Judgment on the Pleadings – No Duty To Defend Or Indemnify Townhome Owner or Developer Against Construction Defect Claims

Peter Syregelas recently obtained judgment on the pleadings in a significant decision related to a declaratory judgment action involving a construction defect suit against a developer/general contractor that sought coverage under a commercial general liability policy issued by our client insurer.

The policy was issued to SZG Prairie LLC (“SZG”), which was the owner, developer, and general contractor of a large townhome construction development in Chicago’s South Loop.  The townhomes were allegedly riddled with defects, requiring the expenditure of large sums of money by the townhome owners’ association to repair the defects and replace damaged work.  The association made a pre-suit claim against SZG for the defects. Additionally, SZG was sued by certain subcontractors for SZG’s alleged failure to pay for completion of work at the development. SZG tendered all claims against it to our client—those which were in suit and those not yet in suit.

We denied the tender and filed a declaratory judgment action (“DJA”) in Cook County on behalf of our client insurer. The court held that our client had no duty to defend for multiple reasons. First, the pre-suit claims required no defense because our client’s policy carefully distinguished between “suits” and “claims”—the latter of which required no defense. Second, the claims of the subcontractors for SZG’s failure to pay were not covered because breach of contract is not something that is covered by a CGL policy. Third, we were successful in extending the reasoning in the Illinois Appellate Court’s Acuity v. 950 West Huron case, which modified the previous case law that had held that damage to any part of the construction project itself (1) is not “property damage,” i.e., damage to the property of others, but only economic loss for disappointed expectations, and (2) is not caused by an “occurrence” because a defective building is the ordinary and expected consequence of defectively performed construction work.

The 950 West Huron decision held that where the insured whose coverage is in question is a subcontractor, damage to portions of the construction project beyond the scope of the subcontractor’s work is an occurrence from the standpoint of the subcontractor.  The scope of the subcontractor’s work is the measure of coverage, the court held. However, in our case, because the insured was the general contractor/developer, the entire project was its work so any defects in that work were not covered.

Finally, the court held that SZG could not latch onto an allegation made by the association purportedly on behalf of the individual unit owners regarding “damage to other property” to trigger the duty to defend.  SZG contended that a line of cases finding coverage for damage to other property—i.e., property not part of the construction project, such as unit owners’ personal property—controlled the outcome of our case.  But we relied on Westfield v. West Van Buren, a 2016 Appellate Court decision in which LPP Partner David Osborne represented Westfield, where the court in that case rejected the contention that an isolated allegation of damage to unspecified property, unconnected to any claim for recovery, qualified as “damage to other property” to trigger the insurer’s duty to defend. The association also had no standing to make the claims for damage to other property as the other property did not belong to it.

Judge Cecelia Horan granted our client insurer’s motion for judgment and entered a final order declaring our client owed no defense to SZG.

The case reaffirms case law holding that damage to the project itself is not covered continues to control disputes about coverage for a general contractor/developer.