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Allied Property & Casualty Insurance Co. v. Metro North Condominium Association

United States Court of Appeals, Seventh Circuit

March 8, 2017

Allied Property & Casualty Insurance Company, et al., Plaintiffs-Appellees,
Metro North Condominium Association, Defendant-Appellant.

          Argued October 27, 2016

         Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 15-cv-03925 - Jorge L. Alonso, Judge.

          Before Wood, Chief Judge, and Bauer and Manion, Circuit Judges.


         Allied Property and Casualty Insurance Company issued a commercial general liability policy insuring a subcontractor who worked on a multi-unit residential property owned by Metro North Condominium Association. In 2006 the Metro North property sustained extensive water damage caused by the subcontractor's defective window installation. Metro North and the subcontractor reached a settlement in which the subcontractor assigned to Metro North its right to any insurance proceeds covering the damage. The subcontractor's insurers (Allied and another insurer named AMCO) then filed this declaratory judgment action seeking a declaration that they were not required to cover the losses claimed in the settlement. The district court found for the insurers, and Metro North appeals. We affirm.

         I. BACKGROUND

         Over ten years ago, Metro North Condominium Association hired a developer to build a condominium in Chicago. The developer used two subcontractors, CSC Glass and CSC Construction (collectively called CSC), to install the building's windows. CSC installed the windows defectively, and as a result the building sustained significant water damage following a rain storm in October 2006. The condominium unit owners also incurred personal-property damage.

         In 2009 Metro North sued the developer in Illinois state court for more than $5 million in damages. The developer apparently turned out to be insolvent, and in 2013 Metro North filed a fourth amended complaint that added a claim against CSC for breach of the implied warranty of habitability[1] Metro North also brought a negligence claim against CSC, but that claim was dismissed with prejudice because it was filed after the statute of limitations had expired.

         In 2015 Metro North and CSC reached a settlement in which Metro North dismissed its pending lawsuit. In exchange, CSC assigned to Metro North CSC's rights to payment, if any, of up to $700, 000 of insurance coverage from Allied Property & Casualty Insurance Company ("Allied"). The settlement specified that the right to payment had to "aris[e] out of the claims asserted against CSC in the [underlying Illinois] Action or this Settlement thereof." At the time of the settlement, the only pending claim against CSC in the underlying lawsuit was Metro North's claim for breach of the implied warranty of habitability. The settlement further specified that it was not intended to compensate Metro North for the cost of repairing or replacing CSC's defectively installed windows, but rather for the resultant damage to the remaining parts of Metro North's condominium and to the unit owners' personal property.

         Allied insured CSC under a standard commercial general liability policy (CGL policy) effective from March 2006 to March 2007.[2] The policy required Allied to pay CSC for any covered property damage for which CSC became liable: "We 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 also contained a number of exclusions identifying damages for which there was no coverage. For instance, several provisions (collectively referred to here as the "your work" exclusions), excluded coverage for damage to the particular part of the relevant property worked on by CSC, or for the cost of repairing or replacing CSC's own defective work. Under Exclusion 2.b, the policy also excluded coverage for damages arising from "contractual liability" that is, damages that CSC became obligated to pay "by reason of the assumption of liability in a contract or agreement." This exclusion applied only if CSC would not have been liable "in the absence of the contract or agreement."

         When Allied learned of CSC's settlement, it brought this diversity action against Metro North in federal court, seeking a declaratory judgment that it was not liable for the damages claimed in the settlement. Metro North filed a cross-motion for summary judgment to the contrary. In 2016 the district court entered an order denying Metro North's cross-motion and granting summary judgment for Allied, finding that the settlement damages were not covered under Allied's policy. Metro appeals.

         II. ANALYSIS

         We review the district court's grant of summary judgment de novo, construing all facts and reasonable inferences "in favor of the party against whom the motion under consideration was made." Nat'l Am. Ins. Co. v. Artisan & Truckers Cas. Co., 796 F.3d 717, 723 (7th Cir. 2015). Summary judgment is required if the movant shows that "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a).

         The parties agree that this dispute is governed by Illinois law. See Santa's Best Craft, LLC v. St. Paul Fire & Marine Ins. Co.,611 F.3d 339, 345 (7th Cir. 2010). In Illinois, an insurer has a duty to indemnify "when the insured becomes legally obligated to pay damages in the underlying action that gives rise to a claim under the policy." Traveler's Ins. Co. v. Eljer Mfg., Inc.,757 N.E.2d 481, 491 (Ill. 2001). "Once the insured has incurred liability as a result of the underlying claim, an insurer's duty to indemnify arises only if 'the insured's activity and the resulting loss or damage actually fall within the CGL policy's coverage.'" Id. at 492. The duty to indemnify is significantly narrower than the duty to defend, which applies "if the complaint alleges facts that are even potentially within the coverage of the insurance policy." Ohio Cas. Ins. Co. ...

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