Lexington Insurance Company v. Chicago Flameproof & Wood Specialties Corp. et al
Filing
53
MEMORANDUM Opinion and Order Signed by the Honorable Elaine E. Bucklo on 8/10/2018. Mailed notice. (mgh, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
Lexington Insurance
Company,
Plaintiff,
v.
Chicago Flameproof & Wood
Specialties Corporation, JL
Schwieters Construction,
Inc., and JL Schwieters
Building Supply, Inc.,
Defendants.
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No. 17-cv-3513
Memorandum Opinion and Order
In
this
insurance
coverage
dispute,
Lexington
Insurance
Company (“Lexington”) seeks a declaratory judgment that it has no
duty to defend or indemnify its insured, Chicago Flameproof and
Wood Specialties Corporation (“Chicago Flameproof”), in a lawsuit
pending in the United States District Court for the District of
Minnesota. Chicago Flameproof counterclaims, seeking a declaratory
judgment that Lexington has a duty to defend it in the same federal
lawsuit, as well as two other lawsuits pending in Minnesota state
courts, which name Chicago Flameproof as a third-party defendant.
Before me are the parties’ cross-motions for summary judgment.
Because I find that the underlying complaints are not sufficient
to invoke Lexington’s duty to defend, I grant Lexington’s motion
and deny Chicago Flameproof’s.
I.
Lexington issued a commercial general liability insurance
policy (“the policy” or “the CGL policy”) to Chicago Flameproof,
an
Illinois-based
lumber
retailer,
which
was
in
effect
from
December 31, 2015 to December 31, 2016. The policy provides that
Lexington will pay sums that Chicago Flameproof “becomes legally
obligated to pay as damages because of bodily injury or property
damage” that is “caused by an occurrence that takes place in the
coverage territory” and that “occurs during the policy period.”
The
policy
defines
“property
damage”
as
“physical
injury
to
tangible property, including all resulting loss of use of that
property” and “loss of use of tangible property that is not
physically injured.” It defines “occurrence” as “an accident,
including continuous or repeated exposure to substantially the
same general harmful conditions.” Under the policy, Lexington has
“the right and duty to defend [Chicago Flameproof] against any
suit seeking [covered] damages,” but it has no duty to defend
against a suit seeking uncovered damages. The policy also includes
several
business
risk
exclusions.
For
instance,
the
policy
excludes coverage for property damage to Chicago Flameproof’s
goods or products. It also excludes coverage for property damage
to “impaired property or property that has not been physically
2
injured” that arises out of “a defect, deficiency, inadequacy, or
dangerous condition in [Chicago Flameproof’s] product.”
Lexington and Chicago Flameproof dispute whether the policy
potentially covers damages alleged against Chicago Flameproof in
three lawsuits—one in federal court and two in Minnesota state
courts—all stemming from Chicago Flameproof’s sale of lumber to
framing
contractors
JL
Schwieters
Construction,
Inc.
and
JL
Schwieters Building, Inc. (collectively, “JLS”). According to the
underlying complaints, between October 2015 and March 2016, JLS
contracted
with
two
general
contractors,
Big-D
Construction
Midwest, LLC and DLC Residential, LLC to provide labor and material
for the framing and paneling for four building projects in Hennepin
County, Minnesota. Elness Swenson Graham Architects, Inc. (“ESG”),
the architectural firm for all four projects, required that fireretardant-treated (“FRT”) lumber meeting International Building
Code (“IBC”) requirements be used for the exterior walls of each
building.
To
procure
allegedly
compliant
contracted
with
FRT
lumber
Chicago
for
the
Flameproof
projects,
to
purchase
JLS
a
particular brand of FRT lumber, D-Blaze lumber, which it knew to
be an IBC-compliant brand approved by ESG and which JLS had ordered
from Chicago Flameproof in the past. At the time, D-Blaze was
allegedly
the
only
brand
of
lumber
that
Chicago
Flameproof
advertised on its website. Instead of the D-Blaze brand that JLS
3
was expecting, however, Chicago Flameproof delivered its in-house
FlameTech brand lumber, which, despite being marked as FRT lumber,
purportedly was not IBC-compliant because it had not been tested,
certified, listed, or labeled pursuant to IBC requirements.
Unaware that Chicago Flameproof had delivered a different
type of lumber, JLS installed the FlameTech lumber, which allegedly
resembled the D-Blaze FRT lumber in all material respects, in the
four building projects. When the building owners and ESG discovered
that the lumber was non-compliant, they instructed JLS to remove
and replace it with approved FRT lumber. JLS subsequently brought
suit against Chicago Flameproof, alleging, among other things,
that
the
company
had
either
negligently
or
fraudulently
misrepresented the type of lumber that it was providing, leading
to significant costs and expenses for JLS, including loss of
manpower,
wages,
business
interruption,
attorney’s
fees,
liquidated damages, and damage to the “exterior walls, wiring, and
Tyvek insulation on the Projects” resulting from the removal
process.
In
fraudulent
addition
to
its
misrepresentation
negligent
counts,
misrepresentation
JLS
charged
and
Chicago
Flameproof with deceptive business practices, false advertising,
consumer fraud, breach of warranties, and breach of contract. In
the state lawsuits against it, JLS brought third-party complaints
against
Chicago
Flameproof
seeking
indemnification for the same conduct.
4
contribution
and
When Chicago Flameproof tendered its defense of the federal
lawsuit
to
Lexington,
its
CGL
insurer,
Lexington
filed
this
declaratory judgment action. Lexington contends that its duties to
defend and indemnify are not triggered here because the claims
against Chicago Flameproof do not involve property damage, were
not the result of an occurrence, and were otherwise excluded by
the policy’s business risk exclusions. Chicago Flameproof counters
that the duty to defend is triggered because the claims in the
underlying lawsuits allege damages that are at least potentially
covered by the policy.
II.
Summary judgment is appropriate when “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);
Northfield Ins. Co. v. City of Waukegan, 701 F.3d 1124, 1128 (7th
Cir. 2012). In this case, Lexington and Chicago Flameproof agree
that no factual disputes exist, and they each accordingly move for
summary judgment to resolve the contract interpretation question—
whether Lexington has a duty to defend under Chicago Flameproof’s
CGL policy—that separates them. See Twenhafel v. State Auto Prop.
& Cas. Co., 581 F.3d 625, 628 (7th Cir. 2009) (“Under Illinois
law, the interpretation of an insurance policy is a question of
law that is properly decided by way of summary judgment.”).
5
The parties agree that Illinois law governs this dispute.
Under Illinois law, a liability insurer's duty to defend is broad,
but it is not limitless. Westfield Ins. Co. v. Nat'l Decorating
Serv., Inc., 863 F.3d 690, 695 (7th Cir. 2017). To determine
whether an insurer must defend its insured, courts compare the
allegations of the underlying complaint or complaints and the
express provisions of the insurance policy in dispute. Westfield
Ins. Co. v. W. Van Buren, LLC, 59 N.E.3d 877, 882 (Ill. App. Ct.
1st Dist.), appeal denied, 65 N.E.3d 847 (Ill. 2016). “If the facts
alleged in the underlying complaint fall within, or potentially
within,
the
policy's
coverage,
the
insurer's
duty
to
defend
arises.” Pekin Ins. Co. v. Wilson, 930 N.E.2d 1011, 1017 (Ill.
2010). The complaint must be liberally construed and all doubts
resolved
in
favor
of
coverage
for
the
insured.
Universal
Underwriters Ins. Co. v. LKQ Smart Parts, Inc., 963 N.E.2d 930,
937 (Ill. App. Ct. 1st Dist. 2011). Illinois courts “give little
weight
to
the
legal
label
that
characterizes
the
underlying
allegations.” Lexmark Int'l, Inc. v. Transp. Ins. Co., 761 N.E.2d
1214, 1221 (Ill. App. Ct. 1st Dist. 2001). The relevant inquiry is
whether “the alleged conduct arguably falls within at least one of
the categories of wrongdoing listed in the policy.” Id. “If several
theories are alleged in the complaint, a duty to defend arises
even if only one of them falls within the policy provisions.” Nat'l
Union Fire Ins. Co. of Pittsburgh, Pa. v. Absolute Title Servs.,
6
Inc., No. 09 C 4165, 2011 WL 4905660, at *2 (N.D. Ill. Oct. 13,
2011).
Under the CGL policy at issue here, Lexington has a duty to
defend Chicago Flameproof against any suits alleging “property
damage” resulting from an “occurrence.” Lexington contends that
JL’s complaints against Chicago Flameproof allege neither property
damage nor an occurrence as they are defined under the policy. I
disagree with Lexington with respect to the property damage issue.
The policy defines property damage to include “physical injury to
tangible property.” For purposes of general liability insurance in
Illinois, a physical injury “occurs when property is altered in
appearance, shape, color, or in other material dimension, and does
not take place upon the occurrence of an economic injury, such as
diminution in value.” Travelers Ins. Co. v. Eljer Mfg., Inc., 757
N.E.2d 481, 500 (Ill. 2001). In the underlying complaints here,
JLS plainly seeks to hold Chicago Flameproof liable for physical
injury to tangible property. In its federal suit, JLS repeatedly
claims that the removal and replacement process caused or will
potentially cause damage to existing elements of the four building
projects, including damage to the exterior walls, wiring, and Tyvek
insulation. Chicago Flameproof Countercl. Exh. B. ¶¶ 44, 47, 62,
76, 107, 118, 126, 137. Lexington attempts to characterize these
alleged damages as nothing more than economic injuries stemming
from the repair and replacement of the non-compliant lumber. While
7
it is true that, under Illinois law, the costs of repairing and
replacing an insured’s defective product or work generally do not
constitute property damage, see Eljer, 757 N.E.2d at 502, this
does not necessarily foreclose coverage where, as here, there are
actual allegations of physical alterations to property other than
the insured’s product. See Int’l Envtl. Corp. v. Nat’l Union Fire
Ins. Co. of Pittsburgh, 843 F. Supp. 1218, 1226-27 (N.D. Ill. 1993)
(insurer’s duty to defend was triggered because the underlying
complaints alleged that property damage to other materials would
be necessary in repairing an alleged defect in the insured’s fan
coils); Elco Indus., Inc. v. Liberty Mutual Ins. Co., 414 N.E.2d
41, 46 (Ill. App. Ct. 1st Dist. 1980) (concluding that physical
damages necessarily caused to other engine parts from removing the
insured’s defective pins constituted property damage). Cf. Diamond
State Ins. Co. v. Chester-Jensen Co., 611 N.E.2d 1083, 1090 (Ill.
App. Ct. 1st Dist. 1993) (court could not determine that there was
coverage for property damage because the complaint did not indicate
injury to any portion of the HVAC system in question); Bituminous
Cas. Corp. v. Gust K. Newberg Const. Co., 578 N.E.2d 1003, 1006,
1008 (Ill. App. Ct. 1st Dist. 1991) (although insured argued that
it could be inferred from the underlying complaint that “other
portions
of
the
building
had
to
be
removed
and
replaced
or
repaired,” the complaint did not actually allege any physical
injuries
to
tangible
property).
8
If
the
underlying
complaints
claimed only that Chicago Flameproof was liable for the costs of
removing and replacing the non-compliant lumber—e.g., labor costs,
project delay costs, or liquidated damages—I would be inclined to
agree with Lexington that no property damage was at issue. But
that is not the case. The complaints plainly do allege that other
building materials were physically injured or altered in the
removal process, and these alleged collateral damages potentially
fall within the policy’s definition of property damage.1
Concluding that there are allegations of property damage,
however, does not end the coverage inquiry. For property damage to
be covered by the CGL policy, it must be caused by an “occurrence.”
Compl., Exh. 2 at 6. The policy defines “occurrence” as “an
accident,
including
continuous
or
repeated
exposure
to
substantially the same general harmful conditions.” Id. at 47.
Although the policy does not define “accident,” Illinois courts
have understood the term in insurance coverage cases 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.” Stoneridge Dev. Co. v. Essex
Ins. Co., 888 N.E.2d 633, 650 (Ill. App. Ct. 2d Dist. 2008); see
1
Lexington’s argument that such alleged physical damages cannot
constitute property damage after Eljer is without merit. Eljer
held only that physical damage to property resulting from a
voluntary decision to replace a plumbing system that might leak in
the future was not insured. See 757 N.E.2d at 504.
9
also W. Am. Ins. Co. v. Midwest Open MRI, Inc., 989 N.E.2d 252,
260 (Ill. App. Ct. 1st Dist. 2013). The focus is generally on
“whether the injury is expected or intended by the insured, not
whether the acts were performed intentionally.”
Lemko Corp. v.
Fed. Ins. Co., 70 F. Supp. 3d 905, 916 (N.D. Ill. 2014). However,
even “if the person performing the act did not intend or expect
the result, if the result is the rational and probable consequence
of the act, or, stated differently, the natural and ordinary
consequence of the act, it is not an accident” for liability
insurance
purposes.
citations
and
Stoneridge,
quotation
marks
888
N.E.2d
omitted).
at
Thus,
652
(internal
injuries
that
“should have been reasonably anticipated by the insured” are
expected injuries. Farmers Auto. Ins. Ass'n v. Danner, 967 N.E.2d
836, 843 (Ill. App. Ct. 4th Dist. 2012).
Chicago Flameproof contends that the underlying suits satisfy
the policy’s occurrence requirement because they assert negligent
misrepresentation and because Chicago Flameproof did not expect or
intend
the
injuries
to
other
building
materials.
Chicago
Flameproof is correct that negligent acts, including those giving
rise to negligent misrepresentation claims, can result in an
occurrence “as long as the insured did not expect or intend the
injury.” USAA Cas. Ins. Co. v. McInerney, 960 N.E.2d 655, 661 (Ill.
App. Ct. 2d Dist. 2011). But this does not mean that merely casting
a
claim
in
terms
of
negligence
10
is
enough
to
establish
an
occurrence. It is the actual alleged conduct—not the labels given
to a particular cause of action—that determines whether the duty
to defend is triggered. See Lexmark, 761 N.E.2d at 1221. Here, the
only allegations of negligence against Chicago Flameproof are that
it failed to exercise reasonable care when it represented that it
had D-Blaze lumber in stock and when it did not inform JLS that
its orders could not be fulfilled. Countercl. Exh. B ¶ 56, 58.
Otherwise, JLS’s federal complaint alleges knowing and intentional
conduct
on
the
part
of
Chicago
Flameproof:
that
it
made
a
“unilateral decision to ship Flametech lumber to JL Construction
in place of the D-Blaze FRT lumber that had been ordered,” id. ¶
58; that it “concealed that the FlameTech lumber had not been
tested or listed pursuant to IBC requirements for FRT lumber,” id.
¶ 32; and that it “falsely represented on the bills of lading that
the lumber delivered to JL[S] was FRT lumber,” id. ¶ 74. Although
one claim is couched in negligence terminology, the thrust of JLS’s
complaint
is
that
Chicago
Flameproof
engaged
in
deliberate
conduct—the shipping of the wrong lumber and the concealment of
that fact—that caused the alleged property damage. Cf. Lemko, 70
F. Supp. 3d at 916 (“The complaint is replete with allegations
that the Lemko defendants' misconduct was knowing and intentional,
and the supporting facts leave little room for an inference that
the defendants could not have expected the injuries alleged to be
the
result
of
their
actions.”);
11
Danner,
967
N.E.2d
at
844
(concluding that acts alleged in a negligence claim could not
reasonably be considered accidental in light of the surrounding
allegations). That Chicago Flameproof’s delivery of the FlameTech
lumber was allegedly intentional does not necessarily mean that it
expected or intended the collateral injuries to the exterior walls,
wiring, and insulation. See Atl. Mut. Ins. Co. v. Am. Acad. of
Orthopaedic Surgeons, 734 N.E.2d 50, 58 (Ill. App. Ct. 1st Dist.
2000) (“[T]he issue that must be determined is whether the injury
was expected or intended, not whether the acts were performed
intentionally.”). But even if it did not intend the damages to
other building materials, Chicago Flameproof could have and should
have reasonably anticipated that such injuries could result from
supplying its FlameTech lumber to JLS, if, as alleged in the
underlying complaints, the FlameTech lumber did not qualify as FRT
lumber because it had not been tested, certified, listed or labeled
pursuant to IBC requirements. Countercl. Exh. B ¶ 32. If Chicago
Flameproof
knowingly
supplied
non-IBC-compliant
lumber
and
concealed that it did so, as JLS alleges, then the property damages
that allegedly resulted from tearing out that non-compliant lumber
cannot be said to have been caused by any accident. Rather, these
damages are the natural and ordinary consequence of knowingly
supplying a non-compliant product and thus do not potentially fall
within the CGL policy’s coverage. See Stoneridge, 888 N.E.2d at
652 (“[I]f the result is the rational and probable consequence of
12
the
act,
or,
stated
differently,
the
natural
and
ordinary
consequence of the act, it is not an accident”); Gust K. Newberg,
578 N.E.2d at 1010 (damages flowing from an HVAC system not
performing as expected are “no more than the natural and ordinary
consequences of installing an inadequate HVAC system”); Viking
Constr. Mgmt. Inc. v. Liberty Mutual Ins. Co., 831 N.E.2d 1, 7
(Ill. App. Ct. 1st Dist. 2005) (damages flowing from a contractor’s
use of inadequate building materials are an ordinary and natural
consequence that does not trigger coverage). Cf. Elco, 414 N.E. at
44-45 (finding an occurrence where the insured was unaware of the
defective nature of its product until it was installed, so the
resulting damages were not expected from its standpoint).
The
duty
to
defend
is
broad,
but
it
is
not
limitless.
Westfield, 863 F.3d at 695. There must be at least a potential for
coverage under the policy at issue for the duty to be triggered.
Here, although the underlying federal complaint contains one count
for negligent misrepresentation, mere inclusion of a negligence
theory
does
not—and
cannot—by
itself
satisfy
the
occurrence
requirement. Nowhere in the complaint are there allegations of an
unforeseen or accidental event that produced property damage.
Because there is no alleged occurrence and thus no potential
coverage here, there is no need to address whether the business
risk exclusions that Lexington asserts would also bar coverage.
See W. Van Buren, 59 N.E.3d at 886; Hartford Fire Ins. Co. v. Flex
13
Membrane Int'l, Inc., No. 00 C 5765, 2001 WL 869623, at *3 (N.D.
Ill. Aug. 1, 2001).
III.
For the foregoing reasons, I grant Lexington’s motion for
summary judgment and deny Chicago Flameproof’s motion. Judgment is
entered in Lexington’s favor. Lexington has no obligation to defend
Chicago Flameproof in the underlying suits.
ENTER ORDER:
Elaine E. Bucklo
United States District Judge
Dated: August 10, 2018
14
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