No Coverage for Additional Insured for Construction Defect Claim
The Seventh Circuit affirmed the district court's grant of summary judgment to the insurers, finding there was no coverage for the additional insured on a construction defect claim. St. Paul Guardian Ins. Co. v. Walsh Construction. Co., 2024 U.S. App. LEXIS 10285 (7th Cir. April 29, 2024).
The City of Chicago hired Walsh Construction Company as general contractor for the Facade and Circulation Enhancement (FACE) project at O'Hare International Airport. The FACE project involved building and installing a new canopy for Terminals 1, 2 and 3. The project also called for the construction of a steel and glass curtain wall that would be integrated with the curtain wall at Terminals 2 and 3. Walsh contracted with Carlo Steel Corporation to manufacture the steel and curtain wall. Carlo, in turn, subcontracted with LB Steel, LLC 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.
After completion of the project, the City found cracks in welds performed by LB Steel. The City required Walsh to install shoring to the columns. Walsh and the City entered into a limited settlement agreement in which Walsh agreed to conduct repairs to the columns at its own expense.
The City later sued Walsh for breach of contract and contractual indemnity to recover the costs the City incurred to investigate and remediate the defective well. LB Steel had CGL policies in place with St. Paul, Traveler's, and Charter Oak (Insurers). Walsh was named as an additional insured in each policy. Walsh tendered its defense of the City's claims. The Insurers refused to defend. Walsh eventually settled with the City for $10 million.
The Insurers sued Walsh seeking a declaratory judgment that LB Steel's policies did obligate them to defend Walsh in the underlying suit against the City. Walsh brought four counterclaims, seeking (1) indemnification under the policies for the $24,132,500 Walsh claimed against LB Steel, (2) recovery of attorneys fee and costs Walsh incurred in defending itself against the City, (3) indemnification of the $10 million Walsh paid to the City under the settlement and any additional costs incurred in remediating the damage, and (4) sanctions under Illinois law.
The district court granted summary judgment to the Insurers, concluding there was no duty to defend or indemnify under the policies. The request for sanctions was also denied. The court reasoned that, because the physical damage at issue was limited to LB Steel's own products, it did not constitute "property damage."
The Court of Appeals agreed there was no property damage. The policies only covered damage to the property of others – not to LB Steel's own property. The St. Paul policy defined "property damage" as "physical damage to tangible property of others." The other policies contained a "Your Product" exclusion, which excluded coverage for "'property damage' to 'your product' arising out of it or any part of it." "Your Product" was defined as "any good or products, other than real property, manufactured, sold, handled, distributed or disposed of by . . . you." Thus, Walsh had to demonstrate some physical injury to tangible property beyond the steel elements fabricated by LB Steel.
Walsh, however, did not identify 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 argued that once the welding in the columns holding the canopy's weight cracked, the entire canopy structure became structurally unstable. This, Walsh argued, was sufficient to trigger coverage. The court disagreed. Under Illinois law, an increased potential for future property damage did not itself constitute property damage.
Walsh also argued that there was property damage because LB Steel''s component parts were so intertwined with the canopy structure that damage to the steel columns necessarily meant damage to the canopy as a whole. But damage to the columns did not require the entire canopy to be taken down and rebuilt. Walsh restored the canopy's structural integrity by retrofitting the defective columns. The outcome may have been different if physical abnormalities in the columns required Walsh to disassemble the canopy and start anew, but this was not the case here. Therefore, there was no duty to indemnify because there was no property damage.
Further, there was no duty to defend. The underlying complaint did not give a suggestion that LB Steel's defective welds might have caused damage to other parts of the canopy system.
Finally, sanctions were not warranted because the Insurers' coverage position prevailed.
