                           ILLINOIS OFFICIAL REPORTS
                                         Appellate Court




        Milwaukee Mutual Insurance Co. v. J.P. Larsen, Inc., 2011 IL App (1st) 101316




Appellate Court            MILWAUKEE MUTUAL INSURANCE COMPANY, n/k/a Milwaukee
Caption                    Insurance Company, Plaintiff-Appellant, v. J.P. LARSEN, INC.,
                           Defendant-Appellee (Weather-Tite, Inc.; Board of Directors of the Prairie
                           District Homes Tower Residences Condominium Association; 18th and
                           Prairie II, LLC; Legacy Development Group VIII, LLC; William E.
                           Warman; Warren Barr III; David Cuomo; William McNabola; General
                           Investment Corporation; Dusan Kraljevic; Jadranka Kraljevic; Jennifer
                           Kraljevic; and Hansen and Hempel Company, Defendants).



District & No.             First District, First Division
                           Docket No. 1-10-1316


Filed                      August 15, 2011


Held                       The trial court properly found that plaintiff insurer had a duty to defend
(Note: This syllabus       defendant subcontractor under a comprehensive general liability policy
constitutes no part of     in a third-party action alleging that the subcontractor installed leaky
the opinion of the court   windows in a condominium building, since the underlying pleadings
but has been prepared      alleged “property damage” resulting from an “occurrence” within the
by the Reporter of         policy's meaning
Decisions for the
convenience of the
reader.)


Decision Under             Appeal from the Circuit Court of Cook County, No. 09-CH-20554; the
Review                     Hon. Daniel A. Riley, Judge, presiding.
Judgment                   Affirmed.


Counsel on                 Novak Law Offices, of Chicago (Neal R. Novak and Reid J. Rozen, of
Appeal                     counsel), for appellant.

                           Law Offices of James A. Smith, of Chicago (James A. Smith, of counsel),
                           and Arnold M. Flank, Ltd., of Northbrook (Arnold M. Flank, of counsel),
                           for appellee.
Panel                      JUSTICE LAMPKIN delivered the judgment of the court, with opinion.
                           Presiding Justice Hall and Justice Rochford concurred in the judgment
                           and opinion.




                                            OPINION

¶1          Plaintiff, Milwaukee Mutual Insurance Company, n/k/a Milwaukee Insurance Company
        (Milwaukee Insurance), appeals the trial court’s order denying its motion for summary
        judgment and granting summary judgment in favor of defendant, J.P. Larsen, Inc. (Larsen).
        Plaintiff contends the trial court erred in finding the underlying pleadings sufficiently
        established plaintiff had a duty to defend Larsen in a third-party action. Based on the
        following, we affirm.

¶2                                            FACTS
¶3          At all relevant times, Milwaukee Insurance provided Larsen with commercial general
        liability (CGL) insurance and umbrella insurance. In March 2003, Weather-Tite, Inc.
        (Weather-Tite), hired Larsen as a subcontractor to apply sealant to windows installed by
        Weather-Tite in a condominium building called Prairie District Homes (PDH). The windows
        subsequently leaked and caused water damage. On July 29, 2008, the PDH Association filed
        a third amended verified complaint against, inter alia, Weather-Tite for breach of express
        and implied warranties. On April 23, 2009, Weather-Tite filed a third-party complaint against
        Larsen alleging that, in the event the PDH Association was successful with its breach of
        warranty claims, Larsen was liable for contribution as a joint tortfeasor and also alleging
        Larsen was in breach of contract for failing to add Weather-Tite as an additional insured to
        its CGL policy.
¶4          Weather-Tite and Larsen both tendered defenses to Milwaukee Insurance. Weather-Tite
        tendered its defense to the PDH Association’s third amended verified complaint and Larsen
        tendered its defense to Weather-Tite’s third-party complaint. Milwaukee Insurance denied
        both defense tenders, finding there was no coverage under the CGL policy where the
        complaints alleged only construction defects and not “property damage” or an “occurrence”


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       within the terms of the policy.
¶5         On June 25, 2009, Milwaukee Insurance filed a complaint for declaratory judgment
       against Weather-Tite and Larsen to determine the parties’ rights under the CGL policy.
       Milwaukee Insurance filed a motion for summary judgment, and Weather-Tite and Larsen
       both filed cross-motions for summary judgment. On March 30, 2010, the trial court entered
       an order granting Milwaukee Insurance’s summary judgment motion as to Weather-Tite, but
       denying Milwaukee Insurance’s summary judgment motion as to Larsen. The trial court
       granted Larsen’s cross-motion for summary judgment against Milwaukee Insurance. This
       appeal followed.

¶6                                             DECISION
¶7          Summary judgment is appropriate when “the pleadings, depositions, and admissions on
       file, together with the affidavits, if any, show that there is no genuine issue as to any material
       fact and that the moving party is entitled to a judgment as a matter of law.” 735 ILCS 5/2-
       1005(c) (West 2002). When cross-motions for summary judgment have been filed, the
       parties agree there are no genuine issues of material fact and only a question of law is at
       issue; therefore, the parties invite the trial court to decide the issues based on the record.
       Greenwich Insurance Co. v. RPS Products, Inc., 379 Ill. App. 3d 78, 84, 824 N.E.2d 1102
       (2008). We review an order granting summary judgment de novo. Adames v. Sheahan, 233
       Ill. 2d 276, 296, 909 N.E.2d 742 (2009).
¶8          The construction of an insurance policy is a question of law. CMK Development Corp.
       v. West Bend Mutual Insurance Co., 395 Ill. App. 3d 830, 837, 917 N.E.2d 1155 (2009). In
       construing the terms of an insurance policy, it is this court’s goal to give effect to the intent
       of the contracting parties by relying on the language used in the signed contract. Id. at 837-
       38. We construe an insurance policy as a whole, using the plain and ordinary meaning of the
       terms to give effect to every provision. Id. at 838. Construction of the policy should include
       “due regard to the risk undertaken, the subject matter that is insured and the purposes of the
       entire contract.” Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90,
       108, 607 N.E.2d 1204 (1992). When the policy terms are unambiguous, we must apply them
       as written; however, if the terms are ambiguous, we must construe them strictly against the
       insurance company as the drafters of the policy. CMK Development Corp., 395 Ill. App. 3d
       at 838.
¶9          Milwaukee Insurance contends the trial court erred in finding it had a duty to defend
       Larsen under the parties’ CGL policy where the underlying pleadings failed to allege
       damages within the policy’s coverage.
¶ 10        Courts have established a general set of rules regarding a CGL insurer’s duty to defend,
       such that:
                “ ‘A court must compare the allegations in the underlying complaint to the policy
                language ***.’ [Citations.] The allegations in the underlying complaint must be
                liberally construed in favor of the insured. [Citation.] ‘ “An insurer may not
                justifiably refuse to defend an action against its insured unless it is clear from the face
                of the underlying complaints that the allegations fail to state facts which bring the
                case within, or potentially within, the policy’s coverage.” ’ (Emphasis omitted.)


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               [Citation.] Where the insurer relies on a provision that it contends excludes coverage
               to reject a tender of defense, we review the applicability of the provision to ensure
               it is ‘ “clear and free from doubt” that the policy’s exclusion prevents coverage.’
               [Citation.]” National Fire Insurance of Hartford v. Walsh Construction Co., 392 Ill.
               App. 3d 312, 315-16, 909 N.E.2d 285 (2009).
       “If recovery is premised on several theories of liability, some of which are excluded from
       coverage, the insurer is still obligated to defend as long as one theory might possibly fall
       within the scope of the policy coverage.” Pekin Insurance Co. v. Richard Marker Associates,
       Inc., 289 Ill. App. 3d 819, 821, 682 N.E.2d 362 (1997).
¶ 11       The CGL policy issued by Milwaukee Insurance to Larsen provided:
                    “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. We will have the right and duty to defend the insured against any ‘suit’
               seeking those damages. However, we will have no duty to defend the insured against
               any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this
               insurance does not apply. We may at our discretion, investigate any ‘occurrence’ and
               settle any claim or ‘suit’ that may result.”
           The CGL policy limited coverage to “property damage” that was “caused by an
           ‘occurrence’ that takes place in the coverage territory” and “occurs during the policy
           period.” “Property damage” was defined by the policy as: (1) “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 (2) “[l]oss 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.” “Occurrence” was defined by the
           policy as “an accident, including continuous or repeated exposure to substantially the
           same general harmful conditions.”
¶ 12       Turning to the substance of the pleadings, the third amended verified complaint filed by
       the PDH Association contained two counts against Weather-Tite, breach of the implied
       warranties of habitability and workmanship and breach of an express warranty. Incorporated
       by reference into both counts, the PDH Association alleged:
                    “The Condominium has and continues to experience severe water infiltration due
               to the faulty construction for which the Developer [18th and Prairie II, L.L.C.] is
               responsible under its express warranty, including but not limited to the following:
               installing a window system that does not adequately manage the water which enters
               the system; failing to install flashing at various locations as required by the
               architectural drawings and/or improperly installing flashing at various locations;
               failing to properly install metal base flashing and sealant joints in various locations
               resulting in deboned, open and split sealant joints in various locations; allowing
               cracked and deboned mortar joints throughout the masonry; allowing cracks within
               individual brick masonry and cast stone units at several locations; allowing
               efflorescence or water infiltration into brickwork[;] allowing loose and displaced cast
               stone units at various locations; failing to provide proper end dams at various
               locations; not providing end dams at other locations[;] and failing to complete
               warranty punch list items.”

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       Further incorporated by reference to both counts against Weather-Tite, the PDH Association
       alleged the developer’s failures to correct the deficiencies “have and continue to cause
       damage to the Condominium common elements, the units, and the individual unit owner’s
       personal property. Apart from the property damage, the Association will have to make repairs
       to correct the design and/or construction defects” with damages estimated between $4
       million and $8 million.
¶ 13       Specifically, in the breach of implied warranties count, the PDH Association alleged that
       “Weather-Tite impliedly warranted to the Unit Purchasers that the Condominium was
       reasonably fit and suited for the purposes of habitation as a residence” and “individual Unit
       Owners have sustained loss due to the faulty and defective work” where Weather-Tite failed
       “to perform its duties with proper workmanship, quality and skill [resulting] in the
       installation of a window system that does not adequately manage the water which enters the
       system, resulting in significant and continuing water leakage into the common elements and
       residential Units of the Condominium.” The PDH Association sought “damages in the
       amount attributable to Weather[-]Tite’s breach.” With respect to the breach of express
       warranty count, the PDH Association alleged the “Board and the individual Unit Owners
       have sustained loss due to the faulty and defective work in the Condominium” done by
       Weather-Tite and within the one-year requisite warranty period “severe exterior leaks were
       occurring in various windows of the Condominium” such that damages were sought in the
       “amount attributable to Weather[-]Tite’s breach.”
¶ 14       The third-party complaint filed by Weather-Tite against Larsen contained two counts. In
       the first count, Weather-Tite alleged Larsen was liable for contribution as a joint tortfeasor
       in the event the PDH Association was successful in its claims against Weather-Tite because
       Larsen committed one or more “negligent acts and/or omissions,” including: “[n]egligently
       and carelessly failed to follow the blueprints and plans provided for the contemplated
       construction”; “[c]arelessly and negligently failed to instruct its employees as to the scope
       of work to be performed in the matter [sic] in which it was to be performed”; “[n]egligently
       and carelessly deviated from the plans and specifications for the proposed caulking and
       sealing of window frames, panel frames, and louver frames”; “[w]as otherwise careless and
       negligent in its performance of its work, supervision of its employees”; and “[f]ailed to
       inspect the area of occurrence.” Weather-Tite further alleged that “[a]s a direct and proximate
       result of one or more of the *** negligent acts or omissions, *** [Larsen] proximately caused
       and/or contributed to the alleged injuries claimed by” the PDH Association. In the second
       count, Weather-Tite alleged Larsen breached the parties’ subcontract by failing to name
       Weather-Tite as an additional insured on Larsen’s general liability insurance policy, thereby
       causing Weather-Tite to incur costs, expenses, attorney fees, and potential indemnity
       obligations.
¶ 15       In order to determine whether Milwaukee Mutual has a duty to defend Larsen, we must
       ascertain whether the underlying pleadings alleged facts demonstrating “property damage”
       resulting from an “occurrence” within, or potentially within, the terms of the CGL policy.

¶ 16                                   I. Property Damage
¶ 17       We first consider whether the pleadings alleged “property damage” within the meaning
       of the CGL policy. Milwaukee Mutual contends it had no duty to defend where the

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       underlying allegations failed to request “property damages,” only requesting recovery of the
       costs to repair or replace the damaged structure, which are not covered under the CGL policy.
¶ 18       “Property damage” was defined in the CGL policy as “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 [l]oss 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.” The supreme court has further provided that “to the
       average, ordinary person, tangible property suffers a ‘physical’ injury when the property is
       altered in appearance, shape, color or in other material dimension. Conversely, to the average
       mind, tangible property does not experience ‘physical’ injury if that property suffers
       intangible damage, such as diminution in value as a result from the failure of a component
       *** to function as promised.” Travelers Insurance Co. v. Eljer Manufacturing, Inc., 197 Ill.
       2d 278, 301-02, 757 N.E.2d 481 (2001).
¶ 19       In determining whether there was “property damage,” we keep in mind the policy
       considerations behind CGL insurance. Specifically, the supreme court has said:
                    “ ‘[C]omprehensive general liability policies *** are intended to protect the
                insured from liability for injury or damage to the persons or property of others; they
                are not intended to pay the costs associated with repairing or replacing the insured’s
                defective work and products, which are purely economic losses. [Citations.] Finding
                coverage for the cost of replacing or repairing defective work would transform the
                policy into something akin to a performance bond.’ ” Id. at 314 (quoting Qualls v.
                Country Mutual Insurance Co., 123 Ill. App. 3d 831, 833-34, 462 N.E.2d 1288
                (1984)).
       Going further, the appellate court has said:
                “[If] insurance proceeds could be used for damages from defective workmanship, a
                contractor could be initially paid by the customer for its work and then by the
                insurance company to repair or replace the work. [Citation.] Treating a CGL policy
                like a performance bond would be unjust to the CGL insurer, which, in contrast to
                the surety on a performance bond, cannot bring suit against the contractor for the
                defective construction.” Stoneridge Development Co. v. Essex Insurance Co., 382 Ill.
                App. 3d 731, 752, 888 N.E.2d 633 (2008) (citing Monticello Insurance Co. v. Wil-
                Freds Construction, Inc., 277 Ill. App. 3d 697, 709, 661 N.E.2d 451 (1996)).
¶ 20       In its third amended verified complaint, the PDH Association alleged that, due to faulty
       construction, the condominium common elements, individual units and unit owners’ personal
       property were damaged. The complaint further stated that “apart from the property damage,
       the Association will have to make repairs to correct the design and/or construction defects”
       (emphasis added) in the amount of $4 million to $8 million. The allegation was pled against
       the developer, but was also incorporated into the breach of warranty counts against Weather-
       Tite. Moreover, in the breach of implied warranty count, the PDH Association alleged
       Weather-Tite’s faulty workmanship caused individual unit owners to sustain losses. The
       breach of warranty counts, and the allegations incorporated therein, were imputed against
       Larsen vis-à-vis the third-party complaint in which Larsen was alleged to be a joint tortfeasor
       based on negligence. Although the damages to the common elements, individual units and
       personal property were not expressly described, we must construe the pleadings liberally to

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       allow for coverage, or, at least, the potential for coverage. Walsh Construction Co., 392 Ill.
       App. 3d at 315.
¶ 21       The damages alleged are not merely construction defects, which would constitute
       economic losses not covered under the CGL policy. The costs described for the construction
       defects were between $4 million and $8 million. The costs associated with the “property
       damage” suffered by the individual unit owners was in addition to that sum, according to the
       complaint. The damages alleged are not intangible or merely associated with the repair or
       replacement of the faulty window caulking and sealant.
¶ 22       Milwaukee Mutual spends a lot of time in its brief arguing that the allegations against
       Larsen are based in contract and, therefore, Milwaukee Mutual could have no duty to defend.
       We disagree. The allegations in the third-party complaint repeatedly state that Larsen
       negligently completed the job for which it was hired. Thus, although identified as a cause of
       action for contribution, the allegations of the pleading control over its form and the
       allegations sounded in negligence. See Pekin Insurance Co. v. Dial, 355 Ill. App. 3d 516,
       520, 823 N.E.2d 986 (2004) (“[t]he factual allegations of the complaint, rather than the legal
       theory under which the action is brought, determine whether there is a duty to defend”);
       Lyons v. State Farm Fire & Casualty Co., 349 Ill. App. 3d 404, 407-10, 811 N.E.2d 718
       (2004). Moreover, Milwaukee Mutual fails to acknowledge that allegations based in contract
       have resulted in duties to defend as long as the damage is not to the actual property the
       insured was working on but, rather, is to other property caused by the insured’s work
       product. See Richard Marker Associates, Inc., 289 Ill. App. 3d at 820 (duty to defend found
       where the underlying allegations were for breach of an architectural services agreement in
       which the insured failed to adequately design the placement and insulation of water and
       plumbing pipes and breach of a construction contract for a faulty HVAC system).
¶ 23       We conclude the pleadings alleged “property damage” within, or at least potentially
       within, the definition of the CGL policy.

¶ 24                                      II. Occurrence
¶ 25       We next must consider whether the “property damage” resulted from an “occurrence”
       within the meaning of the CGL policy. Milwaukee Mutual contends the underlying pleadings
       do not allege an “occurrence” where the “defects alleged in the [t]hird-[p]arty [c]omplaint
       are the natural and ordinary consequence of faulty workmanship, and the resulting damage
       was not caused by an ‘accident.’ ”
¶ 26       As previously stated, “occurrence” was defined in the CGL policy as “an accident,
       including continuous or repeated exposure to substantially the same general harmful
       conditions.” “Accident” was not defined in the policy, but courts have agreed that an
       “accident” is “ ‘an unforeseen occurrence, usually of an untoward or disastrous character or
       an undesigned sudden or unexpected event of an inflictive or unfortunate character.’ ” State
       Farm Fire & Casualty Co. v. Watters, 268 Ill. App. 3d 501, 506, 644 N.E.2d 492 (1994)
       (quoting Aetna Casualty & Surety Co. v. Freyer, 89 Ill. App. 3d 617, 619, 411 N.E.2d 1157
       (1980)). The “ ‘natural and ordinary consequences of an act do not constitute an accident.’ ”
       Watters, 268 Ill. App. 3d at 506 (quoting Freyer, 89 Ill. App. 3d at 619). In general, “ ‘there
       is no “occurrence” when a subcontractor’s defective workmanship necessitates removing and
       repairing work.’ ” Viking Construction Management, Inc. v. Liberty Mutual Insurance Co.,

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       358 Ill. App. 3d 34, 42, 831 N.E.2d 1 (2005) (quoting Robert J. Franco, Insurance Coverage
       for Faulty Workmanship Claims Under Commercial General Liability Policies, 30 Tort &
       Insurance L.J. 785, 789 (1995)).
¶ 27       This court has repeatedly stated that damage to something other than the project itself
       does constitute an “occurrence” under a CGL policy. CMK Development Corp., 395 Ill. App.
       3d at 840 (citing Stoneridge Development Co., 382 Ill. App. 3d at 752). “[D]efective
       workmanship could be covered if it damaged something other than the project itself.”
       Stoneridge Development Co., 382 Ill. App. 3d at 753. Examples of qualifying other property
       include damage to a homeowner’s furniture, clothing and antiques as a result of the insured’s
       faulty placement and insulation of plumbing and water pipes (Richard Marker Associates,
       Inc., 289 Ill. App. 3d at 823); damage to cars in a parking garage completed with faulty
       workmanship by the insured, but not water damage to the lobby and basement, damaged
       concrete, and cracked floors in the adjoining building built by the same insured (Wil-Fred’s,
       277 Ill. App. 3d at 705); and damage to carpets, upholstery and draperies at a school where
       the insured incorporated asbestos-containing materials into the building structure (United
       States Fidelity & Guaranty Co. v. Wilkin Insulation Co., 144 Ill. 2d 64, 75, 578 N.E.2d 926
       (1991)).
¶ 28       In its third amended verified complaint, the PDH Association alleged the installation of
       a faulty window system resulted “in significant and continuing water leakage into the
       common elements and residential” units. (Emphasis added.) Moreover, as previously
       discussed, the “property damage” that is, at least possibly, imputed to Larsen through his
       negligent workmanship included personal property and water damage throughout a building
       not constructed by Larsen. See Viking, 358 Ill. App. 3d at 54 (“negligent workmanship that
       resulted in damage to something other than the structure worked upon”); Richard Marker
       Associates, Inc., 289 Ill. App. 3d at 822 (there must be “damage to other materials not
       furnished by the insured”). Therefore, the underlying pleadings alleged that Larsen’s
       negligent workmanship caused an accident in the form of significant and continuing water
       leakage. This is more than an allegation that the window sealant and caulking were defective.
       See Richard Marker Associates, Inc., 289 Ill. App. 3d at 823. We, therefore, conclude that
       an “occurrence” was pled.

¶ 29                                       CONCLUSION
¶ 30       Based on our finding that the pleadings alleged facts that bring the cause within, or at
       least potentially within, the CGL policy’s coverage, we conclude Milwaukee Insurance has
       a duty to defend Larsen in the third-party action. We affirm the judgment of the circuit court.

¶ 31      Affirmed.




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