Court Opinion

ID: 9964235
Source: CourtListenerOpinion
Date Created: 2024-04-29 15:00:52.146125+00
Date Added: 2024-06-11T08:25:14.693722
License: Public Domain

In the

    United States Court of Appeals
                 For the Seventh Circuit
                     ____________________
No. 23-1662
ST. PAUL GUARDIAN INSURANCE COMPANY, et al.,
                                     Plaintiffs-Appellees,
                                 v.

WALSH CONSTRUCTION COMPANY,
                                               Defendant-Appellant.
                     ____________________

         Appeal from the United States District Court for the
           Northern District of Illinois, Eastern Division.
          No. 1:15-cv-10324 — Virginia M. Kendall, Judge.
                     ____________________

    ARGUED JANUARY 24, 2024 — DECIDED APRIL 29, 2024
                ____________________

   Before WOOD, SCUDDER, and LEE, Circuit Judges.
    LEE, Circuit Judge. In 2003, the City of Chicago contracted
with Walsh Construction Company to manage the construc-
tion of a canopy and curtain wall system at O’Hare Interna-
tional Airport. As part of that project, Walsh entered into a
contract with Carlo Steel Corporation, which in turn subcon-
tracted with LB Steel, LLC to fabricate and install steel col-
umns to support the wall and canopy. Per their agreement, LB
Steel listed Walsh as an additional insured in its commercial
2                                                   No. 23-1662

general liability (CGL) insurance policies. Several years into
the project, the City discovered cracks in the welds of the steel
columns and sued Walsh for breaching its contract. Walsh, in
turn, sued LB Steel under its subcontract. Walsh also asked LB
Steel’s insurers to defend it in the City’s lawsuit, but they
never did. Walsh eventually secured a judgment against LB
Steel, which led it to declare bankruptcy. Walsh then sued LB
Steel’s insurers to recover the costs of defending against the
City’s suit and indemniﬁcation for any resulting losses.
    In this suit, LB Steel’s insurers seek a declaratory judgment
that LB Steel’s CGL policies do not cover the expenses Walsh
incurred to repair the defective columns at the City’s insist-
ence. They also seek a declaratory judgment that they did not
have a duty to defend Walsh in the City’s underlying suit. The
parties ﬁled cross-motions for summary judgment, and the
district court granted summary judgment in favor of the
plaintiﬀ insurers on both issues. This case turns upon the
question of whether, under Illinois law, the defects in the
welds and columns constitute “property damage” under LB
Steel’s CGL policies. We conclude that they do not and aﬃrm.
    I. Background
       A. The Project
   In 2003, the City hired Walsh as the general contractor for
the Façade and Circulation Enhancement (FACE) project at
O’Hare. The FACE project involved building and installing a
new canopy for Terminals 1, 2, and 3. In addition to the can-
opy, the project called for the construction of a steel and glass
curtain wall that would be integrated with the canopy at Ter-
minals 2 and 3. Walsh contracted with Carlo to manufacture
the steel and curtain wall. Carlo, in turn, subcontracted with
No. 23-1662                                                  3

LB Steel to manufacture and install the steel elements of the
wall, which included steel columns, hammer heads, and box
girders. The subcontract between Carlo and LB Steel included
an indemnity provision that required LB Steel to indemnify
Carlo and Walsh for any property damage resulting from LB
Steel’s negligent performance.
   The City discovered cracks in welds performed by LB Steel
in December 2004 and again in November 2005, leading it to
question the structural integrity of the canopy system. As a
result, the City required Walsh to install shoring to the col-
umns. In February 2008, Walsh and the City entered into a
limited settlement agreement in which Walsh agreed to con-
duct repairs to the columns at its own expense.
      B. The Underlying Suit
    In November 2008, the City sued Walsh in Illinois court for
breach of contract and contractual indemnity to recover the
costs the City incurred to investigate and remediate the defec-
tive welds. At the time, LB Steel had CGL policies in place
with St. Paul Guardian Insurance Company, Travelers Prop-
erty Casualty Company of America, and the Charter Oak Fire
Insurance Company (Insurers). Walsh was listed as an addi-
tional insured. So, in January 2010, Walsh tendered its defense
of the City’s claims to the Insurers under LB Steel’s policies.
The Insurers acknowledged receipt and asked for additional
information from Walsh, but they never provided a ﬁnal cov-
erage decision and did not defend Walsh in the City’s lawsuit.
    Walsh eventually agreed to settle the City’s damages
claims for $10 million. Then, Walsh ﬁled its own third-party
complaint against LB Steel for breach of contract, professional
negligence, and fraud. The Illinois trial court found for Walsh
4                                                   No. 23-1662

on its breach of contract claim and entered a judgment against
LB Steel awarding Walsh $19,187,304. LB Steel appealed and
ﬁled for bankruptcy four days later.
    On appeal, the Illinois appellate court aﬃrmed the trial
court’s judgment as to Walsh’s contract claim but reversed the
trial court with respect to certain credits and setoﬀs. Walsh
and LB Steel then reached a bankruptcy settlement that pro-
vided Walsh with $3,367,350 and a $24,132,650 unsecured
claim against LB Steel’s bankruptcy estate.
       C. Procedural History
    That brings us to this suit. In November 2015, the Insurers
sued Walsh in the Northern District of Illinois seeking a de-
claratory judgment that LB Steel’s CGL policies do not cover
the $19 million judgment against LB Steel or the subsequent
bankruptcy settlement. The Insurers also sought a declaratory
judgment that they did not have a duty to defend Walsh in the
underlying suit against the City. In response, Walsh brought
four counterclaims, seeking 1) indemniﬁcation under the pol-
icies for the $24,132,650 Walsh claimed against LB Steel, 2) re-
covery of attorneys’ fees and costs Walsh incurred in defend-
ing itself against the City, 3) indemniﬁcation of the $10 million
Walsh paid to the City under the settlement and any addi-
tional costs incurred in remediating the damage, and 4) sanc-
tions pursuant to 215 Ill. Comp. Stat. 5/155 (§ 155).
    Ruling on cross-motions for summary judgment, the dis-
trict court found in favor of the Insurers, concluding that they
had neither the duty to indemnify nor the duty to defend un-
der the CGL policies. The court also denied Walsh’s request
for sanctions under § 155. In short, the court reasoned that,
because the physical damage at issue was limited to LB Steel’s
No. 23-1662                                                       5

own products, it did not constitute “property damage” as that
term appears in the policies, thereby precluding coverage. As
for the duty to defend, the court determined that the Insurers
had none, because the City’s underlying claims did not impli-
cate potential coverage under LB Steel’s policies. This appeal
followed.
   II. Legal Standard
    Summary judgment is appropriate where there are no ma-
terial facts in dispute and the moving party is entitled to judg-
ment as a matter of law. Fed. R. Civ. Pro. 56(a). We “review
the district court’s interpretation of the insurance policy at is-
sue and the resulting grant of summary judgment de novo.”
Lexington Ins. Co. v. Chi. Flameproof & Wood Specialties Corp.,
950 F.3d 976, 980 (7th Cir. 2020). The parties agree that Illinois
law controls. See Santa’s Best Craft, LLC v. St. Paul Fire & Ma-
rine Ins. Co., 611 F.3d 339, 345 (7th Cir. 2010).
    An insurer in Illinois has the duty to indemnify when “the
insured becomes legally obligated to pay damages in the un-
derlying action that gives rise to a claim under the policy.”
Allied Prop. & Cas. Ins. Co. v. Metro N. Condo. Ass’n, 850 F.3d
844, 847 (7th Cir. 2017) (quoting Traveler’s Ins. Co. v. Eljer Mfg.,
Inc., 757 N.E.2d 481, 491 (Ill. 2001)). Once the insured has in-
curred liability, the duty to indemnify only arises if “the in-
sured’s activity and the resulting loss or damage actually fall
within the CGL policy’s coverage.” Id. (quoting Eljer, 757
N.E.2d at 492). An insurer’s duty to defend is broader and is
triggered “if the complaint alleges facts that are even poten-
tially within the coverage of the insurance policy.” Ohio Cas.
Ins. Co. v. Bazzi Constr. Co., 815 F.2d 1146, 1147 (7th Cir. 1987)
(citing Md. Cas. Co. v. Peppers, 355 N.E.2d 24, 28 (Ill. 1976)).
6                                                     No. 23-1662

    The insured carries the initial burden to show that its loss
falls within the terms of the policy. St. Michael’s Orthodox Cath.
Church v. Preferred Risk Mut. Ins. Co., 496 N.E.2d 1176, 1178 (Ill.
App. Ct. 1986). If an insured meets this burden, the burden
shifts to the insurer to prove that a policy exclusion applies.
Santa’s Best, 611 F.3d at 347. If an exclusion applies, the bur-
den then shifts back to the insured to show that an exception
to the exclusion applies. Id.
    We “must construe the policy as a whole and take into ac-
count the type of insurance purchased, the nature of the risks
involved, and the overall purpose of the contract.” Eljer, 757
N.E.2d at 491 (internal quotation marks omitted). To do so, we
give policy provisions “their plain, ordinary, and popular
meaning.” Id. (emphasis omitted) (quoting Outboard Marine
Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204, 1215 (Ill. 1992)).
If the policy language is ambiguous and therefore “suscepti-
ble to more than one reasonable meaning,” the policy should
be construed strictly against the insurer. Sproull v. State Farm
Fire & Cas. Co., 184 N.E.3d 203, 209 (Ill. 2021). But we will not
“strain to ﬁnd ambiguity in an insurance policy where none
exists.” Hess v. Est. of Klamm, 161 N.E.3d 183, 188 (Ill. 2020).
    III. Analysis
    Walsh presents three arguments on appeal. First, Walsh ar-
gues that the district court erred when it determined that the
Insurers’ policies do not cover Walsh’s damages. Second,
Walsh contends that the district court erred when it found
that the Insurers owed no duty to defend Walsh in the under-
lying suit. Finally, Walsh argues that the district court should
have imposed sanctions on the Insurers pursuant to § 155.
No. 23-1662                                                     7

       A. Property Damage
    We begin with the question of covered damages. The In-
surers’ complaint ﬁrst seeks a declaratory judgment that LB
Steel’s policies do not cover the judgment against LB Steel in
the underlying litigation or the subsequent settlement. LB
Steel’s insurance policies with St. Paul, Travelers, and Charter
Oak cover “bodily injury” or “property damage” that results
from an “event” or “occurrence.” Here, the dispute centers
around the meaning of “property damage,” which is deﬁned
in each of the policies.
    To determine the scope of coverage, we look to the “lan-
guage of the initial grant of coverage in the insuring agree-
ment[s].” See Acuity v. M/I Homes of Chicago, LLC, 2023 IL
129087, ¶ 52 (Ill. 2023). Important for our purposes, LB Steel’s
policies only cover damage to the property of others—not to
LB Steel’s own property. In the St. Paul policies, this is evident
from the deﬁnition of “property damage,” which they deﬁne
as “physical damage to tangible property of others.” Unlike the
St. Paul policies, the policies with Travelers and Charter Oak
deﬁne “property damage” as “physical injury to tangible
property” without limiting the deﬁnition to the property of
others. But these policies separately contain a “Your Product”
exclusion, which excludes coverage for “‘[p]roperty damage’
to ‘your product’ arising out of it or any part of it.” “Your
product,” in turn, is deﬁned as “[a]ny goods or products,
other than real property, manufactured, sold, handled, dis-
tributed or disposed of by … you.” Thus, in order to succeed
on the coverage question, Walsh must demonstrate some
physical injury to tangible property beyond the steel elements
fabricated by LB Steel.
8                                                    No. 23-1662

    The problem is that Walsh has not met this burden. For
example, Walsh has not identiﬁed any cracks in the glass,
damage to concrete, or alterations to any other parts of the
canopy or curtain wall not provided by LB Steel. Walsh does
note that it had to install retroﬁt structures around the af-
fected columns, but those retroﬁts were only installed to rem-
edy the defects in the columns themselves.
    Instead of providing evidence of any actual, physical dam-
age to something other than what LB Steel manufactured,
Walsh oﬀers a diﬀerent, more attenuated theory of property
damage: that once the welding in the columns holding the
canopy’s weight cracked, the entire canopy structure became
structurally unstable. As Walsh sees it, this structural instabil-
ity was a “harmful physical change to the canopy system” suf-
ﬁcient to trigger coverage.
    There is a fatal ﬂaw in this theory, however. Essentially,
what Walsh is saying is that the defective welds increased the
potential for the canopy to collapse. At the same time, it oﬀers
no evidence that this “structural instability” had manifested
itself in any physical way (other than in the LB Steel columns
themselves). But under Illinois law, an increased potential for
future property damage does not itself constitute property
damage. The Illinois Supreme Court made this clear in Eljer,
757 N.E.2d. at 502. There, the policyholders manufactured
residential plumbing systems that had an estimated ﬁve per-
cent failure rate. See id. at 486, 502. While some claimants ex-
perienced actual property damage after their plumbing sys-
tems leaked, others removed the systems before they leaked
as a preventive measure. Id. at 487. These proactive claimants,
the Illinois Supreme Court explained, had no claim for indem-
nity against the insurer because their systems had performed
No. 23-1662                                                    9

as intended and had yet to cause any physical injury to tangi-
ble property. Id. at 502. And the court recently reaﬃrmed this
reasoning in Acuity, 2023 IL 129087, at ¶ 37.
   LB Steel’s defective welds are much like the compromised
plumbing systems of the chary homeowners. Both may create
the potential for future damage to the property of others, but
where such damage has yet to manifest, there is no “property
damage” that triggers coverage under the CGL policies. Fur-
thermore, just as the proactive homeowners did in Eljer,
Walsh took preventative measures by retroﬁtting LB Steel’s
defective columns before they could cause damage to other
parts of the canopy system. And, just as in Eljer, Walsh’s pre-
ventative costs are economic losses not recoverable under the
policies.
    Setting Eljer to the side, Walsh protests that this rule cre-
ates a “perverse outcome” because it penalizes the company
for taking steps to prevent the canopy’s catastrophic collapse.
But there are many reasons (economic and otherwise) why a
party in Walsh’s shoes might take steps to prevent such a ca-
lamitous failure (avoiding millions of dollars in potential lia-
bility being just one). Remember too that LB Steel—not
Walsh—is the policyholder. To ﬁnd coverage here would
mean that manufacturers like LB Steel could perform defec-
tive work without consequence, knowing that they could later
recoup any resulting adverse judgments under their CGL pol-
icies. That can hardly be what the contracting parties in-
tended.
    Taking a slightly diﬀerent tack, Walsh argues that there is
property damage here because LB Steel’s component parts are
so intertwined with the canopy structure that damage to the
steel columns necessarily means damage to the canopy as a
10                                                   No. 23-1662

whole. For support, Walsh relies on Pittway Corp. v. American
Motorists Insurance Co., 370 N.E.2d 1271 (Ill. App. Ct. 1977). In
that case, a valve manufacturer supplied defective valves that
were used in aerosol hairspray cans. Id. at 1272–73. The defec-
tive valves caused the cans to leak, rendering them useless. Id.
The Illinois Appellate Court held that the incorporation of the
defective valves into the cans constituted property damage to
the cans as a whole. Id. at 1274. In doing so, the court con-
cluded that a defective valve caused property damage “to the
extent that the market value of the ﬁnal product [the can] was
diminished.” Id. at 1273–74.
     Pittway is unhelpful to Walsh for two reasons. First, the
policy at issue in Pittway deﬁned property damage as “injury
to or destruction of tangible property.” Id. at 1273. In line with
this deﬁnition, the court found that property damage could
include property that has “been diminished in value or made
useless irrespective of any actual physical injury to the tangible
property.” Id. at 1274 (emphasis added). But the CGL policies
here deﬁne property damage as “physical injury to tangible
property” and “physical damage to tangible property of oth-
ers.” And in Eljer, the Illinois Supreme Court announced that
when the deﬁnition of property damage requires physical in-
jury, property damage “does not take place upon the occur-
rence of an economic injury, such as diminution in value.” El-
jer, 757 N.E.2d at 500.
    Second, even if we accept the premise that, where a part is
so intertwined with the entire mechanism, damage to the part
constitutes damage to the whole, this is not what we have
here. What made the cans in Pittway unique was that once the
defective valves broke, the cans had to be scrapped because it
was “economically impossible” to ﬁx them. Pittway, 370
No. 23-1662                                                          11

N.E.2d at 1273. Here, unlike the cans in Pittway, the damage
to the columns did not require the entire canopy to be taken
down and rebuilt. Indeed, Walsh restored the canopy’s struc-
tural integrity by retroﬁtting the defective columns. The out-
come may be diﬀerent if physical abnormalities in the col-
umns required Walsh to disassemble the canopy and start
anew, but that was not the case.
    In sum, Walsh has not suﬀered any covered losses because
its damages were limited to LB Steel’s own defective work. 1
Accordingly, the Insurers are not required to indemnify
Walsh for its losses. We therefore aﬃrm the district court’s
grant of summary judgment in favor of the Insurers on Count
I of the Insurers’ Amended Complaint. We also aﬃrm the dis-
trict court’s denial of summary judgment as to coverage in
Count I and the duty to indemnify in Count III of Walsh’s
Counterclaim.
       B. Duty to Defend
   The Insurers also seek a declaratory judgment that they
had no duty to defend Walsh against the City’s claims in the
underlying suit. An insurer has a duty to defend when “the
complaint’s allegations fall within or potentially within the
coverage provisions of the policy.” Lyons v. State Farm Fire &
Cas. Co., 811 N.E.2d 718, 721 (Ill. App. Ct. 2005); accord Chi.
Flameproof, 950 F.3d at 980. Because a complaint “need not al-
lege or use language aﬃrmatively bringing the claims within

   1 The Insurers also argue that there was no “event” or “occurrence”
triggering coverage under the policies. Because we conclude that there
was no “property damage” under the Insurers’ policies, we need not reach
the question of whether there was an “event” or “occurrence” triggering
coverage.
12                                                    No. 23-1662

the scope of the policy,” the duty to defend is broader than
the duty to indemnify. Travelers Ins. Cos. v. Penda Corp., 974
F.2d 823, 827 (7th Cir. 1992) (quoting W. Cas. & Sur. Co. v. Ad-
ams Cnty., 534 N.E.2d 1066, 1068 (Ill. App. Ct. 1989)).
    Whether there was a duty to defend depends on the facts
underlying a plaintiﬀ’s complaint, not the speciﬁc legal the-
ory on which the plaintiﬀs based their claims. See Chi. Flame-
proof, 950 F.3d at 980. To determine whether there is a duty to
defend, Illinois courts follow the so-called “eight-corners
rule.” United Fire & Cas. Co. v. Prate Rooﬁng & Installations,
LLC, 7 F.4th 573, 579–80 (7th Cir. 2021). Under that rule, courts
determine the duty to defend by looking “only within the four
corners of the insurance policy and the four corners of the
complaint for which defense is sought.” Id. (citing Pekin Ins.
Co. v. St. Paul Lutheran Church, 78 N.E.3d 941, 951 (Ill. App. Ct.
2016)).
    The threshold for pleading a duty to defend in Illinois is
low. Pekin Ins. Co. v. AAA-1 Masonry & Tuckpointing, Inc., 81
N.E.3d 1040, 1045 (Ill. App. Ct. 2017). Indeed, courts have
used very broad language to describe the scope of the duty.
See, e.g., Scottsdale Ins. Co. v. Columbia Ins. Grp., Inc., 972 F.3d
915, 919 (7th Cir. 2020) (“An insurer can only refuse to defend
if the allegations of the underlying complaint preclude any
possibility of coverage.”) (quoting Ill. Tool Works, Inc. v. Trav-
elers Cas. & Sur. Co., 26 N.E.3d 421, 428 (Ill. App. Ct. 2015)).
   But it must be said that, although broad, “the insurer’s
duty to defend … is not without limits.” Lagestee-Mulder, Inc.
v. Consol. Ins. Co., 682 F.3d 1054, 1059 (7th Cir. 2012).
Notwithstanding the breadth of the duty, the claim against
the insured must still contain “explicit factual allegations that
potentially fall within policy coverage.” Id. at 1058–59
No. 23-1662                                                              13

(quoting Amerisure Ins. Co. v. Microplastics, Inc., 622 F.3d 806,
810 (7th Cir. 2010)). As applied here, the City’s allegations
must somehow indicate that there might have been—or could
have been—damage to parts of the canopy not supplied by
LB Steel. While we must peruse the City’s allegations with
care, we “will not read into the complaint facts that are not
there.” Id. at 1059 (quoting Pekin Ins. Co. v. Roszak/ADC, LLC,
931 N.E.2d 799, 806 (Ill. App. Ct. 2010)).
    Here, the City’s Third Amended Complaint limits its alle-
gations to LB Steel’s defective welds and steel and the costs of
repairing them. For example, the City alleged that “[n]umer-
ous of the welds installed by Walsh … contain unacceptable
amounts of slag, cracks and other unacceptable [ ] ﬂaws.” The
City also asserts that “Walsh breached its contractual obliga-
tions by providing welds containing slag and other irregulari-
ties.” The complaint does not give even the slightest sugges-
tion that LB Steel’s defective welds might have caused dam-
age to other parts of the canopy system. 2
    Scanning the complaint to overcome this hurdle, Walsh
points us toward the City’s conclusory allegation that its dam-
ages included costs associated with “repair.” For example,
Walsh recites a paragraph in the complaint that lists the City’s
damages to include “costs associated with investigation, loss
of competitive advantage, removal, repair and/or replacement,
additional costs of construction, diminution of value, and

    2 As we have made plain, we agree with our dissenting colleague that
the City’s complaint need not plead “an explicit factual allegation that the
defective structural welds damaged the canopy.” We only require the
complaint to somehow signal that there might have been or could have been
covered damages—in other words, that there was the “potential” for cov-
erage as Illinois cases require.
14                                                              No. 23-1662

costs for consultants and attorneys.” According to Walsh, this
broad boilerplate language (we know it is boilerplate because
the exact words are repeated in other counts the City brought
against other defendants for other parts of the FACE project)
is enough to put the Insurers on notice that the defective
welds may have caused physical damage to non-LB Steel
components, thereby potentially implicating the policies.
    But we think that this general assertion falls short for two
reasons. First, the complaint makes clear at paragraph 102
that the “repairs” necessitated by LB Steel’s defective welds
were repairs to the “welding of the canopy” and not to other
canopy structures or components. Second, if we accept
Walsh’s theory, an insurer would have a duty to defend any
lawsuit where the complaint contains a generalized statement
of damages or a conclusory request for relief. The duty to de-
fend may be broad, but Illinois law does not permit us “to
speculate about possible factual scenarios that are absent from
the claim itself.” Lagestee-Mulder, 682 F.3d at 1059 (quoting
Microplastics, 622 F.3d at 814). 3 After carefully examining this

     3 The dissent emphasizes that the City’s complaint does not “foreclose
the possibility that the defective welds caused physical damage to the
other elements of the canopy.” In doing so, it maintains that “silence has
a legal consequence under Illinois law.” But the notion that “silence” can
somehow trigger the duty to defend cuts against the fact that the potential
for covered damages must be found somewhere in the four corners of the
complaint. See Prate Roofing, 7 F.4th at 579–80; Microplastics, 622 F.3d at 812
(“The duty to defend applies only to facts that are explicitly alleged; it is
the actual complaint, not some hypothetical version, that must be consid-
ered.”) (internal quotation omitted); see also U.S. Fidelity & Guar. Co. v. Wil-
kin Insulation Co., 578 N.E.2d 926, 930 (Ill. 1991) (“If the underlying com-
plaints allege facts within or potentially within policy coverage, the insurer
is obliged to defend its insured even if the allegations are groundless, false,
or fraudulent.”) (emphasis added). A rule that would impose a duty to
No. 23-1662                                                           15

complaint, we conclude that the Insurers did not have a duty
to defend Walsh in the underlying action based upon Illinois’s
eight-corners rule.
    As a ﬁnal note, we do not think the outcome here will in-
centivize insurers to “lay low” and intentionally delay in
making coverage decisions. Insurers are already incentivized
to defend when—unlike here—the underlying facts show a
potential for coverage. An insurer who fails to defend but is
later found to have a duty to indemnify foregoes having any
input in how the underlying lawsuit is litigated. They might
give up certain defenses, for example. Or they might be forced
to pay a settlement that they would have negotiated diﬀer-
ently had they defended the suit themselves. Moreover, insur-
ers that delay coverage decisions may face liability under Illi-
nois law for improper claims practices. 215 Ill. Comp. Stat.
5/154.6. Given these real concerns, an insurer has an incentive
to defend (perhaps under a reservation of rights letter), and
when an insurer does not, it does so at its own risk.
   In sum, the City’s underlying claims against Walsh did not
contain allegations falling within or potentially within the
coverage provisions of the CGL policies. As a result, the com-
plaint did not trigger the Insurers’ duty to defend Walsh un-
der Illinois law. Accordingly, we aﬃrm the district court’s
grant of summary judgment in favor of the Insurers as to
Count II of the Insurers’ Amended Complaint and Count II of
Walsh’s Counterclaim.

defend unless the underlying complaint affirmatively disavows any and
all hypothetical damage to the property of others is not only unrealistic
(why would a plaintiff ever do that?), but boundless.
16                                                  No. 23-1662

        C. Section 155 Sanctions
    Illinois law gives courts the authority to impose sanctions
when there was “an unreasonable delay in settling a claim,
and it appears to the court that such action or delay is vexa-
tious and unreasonable.” 215 Ill. Comp. Stat. 5/155(1). How-
ever, it is “neither vexatious nor unreasonable to litigate a
‘bona ﬁde dispute concerning the scope and application of in-
surance coverage,’ let alone to deny coverage based on a po-
sition that prevails.” PQ Corp. v. Lexington Ins. Co., 860 F.3d
1026, 1038 (7th Cir. 2017) (quoting Citizens First Nat’l Bank of
Princeton v. Cincinnati Ins. Co., 200 F.3d 1102, 1110 (7th Cir.
2000)). Because we ﬁnd that the Insurers’ coverage position
prevails, we agree with the district court that sanctions are not
warranted. We therefore aﬃrm the district court’s grant of
summary judgment for the Insurers on Count IV of Walsh’s
Counterclaim as well.
     IV. Conclusion
   For the foregoing reasons, the judgment of the district
court is AFFIRMED.
No. 23-1662                                                    17

     SCUDDER, Circuit Judge, concurring in part and dissenting
in part. I agree with the majority that LB Steel’s defective
welds did not cause “property damage” within the meaning
of the St. Paul, Travelers, and Charter Oak policies. I
respectfully part ways, however, with the majority’s
conclusion that the insurers had no duty to defend Walsh in
its litigation with the City. In my opinion, the majority’s
reasoning stands in irreconcilable tension with a ﬂoodtide of
Illinois law broadly deﬁning the contours of the duty to
defend and threatens to dilute the scope of that right in cases
like this one, where the potential for coverage is in no way
foreclosed by the four corners of the underlying complaint.
    Under Illinois law, the duty to defend is serious business.
An insurer’s duty to defend is “much broader” than its duty
to indemnify. Crum & Forster Managers Corp. v. Resolution Tr.
Corp., 620 N.E.2d 1073, 1079 (Ill. 1993). “Refusal to defend,”
the Illinois Supreme Court has emphasized, “is unjustiﬁable
unless it is clear from the face of the underlying complaint
that the facts alleged do not fall potentially within the policy’s
coverage.” Outboard Marine Corp. v. Liberty Mutual Ins. Co., 607
N.E.2d 1204, 1212 (Ill. 1992). Put another way, “[a]n insurer
can refuse to defend only if the allegations of the underlying
complaint preclude any possibility of coverage.” Ill. Union Ins.
Co. v. Medline Indus., Inc., 220 N.E.3d 380, 387 (Ill. App. Ct.
2022) (emphasis added).
   Illinois courts assess the potential for coverage using the
so-called “eight-corners” rule. See Pekin Ins. Co. v. St. Paul
Lutheran Church, 78 N.E.3d 941, 951 (Ill. App. Ct. 2016). That
approach requires us to compare “the four corners of the
underlying complaint with the four corners of the insurance
contract[s]” at issue—here, the policies LB Steel took out from
18                                                  No. 23-1662

St. Paul, Travelers, and Charter Oak. Id. From there we ask
whether the facts alleged in the complaint, “liberally
construed in favor of” Walsh, fall at least potentially within
the policies’ coverage. Outboard Marine Corp., 607 N.E.2d at
1220. This threshold is “low, and any doubt … [must] be
resolved in [Walsh’s] favor.” Pekin Ins. Co. v. AAA-1 Masonry
& Tuckpointing, Inc., 81 N.E.3d 1040, 1045 (Ill. App. Ct. 2017).
    As Illinois law’s emphasis on possibility (as opposed to
plausibility) suggests, these rules do not establish or amount
to a pleading standard. Nowhere does Illinois law require that
“the complaint allege or use language aﬃrmatively bringing
the claims within the scope of the policy” before a duty to
defend will attach. Int’l Ins. Co. v. Rollprint Packaging Prods.,
Inc., 728 N.E.2d 680, 688 (Ill. App. Ct. 2000); see also Empire
Indemnity Ins. Co. v. Chi. Province of Soc’y of Jesus, 990 N.E.2d
845, 854 (Ill. App. Ct. 2013) (same). To the contrary, Illinois
courts have rejected such an approach because it would hinge
the existence of the duty to defend “on the draftsmanship
skills or whims of the plaintiﬀ in the underlying action.”
Rollprint Packaging Prods., 728 N.E.2d at 688. Recognizing the
inequity of such a rule, Illinois courts have made clear that the
controlling inquiry is whether there is potential for coverage,
not whether that potential is plausibly alleged or described
with particularity in the underlying complaint. To confuse
pleading rules with duty to defend obligations is to make a
legal error.
     Moving to the allegations of the City’s complaint in its
litigation with Walsh, a couple of key points stand out. The
City alleged that Walsh breached its contractual obligations
in many ways, including by “performing, or causing to be
performed, inadequate welds” that did not conform to
No. 23-1662                                                  19

industry standards or the FACE project’s speciﬁcations. See
R. 60-2, ¶¶ 208–09. And although the City’s complaint did not
specify whether or how these defects compromised the
canopy structure, it sought damages for “investigation, loss
of competitive advantage, removal, repair and/or
replacement, additional costs of construction, diminution of
value, and costs for consultants and attorneys.” Id. at ¶ 218.
    The majority is right to observe that LB Steel’s defective
welds could result in covered damages under the St. Paul,
Travelers, and Charter Oak policies only if they in turn caused
physical damage to other components of the canopy. To
resolve that question, re-read the previous paragraph’s
quotation from the City’s complaint and ask yourself whether
the allegations preclude any possibility that LB Steel’s welds
caused such damage. The answer is no. Although the City’s
complaint explicitly alleged that Walsh (through its
subcontractors) provided defective structural welds, it was
silent on the eﬀect that those defects had, or did not have, on
the O’Hare Airport’s broader canopy structure. That silence
has a legal consequence under Illinois law given the
inferences that otherwise ﬂow from the City’s complaint.
     The City’s complaint did not foreclose the possibility that
the defective welds caused physical damage to other elements
of the canopy. It is easy to imagine how structural welds in a
massive, intricate structure like the O’Hare Airport’s canopy
could (and that is all that matters) cause elements supported
by those welds to warp, buckle, or sag. That the complaint
does not explicitly allege such damage is irrelevant, because
Illinois law does not require “the complaint [to] allege or use
language aﬃrmatively bringing the claims within the scope
of the policy.” Rollprint Packaging Prods., 728 N.E.2d at 688.
20                                                    No. 23-1662

Nor is it relevant that we now know that such damage did not
in fact occur. Under Illinois law, it is the complaint that
controls, not hindsight. All of this leads me to conclude that
the insurance companies did have a duty to defend Walsh.
    In reaching a contrary conclusion, the majority applies a
quasi-pleading requirement that ﬁnds little support in Illinois
law. As it sees things, what is missing from the City’s
complaint is an explicit factual allegation that the defective
structural welds damaged the canopy. The majority roots this
requirement in both our decisions in Lagestee-Mulder, Inc. v.
Consolidated Ins. Co., 682 F.3d 1054 (7th Cir. 2012) and
Amerisure Mutual Ins. Co. v. Microplastics, Inc., 622 F.3d 806
(7th Cir. 2010) and in a functional desire to avoid deﬁning the
duty to defend so broadly that it is triggered by any complaint
that lodges a general and non-particularized request for
damages. Although I understand the majority’s concern, I am
unable to agree with its application of those decisions here.
    In Lagestee-Mulder and Amerisure, we applied what
eﬀectively amounts to an exception to the principle, repeated
ad nauseum by Illinois courts, that an insurer can refuse to
defend a suit “only if the allegations of the underlying
complaint preclude any possibility of coverage.” Ill. Union Ins.
Co., 220 N.E.3d at 387; see also, e.g., Fayezi v. Ill. Casualty Co.,
58 N.E.3d 830, 846 (Ill. App. Ct. 2016); Ill. Emcasco Ins. Co. v.
Nw. Nat’l Casualty Co., 785 N.E.2d 905, 910 (Ill. App. Ct. 2003).
The complaints there, much like the City’s here, alleged
defects in the insured’s own work and lodged general
requests for damages that did “not logically foreclose the
theoretical possibility” that those defects inﬂicted damage to
the property of others. Amerisure, 622 F.3d at 811–12; see also
Lagestee-Mulder, 682 F.3d at 1058–59. Nonetheless, we held in
No. 23-1662                                                 21

each case that the complaint did not trigger a duty to defend
because the possibility of coverage in those cases was utterly
speculative.
   The majority seems to read Lagestee-Mulder and Amerisure
to require factual allegations explicitly alleging covered
damages before a duty to defend will be triggered. I do not
read those cases so broadly. In my view, those decisions
embody a narrower rule (or perhaps an exception to a broad
rule) that applies only when the possibility of coverage can be
ascertained only through rank speculation. This is not such a
case.
    One does not have to be a civil engineer to understand the
risk that defective structural welds pose to the physical
integrity of the structural elements they support. Indeed, that
precise consideration jumps oﬀ the page of the City’s
complaint: the City cared about the welding defects precisely
because those defects may have compromised the structural
integrity of the canopy at the O’Hare Airport. Recognizing as
much, an employee in Travelers’ own legal department stated
in an internal memorandum that “We think we might have a
duty to defend Walsh.” In light of that admission, the
majority’s conclusion that the City’s complaint did not
disclose any possibility of covered damages is diﬃcult to
accept.
    To be clear, I would not—as the majority suggests—
require that the City’s complaint expressly disavow the
existence of covered damages before ﬁnding the absence of a
duty to defend. Such a view is incompatible with the
requirement that an underlying complaint allege at least some
facts that, liberally construed, fall “potentially within” a
policy’s coverage. See Crum & Forster, 620 N.E.2d at 393.
22                                                 No. 23-1662

Where I disagree with the majority is in its insistence that a
potential for coverage cannot be reasonably inferred from the
facts that the City did allege in its complaint. Unlike the
majority, I would not require an explicit allegation of covered
damages when the potential for such damage is clear as a
matter of common sense.
    We should be careful before turning Lagestee-Mulder and
Amerisure’s narrow holdings into the kind of pleading
requirement the Illinois courts have continuously disavowed.
I worry that the majority’s opinion takes a step in that
direction. Construing the allegations of the City’s complaint
liberally in Walsh’s favor, as we are required to do, I would
conclude that those allegations fall at least potentially within
the coverage of the St. Paul, Travelers, and Charter Oak
policies. I therefore respectfully dissent from the majority’s
holding that St. Paul, Travelers, and Charter Oak had no duty
to defend.