Additional Insured Not Entitled to Coverage for Named Insured’s Defective Work

    The Court of Appeals for the Seventh Circuit determined there was no duty to defend or to indemnify the additional insured for the named insured's defective work. St. Paul Guardian Ins. Co., et al. v. Walsh Construction Co., 99 F. 4th 1035 (7th Cir. 2024).

    The City of Chicago contracted with Walsh Construction Company to manage the construction of a canopy and curtain wall system at O'Hare International Airport. Walsh entered into a contract with Carlo Steel Corporation, which in turn subcontracted with LB Steel, LLC to fabricate and install steel columns to support the wall and canopy. LB Steel listed Walsh as an additional insured in its commercial general liability policies. LB Steel's insurers were St. Paul, Travelers, and Charter Oak Fire Insurance Company.

    Several years into the project, the City discovered cracks in the welds of the steel columns and sued Walsh. 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 refused to do so. Walsh eventually secured a judgment against LB Steel, but LB Steel declared bankruptcy. Walsh then sued LB Steel's insurers to recover the costs of defending against the City's lawsuit and indemnification for any resulting losses. 

    In this suit, LB Steel's insurers sought a declaratory judgment that LB Steel's CGL policies did not cover the expenses Walsh incurred to repair the defective columns. They also sought 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 insurers on both issues. 

    On appeal, the case turned on the issue of whether, under Illinois law, the defects in the welds and columns constituted "property damage" under LB Steel's policies.

    First, addressing whether there was "property damage" under the policies, the court noted that the policies only covered damage to the property of others – not to LB Steel's own property. In order to succeed on the coverage question, Walsh had to demonstrate some physical injury to tangible property beyond the steel elements fabricated by LB Steel. 

    Walsh, however, failed to meet this burden. For example, Walsh did not identify any cracks in the glass, damage to concrete, or alterations to any other part of the canopy or curtain wall not provided by LB Steel. Walsh argued that once the welding in the columns holding the canopy's weight cracked, the entire canopy structure became structurally unstable. In other words, the defective welds increased the potential for the canopy to collapse. But this offered no evidence that the "structural instability" had manifested itself in any physical way (other than in the LB Steel columns themselves). 

    Therefore, Walsh did not suffer any covered losses because its damages were limited to LB Steel's own defective work. Accordingly, the insurers were not required to indemnify Walsh for its losses. The district court's grant of summary judgment in favor of the insurers on the duty to indemnify was affirmed.

    Regarding the duty to defend, the City's complaint limited its allegations to LB Steel's defective welds and steel and the costs of repairing them. The complaint did not suggest that LB Steel's defective welds might have caused damage to other parts of the canopy system. Therefore, the insurers did not have a duty to defend Walsh in the underlying action. The district court's grant of summary judgment in favor of the insurers on the duty to defend was affirmed.

    Thanks to colleague Mark Murakami for forwarding this case to me.