Court Opinion

ID: 3002802
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:34:11.681607+00
Date Added: 2024-06-11T15:03:20.225003
License: Public Domain

In the

United States Court of Appeals
              For the Seventh Circuit

No. 07-3147

N AUTILUS INSURANCE C OMPANY,
an Arizona corporation,
                                              Plaintiff-Appellant,
                               v.

1452-4 N. M ILWAUKEE A VENUE, LLC,
G REAT C ENTRAL INSURANCE C OMPANY,
a subrogee of Thomas Tunney Enterprises, Ltd.
doing business as Ann Sather Restaurant,
and B ADGER M UTUAL INSURANCE C OMPANY,
as subrogee of Anthony Mignano,
                                   Defendants-Appellees.

          A ppeal from the U nited States District Court
     for the Northern District of Illinois, Eastern Division.
          N o. 06 C 6440— M atthew F. Kennelly, Judge.

     A RGUED F EBRUARY 14, 2008—D ECIDED A PRIL 7, 2009

 Before R IPPLE, S YKES, and T INDER, Circuit Judges.
  S YKES, Circuit Judge. Nautilus Insurance Company filed
this declaratory-judgment action to determine whether
2                                              No. 07-3147

it has a duty to defend or indemnify its insured, 1452-4
North Milwaukee Avenue LLC (“1452 LLC”), against
lawsuits alleging that an excavation on 1452 LLC’s prop-
erty damaged a neighboring building. In Nautilus’s
view, none of the claimed damage is covered because
two clauses in the insurance policy—the “contractors and
subcontractors” exclusion and the “classification limita-
tion” exclusion—eliminate coverage for the property
damage alleged in the underlying complaints. The
district court disagreed, entered judgment on the
pleadings declaring a duty to defend, and dismissed
the duty to indemnify claim as unripe. Nautilus appeals.
  We reverse. The underlying complaints assert multiple
claims against 1452 LLC, its contractors, and a subcon-
tractor, but the property damage at issue in all the
claims—damage to the neighboring building—is alleged
to have arisen from excavation work performed on 1452
LLC’s property by contractors and a subcontractor. Al-
though the complaints assert claims for relief against
1452 LLC directly (for negligence, res ipsa loquitur, and
violation of a statutory duty to give adjacent property
owners advance notice of the excavation), these claims
do not allege any property damage or injury independent
of the damage caused by the contractors’ and subcon-
tractor’s negligent excavation. That is, the claims against
1452 LLC simply state alternative theories of recovery
for the property damage caused by the faulty excava-
tion work conducted by the contractors and the subcon-
tractor. Because coverage for this property damage is
excluded by the contractor-subcontractor exclusion,
No. 07-3147                                                3

Nautilus has no duty to defend and therefore no duty
to indemnify either.

                      I. Background
  In the fall of 2005, the building that housed the Ann
Sather Restaurant, located at 1448 North Milwaukee
Avenue in Chicago, was damaged so seriously that it
had to be demolished. The restaurant, the owner of the
property, and two insurance companies that had to pay
for the loss filed lawsuits in Cook County Circuit Court
alleging that the damage was caused by a negligent
excavation conducted at 1452-54 North Milwaukee Ave-
nue, the property next door to the restaurant.1 The suits
were brought against 1452 LLC, the owner of 1452-54
North Milwaukee Avenue, and the general contractor,
project manager, and subcontractor hired by 1452 LLC
to perform the excavation.
  The complaints alleged that 1452 LLC hired the con-
tractor, project manager, and subcontractor to perform
an excavation on its property and that they botched the
job. More specifically, the complaints alleged that the
contractor, project manager, and subcontractor failed to
properly reinforce the neighboring property; ran a
backhoe into the side of the restaurant causing structural
damage; and committed various other errors and omis-
sions during the course of their work. The complaints

1
  The allegations in each of the complaints are identical for
purposes of this coverage dispute.
4                                                 No. 07-3147

further alleged that the damage to the restaurant building
was so severe that the building had to be demolished.
  The complaints asserted various claims for relief against
the contractor, project manager, and subcontractor, and
also asserted claims against 1452 LLC for negligence,
negligent hiring and supervision of the contractors and
subcontractor, res ipsa loquitur, and violating section
140/1 of chapter 765 of the Illinois Compiled Statutes.
Section 140/1 requires that a property owner “intending
to make or to permit an excavation to be made on his
land shall give due and reasonable notice in writing to the
owner or owners of adjoining lands.” 765 ILL. C OMP. S TAT.
140/1(1). If notice is not given, the statute imposes liability
on the property owner for any damage to the adjacent
property “arising from such excavation.” Id. 140/1(2). The
complaints alleged that the required statutory notice
was not given.
  Nautilus Insurance Company had issued a comprehen-
sive general liability policy (“CGL”) to 1452 LLC covering
the time period in question, so 1452 LLC tendered the
defense of the lawsuits to Nautilus. Nautilus denied
coverage and brought this suit against 1452 LLC and the
plaintiffs in the underlying suits in federal district court,
invoking the court’s diversity jurisdiction and seeking a
declaratory judgment that it had no duty to defend
or indemnify its insured in the underlying lawsuits.
Nautilus claimed that the property damage alleged in
the underlying complaints was excluded from coverage
under the CGL policy’s “contractors and subcontractors”
exclusion or its “classification limitation” exclusion. Some
No. 07-3147                                               5

of the defendants moved to dismiss under Rule 12(b)(6)
of the Federal Rules of Civil Procedure; others sought judg-
ment on the pleadings under Rule 12(c). All of the
motions were premised upon the argument that neither
of the exclusions invoked by Nautilus applied, so the
district court treated all of the motions as seeking judg-
ment on the pleadings.
  The district court rejected Nautilus’s arguments about
the applicability of the two exclusions and found coverage
under the policy. The court first held that although the
property damage alleged in the underlying complaints
“was occasioned by 1452 LLC’s contractors’ operations,”
the statutory claim against 1452 LLC fell outside the
contractor-subcontractor exclusion and therefore was
covered by the policy. The court said that if 1452 LLC
were found to have violated the statute, then “it breached
a duty that it owed neighboring property owners
directly, making it liable based on its own conduct, not
that of contractors or subcontractors.” The court also
concluded that the classification-limitation exclusion did
not apply. That clause of the policy excludes coverage
for “operations that are not classified or shown on the
Declarations, its endorsements, or supplements.” The
declarations, endorsements, and supplements in the
policy listed 1452 LLC’s property as “vacant land” and a
“vacant building,” and under “description of operations”
specified that 1452 LLC “intends to demolish” the building.
Nautilus argued that it was possible that 1452 LLC was
using the building in some capacity or storing some
personal property there and thus the property might not
6                                             No. 07-3147

actually have been “vacant” as classified in the declara-
tions, endorsements, and supplements. The district court
rejected this argument, noting that nothing in the under-
lying complaints supported this speculation; to the con-
trary, the complaints described vacant property that was
demolished and excavated. Accordingly, the court
entered a declaration that Nautilus had a duty to defend
1452 LLC, dismissed the duty-to-indemnify claim as
unripe, and entered final judgment terminating the case.
Nautilus appealed.

                      II. Analysis
   The question in a duty-to-defend case is whether the
damages alleged in the underlying complaint fall within
or potentially within the insurance policy’s coverages.
Under Illinois law, which governs this suit, Nautilus may
justifiably refuse to defend only if it is clear from the
underlying complaints that the alleged property damage
does not fall within or potentially within the policy’s
coverage. Outboard Marine Corp. v. Liberty Mut. Ins. Co.,
607 N.E.2d 1204, 1212 (Ill. 1992). Here, it would be clear
that Nautilus was required to defend against the suits
if not for the two exclusions in the CGL policy that were
the focus of dispute in the district court. The first—the
contractor-subcontractor exclusion—excludes from cover-
age all property damage “arising out of operations per-
formed for you by contractors or subcontractors you
hire or your acts or omissions in connection with your
general supervision of such operations.” The second—the
classification-limitation exclusion—is designed to limit
No. 07-3147                                                7

the types of risk that are covered and excludes coverage
for damage from “operations that are not classified or
shown on the Declarations, its endorsements or supple-
ments.” Our review is de novo. Sokol & Co. v. Atl. Mut. Ins.
Co., 430 F.3d 417, 420 (7th Cir. 2005). Nautilus has the
burden of establishing that coverage is excluded. Id. at
423 (citing Conn. Specialty Ins. Co. v. Loop Paper Recycling,
Inc., 824 N.E.2d 1125, 1130 (Ill. App. Ct. 2005)).

A. Contractor-subcontractor Exclusion
  Nautilus argues that it has no duty to defend because
the property damage alleged in the underlying com-
plaints is excluded by the contractor-subcontractor exclu-
sion. In reaching the opposite conclusion, the district court
emphasized that 1452 LLC might be liable “based on its
own conduct, not that of contractors or subcontractors,”
because the underlying complaints alleged that 1452
LLC failed to give the statutorily required advance notice
of the excavation. Nautilus takes issue with this rea-
soning, noting that the contractor-subcontractor clause
excludes not only property damage “arising out of opera-
tions performed . . . by contractors or subcontractors,” but
also damage arising out of 1452 LLC’s own “acts or
omissions in connection with [its] general supervision of
such operations.” This language plainly knocks out
coverage for claims based on negligent hiring or
negligent supervision of contractors and subcontractors.
It may also exclude coverage for the statutory claim if
the failure to give the required notice is considered an
8                                                 No. 07-3147

“act[ ] or omission[ ] in connection with [1452 LLC’s]
general supervision of [the contractors’ and subcontrac-
tor’s] operations.”
  We need not decide this precise question. Under the
statute, 1452 LLC was required to give adjacent property
owners advance notice of the excavation; a failure to
comply results in liability to adjacent property owners,
their occupants, and tenants for any damage to the adja-
cent land or buildings “arising from such excavation.” 765
ILL. C OMP. S TAT. 140/1(2). While it is true that the
statutory duty of the property owner is independent of the
duties of contractors and subcontractors, there is no
separate or independent compensable injury; a failure
to comply gives rise to liability for any property damage
“arising from” the excavation. Thus, the statutory claims
in the underlying complaints seek recovery for the same
loss as all the other claims—the property damage arising
out of the faulty excavation performed by 1452 LLC’s
contractors and subcontractor—and coverage for that
property damage is excluded by the contractor-subcon-
tractor exclusion.
   In this situation, Illinois caselaw holds that there is no
coverage for either of the intertwined claims. See
Northbrook Prop. & Cas. Co. v. Transp. Joint Agreement, 741
N.E.2d 253, 254-55 (Ill. 2000); Mass. Bay Ins. Co. v. Uniquet
Presort Servs., Inc., 679 N.E.2d 476, 479 (Ill. App. Ct. 1997);
Oakley Transp., Inc. v. Zurich Ins. Co., 648 N.E.2d 1099, 1107
(Ill. App. Ct. 1995). The Northbrook Property, Massachusetts
Bay, and Oakley decisions all involved applications of a
standard automobile exclusion in a CGL policy. The
No. 07-3147                                                9

underlying lawsuits sought damages arising out of auto-
mobile accidents caused by (in Oakley and Massachusetts
Bay) the insureds’ truck drivers or (in Northbrook Property)
the insured’s bus driver.
  In Oakley, the underlying complaint stated claims
against a trucking company for negligent entrustment
and negligent supervision of its truck driver and sought
damages for an accident caused by the driver. 648
N.E.2d at 1101. The automobile exclusion in the trucking
company’s CGL policy excluded damages arising out of
the use of automobiles owned or operated by the insured.
The Illinois Appellate Court held that coverage was
excluded under the policy’s automobile exclusion
because the injury alleged in the negligent entrustment
and supervision claims was “not independent of, but
inextricably intertwined with, the employee’s use of the
truck.” Id. at 1107.
  In Massachusetts Bay, the underlying complaint alleged
that the insured trucking company failed to comply with
federal regulations requiring it to test its drivers for drug
use and sought damages for an accident caused by one
of its truck drivers while under the influence of drugs.
679 N.E.2d at 477. As in Oakley, the trucking company’s
CGL policy contained a standard automobile exclusion.
The Illinois Appellate Court held that the exclusion
applied because the drug-testing claim against the
trucking company “is specifically dependent upon the
fact that [the plaintiffs’] injuries occurred in a vehicle
accident.” Id. at 479.
  In Northbrook Property, the underlying complaint
alleged that the insured school districts failed to properly
10                                              No. 07-3147

inspect bus routes and train bus drivers and sought
damages for an accident caused by one of the districts’
school-bus drivers. The Illinois Supreme Court held that
the automobile exclusion in the school district’s CGL
policy applied:
     The policy excludes injuries arising from the school
     districts’ use or operation of a motor vehicle. Allega-
     tions that the school districts inadequately planned
     and inspected bus routes or failed to warn bus
     drivers of potential hazards along the routes are
     nothing more than rephrasings of the fact that the
     students’ injuries arose from the school districts’ use
     or operation of a motor vehicle. Contrary to the ap-
     pellate court’s holding, the students’ complaints
     failed to allege that the injuries arose from events
     wholly independent of any negligent operation of the
     bus. Northbrook therefore has no duty to defend the
     school districts in the underlying lawsuits.
Northbrook Property, 741 N.E.2d at 254-55 (citation and
internal quotation marks omitted).
  The same result is required here. The claims against 1452
LLC in the underlying complaints do not allege any
property damage or other injury independent of the
property damage caused by the botched excavation
performed by 1452 LLC’s contractors and subcontractor.
The underlying complaints allege that 1452 LLC is liable
for that property damage by virtue of having failed to
give the statutorily required notice, but because the
property damage alleged in the complaints falls within
the terms of the contractor-subcontractor exclusion, the
presence of an alternative theory of relief against 1452
No. 07-3147                                             11

LLC is insufficient to trigger coverage. The negligence and
res ipsa loquitur claims against 1452 LLC also seek recov-
ery for the same injury—property damage arising out of
operations performed by 1452 LLC’s contractors and
subcontractor—and are therefore excluded by the
contractor-subcontractor exclusion as well.

B. The Classification-limitation Exclusion
  Nautilus also maintains that the policy’s classification-
limitation exclusion operates to exclude coverage here.
However, our conclusion that the contractor-subcon-
tractor exclusion applies makes any discussion of the
applicability of another exclusion academic. We will say
only that this argument seems weak. The classification-
limitation clause excludes coverage if 1452 LLC used its
property in a way that wasn’t disclosed in the policy’s
declarations, endorsements, or supplements, and those
indicated that the insured property was vacant. Nautilus
argues that 1452 LLC might have been storing property
in its building or otherwise using it in some capacity,
making the building not “vacant.”
  At this stage of the proceedings, only the allegations
in the underlying complaints are relevant, and they do not
mention that any property was being stored in 1452
LLC’s building or that the building was anything but
vacant. The complaints describe an excavation on 1452
LLC’s property, suggesting that 1452 LLC’s building
was demolished; this is fully consistent with the “vacant
land” and “vacant building” classification in the policy.
12                                                No. 07-3147

   Nautilus points out that the Illinois appellate courts
have sometimes permitted consideration of extrinsic
evidence in a duty-to-defend case if that evidence relates
to issues that are unlikely to be addressed in the underly-
ing lawsuit. See, e.g., State Farm Fire & Cas. Co. v. Shelton,
531 N.E.2d 913, 919 (Ill. App. Ct. 1988); Fid. & Cas. Co. of
N.Y. v. Envirodyne Eng’rs, Inc., 461 N.E.2d 471, 473-74 (Ill.
App. Ct. 1983). Whether 1452 LLC’s building was vacant
is unlikely to be relevant in the underlying lawsuit, so
Illinois courts might consider evidence addressing that
issue in determining whether there is a duty to defend.
Even assuming extrinsic evidence could be con-
sidered, however, Nautilus has offered nothing but its
own speculation that 1452 LLC’s building might not have
been vacant. That would ordinarily be the end of the
matter because Nautilus has the burden of proving that the
exclusion applies. Sokol, 430 F.3d at 423; see also U.S. Fid. &
Guar. Co. v. Brennan, 410 N.E.2d 613, 615 (Ill. App. Ct.
1980). This case was decided at the pleadings stage,
however, and Nautilus argues on appeal that it is entitled
to discovery on the issue of the classification-limitation
exclusion.
  We need not resolve these questions. The contractor-
subcontractor exclusion applies, and therefore Nautilus
has no duty to defend 1452 LLC in the underlying law-
suits. Because the duty to defend is broader than the duty
to indemnify, Nautilus is entitled to a declaratory judg-
ment that it has no duty to defend or indemnify 1452
LLC. See Sokol, 430 F.3d at 421 (citing Crum & Forster
Managers Corp. v. Resolution Trust Corp., 620 N.E.2d 1073,
1081 (Ill. 1993)).
No. 07-3147                                            13

  The judgment of the district court is R EVERSED, and the
case is R EMANDED for entry of judgment for Nautilus
consistent with this opinion.

                          4-7-09