ILLINOIS OFFICIAL REPORTS

Appellate Court

Milwaukee Mutual Insurance Co. v. J.P. Larsen, Inc., 2011 IL App (1st) 101316

Appellate Court

Caption

MILWAUKEE MUTUALINSURANCE COMPANY, n/k/aMilwaukee

Insurance Company, Plaintiff-Appellant, v. J.P. LARSEN, INC.,

Defendant-Appellee (Weather-Tite, Inc.; Board of Directors of the Prairie

District Homes Tower Residences Condominium Association; 18th and

Prairie II, LLC; Legacy Development Group VIII, LLC; William E.

Warman; Warren Barr III; David Cuomo; William McNabola; General

Investment Corporation; Dusan Kraljevic; Jadranka Kraljevic; Jennifer

Kraljevic; and Hansen and Hempel Company, Defendants).

 District & No. First District, First Division

Docket No. 1-10-1316

Filed August 15, 2011

Held

(Note: This syllabus

constitutes no part of

the opinion of the court

but has been prepared

by the Reporter of

Decisions for the

convenience of the

reader.)

The trial court properly found that plaintiff insurer had a duty to defend

defendant subcontractor under a comprehensive general liability policy

in a third-party action alleging that the subcontractor installed leaky

windows in a condominium building, since the underlying pleadings

alleged “property damage” resulting from an “occurrence” within the

policy's meaning

Decision Under 

Review

Appeal from the Circuit Court of Cook County, No. 09-CH-20554; the

Hon. Daniel A. Riley, Judge, presiding.
Judgment Affirmed.

Counsel on

Appeal

Novak Law Offices, of Chicago (Neal R. Novak and Reid J. Rozen, of

counsel), for appellant.

Law Offices of James A. Smith, of Chicago (James A. Smith, of counsel),

and Arnold M. Flank, Ltd., of Northbrook (Arnold M. Flank, of counsel),

for appellee.

Panel JUSTICE LAMPKIN delivered the judgment of the court, with opinion.

Presiding Justice Hall and Justice Rochford concurred in the judgment

and opinion.

OPINION

¶ 1 Plaintiff, Milwaukee Mutual Insurance Company, n/k/a Milwaukee Insurance Company

(Milwaukee Insurance), appeals the trial court’s order denying its motion for summary

judgment and granting summary judgment in favor of defendant, J.P. Larsen, Inc. (Larsen).

Plaintiff contends the trial court erred in finding the underlying pleadings sufficiently

established plaintiff had a duty to defend Larsen in a third-party action. Based on the

following, we affirm.

¶ 2 FACTS

¶ 3 At all relevant times, Milwaukee Insurance provided Larsen with commercial general

liability (CGL) insurance and umbrella insurance. In March 2003, Weather-Tite, Inc.

(Weather-Tite), hired Larsen as a subcontractor to apply sealant to windows installed by

Weather-Tite in a condominium building called Prairie District Homes (PDH).The windows

subsequently leaked and caused water damage. On July 29, 2008, the PDH Association filed

a third amended verified complaint against, inter alia, Weather-Tite for breach of express

and implied warranties. On April 23, 2009, Weather-Tite filed a third-partycomplaint against

Larsen alleging that, in the event the PDH Association was successful with its breach of

warranty claims, Larsen was liable for contribution as a joint tortfeasor and also alleging

Larsen was in breach of contract for failing to add Weather-Tite as an additional insured to

its CGL policy.

¶ 4 Weather-Tite and Larsen both tendered defenses to Milwaukee Insurance. Weather-Tite

tendered its defense to the PDH Association’s third amended verified complaint and Larsen

tendered its defense to Weather-Tite’s third-party complaint. Milwaukee Insurance denied

both defense tenders, finding there was no coverage under the CGL policy where the

complaints alleged only construction defects and not “property damage” or an “occurrence”

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within the terms of the policy.

¶ 5 On June 25, 2009, Milwaukee Insurance filed a complaint for declaratory judgment

against Weather-Tite and Larsen to determine the parties’ rights under the CGL policy.

Milwaukee Insurance filed a motion for summary judgment, and Weather-Tite and Larsen

both filed cross-motions for summary judgment. On March 30, 2010, the trial court entered

an order granting Milwaukee Insurance’s summary judgment motion as to Weather-Tite, but

denying Milwaukee Insurance’s summary judgment motion as to Larsen. The trial court

granted Larsen’s cross-motion for summary judgment against Milwaukee Insurance. This

appeal followed.

¶ 6 DECISION

¶ 7 Summary judgment is appropriate when “the pleadings, depositions, and admissions on

file, together with the affidavits, if any, show that there is no genuine issue as to any material

fact and that the moving party is entitled to a judgment as a matter of law.” 735 ILCS 5/2-

1005(c) (West 2002). When cross-motions for summary judgment have been filed, the

parties agree there are no genuine issues of material fact and only a question of law is at

issue; therefore, the parties invite the trial court to decide the issues based on the record.

Greenwich Insurance Co. v. RPS Products, Inc., 379 Ill. App. 3d 78, 84, 824 N.E.2d 1102

(2008). We review an order granting summary judgment de novo. Adames v. Sheahan, 233

Ill. 2d 276, 296, 909 N.E.2d 742 (2009).

¶ 8 The construction of an insurance policy is a question of law. CMK Development Corp.

v. West Bend Mutual Insurance Co., 395 Ill. App. 3d 830, 837, 917 N.E.2d 1155 (2009). In

construing the terms of an insurance policy, it is this court’s goal to give effect to the intent

of the contracting parties by relying on the language used in the signed contract. Id. at 837-

38. We construe an insurance policy as a whole, using the plain and ordinary meaning of the

terms to give effect to every provision. Id. at 838. Construction of the policy should include

“due regard to the risk undertaken, the subject matter that is insured and the purposes of the

entire contract.” Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90,

108, 607 N.E.2d 1204 (1992). When the policy terms are unambiguous, we must apply them

as written; however, if the terms are ambiguous, we must construe them strictly against the

insurance company as the drafters of the policy. CMK Development Corp., 395 Ill. App. 3d

at 838.

¶ 9 Milwaukee Insurance contends the trial court erred in finding it had a duty to defend

Larsen under the parties’ CGL policy where the underlying pleadings failed to allege

damages within the policy’s coverage.

¶ 10 Courts have established a general set of rules regarding a CGL insurer’s duty to defend,

such that:

“ ‘A court must compare the allegations in the underlying complaint to the policy

language ***.’ [Citations.] The allegations in the underlying complaint must be

liberally construed in favor of the insured. [Citation.] ‘ “An insurer may not

justifiably refuse to defend an action against its insured unless it is clear from the face

of the underlying complaints that the allegations fail to state facts which bring the

case within, or potentially within, the policy’s coverage.” ’ (Emphasis omitted.)

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[Citation.] Where the insurer relies on a provision that it contends excludes coverage

to reject a tender of defense, we review the applicability of the provision to ensure

it is ‘ “clear and free from doubt” that the policy’s exclusion prevents coverage.’

[Citation.]” National Fire Insurance of Hartford v. Walsh Construction Co., 392 Ill.

App. 3d 312, 315-16, 909 N.E.2d 285 (2009).

“If recovery is premised on several theories of liability, some of which are excluded from

coverage, the insurer is still obligated to defend as long as one theory might possibly fall

within the scope of the policy coverage.” Pekin InsuranceCo. v. Richard Marker Associates,

Inc., 289 Ill. App. 3d 819, 821, 682 N.E.2d 362 (1997).

¶ 11 The CGL policy issued by Milwaukee Insurance to Larsen provided:

“We will pay those sums that the insured becomes legally obligated to pay as

damages because of ‘bodily injury’ or ‘property damage’ to which this insurance

applies. We will have the right and duty to defend the insured against any ‘suit’

seeking those damages. However, we will have no duty to defend the insured against

any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this

insurance does not apply. We may at our discretion, investigate any ‘occurrence’ and

settle any claim or ‘suit’ that may result.”

The CGL policy limited coverage to “property damage” that was “caused by an

‘occurrence’ that takes place in the coverage territory” and “occurs during the policy

period.” “Property damage” was defined by the policy as: (1) “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 (2) “[l]oss of use of

tangible property that is not physically injured. All such loss of use shall be deemed to

occur at the time of the ‘occurrence’ that caused it.” “Occurrence” was defined by the

policy as “an accident, including continuous or repeated exposure to substantially the

same general harmful conditions.”

¶ 12 Turning to the substance of the pleadings, the third amended verified complaint filed by

the PDH Association contained two counts against Weather-Tite, breach of the implied

warranties of habitability and workmanship and breach of an express warranty. Incorporated

by reference into both counts, the PDH Association alleged:

“TheCondominium has and continues to experience severe waterinfiltration due

to the faulty construction for which the Developer [18th and Prairie II, L.L.C.] is

responsible under its express warranty, including but not limited to the following:

installing a window system that does not adequately manage the water which enters

the system; failing to install flashing at various locations as required by the

architectural drawings and/or improperly installing flashing at various locations;

failing to properly install metal base flashing and sealant joints in various locations

resulting in deboned, open and split sealant joints in various locations; allowing

cracked and deboned mortar joints throughout the masonry; allowing cracks within

individual brick masonry and cast stone units at several locations; allowing

efflorescence or waterinfiltration into brickwork[;] allowing loose and displaced cast

stone units at various locations; failing to provide proper end dams at various

locations; not providing end dams at other locations[;] and failing to complete

warranty punch list items.”

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Further incorporated by reference to both counts against Weather-Tite, the PDH Association

alleged the developer’s failures to correct the deficiencies “have and continue to cause

damage to the Condominium common elements, the units, and the individual unit owner’s

personal property.Apart from the propertydamage, the Association will have to make repairs

to correct the design and/or construction defects” with damages estimated between $4

million and $8 million.

¶ 13 Specifically, in the breach of implied warranties count, the PDH Association alleged that

“Weather-Tite impliedly warranted to the Unit Purchasers that the Condominium was

reasonably fit and suited for the purposes of habitation as a residence” and “individual Unit

Owners have sustained loss due to the faulty and defective work” where Weather-Tite failed

“to perform its duties with proper workmanship, quality and skill [resulting] in the

installation of a window system that does not adequately manage the water which enters the

system, resulting in significant and continuing water leakage into the common elements and

residential Units of the Condominium.” The PDH Association sought “damages in the

amount attributable to Weather[-]Tite’s breach.” With respect to the breach of express

warranty count, the PDH Association alleged the “Board and the individual Unit Owners

have sustained loss due to the faulty and defective work in the Condominium” done by

Weather-Tite and within the one-year requisite warranty period “severe exterior leaks were

occurring in various windows of the Condominium” such that damages were sought in the

“amount attributable to Weather[-]Tite’s breach.”

¶ 14 The third-party complaint filed byWeather-Tite against Larsen contained two counts. In

the first count, Weather-Tite alleged Larsen was liable for contribution as a joint tortfeasor

in the event the PDH Association was successful in its claims against Weather-Tite because

Larsen committed one or more “negligent acts and/or omissions,” including: “[n]egligently

and carelessly failed to follow the blueprints and plans provided for the contemplated

construction”; “[c]arelessly and negligently failed to instruct its employees as to the scope

of work to be performed in the matter [sic] in which it was to be performed”; “[n]egligently

and carelessly deviated from the plans and specifications for the proposed caulking and

sealing of window frames, panel frames, and louver frames”; “[w]as otherwise careless and

negligent in its performance of its work, supervision of its employees”; and “[f]ailed to

inspect the area of occurrence.” Weather-Tite further alleged that “[a]s a direct and proximate

result of one or more of the *** negligent acts or omissions, *** [Larsen] proximatelycaused

and/or contributed to the alleged injuries claimed by” the PDH Association. In the second

count, Weather-Tite alleged Larsen breached the parties’ subcontract by failing to name

Weather-Tite as an additional insured on Larsen’s general liability insurance policy, thereby

causing Weather-Tite to incur costs, expenses, attorney fees, and potential indemnity

obligations.

¶ 15 In order to determine whether Milwaukee Mutual has a duty to defend Larsen, we must

ascertain whether the underlying pleadings alleged facts demonstrating “property damage”

resulting from an “occurrence” within, or potentially within, the terms of the CGL policy.

¶ 16 I. Property Damage

¶ 17 We first consider whether the pleadings alleged “property damage” within the meaning

of the CGL policy. Milwaukee Mutual contends it had no duty to defend where the

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underlying allegations failed to request “property damages,” only requesting recovery of the

costs to repair or replace the damaged structure, which are not covered under the CGLpolicy.

¶ 18 “Property damage” was defined in the CGL policy as “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 [l]oss of use of tangible

property that is not physically injured. All such loss of use shall be deemed to occur at the

time of the ‘occurrence’ that caused it.” The supreme court has further provided that “to the

average, ordinary person, tangible property suffers a ‘physical’ injury when the property is

altered in appearance, shape, color or in other material dimension. Conversely, to the average

mind, tangible property does not experience ‘physical’ injury if that property suffers

intangible damage, such as diminution in value as a result from the failure of a component

*** to function as promised.” Travelers Insurance Co. v. Eljer Manufacturing, Inc., 197 Ill.

2d 278, 301-02, 757 N.E.2d 481 (2001).

¶ 19 In determining whether there was “property damage,” we keep in mind the policy

considerations behind CGL insurance. Specifically, the supreme court has said:

“ ‘[C]omprehensive general liability 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. [Citations.] Finding

coverage for the cost of replacing or repairing defective work would transform the

policy into something akin to a performance bond.’ ” Id. at 314 (quoting Qualls v.

Country Mutual Insurance Co., 123 Ill. App. 3d 831, 833-34, 462 N.E.2d 1288

(1984)).

Going further, the appellate court has said:

“[If] insurance proceeds could be used for damages from defective workmanship, a

contractor could be initially paid by the customer for its work and then by the

insurance company to repair or replace the work. [Citation.] Treating a CGL policy

like a performance bond would be unjust to the CGL insurer, which, in contrast to

the surety on a performance bond, cannot bring suit against the contractor for the

defective construction.” Stoneridge Development Co. v. Essex InsuranceCo., 382 Ill.

App. 3d 731, 752, 888 N.E.2d 633 (2008) (citing Monticello Insurance Co. v. WilFreds Construction, Inc., 277 Ill. App. 3d 697, 709, 661 N.E.2d 451 (1996)).

¶ 20 In its third amended verified complaint, the PDH Association alleged that, due to faulty

construction,the condominium common elements, individual units and unit owners’ personal

property were damaged. The complaint furtherstated that “apart from the property damage,

the Association will have to make repairs to correct the design and/or construction defects”

(emphasis added) in the amount of $4 million to $8 million. The allegation was pled against

the developer, but was also incorporated into the breach of warranty counts against WeatherTite. Moreover, in the breach of implied warranty count, the PDH Association alleged

Weather-Tite’s faulty workmanship caused individual unit owners to sustain losses. The

breach of warranty counts, and the allegations incorporated therein, were imputed against

Larsen vis-à-visthe third-party complaint in which Larsen was alleged to be a joint tortfeasor

based on negligence. Although the damages to the common elements, individual units and

personal property were not expressly described, we must construe the pleadings liberally to

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allow for coverage, or, at least, the potential for coverage. Walsh Construction Co., 392 Ill.

App. 3d at 315.

¶ 21 The damages alleged are not merely construction defects, which would constitute

economic losses not covered under the CGL policy. The costs described for the construction

defects were between $4 million and $8 million. The costs associated with the “property

damage” suffered by the individual unit owners was in addition to that sum, according to the

complaint. The damages alleged are not intangible or merely associated with the repair or

replacement of the faulty window caulking and sealant.

¶ 22 Milwaukee Mutual spends a lot of time in its brief arguing that the allegations against

Larsen are based in contract and, therefore, Milwaukee Mutual could have no duty to defend.

We disagree. The allegations in the third-party complaint repeatedly state that Larsen

negligently completed the job for which it was hired. Thus, although identified as a cause of

action for contribution, the allegations of the pleading control over its form and the

allegations sounded in negligence. See Pekin Insurance Co. v. Dial, 355 Ill. App. 3d 516,

520, 823 N.E.2d 986 (2004) (“[t]he factual allegations of the complaint, rather than the legal

theory under which the action is brought, determine whether there is a duty to defend”);

Lyons v. State Farm Fire & Casualty Co., 349 Ill. App. 3d 404, 407-10, 811 N.E.2d 718

(2004). Moreover, Milwaukee Mutual fails to acknowledge that allegations based in contract

have resulted in duties to defend as long as the damage is not to the actual property the

insured was working on but, rather, is to other property caused by the insured’s work

product. See Richard Marker Associates, Inc., 289 Ill. App. 3d at 820 (duty to defend found

where the underlying allegations were for breach of an architectural services agreement in

which the insured failed to adequately design the placement and insulation of water and

plumbing pipes and breach of a construction contract for a faulty HVAC system).

¶ 23 We conclude the pleadings alleged “property damage” within, or at least potentially

within, the definition of the CGL policy.

¶ 24 II. Occurrence

¶ 25 We next must consider whether the “property damage” resulted from an “occurrence”

within the meaning of the CGLpolicy. Milwaukee Mutual contends the underlying pleadings

do not allege an “occurrence” where the “defects alleged in the [t]hird-[p]arty [c]omplaint

are the natural and ordinary consequence of faulty workmanship, and the resulting damage

was not caused by an ‘accident.’ ”

¶ 26 As previously stated, “occurrence” was defined in the CGL policy as “an accident,

including continuous or repeated exposure to substantially the same general harmful

conditions.” “Accident” was not defined in the policy, but courts have agreed that an

“accident” is “ ‘an unforeseen occurrence, usually of an untoward or disastrous character or

an undesigned sudden or unexpected event of an inflictive or unfortunate character.’ ” State

Farm Fire & Casualty Co. v. Watters, 268 Ill. App. 3d 501, 506, 644 N.E.2d 492 (1994)

(quoting Aetna Casualty & Surety Co. v. Freyer, 89 Ill. App. 3d 617, 619, 411 N.E.2d 1157

(1980)). The “ ‘natural and ordinary consequences of an act do not constitute an accident.’ ”

Watters, 268 Ill. App. 3d at 506 (quoting Freyer, 89 Ill. App. 3d at 619). In general, “ ‘there

is no “occurrence”when a subcontractor’s defectiveworkmanship necessitates removing and

repairing work.’ ” Viking Construction Management, Inc. v. Liberty Mutual Insurance Co.,

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358 Ill. App. 3d 34, 42, 831 N.E.2d 1 (2005) (quoting Robert J. Franco, Insurance Coverage

for Faulty Workmanship Claims Under Commercial General Liability Policies, 30 Tort &

Insurance L.J. 785, 789 (1995)).

¶ 27 This court has repeatedly stated that damage to something other than the project itself

does constitute an “occurrence” under a CGLpolicy.CMK Development Corp., 395 Ill. App.

3d at 840 (citing Stoneridge Development Co., 382 Ill. App. 3d at 752). “[D]efective

workmanship could be covered if it damaged something other than the project itself.”

Stoneridge Development Co., 382 Ill. App. 3d at 753. Examples of qualifying other property

include damage to a homeowner’s furniture, clothing and antiques as a result of the insured’s

faulty placement and insulation of plumbing and water pipes (Richard Marker Associates,

Inc., 289 Ill. App. 3d at 823); damage to cars in a parking garage completed with faulty

workmanship by the insured, but not water damage to the lobby and basement, damaged

concrete, and cracked floors in the adjoining building built by the same insured (Wil-Fred’s,

277 Ill. App. 3d at 705); and damage to carpets, upholstery and draperies at a school where

the insured incorporated asbestos-containing materials into the building structure (United

States Fidelity & Guaranty Co. v. Wilkin Insulation Co., 144 Ill. 2d 64, 75, 578 N.E.2d 926

(1991)).

¶ 28 In its third amended verified complaint, the PDH Association alleged the installation of

a faulty window system resulted “in significant and continuing water leakage into the

common elements and residential” units. (Emphasis added.) Moreover, as previously

discussed, the “property damage” that is, at least possibly, imputed to Larsen through his

negligent workmanship included personal property and water damage throughout a building

not constructed by Larsen. See Viking, 358 Ill. App. 3d at 54 (“negligent workmanship that

resulted in damage to something other than the structure worked upon”); Richard Marker

Associates, Inc., 289 Ill. App. 3d at 822 (there must be “damage to other materials not

furnished by the insured”). Therefore, the underlying pleadings alleged that Larsen’s

negligent workmanship caused an accident in the form of significant and continuing water

leakage. This is more than an allegation that the window sealant and caulking were defective.

See Richard Marker Associates, Inc., 289 Ill. App. 3d at 823. We, therefore, conclude that

an “occurrence” was pled.

¶ 29 CONCLUSION

¶ 30 Based on our finding that the pleadings alleged facts that bring the cause within, or at

least potentially within, the CGL policy’s coverage, we conclude Milwaukee Insurance has

a duty to defend Larsen in the third-party action. We affirm the judgment of the circuit court.

¶ 31 Affirmed.

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