Lyerla v. AMCO Insurance Co., (7th Circ. Doc. No. 07-3104)
In a recent case from the Seventh Circuit the court found that no coverage existed in a CGL policy for a contractor sued by homeowners for breach of contract. (The opinion can be found here.)
The contractor had performed work on a residential project and the owners of the project sued him for breaching his construction contract by failing to complete the punchlist, and for liquidated damages guaranteed to them under the contract ($100 per day for every day the project went over the date required for completion of the punchlist items for the first 14 days and $150 for every day thereafter). The contractor tendered the claim to his insurer and coverage was denied. The contractor settled the suit with the owners for $53,000 and brought an action against the insurer for breach of contract and for violating the Illinois Insurance Code. The insurer and the contractor both moved for summary judgment on the matter and the district court concluded that the underlying breach of contract claim filed by the owners had not alleged either an “occurrence” or “property damage” as defined in the contractor’s CGL policy.
The definitions in the policy were:
That insurer “will 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 policy:
applies to “bodily injury” and “property damage” only if:
1) The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory”; and
2) The “bodily injury” or “property damage” occurs during the policy period.
“Occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” “Property damage” is defined as:
a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.
Lyerla v. AMCO Ins. Co., at 2 - 3.
The Seventh Circuit agreed with the District Court’s decision and went on to note that Illinois law was replete with cases holding that allegations for breach of contract against an insured do not trigger coverage where the alleged defects resulting from the breach are considered the natural and ordinary consequences of the improper construction techniques of the contractor or its subs and therefore do not constitute “occurrences” within the definitions of most CGL policies.
The court also held that the damages alleged by the owners against the contractor for the costs they were forced to pay to complete the construction and the liquidated damages did not amount to “property damage” under the policy where they could not be considered damage to tangible property or damages resulting from “loss of use” by the owners.
The opinion serves to reaffirm the principal that the CGL policy doesn’t provide coverage for breach of contract claims and should put designers, contractors, and subs on notice that different policies should be procured if they would have coverage for these allegations.
