Christina Phillips | Property Insurance Coverage Law Blog | March 30, 2017
Often a homeowner’s damages are not the result of a storm event, but rather the result of defective construction. In such situations, the homeowner will often pursue an action against the general contractor or subcontractor for various claims, such as negligence or breach of implied warranty of habitability. Ultimately, the question becomes whether the contractor or subcontractor’s commercial general liability policy will provide indemnification of the loss and damages.
This issue was recently addressed by the Seventh Circuit Court of Appeals in Allied Property & Casualty Insurance Company v. Metro North Condominium Association.1The condominium association had sustained significant damages as a result of defectively installed windows, and Metro North brought a claim against the subcontractors for breach of implied warranty of habitability. Metro North reached a settlement and dismissed the pending lawsuit. As part of the settlement, the subcontractors specifically assigned the right of payment from its insurer, Allied. The settlement specified that the right to payment had to “arise out of the claims asserted against” the subcontractors in the underlying lawsuit or settlement. The settlement expressly stated that that it was not intended to compensate Metro North for the cost to repair or replace the defectively installed windows, rather it was to compensate Metro North for the resulting damage to remaining parts of the building and other owners’ personal property.
The subcontractors were insured under a standard commercial general liability policy. The measure of damages for a breach of implied warranty of habitability claim is the cost of repairing the defective conditions—here, the cost of repairing the defectively installed windows. Illinois courts, however, have concluded that commercial general liability policies like the one issued by Allied, do not cover the cost of repairing the insured’s defectively completed work.2 Such a conclusion was applicable under the Allied policy which excluded the cost of repairing defective work, under what is commonly referred to as the “your work” exclusion.
While the Seventh Circuit noted that the labeling of the claim against the insured is not dispositive of determining coverage, the only legal theory asserted at the time of settlement was breach of the implied warranty of habitability, a theory which did not allow for recovery under the policy. As such, the Seventh Circuit concluded that the policy did not provide coverage for remedying the cost of the defective windows. Accordingly, by the settlement’s own terms, the claimed right to payment did not “arise out of the claims asserted” in the underlying lawsuit.
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1 Allied Prop. & Cas. Ins. Co. v. Metro North Condo. Ass’n, No. 16-1868, 2017 U.S. App. Lexis 4107 (7th Cir. Mar. 8, 2017).
2 See Pekin v. Richard Marker Assocs., Inc., 682 N.E.2d 362, 365 (Ill. App. Ct. 1997).