JORGE ALONSO, United States District Judge
In this diversity case, plaintiff Acuity, an insurance company, seeks a declaration that certain commercial general liability ("CGL") insurance policies that Acuity issued to Lenny Szarek, Inc. ("Szarek") do not cover the underlying claims against defendants Szarek, Lennar Chicago, Inc. ("Lennar"), and Cary Woods LLC ("Cary"), which stem from the faulty construction of two condominium projects, the Mulberry Grove Condominium development and the Cary Woods Condominium
Acuity issued Szarek, a carpentry contractor, a series of CGL insurance policies effective from 2002 to 2009. (3d Am. Compl. ¶ 41, ECF No. 51.) Beginning in 2001, Szarek agreed to perform carpentry work on both the Mulberry Grove and Cary Woods condominium projects. (Id. ¶¶ 20, 25, 34.) In approximately 2010, the condominium unit owners began to investigate apparent water infiltration issues, and the Mulberry Grove Condominium Association and the Cary Woods Condominium Association took action against the condominium developers and builders. (Id. ¶¶ 20, 29.) This case concerns whether Acuity's policies provide coverage for the damage allegedly caused by Szarek's work.
In the Mulberry Grove action, the Mulberry Grove Condominium Association and its board of directors ("the Mulberry Grove plaintiffs") filed suit against Mulberry Grove LLC — the developer of the Mulberry Grove Condominium — and its two members, Concord Homes, Inc. ("Concord") and Lennar.
In June 2014, Lennar filed a complaint against Szarek in state court ("the Lennar complaint"), contending that Szarek breached its subcontract by failing to defend Lennar in the Mulberry Grove plaintiffs' lawsuit. (3d Am.Compl. ¶¶ 39-40.)
In the Cary Woods underlying matter, the Cary Woods Condominium Association notified Cary Woods LLC, the developer of the condominium, and Lennar of water infiltration problems at the condominium and alleged that the problems were due to construction defects. In 2012, the Condominium Association submitted a request for mediation under the mandatory alternative dispute resolution process prescribed by its Declaration of Condominium Ownership for Cary Woods Condominium ("Declaration") for resolving disputes with the condominium developers and builders.
The Acuity policies issued to Szarek require Acuity to pay "those sums that the insured becomes legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies."
The policies contain an additional insured endorsement that provides that they insure not only Szarek but also "any person or organization for whom you [Szarek] are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as additional insured on your policy." (Id. ¶¶ 49-53.) Szarek's subcontracts with Mulberry Grove LLC and Cary contained provisions requiring Szarek to obtain insurance covering them as additional insureds. (Id. ¶¶ 25, 37-38.)
Acuity seeks a declaration that it has no duty to defend or indemnify Szarek against the Mulberry Grove complaint (Count I), the Cary/Lennar complaint (Count II), or the Lennar complaint (Count VII); it has no duty to defend or indemnify Mulberry (Count III), Concord or Lennar (Count IV) against the Mulberry Grove complaint as additional insureds; it has no duty to defend or indemnify Cary (Count V) or Lennar (Count VI) against the Cary Woods mediation as additional insureds; and it has no duty to defend or indemnify Cary against the Cary Woods arbitration as an additional insured (Count VIII). Lennar and Cary have filed counterclaims that amount to mirror images of Acuity's claims. (ECF No. 53.) Acuity has filed a motion for judgment on the pleadings (ECF No. 57), although it notes that Acuity, Lennar and Cary have agreed to "hold ... in abeyance" Acuity's claims in Counts V, VI and VIII, as well as Counts I and II of Cary's amended counterclaim, due to the settlement of the Cary Woods claim during the pendency of this case. (Mem. Supp. Acuity's 12(c) Mot. at 2-3, ECF No. 58.) Lennar and Szarek have filed a cross-motion for judgment on the pleadings as to Acuity's duty to defend. (ECF No. 59.)
Rule 12(c) permits a party to move for judgment on the pleadings, which consist
"A motion under Rule 12(b)(6) tests whether the complaint states a claim on which relief may be granted." Richards v. Mitcheff, 696 F.3d 635, 637 (7th Cir.2012). Under Rule 8(a)(2), a complaint must include "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). The short and plain statement under Rule 8(a)(2) must "give the defendant fair notice of what the claim is and the grounds upon which it rests." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (ellipsis omitted).
Under federal notice-pleading standards, a plaintiff's "[f]actual allegations must be enough to raise a right to relief above the speculative level." Id. Stated differently, "a complaint must contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955). "In reviewing the sufficiency of a complaint under the plausibility standard, [courts must] accept the well-pleaded facts in the complaint as true, but [they] `need[] not accept as true legal conclusions, or threadbare recitals of the elements of a cause of action, supported by mere conclusory statements.'" Alam v. Miller Brewing Co., 709 F.3d 662, 665-66 (7th Cir.2013) (quoting Brooks v. Ross, 578 F.3d 574, 581 (7th Cir.2009)).
The Court first considers whether Acuity had a duty to defend Szarek or any additional insured under the basic coverage provisions of the policy in the Mulberry Grove action. The duty to defend arises when the underlying complaint makes allegations that "fall within or potentially within the coverage provisions of the policy." Viking Constr. Mgmt., Inc. v. Liberty Mut. Ins. Co., 358 Ill.App.3d 34, 294 Ill.Dec. 478, 831 N.E.2d 1, 6 (Ill.App. Ct.2005) (citing Lyons v. State Farm Fire & Cas. Co., 349 Ill.App.3d 404, 285 Ill.Dec. 231, 811 N.E.2d 718, 722 (Ill.App.Ct.2004)).
Acuity had a duty to defend Szarek and any additional insureds in the underlying case only if the underlying claims could be construed, resolving any doubts and ambiguities in favor of coverage,
Illinois courts hold that "there is no occurrence when a subcontractor's defective workmanship necessitates removing and repairing work," Milwaukee Mut. Ins. Co. v. J.P. Larsen, Inc., 353 Ill.Dec. 662, 956 N.E.2d 524, 531 (Ill.App.Ct.2011) (citing Viking Constr., 294 Ill.Dec. 478, 831 N.E.2d at 6), but when the defective workmanship results in damage to something other than the construction project itself, there may be an occurrence, id. (citing CMK Dev. Corp. v. W. Bend Mut. Ins. Co., 395 Ill.App.3d 830, 335 Ill.Dec. 91, 917 N.E.2d 1155, 1164-65 (Ill.App.Ct.2009), and Stoneridge Dev. Co. v. Essex Ins. Co., 382 Ill.App.3d 731, 321 Ill.Dec. 114, 888 N.E.2d 633, 653 (Ill.App.Ct.2008). Thus, where faulty workmanship results in cracks in the load-bearing elements of a home, there is no occurrence causing covered property damage, Stoneridge, 321 Ill.Dec. 114, 888 N.E.2d at 654, but where faulty workmanship results in leaks that cause water damage to the homeowner's furniture, clothing and antiques, there is an occurrence causing covered property damage, see Pekin Ins. Co. v. Richard Marker Assocs., Inc., 289 Ill.App.3d 819, 224 Ill.Dec. 801, 682 N.E.2d 362, 365-66 (Ill.App.Ct.1997).
Defendants contend that this case is virtually identical to Richard Marker because the underlying claim is that faulty workmanship resulted in leaks that damaged not only the common elements of the Mulberry Grove Condominium (i.e., the construction project) but also the individual units and the individual unit owners' private property. Acuity, however, identifies a critical difference: in Richard Marker, the underlying claimant was a homeowner who owned both the home that allegedly suffered from a construction defect as well as the personal property within the home that was damaged by the water infiltration.
In this case, Acuity argues, the underlying claimant is the condominium association, which may "own" the common elements of the building but does not own the personal property within the individual units or the units themselves. The individual unit owners apparently did not join the condominium association in asserting the underlying claims against the defendants, and the condominium association has asserted no right to act on behalf of the individual unit owners with respect to any damages to their personal property. Rather, the condominium association brings suit only "in its representative capacity... concerning the construction deficiencies in the common elements," and the prayers for relief are limited to the "cost of repair or replacement of the ... defects," including fees to "investigate and repair the ... defective conditions" and interest on "loans taken for repair of the defects." (Mulberry Grove Compl. ¶¶ 34, 36, 40, ECF No. 43-1.) Thus, Acuity contends, the underlying claim is not even
Defendants reply that this is a distinction without a difference because, as a general matter, the duty to defend is determined from the facts alleged in the underlying case, the underlying allegations are construed broadly, and the allegation in this case that water infiltration damaged personal property separate from the construction project is enough, regardless of whose property it may turn out to be, to bring this case at least potentially within the policies' coverage provisions.
The Court disagrees. Defendants are correct that the duty to defend is determined from the facts of the underlying matter, and, in many circumstances, a CGL policy may cover damage to personal property due to water infiltration resulting from defective work; however, as Acuity explains, the facts in an underlying matter only establish a duty to defend to the extent they "point to a theory of recovery" that is potentially covered — that is, a theory by which the underlying claimant may be entitled to relief against the insured, based on facts that fall within coverage. Health Care Indus. Liab. Ins. Program v. Momence Meadows Nursing Ctr., Inc., 566 F.3d 689, 696 (7th Cir.2009) (citing U.S. Fid. & Guar. Co. v. Wilkin Insulation Co., 144 Ill.2d 64, 161 Ill.Dec. 280, 578 N.E.2d 926, 932 (1991) ("[A]n insurer has a duty to defend its insured if any
If the facts do not point to a valid theory by which the underlying claimant is entitled to recover from the insured for a covered injury, the facts would not "potentially" bring the case within coverage, as the Illinois Appellate Court has explained:
William J. Templeman Co. v. Liberty Mut. Ins. Co., 316 Ill.App.3d 379, 249 Ill.Dec. 65, 735 N.E.2d 669, 676 (Ill.App.Ct. 2000); see also Del Monte Fresh Produce, N.A., Inc. v. Transp. Ins. Co., 500 F.3d 640, 646 (7th Cir.2007) ("[I]t is the actual complaint, not some hypothetical version, that must be considered.") (citing Conn. Indem. Co. v. DER Travel Serv., Inc., 328 F.3d 347, 350-51 (7th Cir.2003)); Amerisure Mut. Ins. Co. v. Microplastics, Inc., 622 F.3d 806, 811-12 (7th Cir.2010) ("Implied claims that are not specifically alleged can be ignored.").
In this case, if the condominium association wins its lawsuit, it will recover only for the damage to the common elements; the Court is unaware of any right the condominium association has to recover from
Defendants urge this Court to follow J.P. Larsen, 353 Ill.Dec. 662, 956 N.E.2d at 530-32, in which the Illinois Appellate Court held, in a similar factual context, that an insurer had a duty to defend a subcontractor because the condominium association's underlying complaint mentioned water damage to the personal property of the individual unit owners. In J.P. Larsen, the court did not address the fact that, as in this case, the individual unit owners did not join the condominium association in bringing the underlying action.
This Court cannot speculate to why J.P. Larsen was silent on this point, unless the reason is that the insurer simply never raised the issue and the trial and appellate courts overlooked it. In any case, Acuity correctly points out that this Court is not bound by a decision of a state's intermediate appellate court, even on a question of state law, if the state's supreme court would reach a different decision. Robinson v. Ada S. McKinley Cmty. Servs., Inc., 19 F.3d 359, 363 (7th Cir.1994) ("We will not follow an Illinois Appellate Court's interpretation of state law if we are convinced that the Illinois Supreme Court would decide the issue differently.") The Illinois Supreme Court would be unlikely to concur with J.P. Larsen in light of a wealth of authority interpreting Illinois law to impose no duty to defend where the underlying facts might potentially bring the claim within coverage in some hypothetical version of the proceeding, but not the underlying proceeding as actually instituted. Momence Meadows, 566 F.3d at 696 (citing Wilkin, 161 Ill.Dec. 280, 578 N.E.2d at 932); see Lagestee-Mulder, 682 F.3d at 1059, Avent, 612 F.3d at 614-15, Rock v. State Farm Fire & Cas. Co., 395 Ill.App.3d 145, 334 Ill.Dec. 784, 917 N.E.2d 610, 614-15 (Ill. App.Ct.2009) petition for leave to appeal denied 235 Ill.2d 604, 338 Ill.Dec. 254, 924 N.E.2d 460 (2010); Templeman, 249 Ill.Dec. 65, 735 N.E.2d at 676, Crawford Labs., Inc. v. St. Paul Ins. Co. of Ill., 306 Ill.App.3d 538, 239 Ill.Dec. 899, 715 N.E.2d 653, 658 (Ill.App.Ct.1999), petition for leave to appeal denied, 185 Ill.2d 621, 242 Ill.Dec. 135, 720 N.E.2d 1090 (1999); Diamond State Ins. Co. v. Chester-Jensen Co., 243 Ill.App.3d 471, 183 Ill.Dec. 435, 611 N.E.2d 1083, 1087-88 (Ill.App.Ct.1993); Bituminous Cas. Corp. v. Gust K. Newberg Const. Co., 218 Ill.App.3d 956, 161 Ill.Dec. 357, 578 N.E.2d 1003, 1008 (Ill. App.Ct.1991), petition for leave to appeal denied, 143 Ill.2d 636, 167 Ill.Dec. 396, 587 N.E.2d 1011 (1992).
Defendants argue that the Illinois Condominium Property Act allows a condominium association to "act in a representative capacity in relation to matters involving the common elements
For purposes of the present action, however, there is no need to determine precisely what right a condominium association may have to act on behalf of the individual unit owners. In the underlying action, the condominium association merely mentions damage to the personal property of the individual unit owners; it does not seek to recover for it. An underlying claim does not give rise to a duty to defend merely because it does not "logically foreclose the theoretical possibility" of a potentially covered claim lying somewhere in the underlying facts. Microplastics, 622 F.3d at 811-12 (citing Del Monte, 500 F.3d at 644). The condominium association has not asserted any claim against defendants for the personal property within the individual units, nor does it contend in the underlying action that it has any right to do so.
Defendants argue that, while the Acuity policies exclude damage to the insured's own work,
This argument is unavailing. Damage to a structure that results from its defective construction is not "unforeseen" or an "accident"; it is the natural consequence of faulty workmanship. See, e.g., Am. Fire & Cas. Co. v. Broeren Russo Const., Inc., 54 F.Supp.2d 842, 847-48 (C.D.Ill.1999). Thus, as numerous courts interpreting Illinois law have explained in this context, property damage due to construction defects is not caused by an "occurrence" within the meaning of a CGL policy, regardless of whether the insured contractor is responsible for all or just a portion of the building project. CMK, 335 Ill.Dec. 91, 917 N.E.2d at 1164-65, Stoneridge, 321 Ill.Dec. 114, 888 N.E.2d at 656 (citing Viking Constr., 294 Ill.Dec. 478, 831 N.E.2d at 6-7, and Monticello Ins. Co. v. Wil-Freds Const., Inc., 277 Ill.App.3d 697, 214 Ill.Dec. 597, 661 N.E.2d 451, 456-57 (Ill.App.Ct.1996)); see also Hartford Cas. Ins. Co. v. Constr. Builders in Motion, Inc., 966 F.Supp.2d 777, 790 (N.D.Ill.2013), Hartford Fire Ins. Co. v. Flex Membrane
Defendants also argue that the underlying complaint alleges that the water infiltration damaged the "interior finishings" of the individual units, which are not among the common elements of the building. These allegations do not bring the claim potentially within coverage, for reasons already stated. First, if the "interior finishings" are not common elements, then any allegations of damage to them, as with allegations of damage to personal property, do not point to a possible "theory of recovery" on an underlying claim brought not by the individual unit owners but by the condominium association. Second, even putting aside the fact that the condominium association is not seeking and cannot seek to recover for damage to elements of the individual units, the interior finishings are part of the construction project, so any damage to them due to faulty workmanship is not "property damage" caused by an "occurrence" or "accident"; it is the natural consequence of faulty workmanship. See CMK, 335 Ill.Dec. 91, 917 N.E.2d at 1166-67.
This Court concludes that the underlying Mulberry Grove complaint does not allege "property damage" caused by an "occurrence" within the meaning of the relevant Acuity policies. Because there is not even the potential for coverage based on the allegations in the underlying proceedings, Acuity had no duty to defend. The Court need not address the parties' arguments, raised in the briefing on Lennar and Szarek's motion (ECF No. 60, 64, 70), concerning whether Lennar was covered as an additional insured under the Acuity policies because Acuity has no duty to defend under the general coverage provisions of the policy.
Acuity contends that it has no duty to defend or indemnify Szarek for the breach of contract and indemnity claims Cary and Lennar have brought against Szarek in the Cary/Lennar complaint and the Lennar complaint. According to Acuity, these claims are based on Szarek's obligations under its subcontracts with Cary and Mulberry,
The Acuity policies exclude coverage for "[b]odily injury or property damage for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." (3d Am. Compl. ¶ 42, section IV.3.b.)
Acuity contends that, based on the contractual liability exclusion, its policies do not cover the developers' claims that Szarek breached its contracts with them by failing to construct the buildings in a workmanlike fashion or to procure insurance coverage. Szarek wisely makes no response to this contention, as it is abundantly clear that Cary and Lennar's claims concerning Szarek's failure to construct the buildings in a workmanlike fashion or to procure insurance coverage fall within the contractual liability exclusion. See Viking Constr., 294 Ill.Dec. 478, 831 N.E.2d at 8-10 (citing Ind. Ins. Co. v. Hydra Corp., 245 Ill.App.3d 926, 185 Ill.Dec. 775,
Acuity contends that it has no duty to defend or indemnify Szarek for the indemnity claims Cary and Lennar have brought against Szarek in the Cary/Lennar complaint and the Lennar complaint. The contractual liability exclusion in the Acuity policies does not apply "to liability for damages: (1)[a]ssumed in a contract or agreement that is an insured contract, provided the bodily injury or property damage occurs subsequent to the execution of the contract or agreement; or (2)[t]hat the insured would have in the absence of the contract or agreement." (3d Am. Compl. ¶ 42, section IV.3.b.) An "insured contract" is defined as "[t]hat part of any other contract or agreement pertaining to your business ... under which you assume the tort liability of another party to pay for bodily injury or property damage to a third person or organization
Acuity argues that the subcontracts do not meet the definition of "insured contract" because, in the relevant portions of the subcontracts, Szarek promised to indemnify the developers for liability they incurred due to Szarek's acts or omissions, but "insured contracts" are only those in which a named insured promises to assume the tort liability another party has incurred for the other party's own acts or omissions. Acuity cites Virginia Surety Co. v. Northern Insurance Co. of New York, 224 Ill.2d 550, 310 Ill.Dec. 338, 866 N.E.2d 149, 158-59 (2007) in support of its interpretation of the term. But Virginia Surety interpreted only a definition of "insured contract" similar to the one used in the policies effective between 2002 and 2005, and Acuity fails to acknowledge the fact that the definition used in the post-2005 policies differs. In its discussion of this issue, Acuity does not address whether coverage under its post-2005 policies may be triggered if there is any covered property damage, but elsewhere in the present briefing it appears to admit that it may be. (See Acuity's Resp. to Lennar/Szarek Mot. J. Pleadings, ECF No. 64, at 12.)
The Court has been unable to locate any case applying Illinois law that interpreted the definition of "insured contract" found in the post-2005 policies, but it would seem that the proviso (not found in the older policies) might bring Szarek's subcontracts within the definition of "insured contract," if there are any allegations of potentially covered property damage. See, e.g., Leaf River Cellulose, LLC v. Mid-Continent Cas. Co., No. 2:11-CV-54-KS-MTP, 2012 WL 1906529, at *7-8 (S.D.Miss. May 25, 2012) (finding that, under a definition of "insured contract" similar to that in the post-2005 Acuity policies, an indemnification agreement was an "insured contract").
Szarek, however, does not attempt to exploit this weakness in Acuity's argument. Rather, it contends that the state court in the Cary/Lennar action characterized the indemnity claims in that case as "contribution claims sounding in negligence and not indemnification claims sounding in breach of contract," and therefore the contractual liability exclusion does
Szarek mischaracterizes the Cary/Lennar court's ruling. The court construed the claims against Szarek as "claims for contribution," but it does not follow that the claims therefore "sound in negligence." Contribution is an equitable concept that may be applied to contract liability as well as tort liability, and it is frequently so employed in insurance coverage matters. See Liberty Mut. Ins. Co. v. Lumbermens Mut. Cas. Co., 525 F.Supp.2d 993, 995-96 (N.D.Ill.2007). Szarek cites no authority to the contrary — indeed, it cites no authority at all. The Court is not persuaded that the Cary/Lennar indemnification claims are negligence claims rather than breach of contract claims. On the contrary, they are clearly rooted in Szarek's subcontracts.
Nevertheless, the Court need not determine whether Szarek's subcontracts are "insured contracts" within the definition of the policy, even though they only require Szarek to indemnify the developers for damages caused by Szarek's own acts or omissions. There is no need to resort to interpreting exclusions and their exceptions if there is no coverage to begin with, and the underlying claimants do not allege "property damage" caused by an "occurrence" that the policy potentially covers.
The Court has already explained its reasons for concluding that the Mulberry Grove underlying complaint, on which the Lennar complaint is based, does not allege any property damage caused by an "occurrence." As in the Mulberry Grove action, the Cary Woods action
Acuity argues that, although the policies at issue provide specialized coverage for Improper Home Repair and Remodeling, this coverage does not apply in this case because it applies only to "residences", which are defined as "dwelling[s] containing 6 or fewer apartments, condominiums, town houses or dwelling units," and it applies only to the "fixing, replacing, altering, converting, modernizing, improving or making of an addition to ... real property ...," not "[n]ew original construction." (3d Am.Compl. ¶ 47.) Acuity contends that the condominium buildings are too large to fit the definition of "residence," and the work at issue here was new construction, not fixing or improving. Defendants do not respond to this argument. The Court deems defendants, by their silence, to have either conceded that there is no improper home repair/remodeling coverage or abandoned any claim to it. See Brodsky v. HumanaDental Ins. Co., No. 10 C 3233, 2014 WL 2780089, at *11 (N.D.Ill. June 12, 2014).
For the reasons set forth above, the Court grants Acuity's motion for partial judgment on the pleadings [57] and denies Lennar and Szarek's motion for judgment on the pleadings [59]. Status hearing set for 10/7/15 at 9:30 a.m.
