 2010). Consolidated objected to the discovery on relevance
grounds, arguing that “its acceptance of Frontrunner’s tender is irrelevant to its denial of

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Lagestee-Mulder’s tender because the validity of each decision is measured solely by the
policy’s terms.” Id. at *2. The court responded as follows:
Consolidated’s submission ultimately may carry the day, but at this point
the court cannot foreclose the possibility that the Frontrunner decision
could bear on the validity of the Lagestee-Mulder decision. Perhaps, for
example, Consolidated’s denial of Lagestee-Mulder’s tender turned on a
policy provision that is ambiguous, and perhaps Consolidated interpreted
that provision differently when deciding to accept Frontrunner’s tender.
Lagestee-Mulder is entitled to explore these issues in discovery, and the
only way to do so is by allowing it access to documents and information
regarding Consolidated’s decision to accept Frontrunner’s tender.
Ibid. (internal citations omitted). Having had the opportunity to take that discovery, Lagestee
has not argued that Consolidated’s differential treatment of Lagestee and Frontrunner resulted
from Consolidated’s decision to interpret an ambiguous policy term against Lagestee and in
favor of Frontrunner; nor has Lagestee put forth any evidence indicating that the differential
treatment was otherwise improper. The court’s coverage analysis, therefore, rests entirely on the
terms of the Consolidated policy and the allegations in the Crown Centre suit.
To summarize, because Crown’s claims against Lagestee in the state court case did not
trigger Consolidated’s duty to defend, Consolidated’s summary judgment motion is granted and
Lagestee’s summary judgment motion is denied.

November 8, 2011
United States District Judge

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