Frankenmuth Mutual Insurance Company v. Hodsco Construction, Inc. et al
Filing
30
OPINION and Order. Signed by the Honorable Charles R. Norgle, Sr on 6/8/2016.mailed notice(rm, )
IN THE UNITED STATES DISTRICT COURT F'OR
THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
FRANKENMUTH MUTUAL INSURANCE
COMPANY, a Michigan corporation,
)
)
)
Civil Action No. 15 CV 11029
Plaintiff,
Hon. Charles R. Norgle
v.
HODSCO CONSTRUCTION, INC., et a1.,
Defendants.
HODSCO CONTSTRUCTION, [NC.,
Counter-Plaintiff,
V.
FRANKENMUTH MUTUAL INSURANCE
COMPANY,
Counter-Defendant.
OPINION AND ORDER
CHARLES R. NORGLE, United States District Court Judge
Several years after a residential development was built in Glenview, Illinois, residents
discovered water leaking into their homes. As a result, the condominium association, Defendant
Tower Crossing Condominium Association (the "Association") sued several contractors in state
court, including Defendant Hodsco Construction,Inc. ("Hodsco") (Hodsco and the Association
are
collectively, "Defendants"). When Hodsco sought to have its insurer, Plaintiff Frankenmuth
Mutual Insurance Company ("Frankenmuth") provide its defense, Frankenmuth filed this action,
and seeks a declaratory judgment that
it does not owe Hodsco
a duty to defend.
Frankenmuth is a Michigan Corporation with its principal place of business in that State.
The Association and Hodsco are both Illinois corporations, and both have their principal places
of business in Illinois. There is more than $75,000 in controversy in the underlying litigation;
accordingly, the Court has subject matter jurisdiction pursuant to 28 U.S.C. $ 1332(a). Before the
Court are Frankenmuth's and Hodsco's cross-motions for judgment on the pleadings, brought
pursuant to Federal Rule of Civil Procedure 12(c). For the following reasons, Frankenmuth's
motion is denied and Hodsco's motion is granted; the Court finds that Frankenmuth does owe
Hodsco a duty to defend.
I. BACKGROUND
A. The Underlying State Court Litigation
Kimball Hill, Inc. ("Kimball Hill") was a residential real estate developer. At some point
in2002, Kimball Hill started development of a 154-unit town home complex called Tower
Crossing, which was located in Glenview, Illinois, at the site of the former Glenview Naval
Air
Station. The Association was subsequently formed to govern the common elements of Tower
Crossing and its residents.
To build Tower Crossing, Kimball Hill subcontracted with several firms, including
Hodsco. Specifically, Kimball Hill hired Hodsco to build masonry- and concrete-block demising
walls for the individual units. Kimball Hill, Hodsco, and the other subcontractors hired by
Kimball Hill constructed the Tower Crossing units throughout 2002 and2003.
In November 2005, Tower Crossing's homeowners assumed control of the Association,
via a board of directors. Some time after control of the Association was ceded to the
homeowners, the Association discovered numerous defects in Tower Crossing's construction.
This discovery culminated in the Association filing suit against several subcontractors, including
Hodsco. See Tower Crossing Condominium Assoc.. et al. v. Prate Sheet Metal. Inc.. et al.,15 L
9475 (Cir. Ct. Cook Cnty. Sept. 16,2015) [hereinafter the "State Court
Litigation"], Ex. A to
Compl. Declaratory J. As the allegations pertain to Hodsco, the Association alleges that, due to
Hodsco's misfeasance:
"[P]arapet balconies lack and/or were constructed with improperly installed
flashing and coping; roof saddle roofing membranes were improperly integrated
with chimneys and parapet walls; there was or may have been excessive clogging
of the drainage cavity (air space) with mortar between the exterior brick wythe
and wood frame structure; masoffy chimneys contained defective flashing andlor
are not flashed; punched windows were defectively flashed and/or installed;
coping was defectively flashed; the rear patio parapet to wall intersections were
defectively flashed; concrete chimney caps were defectively flashed or were not
flashed; concrete chimney caps were defectively sloped; [and] through-wall
masonry flashing at floor line shelf angles was defective."
Compl. Declaratory J. fl 18 (quoting State Court Litigation, Third Am. Compl. fltT29, 31)
(internal formatting structures omitted). The Association alleges further that as a result of the
above construction defects
:
"[S]ome or all of the Defects caused sudden and calamitous water infiltration
andlor mold growth within the interior spaces of [the] Homes, which has damaged
[the] Homes (including elements of the Homes separate and apart from the
defective elements), interior finishes within [the] Homes and personal property of
Homeowners located within [the] Homes (collectively "Property Damage"). In
some instances, during periods of rain, rapidly infiltrating water cascaded into
interior portions of [the] Homes and fell from ceilings and/or other surfaces
creating the equivalent of a waterfall within the Home."
Compl. Declaratory J. fl 19 (quoting State Court Litigation, Third Am. Compl. fl 32). The
complaint in the State Court Litigation does not allege that Hodsco's construction defects caused
bodily injury to any individuals. At some point, Hodsco gave Frankenmuth notice of the claim
filed against it (i.e. the State Court Litigation), and asked Frankenmuth to honor its contractual
duty to defend Hodsco in that action.
B. The Contract Between Frankenmuth and Hodsco
From December 31,2000 until December 31, 2003 (the "Policy Period"), Hodsco was
insured by Frankenmuth for indemnification against, inter alia, general commercial liability,
pursuant to a written insurance policy [hereinafter the "Agreement"]. See Ex. B to Frankenmuth
Mut. Ins. Co.'s Mem. Supp.Mot. J. Pleadings l3 [hereinafter "Frankenmuth's Mot."]. The
Agreement was originally for one year, and was renewed twice, using language that was virtually
identical to the original agreement. Several terms and conditions of the Agreement are relevant
to the issues in this case.
The Agreement specified that Frankenmuth would defend and if necessary, indemnify,
Hodsco against any claims of "bodily injury" or "property damage" for which Hodsco is alleged
to be liable. See Agreement $ I, Coverage A.1.a. This broad grant of indemnity is circumscribed
by temporal limitations, outright substantive exclusions from coverage, and technical definitions.
First, the Agreement only requires Frankenmuth to defend and indemnify Hodsco if the
claim arises within the Policy Period. Specifically, the claimed bodily injury or property damage
must be "caused by an 'occurrence' that takes place in the 'coverage territory' . . . during the
[P]olicy [P]eriod." Id. $ I, Coverage A.1.b.
Second, the Agreement excludes many categories of damage from coverage. There are
two policy exclusions that are relevant to this case. First is the "contractual liability" exclusion,
which excludes from coverage "'[b]odily injury' or 'property damage' for which the insured is
obligated to pay damages by reason of the assumption of liability in a contract or agreement."
Id. $ I, Coverage A.2.b. The contractual liability exclusion, itself, has exclusions, the relevant
one of which excludes from the exclusion (i.e. brings back within the scope of coverage)
liability
that Hodsco would have incurred "in the absence of the contract or agreement." See id. $ I,
Coverage A.2.b.(1).
The second exclusion relates to'oDamage to Property." Id. $ I, Coverage
Specifically, the Agreement does not insure property damage, inter alia, to:
A.2i.
(5) 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; or
(6) That particular part of any property that must be restored, repaired or replaced
because "your work" was incorrectly performed on it.
Id. $$ I, Coverage A.2j.(5), (6). Similar to the contractual liability exclusion, the damage-toproperty exclusion has its own exceptions. Relevant to this case, "'property damage' included in
the 'products/completed operationshazard"'does fall within the scope of coverage. See
id. $ l, Coverage A.2j.
"Property damage," "occurrence," o'your work," and "products/completed operations
hazard" are all defined terms within the Agreement. "Property damage" means:
a. Physical injury to tangible property, including all resulting loss of use of that
property. All such loss of use shall be deemed to occur at the time of the physical
injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss
use shall be deemed to occur at the time of the "occurrence" that caused it.
of
Id. $ V.l'1. "'Occurrence' means an accident, including continuous or repeated exposure to
substantially the same general harmful conditions." Id. $ V.13. "'Your work' means: [(a)] work
or operations performed by you or on your behalf; and [(b)] materials, parts or equipment
furnished in connection with such work or operations." Id. $ V.21. The "[p]roducts/completed
operations hazard" includes "all 'bodily injury' and 'property damage' occurring away from the
premises you [the insured] own or rent and arising out of 'your product' or 'your work. . . . Work
that may need service, maintenance, correction, repair or replacement, but which is otherwise
complete, will be treated as completed."'Id. S V.16.
C. Procedural History
On April 23,2008, Kimball Hill filed a Chapter 1l bankruptcy petition. Pursuant to the
resulting reorganization plan, a new trust was formed called the KHI Liquidation Trust (the
"Trust"); Kimball Hill's assets-including contingent claims-were transferred to the Trust. On
November 10,2009, the Association filed suit against Hodsco in the State Court Litigation. The
Association and the Trust engaged in litigation, which concluded with the Trust assigning to the
Association its right to sue Hodsco and the other subcontractors. On September 16, 2015,the
Association filed the State Court Litigation. Shortly thereafter, Hodsco tendered its defense in
that case to Frankenmuth. On December 8, 2015, Frankenmuth filed this action pursuant to the
Declaratory Judgment Act,28 U.S.C. S 2201, and seeks to obtain
a
judicial determination
regarding its rights and obligations under the Agreement that pertain to its duty to defend, and,
if
necessary, to indemnify Hodsco in the State Court Litigation. Although the Association is
nominally
a defendant
in this matter, Frankenmuth represents that it is not seeking any relief
against the Association, and has joined them only to the extent that the Association wishes to
protect any of its interests that may arise here.
Hodsco filed its Answer and Counterclaim on February 5,2016, seeking a determination
that Frankenmuth is under a duty to defend Hodsco. On February 26,2016, Frankenmuth filed its
Answer to Hodsco's counterclaim; at the same time, it filed its motion for judgment on the
pleadings, pursuant to Rule l2(c).In its Response to Frankenmuth's motion, Hodsco also moved
for judgment on the pleadings, which the Association joined. The motions are fully briefed and
are ripe for ruling.
II.
A. Standard
DISCUSSION
of Decision
A motion brought under Rule 12(c) "is governed by the same standards as a motion to
dismiss for failure to state a claim under Rule 12(b)(6)." Lodholtz v. York Risk Servs. Grp.. Inc.,
778F.3d635,639 (7th Cir. 2015) (citing Adams v. Citlz of Indianapolis,742F.3d720,727 (7th
Cir.201\). In order to survive a motion to dismiss under Rule l2(b)(6), a plaintiff s complaint
"must actually suggest that the plaintiff has a right to relief, by providing allegations that raise a
right to relief above the speculative level." Indep. Trust Corp. v. Stewart Info. Servs. Corp., 665
F.3d 930, 935 (7thCir.2012) (internal quotation marks and citation omitted); see also Bell Atl.
Corp. v. Twombl)r, 550 U.S. 544, 570 (2007) (stating that a complaint must allege "enough facts
to state a claim to relief that is plausible on its face"). The Court accepts as true all well-pleaded
factual allegations in the pleadings, and ignores any allegations that are mere legal conclusions.
SeeAdams,742F.3dat728 (citingMcReynoldsv. Merrill Lynch&Co." Inc.,694F.3d 873,885
(7th Cir. 2012)).
B. The Merits: Whether Frankenmuth has a Duty to Defend Hodsco
Where subject matter jurisdiction is premised upon diversity of citizenship, the Court
applies the substantive law of the state in which it
sits-Illinois-when,
as here, the parties do
not argue that another state's law applies. See Thorton v. M7 Aerospace LP ,796
F
.3d
7
57
,770
n.6 (7th Cir. 2015). "The duty to defend is broader than the duty to indemnify." Alton Transp..
Inc. v. Westchester Fire Ins. Co., Nos. 15-2279, 15-2363,2016 WL 2956834, *4 (7th Cir. May
20,2016) (citing Country Mut. Ins. Co. v. Olsak, 908 N.E.2d 1091, 1098 (Ill. App. Ct. 2009)).
But an insurer's duty to defend is not unlimited:
"'[i]f
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. ,622F.3d 806, 810 (7th Cir. 2010)
(quoting Santa's Best Craft. LLC v. St. Paul Fire & Marine Ins. Co., 6l I F.3d 339,346 (7th Cir.
2010). Moreover, the contractual terms in the Agreement and the allegations in the State Court
Litigation are construed in favor of Hodsco. See id. at 81 1.
In Illinois, the construction of
a contract is a question
of law. Rickher v. Home Depot.
Inc., 535 F.3d 661, 664 (7th Cir. 2008). And under Illinois law, if the contractual language is
unambiguous, the Court must construct the contract according to the words' plain and ordinary
meaning. AMCO Ins. Co. v. Erie Ins. Exch.,20l6IL App
(lst)
Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 7204,1212
142660 fl 20 (citing Outboard
(Ill.
1992)).
In this case, Frankenmuth states three main reasons why it does not have a duty to defend
Hodsco. First, Frankenmuth argues that the damages alleged by the Association in the State
Court Litigation fall outside the scope of covered losses within the Agreement. Second,
Frankenmuth avers that the Agreement's policy exclusions affirmatively bar coverage. Third,
even
if Frankenmuth
does have a duty to defend Hodsco, the Association does not have standing
to sue Hodsco on behalf of Tower Crossing's homeowners. The Court will address each
argument in turn.
1.
Whether the events described in the State Court
Litigationfall within the scope of
Frankenmuth's duty to defend.
Frankenmuth asserts two reasons why the contractual terms in the Agreement do not
contemplate the events in the State Court Litigation. First, Frankenmuth claims that it has no
duty to defend because the complaint in the State Court Litigation does not allege an
"occurrence" of "property damage" as those terms are used in the Agreement. Second, even
if
there was an occurence of property damage that was properly alleged in the complaint, there is
still no duty to defend because the occurrence of damage occurred outside of the Policy Period.
a.
Whether the underbtinq complaint alleqes an occurrence of proper\t damaqe,
as those terms are used in the Agreement.
Frankenmuth avers that the complaint in the State Court Litigation does not allege an
"occurrence" of "property damage" as those terms are defined in the Agreement. "Property
damage" is defined as "[p]hysical injury to tangible property, including all resulting loss of use
of that property." Agreement $ V.17.a. Frankenmuth develops how the damage alleged in the
State Court Litigation falls outside the scope of "property damage" by arguing that the
contractual definition--combined with a potential policy exclusion- categorically excludes the
damage alleged in this case from the scope of the broader definition of property damage used in
the Agreement. Because this argument involves a policy exclusion, the Court
will
discuss this
argument in Section II.B.2.b, infra.
Regarding the word o'occurrence," Frankenmuth argues that there is no "occurrence"
alleged because the damage occurred as a result of Hodsco's alleged negligent roof construction,
not some extemal event. The Agreement defines an "occurrence" as "an accident, including
continuous or repeated exposure to substantially the same general harmful conditions."
Agreement $ V.13. The parties appear to dispute the meaning of the word "accident," although
neither claims that the term is ambiguous.
Black's Law Dictionary defines an "accident" as "[a]n unintended and unforeseen
injurious occurrence; something that does not occur in the usual course of events or that could
not be reasonably anticipated; any unwanted or harmful event occurring suddenly, as a collision,
spill, fall, or the like, irrespective of cause or blame." (1Oth ed. 2014). Similarly, "accident" is
defined in Merriam-Webster's Collegiate Dictionary as "an unforeseen and unplanned event or
circumstance," or "an unexpected happening causing loss or injury which is not due to any fault
or misconduct on the part of the person injured but for which legal relief may be sought." (l
ed. 2003).
If the Court gives the contractual language its plain and ordinary meaning,
as
lth
it must,
then the import from these definitions is that an event is an "accident" if the actor causing the
event did not intend to cause the event or could not otherwise foresee that the event would occur.
Here, the complaint in the State Court Litigation alleges that the water damage inflicted
upon the residents of Tower Crossing was caused, at least in part, by Hodsco's failure to install
various portions of the roof system in a manner that would keep water from entering the
structure. The complaint does not suggest that Hodsco intended to cause water damage.
Frankenmuth argues instead that the damage does not constitute an occurence because
the scope of the damage is confined to Hodsco's alleged faulty workmanship, and that Hodsco
should have foreseen that its faulty construction would cause the damage. In other words,
Frankenmuth argues that a loss can only be an "accident"
if it is caused by some third party-not
Hodsco, its insured.
"oForeseeability means that which is objectively reasonable to expect, not merely what
might conceivably occur."'Negron v. City of Chicago,2016IL App (1st) 143432nrc (May 25,
2016) (quoting Nat'l Bank & Tr. Co. of Chi. v. Nat'l Advertising
see also
Co.,l49[ll.2d 14,29 (1992));
Skolnik v. Allied Prop. & Cas. Ins. Co., 45 N.E.3d 1161, 1170 (Ill. App. Ct. 2015)
(quoting McKenna v. AlliedBarton Sec. Servs." LLC, 35 N.E.3d 1007, 1020 (Ill. App. Ct. 2015))
("'Legal cause is essentially
injury is of
a question of foreseeability, where one determines whether the
a type that a reasonable person
would
see as a
likely result of his or her conduct."').
Frankenmuth's position is correct only to the extent that the damage was confined to
Hodsco's construction: a party cannot-by accident-negligently construct a product. For
example, aparty should reasonably foresee that a product they built (e.g. a roof) would be
considered "damaged"
if it was not built correctly.
See Pekin Ins. Co. v. Richard Marker
Assocs.. Inc., 682 N.E.2d362,365 (Ill. App. Ct. 1997) (citing Monticello Ins. Co. v. Wil-Freds
Const.. Inc., 661 N.E.2d 451,456 (Ill. App. Ct. 1996))
("[A] defective structure is the natural
and
ordinary consequence of faulty workmanship."). Similarly, a contractor tasked with constructing
10
a
whole house would reasonably foresee that the house would be damaged if the contractor used
defective workmanship when building the house. See Donven Homes. Inc. v. Amerisure Ins. Co.,
2012IL App (1st) 102790 '!J33 (Mar. 30,2012) (holding that the insurer had no duty to defend
a
general contractor hired to build a house where the underlying complaint only alleged damage to
the contracted-for house). But a party cannot reasonably expect how their defective construction
will affect matters outside of the party's control.
Damage to "other
property"-that is, property
that was not the party's 66qr6fl1"-ls not a foreseeable consequence of the defective construction.
See. e.q., Richard Marker, 682 N.E.2d at 366 (holding insurer had a duty to defend where
insured's plumbing-installation work caused water infiltration that damaged third-party's
personal property); Ohio Cas. Ins. Co. v. Bazzi Const. Co.. Inc., 815 F.2d 1146,ll48-49 (7th
Cir. 1987) (applying Illinois law and drawing distinction between "damage solely to the product
or work of the insured" and "damage to property other than [the insured's] own work or
product.").
Thus, the law in Illinois illustrates that a party can only foresee events that are tied
directly to the party's performance. At this stage, however, the Court need not determine whether
the damages were in fact caused by an "accident," which would bring the event within the
definition of an "occurrence." The Court only needs to determine whether the alleged facts in the
underlying complaint potentially fall within the Agreement's coverage. See Microplastics. Inc.,
622F.3d at 810.
Hereo the complaint in the State Court
Litigation does not suggest that Hodsco expected
that its defective construction would cause the level of property damage that is at issue in the
State Court Litigation. The complaint in the State Court Litigation alleges only that Hodsco's
faulty masonry work caused near-catastrophic water damage inside Tower Crossing's residences.
11
This type of injury is the paradigmatic claim associated with commercial general liability. See
Richard Marker, 682 N.E.2 d at 366 ("A CGL Policy 'does not cover an accident of faulty
workmanship but rather faulty workmanship which causes an accident."') (quoting W. Cas. &
Sur. Co. v. Brochu,475 N.E.2d872,878
(Ill. 1985). Construing all contractual terms and
allegations in favor of Hodsco, the Court finds that these allegations are potentially sufficient to
fall within the Agreement's coverage. Accordingly, the Court finds that the complaint in the
State Court Litigation alleges that Hodsco's actions caused an "occurrence" within the meaning
of the Agreement.
b.
Wether the underbting complaint alleges that the occurrence happened
during the relevqnt Poliq) Period.
Next, Frankenmuth argues that, even if the complaint in the State Court Litigation alleges
an "occurrence" of "property damage," any damage occurred after December
3
1
, 2003 , when the
Policy Period ended. Aside from the first requirement-that the insured cause an occurrence of
property damage-the Agreement also requires that the "'property damage' occurs during the
policy period."
See
Agreement $ I, Coverage A.l.b(2). Under the Agreement, damage to
property is deemed to occur at the moment when the property first experienced the injury, see id.
$
V.l7.a, and "includ[es] continuous or repeated exposure to substantially the same general
harmful conditions." Id.
S
V.13.
Frankenmuth argues that this temporal-limitation clause absolves it of its duty to defend
Hodsco because the Association did not discover the water damage until 2005. Specifically,
Frankenmuth points to the underlying complaint's language that the water flows were "sudden
and calamitous" to support their contention that any damage could not have occurred prior to
2005; if the water discharge was indeed sudden and calamitous, it could not have been the
product of an injury that allegedly occurred before December 31,2003. Frankenmuth contends
t2
that the damage would have been so disastrous that it could not have continued unnoticed for two
years.
Frankenmuth's argument is sound as it relates to the sudden, unwanted water
accumulation within the homes at Tower Crossing. But the underlying complaint's allegations of
injury do not stop with leaking water. Rather, the complaint alleges in relevant part that "some or
all of the Defects caused sudden and calamitous water infiltration and/or mold growth within the
interior spaces of Homes, . . . ." See State Court Litigation, Third Am. CompLn32. The parties
dispute how the Court should construct this sentence of the underlying complaint.
Frankenmuth's position is that the sentence should be parsed to read that the mold growth was
sudden and calamitous, and started at the same time as the water accumulation within the homes.
Defendants, on the other hand, argue that the damage in the complaint should be parsed into two
stages. The
first-the mold growth-occurred shortly after Hodsco finished its work
homes. The
second-the sudden and calamitous water infiltration-occurred after several years
on the
of water accumulation that eventually transformed into a deluge.
Here, construing the terms and allegations in favor of Hodsco, the Court finds that the
complaint in the State Court Litigation alleges that the mold damage potentially occurred shortly
after Hodsco finished its work at Tower Crossing. To be sure, the complaint does not discuss
when the mold started to grow, or when Hodsco finished its work. But Hodsco only has to show
that the facts in the complaint fall "potentially within[] the policy's coverage" to trigger
Frankenmuth's duty to defend. See Microplastics" Inc. ,622F.3d at 810. They have: the
complaint alleges that the Tower Crossing homes were constructed in2002 and2003, that the
Policy Period ran until December 31,2003, and that Hodsco's work was deficiently discharged
in a manner that allowed water to fall inside the homes, plausibly from 2003 until its discovery in
13
2005. The complaint also states that the defects caused mold growth within the interior spaces
of
the homes. The Court finds that these allegations are sufficient to require Frankenmuth to defend
Hodsco in the State Court Litigation, unless a policy exclusion applies.
2. Wether
an exclusion within the Agreement ffirmatively bars coverage.
In the alternative, Frankenmuth argues that even if the complaint does state an occurrence
of property damage within the Policy Period as those terms are used in the Agreement, two
policy exclusions apply to deactivate its duty to defend Hodsco. Specifically, Frankenmuth cites
to the "Contractual Liability" and "Damage to Property" exclusions as the terms that serve to
deny coverage to Hodsco.
o.
Whether the Contractual Liabilit.v exclusion extinguishes Frankenmuth's du\t
to de.fend Hodsco.
Frankenmuth first points to the "Contractual Liability" clause. This clause contains both a
large categorical exclusion, coupled with an exception to the exclusion that nearly swallows the
rule. Specifically, the exclusion states that Frankenmuth will not cover damage to property that
Hodsco is required to pay "by reason of the assumption of liability in a contract or agreement."
See Agreement $
I, Coverage A.2.b. But that exclusion contains an exception: Frankenmuth is
required to cover property damage for which Hodsco is liable, if Hodsco would be liable "in the
absence of the contract or agreement." See id. $ I, Coverage A.2.b(1).
Frankenmuth avers that "[a]s admitted by Hodsco in its Answer, The Underlying Lawsuit
asserts that Hodsco breached an implied warranty to the Association.
Illinois law holds that
claims for implied warranty of habitability are contractual in nature." Frankenmuth's Mot. 13.
Frankenmuth goes on to argue that because Hodsco allegedly breached the implied warranty
habitability-a contractual term as a matter of law-Frankenmuth
l4
of
has no duty to defend Hodsco
because Hodsco assumed
liability (the warrant of habitability) in the contract it had with Kimball
Hill.
Putting aside for the moment the noticeable absence of contractual privity between
Hodsco and the Association, the problem with Frankenmuth's argument is that it does not
consider the exception to the Contractual Liability clause. While this clause does exclude
coverage associated with contractual damages, the Agreement also carves out a large exception
and obliges Frankenmuth to defend Hodsco
if Hodsco would
be liable for the damage, even
if
there was not a contract. In this case, the complaint in the State Court Litigation alleges that
Hodsco negligently constructed various systems in the Tower Crossing residents, which caused
the damage associated with the mold and water infiltration. Frankenmuth's position is thus
inconsistent with this exception to the policy exclusion as applied to the complaint, and the Court
finds that this coverage exclusion does not relieve Frankenmuth of its obligation to defend
Hodsco.
b.
Whether the Damage to ProperM exclusion releases Frankenmuth-from its
dutv to de-fend Hodsco.
The second policy exclusion that Frankenmuth argues applies to this case is the "Damage
to Property" exclusion. That exclusion states that Frankenmuth is not required to cover damage
to certain categories of property. As relevant here, the Damage to Property Exclusion excludes
from coverage damage to property on which Hodsco or its contractors or subcontractors were
working, if the damage arose from that work. See Agreement $ I, Coverage A.2j(5). The
Damage to Property Exclusion also excludes from coverage damage arising from the costs
"restor[ing], repair[ing]. or replac[ing]" any part of the property because Hodsco or its
contractors or subcontractors performed their work incorrectly on the property. See id. $ 1,
Coverage
A.2j(6).
15
of
As with the Contractual Liability Exclusion, the Damage to Property Exclusion contains
another broad exception to the policy exclusion: Frankenmuth is obligated to cover property
damage that occurred because Hodsco or its contractors or subcontractors performed their work
on the property incorrectly, provided that the damage falls within the "Products/completed
operations hazard." See id. $ 1, Coverage
A.2j. The Agreement defines "Products/completed
operations hazard" as including "all 'bodily injury' and 'property damage' occurring away from
premises [Hodsco] own[s] or rent[s] and arising out of [Hodsco's] work." Id. $ V.l6.a. The only
work exempted from this definition is work that Hodsco has not yet completed; even "[w]ork
that may need service, maintenance, correction, repair or replacement, but which is otherwise
complete, will be treated as completed." See id. Parsing this Exclusion, the Exception to the
Exclusion, and the Definition together, the Court interprets these terms of the Agreement to
require Frankenmuth to cover damage to completed property that became damaged at some point
after Hodsco finished its work on the property, and was damaged as a result of Hodsco or its
contractors or subcontractors failing to do their work correctly.
Frankenmuth argues that the Damage to Property Exclusion relieves it of its duty to
defend Hodsco because the property damage occurred on property upon which Hodsco was
working. But this argument does not apply the exception, which requires Frankenmuth to cover
property damage to completed work caused by Hodsco's work performance. Here, the complaint
in the State Court Litigation alleges that the defects that Hodsco caused started to cause damage
to the property some time after Hodsco finished its work. Construing the allegations in the
complaint in a light most favorable to Hodsco, the Court finds that these allegations would
constitute property damage to a completed operation, and that the property damage was caused
by Hodsco's allegedly improper work. Accordingly, the property damage at issue falls within the
t6
"products/completed operations hazard" exception to the Damage to Property Exclusion. Thus,
this Exclusion does not remove Frankenmuth's duty to defend Hodsco.
3.
Whether the Association has standing to pursue damages in connection with personal
property owned by Tower Crossing's homeowners.
Frankenmuth's final argument is that the Association does not have standing to pursue
claims for damage to personal property owned by Tower Crossing's homeowners. Specifically, it
argues that the Association:
[H]as not collected an assessment for repair to unit owners' interior finishes or
personal property. Accordingly, the Association has not paid for repairs to unit
owners' interior finishes or personal property, and cannot show that it has been
damaged by property losses suffered by individual unit owners or that such
demand has been made on the Association."
Frankenmuth's Mot. 12 (citing Third Am. Compl. 1T40, State Court Litigation). Defendants
respond by claiming that the
Illinois Condominium Property Act grants the Association
"standing and capacity to act in a representative capacity in relation to matters involving
common elements or more than one unit, on behalf of the unit owners, as their interests may
appear." See 765 Ill. Comp. Stat. 605-9.1(b).
But the Association is not required to prove standing in the State Court Action;
and in contrast to federal
See Glisson v.
law-
a
plaintiff
s lack
rather-
of standing is an affirmative defense in Illinois.
City of Marion , 720 N.E.2d 1034, 1039 (m. 1999). And the question currently
before the Court asks only whether Frankenmuth has a duty to defend Hodsco. There is no issue
regarding the extent of the damages for which Frankenmuth will ultimately bear the duty to
indemnify under the Agreement. Instead, "[t]he only appropriate action for an insurer in such a
circumstance is to defend its insured and then raise that affirmative defense on behalf of its
insured." See Westfield Ins. Co. v. W. Van Buren. LLC,2016IL App (lst) 140862-U n 41 (May
4,2016) (citing Ill. Emcasco Ins. Co. v. Waukegan Steel Sales Inc., 996 N.E.2d247,255 (Ill.
l7
App. Ct. 2013) (Pucinski, J., dissenting) (unpublished op.). The Court declines to find or
otherwise rule on an issue squarely (and exclusively) before the state court in the underlying
action.
III. CONCLUSION
In conclusion, the Court finds that, as a matter of law, Frankenmuth owes Hodsco a duty
to defend in the State Court Litigation. Specifically, the underlying complaint alleges an
occurrence of property damage-that is, mold growth and sudden and calamitous water
accumulation due to Hodsco's defective construction of various elements of Tower Crossing.
Aside from the finding of primofacie coverage under the Agreement, the relevant exclusions do
not apply. Hodsco would be liable to the Association for damage even without a contract, so the
Agreement's Contractual Liability exclusion does not apply.Also, the Damage to Property
exclusion is inapplicable because the damage occurred to a completed project; the issue
of
standing-and the resolution of all other affirmative defenses-remain before the state court. For
the foregoing reasons, Frankenmuth's motion is denied, and Defendants' cross motion is granted.
IT IS SO ORDERED.
CHARLES RONALD NORGLE,
United States District Court
DATE: June 8,2016
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