Allied Property & Casualty Insurance Company et al v. Metro North Condominium Association

Filing 36

MEMORANDUM Opinion and Order. The Court grants plaintiffs' motion for summary judgment 15 and denies Metro North's motion for summary judgment 18 . Civil case terminated. Signed by the Honorable Jorge L. Alonso on 3/31/2016. Notice mailed by judge's staff (ntf, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
ALLIED PROPERTY & CASUALTY
INSURANCE COMPANY and AMCO
INSURANCE COMPANY,
Plaintiffs,
v.
METRO NORTH CONDOMINIUM
ASSOCIATION,
Defendant.

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No. 15 C 3925
Judge Jorge L. Alonso

MEMORANDUM OPINION AND ORDER
In this diversity case, plaintiffs, Allied Property & Casualty Insurance Company
(“Allied”) and AMCO Insurance Company (“AMCO”), seek a declaration that certain
commercial liability insurance policies they issued to a subcontractor who participated in the
construction of a condominium project do not cover an underlying claim against the
subcontractor stemming from its defective workmanship. Defendant Metro North Condominium
Association (“Metro North”), to whom the subcontractor assigned its right to recover the
insurance proceeds in settlement of the underlying lawsuit, has counterclaimed, seeking a
declaration that the underlying claim is covered and plaintiffs owe Metro North the amount it is
due under the settlement agreement with the subcontractor. The parties have filed cross-motions
for summary judgment. For the reasons set forth below, plaintiffs’ motion is granted, and Metro
North’s motion is denied.

1

BACKGROUND
Metro North is the governing body of a condominium located at 3946 North Ravenswood
Avenue in Chicago. (Pls.’ LR 56.1(b)(3)(B) Resp., ¶ 1, ECF No. 26, at 4.) Metro North filed a
lawsuit in the Circuit Court of Cook County against the developer of the condominium and a
number of its contractors and subcontractors for defective construction that caused various
issues, including water infiltration. (Def.’s LR 56.1(b)(3)(B) Resp., ¶ 5, ECF No. 22; Def.’s
App., Ex. 3b, 4th Am. Compl., ECF No. 24-4.) Among the subcontractors named in Metro
North’s state-court complaint were CSC Construction, Inc. (“CSC Construction”) and CSC
Glass, Inc. (“CSC Glass”) (collectively, “the CSC entities”). (Def.’s App., Ex. 3b, 4th Am.
Compl., ¶¶ 16-17, ECF No. 24-4.)

According to the allegations of the complaint, CSC

Construction “and/or CSC Glass entered into a subcontract . . . to provide window and glazing
services for the [p]roject” (id., ¶ 18), but, beginning with an October 2006 rainstorm, serious
water infiltration issues soon arose (id., ¶¶ 59-61) due to “CSC [Construction] and/or CSC
Glass’[s] construction errors and omissions” (id., ¶ 100). Metro North claimed that, based on
these construction defects and the damage they caused to the building and to the unit owners’
personal property, the CSC entities were liable for breach of the implied warranty of habitability
(“BIWH”).1 (Id., ¶¶ 151-66.)
Allied issued a commercial general liability (“CGL”) policy, effective from March 30,
2006, to March 30, 2007, to CSC Glass. (Def.’s LR 56.1(b)(3)(B) Resp., ¶ 3, ECF No. 22.)
AMCO issued a commercial umbrella liability policy to CSC Glass for the same effective
period. (Id.) Allied provided the CSC entities with an independent defense in the underlying
1

Metro North claimed that the implied warranty of habitability applies to the subcontractors responsible for the
construction defects because the entity that served as the developer and general contractor was insolvent. (Def.’s
App., Ex. 3b, 4th Am. Compl., ¶ 134 n. 1, ECF No. 24-4 (citing Minton v. Richards Grp. of Chi., 452 N.E.2d 835,
837 (Ill. App. Ct. 1983)) (cited with approval in 1324 W. Pratt Condo. Ass’n v. Platt Constr. Grp., Inc., 936 N.E.2d
1093, 1097-99 (Ill. App. Ct. 2010)))..
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lawsuit under a reservation of rights (id., ¶ 7), although it referred in its reservation of rights
letter only to “CSC Construction,” (Def.’s App., Ex. 5, ECF No. 24-7), and Juan Salgado
testified at his deposition2 that CSC Glass is also known as CSC Construction (Def.’s LR 56.1
Stmt., ¶ 63, ECF No. 20).
Metro North entered into a settlement agreement with the CSC entities in which the CSC
entities agreed to pay Metro North “$700,000, to be satisfied solely through the assignment [to
Metro North] of all of their rights to payment, if any, from Allied under the policy issued to [the]
CSC [entities] by Allied, or rights under any other insurance policy issued to [the] CSC
[entities], as arising out of the claims asserted against [the] CSC [entities] in the [underlying
lawsuit] or this Settlement thereof.”

(Def.’s LR 56.1(b)(3)(B) Resp., ¶ 8, ECF No. 22.)

According to the settlement agreement, the settlement figure represented “a reasonable
settlement amount of a portion of the damages incurred by [Metro North] as caused in part by
CSC's alleged improper installation of the windows that caused damage to parts of the Building,
other than the windows themselves, and damage to [Metro North]’s and its members’ personal
property.” (Id., ¶ 18.).
The Allied policy requires Allied to “pay those sums that the insured becomes legally
obligated to pay as damages because of . . . ‘property damage’ . . . caused by an occurrence.”
(Id., ¶ 31.) Similarly, the AMCO policy, which provided both excess follow-form coverage and
primary commercial liability insurance with no retained limit (Def.’s LR 56.1 Stmt., ¶¶ 55-56,
ECF No. 20), requires AMCO to pay “on behalf of the ‘insured’ damages the ‘insured’ becomes
legally obligated to pay by reason of liability imposed by law . . . because of . . . ‘property
2

Plaintiffs move to strike the deposition of Juan Salgado (ECF No. 26, at 2-3), as well as to strike Metro North’s
combined memorandum in support of its motion for summary judgment and in opposition to plaintiffs’ motion (ECF
No. 25, at 1-2). These motions are denied. The motion to strike the deposition is moot, as the Court does not reach
the issue of which CSC entity performed the work in this case or which entity was insured. The motion to strike the
combined brief is denied because the Court intended the parties to file 30-page combined memoranda and, in any
case, plaintiffs are not prejudiced.
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damage’ . . . caused by an occurrence.” (Def.’s LR 56.1(b)(3)(B) Resp., ¶ 31, ECF No. 22.)
Plaintiffs seek a declaration that there is no coverage under the policies for Metro North’s
settlement with the CSC entities. Metro North seeks a declaration that its settlement with the
CSC entities is covered by both policies and plaintiffs must pay Metro North, as assignee of the
CSC entities’ rights under the policies, the full amount of the settlement.
ANALYSIS
The parties have filed cross-motions for summary judgment. “The court shall grant
summary judgment 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). In considering
such a motion, the Court construes the evidence and all inferences that reasonably can be drawn
therefrom in the light most favorable to the nonmoving party. See Kvapil v. Chippewa Cnty.,
Wis., 752 F.3d 708, 712 (7th Cir. 2014). “Summary judgment should be denied if the dispute is
‘genuine’: ‘if the evidence is such that a reasonable jury could return a verdict for the
nonmoving party.’” Talanda v. KFC Nat’l Mgmt. Co., 140 F.3d 1090, 1095 (7th Cir. 1998)
(quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)); see Bunn v. Khoury
Enters., Inc., 753 F.3d 676, 681-82 (7th Cir. 2014). The court will enter summary judgment
against a party who does not “come forward with evidence that would reasonably permit the
finder of fact to find in [its] favor on a material question.” Modrowski v. Pigatto, 712 F.3d 1166,
1167 (7th Cir. 2013).
Metro North’s settlement with the CSC entities is covered under plaintiffs’ policies if the
CSC entities settled the case in reasonable anticipation of liability for damages that fall within
the policies’ definition of “property damage” caused by an “occurrence.” Santa’s Best Craft,
LLC v. St. Paul Fire & Marine Ins. Co., 611 F.3d 339, 350-52 (7th Cir. 2010). Property damage

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is defined in plaintiffs’ policies as “physical injury to tangible property,” (Def.’s LR 56.1 Stmt.,
¶ 48, ECF No. 20) and “occurrence” is defined as an “accident” (id., ¶ 47). Under Illinois law, it
is well-established that a construction defect is not an “occurrence” or “accident”; rather, it is the
natural and ordinary consequence of poor workmanship. See Lyerla v. AMCO Ins. Co., 536 F.3d
684, 689-90 (7th Cir. 2008) (citing cases). CGL policies “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 products,
which are purely economic losses.” Travelers Ins. Co. v. Eljer Mfg., Inc., 757 N.E.2d 481, 503
(2001) (citing Qualls v. Country Mut. Ins. Co., 462 N.E.2d 1288, 1291 (Ill. App. Ct. 1984)).
Stated differently, CGL policies do not cover “an accident of faulty workmanship but rather
faulty workmanship which causes an accident.” Monticello Ins. Co. v. Wil-Freds Const., Inc.,
661 N.E.2d 451, 457 (Ill. App. Ct. 1996).
Illinois courts hold that “there is no occurrence when a subcontractor’s defective
workmanship necessitates removing and repairing work,” Milwaukee Mutual Insurance Co. v.
J.P. Larsen, Inc., 956 N.E.2d 524, 531 (Ill. App. Ct. 2011) (citing Viking Construction
Management, Inc. v. Liberty Mutual Insurance Co., 831 N.E.2d 1, 6 (Ill. App. Ct. 2005)), but
when the defective workmanship results in damage to something other than the construction
project itself, there may be an occurrence, id. (citing CMK Development Corp. v. West Bend
Mutual Insurance Co., 917 N.E.2d 1155, 1164-65 (Ill. App. Ct. 2009), Stoneridge Dev. Co. v.
Essex Ins. Co., 888 N.E.2d 633, 653 (Ill. App. Ct. 2008)). Thus, where faulty workmanship by
the subcontractor who compacted the soil on which a home rests results in cracks in the home’s
load-bearing elements, there is no occurrence causing covered property damage, Stoneridge, 888
N.E.2d at 654, but where faulty workmanship results in leaks that cause water damage to the

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homeowner’s furniture, clothing and antiques, there is an occurrence causing covered property
damage, see Pekin Insurance Co. v. Richard Marker Associates, Inc., 682 N.E.2d 362, 365-66
(Ill. App. Ct. 1997).
According to a breakdown of damages tendered by Metro North’s counsel to the CSC
entities’ counsel during settlement negotiations, Metro North was seeking more than $2.3
million in damages. (Def.’s App., Ex. 6, ECF No. 24-8.) The vast majority of the damages
Metro North claimed related to damage caused by water infiltration to common elements of the
condominium building, other than the windows that represented the precise portion of the
building that the CSC entities actually worked on. (Def.’s Reply Br. at 9, ECF No. 27) (citing
Def.’s App., Ex. 6, ECF No. 24-8.) Metro North also claimed $191,215.15 in damages for
“personal or other property.” (Def.’s App., Ex. 6, ECF No. 24-8.)
Plaintiffs argue that their policies do not cover Metro North’s BIWH claim because (1)
the damages Metro North claimed are not recoverable for BIWH, so the settlement could not
have been entered into in reasonable anticipation of liability. Further, even if the damages Metro
North sought are theoretically recoverable in a BIWH action, they argue that (2) the damages
related to personal property of the unit owners were not recoverable in the underlying action
because the unit owners were not parties to the underlying action, so the settlement as to those
damages was not based on a reasonable anticipation of liability, and (3) the damages related to
portions of the common elements of the condominium building other than those on which the
CSC entities worked were not caused by an “occurrence” because they were merely the natural
and ordinary consequences of faulty workmanship.

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I. BREACH OF IMPLIED WARRANTY OF HABITABILITY DAMAGES
Under Illinois law, the measure of damages for BIWH is “the cost of correcting the
defective conditions,” unless “defects could be corrected only at a cost unreasonably
disproportionate to the benefit to the purchaser, or . . . correcting them would entail unreasonable
destruction of the builder’s work,” in which case “the amount by which the defects have reduced
the value of the property should be the measure of damages.” Park v. Sohn, 433 N.E.2d 651,
657 (Ill. 1982). The damages covered by the CSC entities’ settlement agreement with Metro
North were not for the cost of repairing the defects (which the policies undisputedly do not
cover) or for the diminution in the value of the building, but for the cost of repairing other parts
of the condominium building on which the CSC entities did not work or for personal property of
the unit owners. Plaintiffs argue that Illinois law does not permit the recovery of any such
damages for BIWH, and if the damages that were the basis for the settlement agreement are
unrecoverable, the settlement was not “in reasonable anticipation of liability.” See Santa’s Best
Craft, 611 F.3d at 350-52.
Metro North responds that a contractor who breaches the implied warranty of habitability
is liable for whatever costs are necessary to correct the defective condition of the premises due to
the contractor’s breach, principally citing Nisbet v. Yelnick, 464 N.E.2d 781, 784-85 (Ill. App.
Ct. 1984), which allowed the BIWH plaintiffs to recover consequential damages for loss of use
of their basement while defects were being repaired, which Metro North claims is “directly on
point.” (Def.’s Reply Mem. at 14, ECF No. 27.) Metro North fails to mention that, in a later
case, the Illinois Appellate Court limited the recovery of consequential damages for BIWH to
situations in which the premises are “uninhabitable,” and it held that the plaintiffs could not
recover “consequential damages arising from water leakage into the interior of their unit”

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through a defective window for BIWH. Hills of Palos Condo. Ass’n, Inc. v. I-Del, Inc., 626
N.E.2d 1311, 1329 (Ill. App. Ct. 1993). That case is much closer to the facts of this case than
Nisbet; in fact, it is directly on point. Damages caused by water infiltration into parts of the
building on which the CSC entities did not work and into the individual units are not recoverable
based on the CSC entities’ BIWH.
Metro North argues that the proper inquiry is whether it entered into the settlement in
reasonable anticipation of liability, not whether the court in the underlying action would or
should actually have awarded consequential damages. Metro North is correct that the proper
standard is whether the CSC entities entered into the settlement in “reasonable anticipation of
liability,” Santa’s Best Craft, 611 F.3d at 350 (citing U.S. Gypsum Co. v. Admiral Insurance Co.,
643 N.E.2d 1226, 1244 (Ill. App. Ct. 1994)), but if no damages covered by the insurance policies
could even potentially have been awarded, then the insurers are not required to pay the
settlement because “it is inequitable to require an insurer to pay for a settlement that is clearly
not within the terms of its policy,” id. at 352. In Hills of Palos, a case closer to the facts of this
case than any either party has cited, the Illinois Appellate Court specifically held that damages
such as those Metro North sought are not recoverable for BIWH. There was no reasonable
anticipation of liability or reasonable potential for the award of damages covered by the
insurance policies. The insurers are not required to pay the Metro North settlement.
II. PERSONAL PROPERTY OF THE UNIT OWNERS
Even assuming that Metro North might have been entitled to damages if it prevailed on
the underlying claim, it would not be entitled to recover for any damage to personal property of
its unit owners. As this Court previously explained in its decision in Acuity v. Lenny Szarek,
Inc., No. 13 C 7505, 2015 WL 5163195, at *6 (N.D. Ill. Sept. 2, 2015), the provision of the

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Illinois Condominium Property Act permitting a condominium association to “act in a
representative capacity in relation to matters involving the common elements or more than one
unit, on behalf of the unit owners, as their interests may appear,” 765 Ill. Comp. Stat. 605/9.1(b)
(emphasis added), does not give a condominium association the right to sue for property damage
suffered by individual unit owners.
In support of its argument to the contrary, Metro North cites the Illinois Appellate
Court’s decision in Sandy Creek Condominium Association v. Stolt & Egner, Inc., 642 N.E.2d
171, 175-76 (Ill. App. Ct. 1994), which held that a condominium association could assert a claim
against the condominium developer for defrauding the individual unit owners. While this case
may appear to provide some support for Metro North’s position, its analysis of the issue is scant,
and the portion addressing the association’s standing to assert the unit owners’ fraud claims was
ultimately not a critical element of the decision because the court held that the evidence was
insufficient to support the unit owners’ fraud claims, in any case, and it reversed the jury’s
verdict for the association on the fraud count.
More persuasive to this Court is the Illinois Appellate Court’s subsequent decision in
Poulet v. H.F.O., LLC, 817 N.E.2d 1054, 1064-65 (Ill. App. Ct. 2004), in which the court drew a
distinction between “individual” and “collective” claims (the former are the province of the
individual unit owners, whereas the latter are the province of the condominium association) and
suggested that claims (such as the ones in Sandy Creek) that the condominium developer
defrauded the individual unit purchasers as to certain aspects of the construction of the
condominium belong in the collective category. See id. (citing Frantz v. CBI Fairmac Corp.,
331 S.E.2d 390, 393-94 (Va. 1985)). As to such claims, the association has the exclusive
authority to act (except where it declines to act, in which case the unit owners may bring a

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derivative action), and the association’s actions bind the unit owners. Poulet, 817 N.E.2d at
1064-65 (citing Frantz, 331 S.E.2d at 393-94). On the other hand, claims that the developer
breached the unit purchasers’ individual contract rights, including claims of breach of the
implied warranty of habitability, belong in the individual category. See id. at 1062 (citing
Tassan v. United Dev. Co., 410 N.E.2d 902, 914 (Ill. App. Ct. 1980)).
In Poulet, as a condominium association negotiated a settlement in a lawsuit it had
brought against the condominium developer for mishandling funds, an individual unit owner
brought his own lawsuit against the developer, asserting claims of conversion and fraud similar
to those in the association’s suit. Poulet, 817 N.E.2d at 1055-59. In its opinion, the court
discussed the importance of maintaining the condominium association’s exclusive right to assert
and settle collective claims such as those concerning the handling of association funds:
To allow the individual unit owners here to assert claims of conversion and
common law constructive fraud relating to the Association’s account would, as
stated by the court in Frantz, deprive the Association of its right to act on behalf
of all unit owners, leave the responsibility for and authority over the funds
fragmented and ultimately make the vindication of common rights highly
uncertain, difficult and burdensome. Further, . . . piecemeal litigation brought by
individual unit owners would frustrate the statutory scheme in which the
condominium associations are to act as the representatives of all the individual
owners. We also believe that our finding here avoids a multiplicity of lawsuits,
produces economic savings incident to one trial, has a positive effect on judicial
administration and expedites the resolution of controversies.
Id. at 1067-68 (emphasis added). However, the court explained that individual unit owners
retain the right to bring claims of an “‘individual character,’ such as the . . . breach of warranty
claims in Tassan.” Id. at 1068 (quoting Cigal v. Leader Dev. Corp., 557 N.E.2d 1119, 1121
(Mass. 1990)).
Although Poulet directly concerned only whether an individual unit owner had standing
to assert a claim of injury to the association, not the mirror-image issue that this case presents, it
follows from the reasoning of the decision that the association’s standing to bring collective
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claims must not overlap with the unit owners’ right to bring individual claims, in order to avoid
uncertainty about whether an action by one party binds the other. If an individual unit owner has
the right to bring a breach of implied warranty claim against the developer—which he or she
undisputedly does—then it follows that the association does not, at least absent the consent of
the individual unit owners, see River Plaza Homeowner’s Association v. Healey, 389 Ill. App. 3d
268, 281-82 (Ill. App. Ct. 2009). As one commentator has put it, “in a 100 unit building, there
could be 101 lawsuits for fraud—one for each unit purchaser plus the association.” Richard
Douglass, Interpreting Section 9.1(b) of the Illinois Condominium Property Act, CBA Rec.,
July/August 2015, at 28, 34. More to the point, the association could bring a lawsuit, and then
just as it was nearing its conclusion one or more unit owners would be able to bring their own
lawsuits, potentially snarling the proceedings. In this case, the unit owners were perfectly free to
join in Metro North’s lawsuit if they wanted an individual recovery, as the unit owners in Hills
of Palos did. Allowing Metro North to recover for the damage to their personal property without
their participation in the lawsuit does not comport with the Illinois Condominium Property Act
as the Illinois Appellate Court has interpreted it in Poulet.
III. “OCCURRENCE”
In any case, Metro North admits that only a very small portion of the damages it claimed
in its settlement negotiations with the CSC entities related to the damage to personal property of
the unit owners. Of the $2.3 million in claimed damages, only approximately $195,000 related
to the damage to personal property, less than a tenth of the total claimed damages and a little
more than a quarter of the settlement amount. The settlement agreement does not state how
much of the settlement amount to apportion to which claimed damages other than to state that
the “amount represents a reasonable settlement of a portion of the damages incurred by the

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Association as caused in part by CSC’s alleged improper installation of windows that caused
damage to parts of the Building, other than the windows, themselves, and damage to the
Association’s and its members’ personal property.” (Ans. Countercl., Ex. 7, ECF No. 10-9, ¶ 2.)
Where a settlement encompasses multiple claims and it is unclear how much, if any, of a
settlement is attributable to a covered claim as opposed to an uncovered claim, courts must
“evaluate whether a ‘primary focus’ of the claims that were settled was a potentially covered
loss.” Santa’s Best Craft, 611 F.3d at 352 (quoting Commonwealth Edison Co. v. Nat’l Union
Fire Ins. Co. of Pittsburgh, Pa., 752 N.E.2d 555, 565 (Ill. App. Ct. 2001)). In this case it seems
clear, and Metro North essentially concedes (Reply Br. at 9, ECF No. 27), that the damage to
personal property of the unit owners was not a primary focus of the settlement; even if the
maximum amount of claimed personal property damages were represented in the settlement
amount, it would represent barely a quarter of the full settlement.
Thus, the question becomes whether the claimed damages for damage to the portions of
the building on which the CSC entities did not work, which apparently were the “primary focus”
of the settlement, are covered. Plaintiffs recite a litany of Illinois cases holding that, where an
insured contractor’s faulty workmanship results in damage to the structure on which he worked,
there is no “occurrence” causing covered “property damage” within the meaning of a CGL
policy because there is no “accident”; rather, the damage is the natural and ordinary consequence
of faulty workmanship. (Pls.’ Resp./Reply Br., ECF No. 25, at 6-9.)
Metro North responds that these cases are all distinguishable because the insured
contractors were general contractors, developers or other entities who were responsible for the
entire project. Thus, the claimed damage was merely damage to the insured’s own work that
was caused by its own poor workmanship or that of its subcontractors, and defective

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workmanship that requires “removing and repairing work” is not an “occurrence” within the
meaning of a CGL policy, Viking Construction, 831 N.E.2d at 6; further, such property damage
is expressly excluded by standard CGL policies. Metro North cites instead Milwaukee Mutual
Insurance Co. v. J.P. Larsen, Inc., 956 N.E.2d 524, 532 (Ill. App. Ct. 2011), a factually
analogous case in which the Illinois Appellate Court held that an insurer had a duty to defend a
subcontractor that had improperly sealed windows in a condominium building, causing water
infiltration that damaged the common elements of the condominium and the personal property of
the unit owners.
Plaintiffs have the better of this argument. Although Metro North is correct that many of
the cases upon which plaintiffs rely involve insured general contractors, rather than
subcontractors whose defective work results in damage to portions of the building on which they
did not work, this is a distinction without a difference because these cases do not turn on which
portion of the building was damaged; rather, they turn on the principle that a construction defect
is not an “accident,” which Illinois courts have defined as “an event that is unforeseen and
neither expected nor intended,” Diamond State Insurance Co. v. Chester-Jensen Co., 611 N.E.2d
1083, 1091 (Ill. App. Ct. 1993), and because CGL policies only cover damage caused by an
“occurrence,” which is defined as an “accident,” they do not cover the natural and ordinary
consequences of defective workmanship. When a subcontractor who installs windows performs
defective work, the natural and ordinary consequence is water infiltration that will damage the
rest of the building. There is no accident, so there is no occurrence, so there is no coverage. See
Am. Fire & Cas. Co. v. Broeren Russo Constr., Inc., 54 F. Supp. 2d 842, 847-48 (C.D. Ill. 1999)
(“[I]t is inconceivable that the parties would not have foreseen damage from water leaking into

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the building as a possible result of the failure of the [window contractor’s installation work] to
prevent leaking.”), cited with approval in Stoneridge, 888 N.E.2d at 656.
As stated above, a CGL policy is not meant to cover “an accident of faulty workmanship
but rather faulty workmanship which causes an accident.” Monticello Ins. Co., 661 N.E.2d at
457. Thus, where the window installer’s poor workmanship causes water infiltration which
damages an antique rug, there is “faulty workmanship which causes an accident”; the presence
of that rug in that location was not something the window installer necessarily could have
foreseen—but he could hardly fail to foresee that, if his work was defective, the defects would
result in damage to the structure in which he was installing windows. See Pekin Ins. Co., 682
N.E.2d at 365-66.
Stoneridge dispels any notion that the cases on which plaintiffs rely depend on the fact
that the insured was a general contractor who worked on the entire structure. In that case,
homeowners sued the developer/general contractor who had built their house for improperly
compacting the soil on which the house was built, causing cracks in the load-bearing elements of
the home. Stoneridge, 888 N.E.2d at 654. The Illinois Appellate Court discussed at length the
long line of cases holding that there is no coverage for repairing and replacing an insured
contractor’s defective work because, under such circumstances, there is no occurrence causing
covered property damage. Id. at 651-55. The court then addressed the contractor’s argument
that, viewing the policy as a whole, it was clearly intended to provide coverage for faulty work
performed by a subcontractor. Id. at 656. The contractor argued that the policy excluded
“‘property damage’ to ‘your work’ arising out of it or any part of it,” but there was an exception
to this exclusion “if the damaged work or the work out of which the damage arises was
performed on your behalf by a subcontractor,” as the faulty soil compaction undisputedly was.

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Id. The court held that the subcontractor exception “cannot negate the lack of an ‘occurrence’
here, as the damage arose from the natural and ordinary consequence of defective workmanship
rather than from an ‘accident.’” Id. at 657. Stated differently, there was no need to interpret
exclusions or exceptions because there was no coverage to begin with. Id. at 656-57.
If, as Metro North claims, it mattered that the insured was a general contractor
responsible for the whole building rather than a subcontractor who performed faulty work on
only a portion of the building, that fact would have militated in favor of coverage because the
court would have had to analyze the “your work” exclusion and the subcontractor exception, and
it may have found that the claim covered based on the subcontractor exception. The court did
not perform that analysis because regardless of who performed the work and what the
subcontractor’s scope of work was, damage to a structure due a subcontractor’s faulty work is
not “property damage” caused by an “occurrence.”
Metro North also cites Ohio Casualty Insurance Co. v. Bazzi Construction Co., 815 F.2d
1146, 1147-48 (7th Cir. 1987), in which the Seventh Circuit held that a property owner’s claim
against an insured contractor who built a second story on top of the roof of a garage, which
“compromised the integrity of the whole building” and required the garage owner to “reinforce
the roof joists and steel columns installed in the interior of the building because the foundation
of the existing building was inadequate to support the second floor construction,” was at least
potentially covered because the faulty workmanship damaged something other than the
construction project itself, namely, the existing structure of the garage.

First, this case is

distinguishable because (like J.P. Larsen) it is a duty to defend case, and the duty to defend
arises whenever there is even the potential for coverage. Viking Constr., 831 N.E.2d at 6. The
property owner in Bazzi asserted claims of negligence against the insured contractor, but this

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case includes only a BIWH claim; as plaintiffs admit, they too saw the potential for coverage in
this case before the negligence claims against the CSC entities were dismissed, which is why
they defended the CSC entities under a reservation of rights. (Pls.’ Resp./Reply Br., ECF No.
25, at 2-3.) It is unclear from the opinion in Bazzi to what extent the damage to the structural
integrity of the existing structure of the garage may have truly been an accident, as opposed to
the natural and ordinary consequence of defective workmanship; this is a far cry from
contractual claims brought against a window contractor, as in Broeren Russo (a decision by a
court that would have been bound by Bazzi, if it applied) or this case. The Court notes that if the
Seventh Circuit thought that Bazzi applied to condominium associations’ claims against
contractors whose defective construction caused water infiltration, it might at least have
mentioned the case in Nautilus Insurance Co. v. Board of Directors of Regal Lofts Condominium
Ass’n, 764 F.3d 726, 729 (7th Cir. 2014), which contained precisely those facts, and which also
involved inadequate remodeling of an existing building. See id. (“[T]he deteriorated conditions
had likely developed over many years, even prior to the condominium conversion, but . . . the
present water penetration was the result of inadequate restoration of the walls to a water-tight,
serviceable condition.”).
The parties raise a number of other issues, including which CSC entity actually
performed the work in this case and whether both entities were properly insured by plaintiffs’
policies, and whether various exclusions apply, but we need not reach these ancillary issues
because, for the foregoing reasons, the plaintiff’s insurance policies did not provide coverage for
the CSC entities’ settlement of the underlying lawsuit.

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CONCLUSION
For the reasons set forth above, the Court grants plaintiffs’ motion for summary
judgment [15] and denies Metro North’s motion for summary judgment [18].

Civil case

terminated.
SO ORDERED.

ENTERED: March 31, 2016

__________________________________
HON. JORGE L. ALONSO
United States District Judge

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