No. 2--06--1166 Filed: 5-6-08

______________________________________________________________________________ IN THE APPELLA

TE COURT

OF ILLINO IS SECOND DISTRICT

______________________________________________________________________________ STONERIDGE DEVELOPMENT ) Appeal fro m the Circ uit Court COMPANY, INC., and HIGHLAND GLEN ) of Kane County. ASSOCIATES, ) ) Plaintiff s and Count

erdefenda nts- ) Appellees, ) ) v. ) No. 03--MR--26 ) ) ESSEX INSURANCE COMPANY, ) ) Defendant and Counterplaintiff and ) Counterdefendant-Appellant ) ) (Residential Warranty Corporation, Western ) Pacific Mutual Insurance Company, John ) Walski, and Marie Walski, Defendants and ) Honorable Counterdef

endants and

Counterpla

intiffs- ) Michael J. C olwell, Appellees)

. ) Judge, Presiding.

_____________________________________________________________________________________________ JUSTICE B OWMAN d

elivered the

opinion of

the court: At issue in this case is whet h er Essex I nsurance Company (Essex) is required to provide coverage to its insured, St oneridge De

velopmen t Compan y, Inc., as w ell as to an ad

ditional ins ured under the policy, Highland Glen Associates (collectively Stoneri dge). The po licy came into play after homeowners John and

Marie Wals ki brought s uit against S toneridge f or dam age to thei r townhom e, allegedly ca

used by Sto neridge'sconstructio n of the resi dence on and /or n ear improperl

y compacte d soil. The Walskis also sought relief from Reside ntial Warr anty Corpo ration and it sNo. 2--06--1166

-2-

underwrite

r, Western P acific Mutu al Insurance Company

(collectivel

y WPIC), which had p

rovided a warranty against structural defects to the home. In the instant case , Essex app eals from the t rial court's grant of summary judgment in favor of Stoneridge, WPIC, and the Walsk

is. The trial

court ruled that Essex h ad an undisc losed conf lict of interest

with Stoner

idge and wa s therefore

estopped from denying coverage. We reverse, concluding that Essex did not have a conflict of interest and that the policy does not otherwise cover Stoneridge's liabili ty. I. BACKGROUND Stoner idge is ageneral con

tractor in the

business of

developing

and constru cting new residential

dwellings. Essex insured Stoneridge under a com mercial ge

neral liability (CGL) poli cy effective between Ap

ril 5, 1995, and April 5, 1996. The policy had a general aggregate limit of $2 million, a "Produ cts/Comp leted Opera tions Aggre gate Limit " of $1 mi llion, and a per occurrence limit of $1 million . The policy

coverage rel evant here iscontained in the following portions of the policy: "COVERAGE A. BODILY INJURY AND PROPERT Y DAMAGE LIABILITY 1. Insuring Agreement

a. We will pa

y those sum s that the ins ured becom es legally ob ligated to

pay

as damages because of 'bodily injury' or 'property damage' to which thi s insurance applies. We will have the right and d uty to defe

nd any 'su it' seeking those damages.

*** b. This insurance applies to 'bodily injury' and 'property damage' only if: (1) The 'bo dily injury'

or 'proper

ty damage ' is caused

by an 'occ urrence' th at takes place in the 'coverage territory;' and (2) The 'bodily injury' or 'property damage' occurs during the policy period."No. 2--06--1166

1 "Your work " is defined

as "[w]ork

or operations performed by you or on your behalf," and "[m]aterials, parts or equipment furnished in connection with such work or operations."

2 "Products-C ompleted

OperationsHazard" is d efined as "a

ll ' bodily inj ury' and 'property damage' occurring aw ay fro m premis es you own or rent and arising out of 'your product' or 'your work,' " with the ex ceptions of "[p]rodu cts that

are still in yo

ur physical

possession " and "[w] ork that has not yet been completed or abandoned." -3- The policy defines "occurrence" as "an accident, including cont inuous orrepeated exp osure to substanti ally the sam

e general har

mful con ditions." It

defines "pr

operty dam

age" as: "a. Physical in

jury to tangible property, including all resulting loss of use of that property. A

ll such loss o f use shall b e deemed to occur at th e time of the physical injury that caused it; or

b. Loss o f use of tan gible prope rty that is no t physically

injured. All such loss of use shall be deemed to occur at the time of the 'occurrence' that caused it." The policy excludes " '[p]roperty damage' to 'your work' 1 arising out of it or any part of it and included in the 'pr oducts-c ompleted o peratio ns hazard ,' " 2 but the exclusion is inapplicable "if the damaged work or the w ork out of w hich the dam

ag e arise s was performed on your behalf by a subcontractor." The Walskis bought a new tow nhome fr o m Stoneri dge in Augu st 1995 for $146,163. In conjunct ion with the sale, the Walskis and Stoneridge enrolled in a warranty program through WPIC. The warranty insured against major structural defects for 10 years. Stoneri dge was the warrantor for the first two years, and WPIC was the warrantor for years 3 through 10. StoneridgeNo. 2--06--1166

-4-

further warranted th at the hom e complied with certain buil ding codes a nd that, if i

t did not, Stoneridge would be responsible for the entire 10 -year period for warran

ty claims stemming from noncomp liance. Under a membership agreement between Stoneridge and WPIC, if Stoneridge refused or was unable to fulfill its warranty obligations, WPIC was required to do so, and Stoneridge agreed to then indemnify WPIC for such expenses. On August 6, 2001, the Walskis b rought suit a

gainst Stoneridge, in Mc Henry Coun ty. They alleged that their house had stru ctural problems because the land underneathit and in portions of the

commonarea " co nsist[s] o f unsuitab le structural bearing soil s and earth re tention" and

that "soil movement

has caused

and is causing the load

bearing elem

ents of [th

e] townho me to mo ve, crack and fail, such that , without substant ial repa ir, [the] t ownhome will in the ve ry near future be come dangerous and uninhabitable." The Walskis alleged claims of breach of the purchase contract and breach of the implied warranty of habitability. On their m otion, the a

ction was st

ayed in Novembe

r 2001. In January 200 2, the Wal skis brough t an arbitration action a gainst WP

IC, under an arbitration clause in the warranty agr eement . They all eged that the "foot ings" of t heir town home had"failed due

to unstable subsurface soils causing significant damage to the home." The Walskis sought to recover the home's purchase price. In October 200 2, WPIC b

rought a thir

d-party acti on against S toneridge w ithin the a rbitration action. WPIC alleged that the Walskis notified St oneridge of structural problems in 1996 and notified WPIC of the soil problem in 2000. WPIC further allege d that soil test ing revealed

that Stoneridge had failed t

o properly

compact the soil "on common property adjacent at or adjacent to" the Walskis'

townhom

e. WPIC c laimed tha

t Sto nerid ge breached the warranty program and member ship agreemen

ts by f ailing to pro

perly com

pact the soil ; comply w ith building codes;No. 2--06--1166

3 The Highland Glen Townh ome Associatio n (Associat ion) was named as a defendant in the Walskis' McHenry Co

unty action, and

the Associa

tion filed a counterco mplaint ag ainst Stone ridge. The Association is not a party to this appeal. -5- properly repair the damage; and obtain a W PIC comp liance inspe ction. WP IC also asse

rted claims of equitable contribution, subrogation, and partne r ship indemnification. WPIC sought indemnification for any amounts it paid out and expenses it incurred und er the warran

ty agreeme

nt. In January 2003, the Walskis brought a complaint against Stoneridge within the arbitration action. As intheir McHen ry County a

ction, the Walskis alleg ed that Stoneridge had b reached the purchase contract and the implied warranty of habitability. Stoneridge was initia

lly def ended in the

McHenry County and arb itration acti ons by its private attorney, T

homas Sch

erschel of O'Hag an, Smith

& Amunds en. Essex th

en agreed to

defend Stoneridge under a

reservation of rights, and in February 2003, it retained Jack Riley of Johnson & Bell to defend Stoneridge. Riley substituted his appearance for Scherschel 's. On April 10, 2003, E ssex sent to Stoner idge a le tter dis cussing E ssex's coverage position and

r eiterating its reservati on of right s. In discus sing the W alskis' arb itration com plaint, Ess ex stated that the Walskis w ere alleging that Stoneri dge "breached [its] co ntract to con vey a 'Unit'as that term is 'understood' by the parties and allegedly breached the implied warranty of habi tability." A fter reciting some of the policy provisions, Essex stated: "None of the com

plaints cited

above alleg es any 'bo dily injury' within th e defi nition cited above. To the exten

t, however, the Walsk

i Complai nt, both in law and arbitration, and the Highland GlenCounter-Complaint 3 potentially allege[] 'property damage,' Essex agree s to participate

in the defense of Stone Ridge [ sic ] under a f ull and com

plete reserv ation of rig

hts.No. 2--06--1166

-6-

Moreover, we are unable at this point to

determine

factually whether the

potential 'property damage' arises out of an 'occurrence' as the term is def ined by the p olicy. In

the event tha

t

our in vestigation or discovery reveals that the alle ged damages did not arise out of a n 'occurrence' Essex rese

rves the ri ght to withd

raw from the defens e of this matter if appropriate." In relation to

WPIC'sarbitration t

hird-party c omplaint a

gainst Stoneridge, Ess ex stated that it similarly did not allege any "bodily injury" under the pol icy. Essex then stated: "Moreover, the complaint does not allege 'property damage' as that term is defi ned. The allegations of th e comp laint clearly indicate tha

t [WPIC i s] seeking

indemnity

and other damages from Stone Ridge [ sic ] based upo n Stone Rid ge's [ sic ] alleged brea

ch of contr

act. We have determ

ined that thi s alleged conduct does no t fall within the d

efinitions of 'bodil

y injury' or 'proper

ty damage ,' as the cl aims again st Stone Rid ge [sic] are contract

ual innature. Furtherm ore, [WP IC's] cla im for indem

nity does no t allege an ' occurrence' as that term

is defined by the Policy. It is our unde rstanding th at [WPIC 's] claim arises out of

the alleged failure of Stone Ridge [sic] to meet alleged contractual obligations. Accordingly, t hi s alleged breach of c ontract is no t the conseq uenceof any type

of 'accid ent' as is re quired

by the Policy. " (Emphas is added.) Essex stated that it would still defend Stoneridge, under a reser vation of rights, on these matters but that it reserved the right to withdraw from the defens e if it determ ined that WPIC'sallegations did not fall within the policy. A few months later, on July 29, 2003, the arbitrator entered an interim award. It stated:

" Shortlyafter closing, cracks developed in t he foundat

ion of the re sidence and hav e continued to develop i n other parts of the residenc e causing va

rying amounts of dam

age. ItNo. 2--06--1166

4 The copy of the McHenry Co unty cir cuit cour t's order that ap pears in the r

ecord is uns igned and undated , but the par

ties do not d

ispute its co ntents.

-7- is undisputed that a cause of this cracking is related to the fact that the housewas constru cted on a slope and with improperly compacted soils. * * *

*** The cracking condition was made known to [Stoneridge] in the first year af ter closing in a m

anner suff

icient to trig ger the Buil der's warr anty obliga

tion." The arbitrator rule d t hat Stonerid ge was liabl e to the Wa lskis for br

each of exp

ress warranties contained in

the purchas e agreemen

t and the war

ranty agreemen

t. Based on this ruling, the arbitrator f

urther deter

mined tha t he did "not h ave to reach t he quest io n whether an

y implied warranty of habitab ility appliesor was waiv ed." The a r bitrator ord

ered Stoner

idge to repu

rchase the property fo

r $200,000 , which repr

esented the o

riginal purc hase price pl

us diminished mark

et value. WPIC wasordered to financially guarantee this obligation up to $147, 773. Stone ridge was further liable to W

PIC under th

e warranty a

greement f

or any amount paid und

er this guara

ntee. Moreover, Stoneridge was responsible for the Walskis' attorney fees and costs; Stoneridge and WPIC were jointly

and severall

y liable for

the arbitrati o n expenses; and Stoneri dge was liab le to WPIC und

er the warran

ty agreeme

nt for costsfrom the W

alskis' cla ims. The arbitrator's final award, issued on December 18, 2003, orde red Stonerid ge to pay $291,537.04 to the Walsk is for their a

ward plus at

torney feesand costs an d $176,353 .51 to WP IC for costs from the Walskis' claims. The McHenr y County ci

rcuit court

subsequently confirmed the arbitration award. 4No. 2--06--1166

-8-

Stoneridge is now insolvent and una ble to satisf

y the judgm

ent against it. The Wal skis have thus far recei ved $153,8 48 from W PIC and $3,750 fro m Stoneri dge pursuan t to a turnove

r order. Stoneridge brought the

instant action against Essex on January 22, 2003, while the arbitration

a ction was still pending. Stoneridge sought a declaration that Esse x had a duty to d efend an d indemnify it against the Walskis' claims. D uring the course of the proceedings, Stoneridge submitted an affidav

it from itsprincipal, James Madden, stating that all the work performed on and around the Walsk

is' home was done by

subcontrac tors hired

through Sto neridge, as Stoneridge did not employ any carpenters or tradesmen. After t he final arb itration awa rd was enter

ed in Decem

ber 2003, S toneridge am ended its complaint to seek indemnification for the awa rd and to add WPIC

and the Wa

lskis as def

endants. I n turn, Essex filed a counterclaim for a declaratory judgment against Stoneridge, WPIC, and th e Walskis. Thereafter , WPIC f iled counter

claims aga

inst Essex f

or indemn

ity and estop

pel. WPIC alleged that Essex was estopped from denying coverage to Stoneridge, because Essex had a conflict of interest wit

h Stoneridg e in its defe

nse of the Walskis ' cla ims. WPIC based this allegation on Essex's reservation

of rights le

tter, which WP

IC argued left Stonerid

ge facing a

covered im

plied warranty of habitab ility claim

as wel l as uncovered c ontract claim s. According to WPIC , Essex failed to inform Stoneridge of

this confli ct of intere st. The Wa lskis also f

iled counter

claims aga

inst Essex on these grounds. Correspondingly, Stoneridge amended its second amend ed compla int to include an e stoppel cou

nt based on t

his alleged c onflict of

interest. All parties then

filed cross -motions f

or summary judgm

ent. The tria

l court issu ed a letter opinion on July 6, 2006. It stated: "All parties alleg ing Estoppe l assert that in Essex's communications with Stoneridge *** in anticipation of the abov e-referenc ed arbitration [Essex] fa iled to disclose a potential conf lictNo. 2--06--1166

-9-

of interest in Essex's representation of its insureds. The parties argue that in light of this lack of disclosure Essex now should be estopped from denying indemnity to Stoneridge ***." The trial court found that, based on Stoneridge's insolvency and the final ju dgment ag ainst it, W PIC and the Wa

lskis had sta

nding to ass ert estoppel

. The trial court f

urther stated

that the "co nflict c laimed arises as a result of the tension between the differ ent types of

claims ass erted in the u

nderlying s uit and the incentives Es sex had in defending against those underlying claims." The trial court affirmatively quoted the following passage f rom WPIC's coun terclai m:

" 'Essex's [April 10, 2003,] Reservation of Rights l etter recogn ized the potential for coverage under the implie d warrant y of habit ability claim a nd re jected cover

age for the c ontract claims. The effec t of the rese rvation of r

ights was to

leave Stone

ri dge *** facing

both covered and uncove

red claims . Essex

never informed Stoneridge *** that an attorney who

was selected, retained, paid, and controlled by Essex could have a

n incentive to structure the defense so that Stoneridge *** [was] fou nd liable on the uncover

ed contract/

indemnity claims ra ther tha n on the co vered impl ied warra nty of habi tabilit y claim.' " The trial court further found that, in addition to failing to decline to defend due to the conflict of interest, Essex also induced Stoneridge to surrender its own defe n se, which, under case law, amounted to prejudice

sufficien t to support e stoppel. Th

e trial court r

uled that Es sex was esto

pped from denying coverage, and it granted the motions for summary judgment in favor of Stoneridge , WPIC, and the Walskis. In the letter opinion, the trial court also dir ected the "prevailing party [to] prepare, cir culate, and present for

signature an

y appropria

te order." O n August 7, 2006, Esse x moved f or the trial co

urtNo. 2--06--1166

5 Stoneridge , WPIC, and

Marie Wals ki filed a co mbined ap pellees' b rief in this appeal. John Walski is no longer living. -10- to reconsider its ruling as set forth in its letter opinio n, which Essex stated it was treating "as though it were the order entered" for purposes of the motion to reconsider. On August 15, 2006, the tr ial court ent

ered a judgm

ent order pursuant to i ts July 6 lett er opinion. In a separate order, the court entered and continued Essex's motion to reconsider and set a briefing schedule on the matter. On October 20, 2006, WP IC objected

to the trial co

urt's juris diction to he ar

Essex's motion to reconsider, and Stoneridge and the Wal skis joined in the objecti on. They ar gued that the trial court lacked juris diction beca

use Essex' s motion to

reconsider

was filed b efore the en

try of the tr

ial court's final judgm

ent and that

a prematur

e motion to

reconsider

could not su spend or tol l the finalit y

or enforcem

ent of the A

ugust 15, 2 006, judgm

ent. The tria

l court overruled the objection and denied Essex's motion to reconsider. Essex filed its notice of appeal on November 17, 2006. On appeal, Essex argue s that: (1) the trial court er

red in holding that it was e stopped from denying coverage, a

nd (2) there i s no coverag e under the p olicy for S tonerid ge's liability to the Walskis and WPIC be cause the da mage to the Walskis'

home was not caused

by an"occurrence,"

as defined by the policy, and because contractual liability for economic damages does not constitute "property damage" under the policy. II. ANALY SIS A. Jurisdiction We first addre ss appellees' 5 argument that we lack

jurisdiction

over this app eal. Appellees previously

moved to

dismiss the appeal for lack of jurisdiction, and this court denied the motion.No. 2--06--1166

-11-

However, we have an independe n t duty to dete rmine whe

ther we have

jurisdiction , and we may reconsider

our ruling o n a motion to dismiss an appeal at any time before the disposition of the appeal. See In re Marriage of Waddi ck , 373 Ill. App. 3d 703, 705 (2007). Accordingly, we examine appellees' jurisdiction al argumen

t further. Appellees c ontend that

Essex's m

otion to reco nsider

was prema

t ure and did not toll the time for appeal, resulting in Essex's notice of appeal being untimely . Appelleesnote that, under Supreme Court Rule 303(a)(1) (Official Repor t s Advance Sheet No. 8 (April 11, 2007), R. 303(a)(1), eff. May 1 , 2007), a p arty must file a notice of appeal either (1) within 30 days after the entry of a final j udgment, or (2) if a tim ely postjudgment

motion "d

irected agai nst the judg ment" is filed, within 30 days of the order disposing of the postjudgment motion. Appellees also note tha t, under Supreme C ourt Rule 27 2 (137 Ill. 2 d R. 272), if a trial court announces a final judgment but requires the prevailing party to draft an order, the judgment becomes final onl y when the signed j udgme ntis filed. In this case, the trial court's July 6, 2006, letter opinion explicitly directed the prevailing parties to dr

aft an order

. Appellees t

herefore re ason that the

trial court's ruling granting

summar y judgment i n their fa vor became final and ap pealable on

ly upon the e

ntry of the A

ugust 15, 2006, judgment order. Appellees further argue that Essex's notice of appealwas then

due to be filed within 30 d ays after th e date of the j udgment, in mid-Se ptember, absent a tim

ely filed postjudgment

motion. Appellees a

rgue, with s upport, tha

t, while a tim

ely filed motion to reconsider tolls the time for filing an appeal (see Of ficial Repo

rts A dvance Sheet No. 8 (April 11, 2007), R. 303(a)(1), eff. May 1, 2007), a motion to reconside r that is file d before the final judgment is entered is not timely and does not ext end the tim

e for filin g a notice

of appeal. See Archer Daniels Midland Co. v. Barth , 103 Ill. 2d 536, 538-39 (19 84) (motio n to reconsider, which was f iled after th

e trial court's grant of summary judgment but before the e

ntry of the f

ormal orde

r, was prem

ature and didNo. 2--06--1166

-12-

no ttoll the tim

e for filin g an appeal) ; Canfield v . Delheim er , 210 Ill. App. 3d 10 55, 1059 (1991 ) (same). Appellees conclude that, because Essex did not file a motion to reconside r after the entry of the August 15, 2006, order, its November 17, 2006, notice of appeal was untimely. Essex counters withthe following four arguments: (1) the August 15, 2006, order was not

a finalorder, beca

use Essex' s August

7 motion t

o reconside

r remained

pending at t

he time the

order

was entered; (2) if the Augu st 15 order wasfinal, the t

ime to app eal was tolle d because the trial court enter ed and contin

ued Essex's motion to reconsider after it entered the August 15 order; (3) appellees' active participation, without objection, i n posttrial p roceedings on the mer

its revested jurisdiction in the trial co urt; and (4) a

ppellees are estopped fromchallenging the timelin

ess of its motion to reconside

r, because th

ey did not object to the procedure set by the trial court for briefing and hearing the motion. We agree with Essex's second argument. While Essex filed its motion to reconsider on August 7, 2006, af

ter the trial court's letter opinion but before the filing of the final judgment, the final j udgment c orresponde d to the lette r opinion, a

nd Essex' s motion th

erefore als o attacked o

r "was directed against" the

substance o f the judgm

ent. Imm ediately af

ter the trial c ourt entered

the August 15, 2006, fina

l judgmen

t, it " entered and

continued" Essex's m

otion to reco nsider. W

hen a trial

cour tenters and co ntinues a m otion, the re sult is that th e motion isleft pendin g. See Ya zzin v

. Meadox Surgimed , Inc. , 224 Ill. App. 3d 288, 291 (1 991). Therefor e, the effe ct of the t rial cou rt's action was a cons tructiv e refili ng of Essex 's motion to reconsider on August 15, 2006, within the 30- day period for filing an appeal, tolling the time to file a not ice of appeal un til the mot ion to reconsider

was resol ved. This situati on is rea dily dis tinguis hable fro m Archer Daniels Midland Co. and Canfield

because, in

those cases, the trial cou rts did not en

ter a nd continue

th e prematur

e motions to

reconsider. Accordingl

y, we concl

ude that we h ave jurisdic tion over thi s appeal.No. 2--06--1166

-13- B. Estoppe

l Turning to the merits, Essex first argues tha t t he trial cour t erred by gra

nting appel lees

summar y judgment

based on est

oppel. Sum

mary judgment

is appropriate

only where t

he pleading s, affidavit s, depositions, admissions, and exhibits on file, when viewed in the light most fav orable to the nonmoving party, show that there is no genuine i ssue of material fact and that the m

oving party is entitled to judgment as a matter of law. Zekman v . Direct Am erican Marke

ters, Inc. , 182 Ill. 2d 359, 374 (1998). We review de novo a grant of summary judgment. Ric h v. Princip al Life Insura nce Co. , 226 Ill. 2d

359, 370 (2 007). Also , the constru ction of an insurance p olicy is a question of law, to which de novo review applies. Rich , 226 Ill. 2d at 371. We begin by dis cussing the relevant cas e law on an in surer's du ty to defen d. An in surer' s duty to defend its insured

is much br

oader than it s duty to indemnify the insured. Outboard Marine Corp. v. Liberty Mutual Insurance Co. , 154 Ill. 2d 90, 125 ( 1992). A du ty to indemnif

y arises only if th e insured h as a judgment against it on any underlying claim and the insured's activity and the resulting loss or damage actually come with

in the policy 's coverag e. Outboard Marine Corp. , 154 Ill. 2d at 127-28. In contrast, the precursor duty t o defend ar ises if, liberally construing in the insured's favor t

he allegationsin the under lying com

plaint again st the insure d, there are f actual allegations that even potentially fall within

the coverag e. General Ag ents Insuran ce Co. of Am

erica, Inc. v. Midwest

Sporting Goods Co. , 215 Ill. 2d 146, 154-5 5 (2005). Moreover, if the underlying complaint against the insured contains several theories of recovery and only one o f the theori es is potentially

covered, th

e insurer must still defend the insured. Midwest Sporting Goods Co. , 215 Ill. 2d at 155. In this manner, the insurer ma y become o

bligated to

defend against causes of action and th eories of rec overy that the policy does not actually cover. Illinois Masonic Medical Center v. Turegum Insurance Co. , 168 Ill. Ap p. 3d 158, 1 62 (1988).No. 2--06--1166

-14-

In such circum stances, the insurer must either defend the suit under a reservation of rights

or seek a declaratory judgment that there is no coverage. Midwest Sporting Goods Co. , 215 Ill. 2d at 155. Other

wise, the in surer "is estoppe d from lat er raising po licy defens es to coverag e and is liablefor the awa

rd against th

e insured an d the cost s of the suit, bec ause the dut y to defend

is broader than the dut

y to pay." Murphy v. Urso , 88 Ill. 2d 444, 451 (1981). If the insur er adequatel

y informs the insured t

hat it is proc eeding unde r a reservatio n of ri ghts , and the ins ured accepts defense counsel pro vided by the

insurer, the

insurer has n ot breached

its duty to the in sured and is notes t opped from asserting policy defenses. Royal Insur ance Co. v. Process Des ign Associa tes, Inc. , 221 Ill. App. 3d 966, 974 (1991). An insu re r's duty to defend typically includes the right to control the defense so t hat the insurer may protect its financial interest in the litigation's outcome and m inimize un warranted liability claims. Illinois Maso nic Medical C enter , 1 68 Ill. App. 3d at 163. This presents no problems when the interests of the insurer a

nd the insur

ed are com

pletely aligned. American Family MutualInsurance C o. v. W.H . McNaught on Builders , Inc. , 363 Ill. Ap p. 3d 505, 5 10 (2006). However, where their interests are n ot comple tely aligned , this arrang ement could lead to a conflict of interest because, although the attorney ret ained by the

insurer to re

present the insured has ethical obligations to both parties, in reality the attorney may have closer ti es to the insurer and thus a more compelling interest

in protecting the insurer. W.H. McN aughton Bu ilders, Inc. , 363 Ill. App. 3d at 510. Where there is such a conflict of interest, the insurer must decline to defend the insured and, instead of particip ating in

the defense, the insurer must pay for independent counsel for the insured. Murphy , 88 Ill. 2d at 451-52. If, however, the insurer goes ahead and defends itsinsured without disclosing the conflict of

interest in its reservation of rights, the insur er will be estopped from raising coverage defenses. Doe v. Illinois State Medical Inter-Insurance Excha nge , 234 Ill. App. 3d 129,No. 2--06--1166

-15-

134 (1992); Cowan v. In surance Co. of North A merica , 22 Ill. App. 3d

883, 896 (1 974) ("bare n otice of a reservatio n of rights is ins ufficient unless it makes specif

ic referenc e to the polic y defense which may be ass erted

and to the po tential conf

lict of inter

est"). This i s the type of estoppel at issue in this case. W

hile estoppe

l usually req

uires a showi

ng of preju dice by the insured, and while the existence of such prejudice is typically a question of fact, if, "by the insurer's assumption of the defense the insured has been induced to surrender his right to cont rol his ow n defense, he has suffered a prejudice which will suppor t a finding th at the insure r is estopped

to deny poli cy coverage." Maryland Ca sualty Co. v . Peppers , 64 Ill. 2d 1 87, 196 (19 76). This court recent

ly explained

the test for

determining whether t

here is a conf

lict of inter

est: "[W]e must compare the allegations of the underlying complain t against the

insured to the term s of the policy at issue. *** If, af ter compar

ing the com

plaint to the

insurance policy, it appears that factual issues will be resolved in the underlying suit that would allow insurer-reta

ined counsel to 'lay the groundwork' for a later d enial of cov erage, then

there is

a conflict between the interests of the insurer and tho se of the insured. [Citation.] Put another way, if, in the underlying suit, insurer-retained counsel would have the opportu nity to shift fact s in a way tha t takes the ca se outside th e sco pe of policy c overage, then the insured is not required to defend the u nderlying s uit with insu rer-retained

counsel. [Citations.] Rather, the insured is en titled to def

end the suit with counsel of its choosing

at the insurer' s expense." W.H. McN aughton Bu ilders, Inc. , 363 Ill. App. 3d at 511. The appellate court has also a rticulated th

e test as whe

ther, when c omparing

the co mplai nt's allegations to the policy 's terms, the insurer's interest "would be furthered by providing a less than vigorous defense to

those allegations ." RoyalInsurance Co. , 221 Ill. Ap p. 3d at 975 -76. A conf

lictNo. 2--06--1166

-16-

of interest doe s not exist simply beca use an insur

er has an interest in negating coverage. Shelter Mutual Insur

ance Co. v. Bailey , 160 Ill. Ap p. 3d 146, 1 54 (1987). Examplesof cases wh

ere courts f

ound conf

licts of inte

rest between

insurers and

their insureds are Peppers , Murphy , and W.H. McNaughton Builders, I nc. In Peppers , the insured shot

someone whom he thought was trying to break into his store. Peppers , 64 Ill. 2d at191-92. The victim brought suit against the insured, alleging assault, ne gligence, and willful and wanton con duct. Peppers , 64 Ill. 2d at 1 93. The sup reme court

stated that a confl

ict of intere st

existed because, if the insured were found

liable, the i nsured had a

n interest in a finding of negligence, for which he would be covered und

er the policy , whereas th

e insurer had a

n interest in

a finding th at the insure d acted intentionally, because the policy exclu ded coverag e for intent ionally inf

licted injuries. Peppers , 64 Ill. 2d at 197-98. In Murphy , a woman w as injured w hile riding a s a passenge

rin a prescho ol van. The

woman sued the van's d

river and the van 's owners , the latter o n the basis th at the driver was acting a s an agent of the owners. Murphy , 88 Ill. 2d a t448. The su

preme cou

rt stated that

the owners'

insurance company had a duty to

defend the

driver in addi

tion to the owners becaus e the policy c overed permissive users. Murphy , 88 Ill. 2d a t452-53. Ho wever, the s upreme court also dete rmined that there was a conflict o f interest b etween the d river and the

insurance co mpany. It

reasoned th at, wh ile they would

both benef

it from th e unlikely ev ent that the d river were f

ound not lia

ble , th e insurance company' s interest oth

erwise lay in

a finding th at

the driver did not have permissio n to use the van, in which case the policy would not provide cov erage. In co ntrast, the d river's int erest otherwise lay in a finding

that he did

have perm

ission, in w

hich case the

insurance co mpany would pay any judgment against him. Murphy , 88 Ill. 2d at 453-54.No. 2--06--1166

-17-

In W.H. McN aughton Bu

ilders, Inc. , this court h

eld that a con

flict of in terest existe d between

an insurer and the insured builder becau se, although they had a m utual interest in a finding that the builder was not liab le for mol d damage, the insurer w as equally p rotected if the damage were found to have occu rred befo re the pol icy's inception. W.H. McN aughton Bu ilders, Inc. , 363 Ill. App. 3d at 512; see also Illinois Masonic Med ical Center , 168 Ill. Ap

p. 3d at 168 -69 (confli ct where ins urer could have i nterest in f

ixing liability outside t

he policy pe

riod). Essex argues that t

here is no co nflict of i nterest in th is case beca

use the Walski s' claims alleged only one underlying theory of liability, breach of contract, and the policy d id not cover

that type of liability . Essex ar gues that th e claims al so alleged o nly one type of damag es, econom

ic da mages arising from construction defects due to faulty workmanship, and that there wa s n o potential for coverag e. Addition ally, Ess ex ma intains that this case does not present the type of situation, present in W.H. McN aughton Bu ilders, Inc. , where ther

e was an issu e as to whether the damage occurred during or outside the policy period. Essex further argues that the t rial court erred in relying on

the reservat

ion of righ

ts letter in finding estoppel, because any conflict must appear on the face of the complain t and becaus e Essex

never stated in the

letter that the breach of

implied warranty of habitab ility claim

would be co vered whi le the breach o f contract claim would not. Essex maintains that it "did not parse coverage by claims but by damages ." (Emphasis in original.) According to Essex, it recognized

withrespect to the Walsk

is' claim s that only "p

ropertydamage" c aused by an " occurrence" would be co vered. It argues that

the same is true with respect to WPIC's claims, in that it did not state that W PIC's bre ach of contract "cla

im" was no t covered

but rather

explained th at breach of

contract did

not constitu

te

an "occurrence" and that the ensuing damages were not "property da mage." Es sex also argu es thatNo. 2--06--1166

-18-

bothof the theories that the Walskis relied on, breach of contract and breach of impl ied warrant y of habitability, are grounded in contract. Appellees argue as follows. Only two types of claims we

re addressed in Essex's reservation of rights letter, cont

r act and implied warranty of habitability. Essex's letter specifically rul ed out coverage for the contract claims, thereby recognizing the potential for coverage under the implied warranty of habitability claim. The implied w arrantyof habitab ility is a crea ture of pub lic policy that is independent of contract law. Ap pellees further maintain that , while prej udice is pres umed under Peppers when the ins ured has bee n induced to

surrender it s right to cont rol its own d

efense, in this case

there was ac tual prejudi ce. Appelle es state that E ssex's reta inedcounsel filed with the arbitrator seven brief

s seeking di smissal of

the implie d warra

nty of habitability

claim, the potentially covered clai m, and asking that damages be limited to the contracts' remedy provisions, the uncovered

contract cla

ims. App ellees conte

nd that Esse

x's strategy succ eeded because the arbitrator stated that, having found against Stoneridge on the breach of contract claims, he did n ot have to address the implied warranty of habitability claim. A ccording t o appellees, Essex then used the arbitra tor's decision to support its motion for summary judgment that there was no coverage, w herein Essex stated that "[ i]t is significant that the arbitrator found that Stoneridge's obligat ions to the Walskis ar

ise from t he purchase

contract." In analyzing this issue, we first addre ss whether t he conflict

of interest must appear on the face of the com

plaint, as E ssex argues , or whether the trial c ourt could pro perly re ly on Esse x's reservation of rights letter. Essex points out that the test for det ermining w

hether there

is a conflic t of interest is to

"compare

the allegations of the unde rlying c omplaint a gainst t he insure d to the t erms of the policy at

issue." W.H. McN aughton Bu ilders, Inc. , 363 Ill. App. 3d at 511. While thismay be the standard test, the appellate court has also r elied on memos and letters from the insuranc eNo. 2--06--1166

-19-

carrier in holding t

hat the insurer h ad a conflic t with its ins ured. See RoyalInsurance Co. , 221 Ill. App. 3d at 977-78 . Such relia nce is justified b ecause the co ncern surrou nding a conf

lict of interest is that the insurer may not be fully p r otecting the insured's interest, and this may not always be revealed by compari ng the und erlying complaint 's allegations to the policy. For example, in Royal Insurance Co. , memosand letters s howed that the insuranc e company

was attem

pting to find a way for the insured t

o be found

profession ally neglige

nt, because

such neg ligenc e was not covered by its policy, even t h ough the underlying complaint did not allege professional negligence. Royal Insurance Co. , 221 Ill. App. 3d at 977-78. Thus, we ag ree with app ellees that th e trial court c ould properly consider the

reservation

of rights le

tter in dete

rmining w heth er there was a conflict of interest. We ne xt look to the nature of an implied warranty of habitability claim. The doctrine of i mplie d warranty of habitability was originally created to provi de some parity in landlord-tenant relationshi

ps, because ten ants have m uch less bargaining power in such relationships and lack the

same capacity to inspect and maintain the premises. Board o f D irectors of Bloomfield Club Recreation Ass'n v. Hoffman Group, Inc. , 186 Ill. 2d 419, 424 (1 999). It waslater extend ed to the sale of new hom

es by builde

r-vendors, "to avoid the

harshness of caveat emptorand the doctrine of merger and to aff

ord a degree

of relief to

vendees of

new homes who subsequently discover latent defects in the struct

ure." Petersen v. Hubschman Construction Co. , 76 Ill. 2d 31, 38 (1979). The rationale for this extension is that today's new h omes ar e typically mass-produced and the construction methods afford the buyer little or no opportunity to inspect the dwelling. Instead, the buyer, who is making a significa nt investm

ent, must rely on the b uilder's in tegrity and s kill. Petersen , 76 Ill. 2d at 4 0. The imp lied war ranty o f habitability protects the buyer against latentNo. 2--06--1166

-20-

defects by providin g a warranty that the hou se is reasonably fit to use asa residence. Peterson , 76 Ill. 2d at 40-42. The implied warranty of

habitability

"is implied

as a separate

covenant be

tweenthe buildervendorand the vend

ee." Petersen , 76 Ill. 2d at 41. It "arises with the execution of the contract and survives the delivery

of the deed ." Petersen , 76 Ill. 2d at 41. The im plied warran

ty of habita

bility is a "creature o f public policy" and a "judicial in novation." Naiditch v. Shaf Hom e Builders, Inc. , 160 Ill. App. 3d

245, 264 (1 987). "Wh

il e [it] has ro ots in the exe cution of th e contract f

or sale [citation] , it exists in dependentl y." Naiditch , 160 Ill. App. 3d at 264. Appellees argue that an

implied w arranty of h abitability c laim is not acontract-type claim. They focus on th

e above-quoted languag e that the im plied warran

ty of habitab ility is a "creature of public policy" and

a "judicial in

novation" independent o f the contra ct of sale. Essex argues that the implied warranty of

habitability

is co ntract

ual because , although t he covenant

itself exist s independ ently of the purchase contract, liability is still t ied to the contract because that is the instrumentfrom whi ch the coven ant is impl ied. Essex a

rgues that it s position is f urther supp orted by courts' tre atment of

claims fo r breach of t

he implied

warranty of

habitability . Essex cite s Cooper

v. United Development Co. , 122 Ill. App. 3d 85 0, 858 (198 4), for the pr opositi on that su ch claims

are governed by the statute of limitation s for impl ied contract s. We note

that this court subse quently held that a claim for breach of the implied warranty of habitability is governed by the four -year limitations period of s ection 13--2 14 of the C ode of Civil Procedure (735 ILCS 5 /13--214 (W est 1996)), for the con struction of improvem

ents to real property. Andreoli v. John Henry Homes, In

c. , 297 Ill. App. 3d

151, 154 (1 998). Secti on 13--214 w as not yet in effect whe n the plai ntiffs in Cooper first brought their actio n. Inany event, E ssex additio nally pointsout that liability fo

r breach of the implied warranty ca

n be disclaim

ed in the con

tract (see Petersen , 76 Ill. 2d a t 43) and tha

tNo. 2--06--1166

-21-

breach of the implied warranty does not give rise to a cause of action f or per sonal injuries or property da

mage (see Abram v. Litman , 150 Ill. Ap p. 3d 174, 1 79 (1986)). We agree with E ssex's argument. While the d octrine is a judicial co nstruct that exists apart from the contract

of sale ( Naiditch , 160 Ill. Ap p. 3d at 264 ), the impl

ied warranty

also "is implied

as a separate co venant betw een the" buil der and the h ome-buye r ( Petersen , 76 Ill. 2d at 41). We note that Blac k's Law Dictio nary defines "covenan t" as a "formal agreement or promise, usu. in a contract." B lack's Law Dictionary 369 (7th ed. 1999). Moreover, the implied warranty of habitability

"arises with

the executio n of the con

tract" ( Petersen , 76 Ill. 2d at 41) and "has roo ts in the execution o f the contra ct" ( Naiditch , 160 Ill. Ap

p. 3d at 264 ). Thus, it i s fair to characterize the implied warranty of habitability generally as contractual. We now focus our attentio n on Essex' s reservatio n of rights l etter. As m entioned, E ssex recognized

in the letter that

the Walskis were alleging claims of breach of contract and breach of the implied warranty of habitability. Essex quoted some of its policy provisions and then state d: "None of the com

plaints cited

above alleg es any 'bo dil y inju ry' within the definit

ion cited above. To the exten

t, however, the Walsk

i Complaint, both in l aw and arbit r a tion *** potentially

alleges 'p

roperty dam

age,' Ess ex agrees to p artici pate in the defense of Stone Ridge [ sic ] under a f

ull and complete r

eservation o f rights. Mo

reover, we a

re unable at t

his pointto determine factuall y wheth er the po tential 'pr operty dam

age' arisesout of an 'occurrence' as the term i s defined by the policy. In the event that our investigation or discovery reveals that

the alleged d amages di d not arise out of an 'occurrence' E ssex reserve s the right to withdraw from the defense of this matter if appropriate." Essex next discus sed WPIC 's arbitrat ion thir d-party compla

int against S toneridge, concluding that it did not allege any "bodily injury" unde r the policy. Essex then stated:No. 2--06--1166

-22-

" Moreov er, the complaint does not allege 'property damage' as that term is defined. The allegations of the com

plain t clea

rly indicate

that [WP IC is] seek

ing indem

nity and other damages from Stone Ridge [ sic ] based upo n Stone Rid ge's [ sic ] alleged brea

ch of contr

act. We have determ

ined that thi s alleged conduct does not fall within the definitions of 'bodil y injury' or 'property damage,' as the claims against Stone Ridge [sic ] are contractual in nature. Furtherm ore, [WPIC' s] claim f

or indemn

ity does not

allege an ' occurre nce' as t hat term is defined by the Policy. It

is our understanding that [WPIC's] claim arises out of the alleged failure o f Stone Rid

ge [sic] to

meet alleg ed contractu al obligatio ns. Accord ingly, this alleged breach of contract is not the consequence of any type of 'accident' as is required by the Policy. " (Emphas is added.) Neverthele ss, Essex agree d to defend Stoneridge , under a reservation of rights, on WPIC'sclaims. We conclude th at appelleeshave failed to show that

Essex had

a conflict o f interest. In its letter, Essex stated

that it would defend Stoneridge under a reservation of rights because the Walskis' claims potentially

alleged "pro

perty dam age." It fur

ther stated that it

reserved the

right to with

draw from the defens e if the "pro

perty damage" did not

constitute a

n "occurrence " under the policy. Therefore , Essex

was focusing on wheth

er the factu al allegation s of the W alskis' cla ims fit within its policy, rath

er than focu sing on the Walskis' tw o theories of liability. A

few paragr

aphs later, Essex stated that WPIC' s complai nt did not all ege "propert y damage, " an "occurre

nce," or an "accident," because WPIC was seeking indemnity based on breach of contract. Contrary to appellees' argu ment, Essex never stated that it would potentially cover the Walskis' implied w arranty of h abitability c laim but not their contra

ct claim. T

hough it em

phasized that WPIC'sclaims we

re not covere d, citing the ir "contract

ual" natu re, as discus sed the imp lied warranty of habitab ility is also f

airly charac terized as "contractua l in nature." Tellingly, in theirNo. 2--06--1166

-23-

alternative argument

that the insu

rance policy

itself provides coverag e, appelleesdo not distinguish the Walskis' claim of breach of the implied warranty from their claim of breach of contract. Instead, they focus on w

heth er the fac ts alleged by the Walsk

is show "pro

perty damage" from

an "occurrence," which was the same approach Essex took to the Walskis' claims in its reservation of rights letter. In sum, to accept appellees' argument that the letter showsaconflict of interest wou

ld require adopting a strained and disjointed interpretation of the reservation of rights letter, with little, if any, support in case law. This case sta nds in stark c ontrast to Peppers , Murphy , W.H. McNaughton Builders, Inc. , and Royal Insurance Co. , where examinations of the complaints, policies, and any relevant memos or letters revealed clear conflicts of interest. Accordingly, we conclude th at the trial court erred in granting summary judgment for appelle es on the bas is that Essex was estopped from asserting policy defenses. Our inquiry doe s not end her e, however , because w e may aff irm th e trial court's ruling on any basis supported by the record, regardless of the trial cour t's reasoning. Bell Leasin g Brokerage , LLC v. Roger Au

to Service, In c. , 372 I ll. App. 3d 461, 469 (2007). Summary judgment for appellees still may have been proper if we determine that Stoneridge's liability is covered by the insurance policy. It is to that subject that we next t urn. C. Coverag e Under Pol

icy The constructio n of an insu rance poli cy is a question of law that

can be appro

priately disposed of thro ugh summar

y judgme nt. Crum & Forster Managers Corp. v. Resolution Trust Corp. , 156 Ill. 2d 384, 391 (1993). In construing the policy, the court mus t ascertain th

e contractin g parties' intent as expressed in the agreement. Crum & Fo rster Managers Corp. , 156 Ill. 2d at 391. In doing so, the court must construe the policy as a whole and consider th e risk undert

aken, the su

bject matt erNo. 2--06--1166

-24-

insured, and the contract's purpose. Outboard Marine Corp. , 154 Ill. 2d at 108. Unambiguous words

mu st be given the

ir plain, ord

inary, and p opular me aning, whe reas words t

hat are su sceptible to

morethan one reasonable interpretation are ambigu ous and will be construe d in favor of th e insured and against the insurer that drafted the policy. Outboard Marine Corp. , 154 Ill. 2d at 108-09. The insured has the burden o f est ablishing tha t a claim f alls within t

he policy' s terms. Addison Insurance

Co. v. Fay , 376 Ill. App. 3d 85, 88 (2007). Once the insured satisfies this burden, the insurer has the burden of proving tha

t the loss wa s limited o

r excluded

by a contract provision. Addison Insurance Co. , 376 Ill. App. 3d at 88. The plaintiff in a declaratory judgment action also has the burden of proof. Addison In surance Co. , 376 Ill. Ap

p. 3d at 88. Thus, in thi s case, appellees bear the initial burden of proof. Essex argues that there is no policy coverage, because the damage to the Walskis' home was notcaused by an "occurrence" and because contractual liabi lity foreconomic damages does not constitute "property da

mage." We first e

xplore the d

efinition o f "occurrence." The pol icy defines "occurrence " as "an accide nt, including c ontinuous o r repeated ex

posure to substa ntially the same general harmful conditions." The policy does not define "accident," but this cou rt has defined the term as "an unforeseen occurrence, usually of an untoward or disastrous charact er or an undesigned, sudden, or un ex pected even t of an infl ictive or unf

ortunate cha

racter." Westfiel d National I nsurance Co. v. Continental Community Bank & Trust Co. , 346 Ill. App. 3d 113, 1 17 (2 003), citing Aetna Casualty & Surety Co. v. Freyer , 89 Ill. App. 3d 617, 619 (1980). Many o ther cases ha ve also applied this definition, relying primarily on Freyer . See, e.g. , Vikin g Construct ion Managem

ent, Inc. v. Liberty Mutual Insurance Co. , 358 Ill. Ap p. 3d 34, 42

(2005); Sta te Farm Fi

re & Casualty Co. v. Tillerson , 334 Ill. Ap p. 3d 404, 4 09 (2002); Monticello I nsurance Co. v. Wi l -Freds Construction, Inc. , 277 Ill. Ap p. 3d 697, 7 03 (1996); Indiana Insu rance Co. v . Hydra

Corp. , 245 Ill.No. 2--06--1166

-25-

App. 3d 926, 929(1993); Travelers Insurance Cos. v. P.C. Quote, Inc. , 211 Ill. App. 3d 719, 726 (1991); see also Black' s Law Dictio nary 15 (7th ed. 1 999) (defin ing "acciden

t" 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 anticipa ted"). Most of these cases also state, relying ultimately on Freyer , that the " ' " natural and o rdinary con sequences o f an act do n ot constitut e an acciden

t." ' [Citations.]" Tillerson , 334 Ill. App. 3d at 409; see also Continenta l Community Bank & Trust Co. , 346 Ill. App. 3d

at 117; Wil-Freds , 277 Ill. Ap p 3d at 703; Hydra Corp. , 245 Ill. App. 3d at 930; P.C. Quote, Inc. , 211 Ill. App. 3d at 726. However, this definition of "acciden t" has not bee

n universall

y accepted. In Country Mu tual Insurance C o. v. C arr , 372 Ill. Ap p. 3d 335, 3 40 (2007), t he court ack

nowledged

the abovementioned definition but then stated:

"The Supreme C ourt of Illinois has state d a court should not determi ne whether

some thing is an accident b y looking at whether the

actions lead

ing to the da

mage were intentionally done. Acco rding to the c ourt, the rea l question iswhether t

he perso n performing the a cts leading t o the result i ntended or e xpected the

result. If th

e person did notintend or ex

pect the result, then the result was th e product of

an accident. " Carr , 372 Ill. App. 3d at 341, citing United States Fidelity & Guaranty Co. v. Wilkin Insulation Co. , 144 Ill. 2d 64, 7 7-78 (1991)

. In a situation where the actor did not intend or expect the result, a strict application of this definition would seem to negate the previously-mentioned principle that an act's natural and ordin ary consequenc es do not constitute an accident. However, Carr itself distinguished Viking , Tillerson , and Wil-Freds , which mentioned this principle, on the basis that th ose cases alleged contractual or warranty breaches, u nlike the negligence alleged in Carr

. Carr , 372 Ill. App. 3d at 343. In theNo. 2--06--1166

-26-

instant case, Stone

ridge was f

ound liable

for breach o f contract r

ather than negligence , making t

his situation si milar to Viking , Tillerson , and Wil-Freds , and dist inguisha ble from Carr

. We also note tha

t, while Carr

held itself out as relying on our supreme court's definition of "accident," Freyer , on which many cases rely for the proposition that the n atural and or dinary consequenc es of an act do not constitu

te an accident, relied on another appellate court case, Farmers Elevator MutualInsurance C o. v. Burch , 38 Ill. App. 2d 249, 253 (1962), which in turn relied on a supreme court case, Yates v. Bankers Life & Casualty Co. , 415 Ill. 16, 19 (1953). Carr also cited Yates as support f

or its defin

ition of "ac cident." Se e Carr , 372 Ill. App. 3d at 341. How ever, the Yates court

cited with ap

proval a Uni

tedStates Supreme Court case, United States Mutual Accident Ass'n v. B arry , 131 U.S. 100, 121, 33 L. Ed. 60, 67, 9 S. Ct. 755, 762 (1889), stating: "Under the rule promu

lgated in the Barry case

[ sic ], if an act is performed with the intention of accompli shing a cer

tain result, and if, in th

e attempt t

o accompl

ish that result, another result, unintended and unexpected, and not the rational and pr obab le consequence of the intended act , in fact, occurs, such unintende d result is dee med to be c aused by acc idental means." (E

mphasis a dded.) Yates , 415 Ill. 2d at 19. Thus, we believe that, even if the person performing the act did not intend or expect the re sult, if the result is the "rati on al and proba ble" conseq

uence of the act ( Yates , 415 Ill. 2d at 19) or, sta

ted differently, the "natural

and ordinar

y" conseque

nce of the act ( Freyer , 89 Ill. App . 3d at 619), it is not an "accid

ent." In T illerson , a case sim

ilar to this on

e, the court h

eld that dam

age to a hom

e ca used by a contrac tor's faulty soil compaction did not qu alify as an " occurrence" or "accident." There, the insured contractor built a new room addi tion on a house and converted the existing carport into a gar age. The homeowners later sued the contractor for breach of express and implied warranties

.No. 2--06--1166

-27-

Tillerson , 334 Ill. App . 3d at 406. They allege d that th e contractor h ad built the a ddition ove

r an existing cistern

and failed to properly compact the soil before constructing the addition. Tillerson , 334 Ill. App. 3d

at 408. The

contractor' s insurance c ompany so ught a decla

ratory judgm

ent that it hadno duty t o defend t he contractor, but the trial court ruled against the insurance company. Tillerson , 334 Ill. App. 3d at 406. The appellate court reversed. It stated that the homeo wners' all egations did not fall wit

hin the meaning of an accident or an occurrence, because there were no allegation s o f an unforeseen, sudden, or unexpected event. T illerson , 33 4 Ill. App. 3d at 409. The court stated that the construction defects all eged in the hom

eowners'complain

t were not an

accident, because the

y were the natural

and ordinar

y consequen

ces of the co ntractor'salleged im proper constructio n technique s. The court therefore held that the insurance company had no duty to defend the contractor. Tillerson , 334 Ill. App. 3d at 409. Sev eral other ca ses have sim ilarly held

that damages that are the natural and ordinary consequenc es of fault

y workma nship do no t constitute

an "occurrence " or "acciden t." See Viking , 358 Ill. App. 3d at 53 (no "occurrence" where portion of masonry wa ll instal led by subcontractor collapsed, because the collapse wa s the ordinar

y and natura

l consequence of impro

per bracing); Wil-Freds , 277 Ill. App . 3d at 704 (c racks and wa

ter damag e in building and parking garage constructed

by the insur

ed contracto

r were the n atur al and ordinary consequences of the contrac tor's and its subcontractor s' i mproper c onstruction techniques and did not c onstitute an "occurrence "); Hydra Corp. , 245 Ill. App. 3d at 930 (cracks in concrete flooring and loose paint on building 's exterior were the natural and ordinary consequences of installing defective flooring and applying the wrong kin d of paint a nd did not co nstitute an " occurrence" ). In Viking , the court recogn ized that the

question of

whether fa

ulty constructio n is covered under CGL

policies is "in great dispute" across jurisdictions. Viking , 358 Ill. App. 3d at 42. TheNo. 2--06--1166

-28-

court stated that Illinois foll ows the "m ajority rule" that defect ive construc tion claim s do not fal l within the coverage of CGL policies. Viking , 358 Ill. Ap p. 3d at 42-44. Our analy si s leads us to agree with this co nclusion in situations w

here the dam

ages were the n atural an d ordinary consequences of improper construction methods. As our supreme court has stated:

" '[C]omprehensive general liability policies *** are intended to protect the insured from liability fo

r injury or da

mage tothe persons or property of others; they

are not intended to pay the costs associated with repairing or replaci ng the insured's defective work and products, which are purely economic losses. [Citations.] Finding coverage for the cost of replacing orrepairing defective wo rk would transform the policy into something akin to a performa nce bond.' " Travelers In surance Co. v. Eljer Man ufacturing , Inc. , 197 Ill. 2d 278, 314 (2001), quoting Qualls v. Country Mutual Insurance Co. , 123 Ill. App. 3d 831, 833-34 (1984). The Wil-Freds court elabor ated on this princ iple by expl aining that, if insurance proceeds could be used for damages from defective workmanship, a contractor could be initially pai d by the cust omer for its work and

then by the i nsurance co mpany to r epair or repl ace th e work. Wil-Freds , 277 Ill. App. 3d at 709. Treating a CGL policy like a performance bond would be unjust to the CGL insure

r, which, in contrast to t

he surety on

a performance bond, cannot brin g suit agains tthe contractor for the defective construction. Wil-Freds , 277 Ill. Ap p. 3d at 709 . Still, con struction defects tha t damage something other than th e project itse

lf will cons titute an "oc currence." S ee Pekin Insurance Co. v. Richard M arker Assoc iates, Inc. , 289 Ill. App. 3d 819, 823 (1 997) (where faulty wor

kmanship caused water damage to

homeowners' furn

iture, cloth

ing, and ant

iques, there

was an "occu

rrence" under the contract

or's CGL policy); Wil-Freds , 277 Ill. App. 3d at 705 (if water ha d damaged

carsNo. 2--06--1166

-29-

in the parking

garage, or a

pedestrian

had been h it by fallin g concrete, there would have been an "occurrence ")

. Keeping in mind the definitio n of "occur rence," we n ow examin

e the defini

tion of "pro

perty damage." The policy d

efines "property damage" as, in relevant part, "[p] hysical inju ry to tangibl e property, including a

ll resulting l oss of use

of that prop erty." Tang ible propert y suffers a

physical injury if the prope

rty "is altere d in appearance, shape, c olor or in other mate

rial dimen sion." Eljer Manufacturing ,197 Ill. 2d at 301 . However, regardless o f how the in sured des cribes the property da mage, "CGL polic ies are not in tended to co ver breachesof contract ." Pekin Insurance Co. v . Miller , 367 Ill. App. 3d 263, 268 (2006). Notably, in Viking , which contained the same definition of "property da

mage" as th

e instant cas e, the court c omment ed th at the definition did not include breach of contract

claims, because such claims are not the result of fortuitous events. Viking , 358 Ill

. App. 3d at 4 2. The cour t held that, w

here the und

erlying com

plaint sought only rep air an d replacementof

the damag ed product, it sought eco nomic damages t hat did not c onstitute "p

roperty damages," and therefore there was no coverage under the CGL policy. Viking , 358 Ill. App. 3d at 56. As the Tillerson court explained, "[c] overage und er contracto

r general liab ilit y poli cies is for tort liability for damage to other property, not for the insured' s contractua l liability f

or econom

ic loss." Tillerson , 334 Ill. Ap p. 3d at 410 ; see also Wil-Freds , 277 Ill. App. 3d at 709 (CGL policies

cover tort liability

for physic al damage

to others and

not the insu

re d's c ontractual liability for economic loss due to

the product or c ompleted

work not m

eeting the ba

rgained-fo

r standard); Hydra Corp. , 245 Ill. App. 3d at 929 (damages from breach of contractual obliga tions are not "propert y damage"). The Tillerson court concluded that, in addition to failing to allege an " occurrence," the homeowners who alleged improper compaction of soil did not allege "property damage." The courtNo. 2--06--1166

-30-

stated that the homeowners were pursuing a claim only fora breach of contract to r

ecover econ omic loss, that being re

pair or replacement of the def ective work

or the hom

e's dimi nished valu e. Such economic loss was not

physical injury totangible property, because there was no allegation that the contractor tortiously injured their home. Tillerson , 334 Ill. App. 3d at 410. Applying these princi

ples to the in stant case, we conclude that the damage to the Walskis' home did not cons titute an "oc currence" or "pro perty dam age." The cracks that developed in the Walskis' home were

not an unfo

reseen occu

rrence that

would qualify as an "accide nt," becaus e they

were natural and ordina ry cons equences of defective w orkmansh

ip, namel y, the faul

ty soil compaction. While defective workmans hip c ould be cove red if it dam

aged some

thing other t

han the project itself ( see Richard Marker Asso ciates, Inc. , 289 Ill. App. 3d at 823), in this case the Walskis alleged dam

age only to t

he home. T

hus, there w as no "occur

rence." Als o, there w as no "property damage." The Walsk

is sought co sts of repai

r or replacem

ent or the dim

inished value of their home, wh

ich are econo mic losses

. See Viking , 358 Ill. App. 3d at 56; Tillerson , 334 Ill. App. 3d at 410. More over, Stone ridge was f

ound liable

for breach o f contra

ct and was ordered to repurchase

the property

for the orig inal purchas e price plus its diminis hed marke tvalue. Stoneridge

was also ordered to rei mburse WPIC under the warranty agreement for amounts it paid to the Walskis, as well as for WPIC's expenses. U nder the case s discussed a bove, such

breach-of- contract damages are not cove

red by CGL

policies. S ee Miller , 367 Ill. App. 3d at 268; Viking , 358 Ill. App. 3d at 42; Tillerson , 334 Ill. App. 3d at 410. Appellees counter that three supreme court cases, Western Casualty & Surety Co. v. Brochu , 105 Ill. 2d 486 (1985), Wilkin Insulation Co. , and Eljer Manufacturing , support their position that there was an "occurrenc e" a nd "property damage" within the coverage grant. In Brochu , the homeowners sued the bui lder for bre ach of cont ract and fra

ud in the ind

ucement a

fter t heir homeNo. 2--06--1166

-31-

began sinking into the ground, resulting in cracks in the foundation, saggi ng support bea ms, out-ofsync doors and f

rames, an d interior f

ixtures separating from the walls. Brochu , 105 Ill. 2d at 492. The builder's insurance co mpany sou ght a declara tory ju dg ment that its policy did not provide coverage. Brochu , 105 Ill. 2d at 490. In re solving thisissue, the su preme c ourt first qu oted a portion of the policy

that sta ted that the insur er would p ay " 'all s ums which th e insure d shall be come legallyobligated to

pay as damages because of *** bodily injury or *** propert y damage t

o which this insurance ap

plies ***.' " Brochu , 105 Ill. 2d at 493. The supreme court stated that "the insuring provisions of

the poli cy initi ally pro vide cove rage for t he [homeowne rs'] claim." Brochu , 105 Ill. 2d at 497-98. The supreme court then proceeded to conclude that certain p olicy exclus ions exclud ed coverage. Brochu , 105 Ill. 2d at 498. We agree with E ssex that Brochu is of little guidance here because it did not analyze the terms "occurrence " and "prope rty damag e," instead f

ocusing on p olicy exclus ions that are not at issue in this case. See also Hy dra Co rp. , 245 Ill. App. 3d at 932 (distinguishing other cases on a similar basis). The Brochu court also re cognized, c onsistent w ith our gene ral analysis , that the CGL

" 'policy in question does no t cover an a ccident of f aulty workm

anship but r

ather fault

y workman ship which cause s an acciden t.' " Brochu , 105 Ill. 2d at 498, quoting Weedo v. Stone-EBrick, Inc. , 81 N.J. 23 3, 249, 405 A.2d 788, 796 (1979). In Wilkin Insulation Co. , the second case cited by appellees, our supreme court held that the continuous release of toxic asbestos fibers into the air from insulation constit uted an "accident" or "occurrence " damaging the buildings, because the damage was neither expected nor intended from the standpoint of the insured. Wilkin Insulation Co. ,144 Ill. 2d at 77-78. The suprem e court also concluded

that the asbestos caused physical injury to tangible property, or "property damage," because the fibers c ontamina

ted the build

ings and the

ir contents. Wilkin Insulation Co. , 144 Ill. 2dNo. 2--06--1166

-32-

at 75-76. However, t

he issue in th at case was a defective p

roduct that i mmedia

tely began damaging the buildings a

nd their contents in an ancillary manner, through its health risks, rather tha n defective workman ship that damaged solely the buildings, as in the case here. See Diamond

State Insurance Co. v. Chester-Jensen Co. , 243 Ill. App. 3d 471, 484 (1993) (damage in Wilkin Insulation Co. was notfrom asbe stos's fa

i lure to perf

orm its cont

ractual function as an in sulator, bu t, rather, "it s detriment al impact wa s caused by a wholly anci llary and coincidental ph en o menon, namely the diffusion of

its harmful fibers"); see also Eljer Manufacturing , 197 Ill. 2d at 306 ( Wilkin Insulation Co. "recognized

the unique n ature of asb estos produ cts"). Appellees argue tha t Essex's d efinitio n of "prope rty damage " ignore s the supr eme court's definition of the term in the last case in this series, Eljer Manufactu

ring . As mentioned, Eljer Manufacturing stated that th ere is physical injury to tang ible propert y if the prop erty "is altered in appearance , shape, colo

r or in other m

aterial dim

ension." Eljer Manufacturing , 197 Ill. 2d at 301. Appellees argue that th

is definitio n does not limit "proper ty damage" to person al proper ty. We note that it was our di scussion of

"occurrence " that led us t o conclude t

hat property

damage th at is a

n atural and o rdinary consequence of defective workmanship is not an "accident" under a CGL policy, though ther

e would still be coverag e if the cons truction def ect results in

damage to something other

than the pro

ject itself. W e also note th at Eljer Manufacturing did not have occasion to discuss the p

rinciple tha

t breach of c ontract claim s generally a re not covere d by CGL po li cies , becau s e Eljer Manufacturing involved pr oduct liabil

ity claims , which are g

rounded in t

ort. Even then, Eljer Manufacturing recognized the underlying principle th at costs associated with repairing

or replaci ng the ins ured's def ective wo rk and pro ducts ar e purely e conomi c lo sses and are not covered by CGL policies. Eljer Manufacturing , 197 Ill. 2d at 314.No. 2--06--1166

-33-

Appellees further argue that Essex's CGL p olicy could never be tr ansfor med into a performa nce bond, because it

provides coverage for faulty work performed by a subcontractor. As mentioned, while the po licy exclude s " '[p]ro perty damage' to 'y our work' arising out o f it or any pa

rt of it and included in t he 'produ cts -completed operations hazard,' " there is an exception to the exclusion "if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor." It is undisputed in this case tha t a subcontractor failed t o properly compact the soil and that Stoneridge had in fact subcontracted all of the work on the pr oject. Appellees maintain t

hat Nationa

l Underwrite

r Compan y, Fire Casu alty & Surety Bulletins, show that the insurance industry interprets Essex's subcontrac tor exception to the "damage to your work ex clusion" to provide coverage for damage resulting from the work of subcontractor s . However, such bulletins are not leg al authority binding on t

his court, n or are the bulletins ta ilored to Illinois law. Appellees also argue th at the cases c ited in our ana lysis a re distingu ishable beca

use they involve insureds who perform ed the defe ctive work a

t issue and at

tempted to

use their CGL polici es to correct their

own poor w orkmansh

ip. Howeve

r, the Wil-Freds cour t st ated that the improper construction techniques of the cont ractor and its subc ontractors did not constitute a n "occurrence." Wil-Freds , 277 Ill. App. 3d at 704. I n Viking , the cour t similar ly state d that a s ubcontra ctor's defective workman ship that require s removin g and repairing work is not an "occurrence" ( Viking , 358 Ill. App. 3d at 42), and it concluded that damag es from th

e collapse of

part of a masonry wall defectivel y installed by the subcontractor was not an "occurren ce" ( Viking , 358 Ill. Ap

p. 3d at 54). See also American Fire & Casualty Co. v . Broere n Russo Co nstruction, Inc. , 54 F. Supp. 2d 842, 849 (C.D. Ill. 1999) (damage was not an "occurrence" even if subcon tractor's defective w ork damaged the building , because t

he damage was still the foreseeable result of the negligent andNo. 2--06--1166

6 Such an interpret

ation does n ot necessari ly render the subcontrac tor exceptio n mere surplusage , as it could ar

guably still

be applicab le in certain s ituations, s uch as if the building we re -34- unworkmanlike conduct). Notably, Viking involved th e same standard policy

form as this case, CG 00 01 10 93. Viking , 358 Ill. App. 3d at 51 n.7. To be fair, the aforementioned cases did not specifically discuss the subcontractor provi sion relied on by appell ees, and we

recognize th at there is case law in other jurisdiction s that suppo

rts appellees' position. S ee Auto Owners Insurance Co. v. Ne wman , No. 2645 0, slip op. at 4 (S.C. March 10 , 2008) (sub contractor' s exception to "your wor

k" exclusion

meant that

damage to

other part s of the proje ct from su bcontractor 's faulty

workman ship was cov ered by CGL polic y)

. However, such a posit

ion does not take into

account the

principle th at an excepti on to an exclusion does not create co verage or pro vide an additional basis for coverage ( JG Industri es, Inc. v. N ational Union Fire Insurance Co. of Pittsburgh , 218 Ill. Ap p. 3d 1061, 1066 (1991 ); Qualls , 123 Ill. App. 3d at 834), but , rather, "m erely preser

ves coverage

already gran

ted in the ins u ring pro vision" ( Brochu , 105 Ill. 2d a

t 498). Thu s, some ca ses have hel d that, where the da mage doesnot fall

within the policy's c overage, there is no need to consider the applicability of any ex clusions. S ee Viking , 358 Ill. App. 3d

at 56; Bituminous Casualty Corp. v. Gust K. Newberg C onstruct ion Co. , 218 Ill. App. 3d 956, 966 (1991); see also Lyerla v. Amco Insurance Co. , No. 6--679 --GPM, slip op. at 5 (S.D. Ill. August 2, 2007) (declining to exa mine a sub contractor e xclusion af

ter determ

ining that there was no "occurrence" or "property damage"). At the same time, w e are cogn izant that the policy must be construed as a whole. Outboard Marine Corp. , 154 Ill. 2d at 108. In any event, the subcontractor exception cannot negate the la ck of an "occurren

ce" here, as the damage arose from the natural and ordinary consequence of defective w orkmansh

ip rather tha

n from an " accident." 6 Therefore , the subcon tractor exce

ption does n ot alter our c onclusion t hatNo. 2--06--1166

damaged because a su

bcontractor

hadconfused job orders and worked on the wrong portion of the project. Millers Capital Insurance Co. v. Gambone Brothers Development Co. , 941 A.2d 706, 716 (Pa. Super. 2007). -35- appellees h ave failed to meet their burden of showing that Stoneridge's liability falls within the policy's terms, bec ause they have failed

to show that

the damag e to the Wa

lskis' hom e was "prope

rty damage" c aused by an " occurrence. " III. CONCLUSION We have determ

ined that the

trial court er

red by grant

ing summ ary judgment

for appelle es based on estop pel. We ha

ve also deter

mined tha

t appellees'

assertion th at the policy provides coverage i s incorrect a

nd does not p

rovide an alt

ernative bas is for aff

irming the

trial court' s gran t of summar y judgmen

t in their favor . Rather, ba sed on our co nclusion th at the policy does not cover Stonerid ge's liability, w e reverse the tr ial court's r uling and , pursuan t to our a uthorit y under Su preme Court Rule 366 (155 Ill. 2d R. 366), we enter summary judgment in Essex's favor. Reversed; judgment entered. CALLUM and GILLERA N JOHNSO N, JJ., concur.