In a prior post, we noted the Indiana Supreme Court held that the CGL policy covers damage to a home structure resulting from shoddy subcontractor work unless the subcontractor work was intentionally faulty. See Sheehan Constr. Co. v. Cont'l Cas. Co., 935 N.E. 2d 160 (Ind. 2010). In a subsequent construction defect case, the Seventh Circuit reversed the district court's decision in favor of the insurer and remanded for reconsideration in light of Sheehan. See Trinity Homes LLC v. Ohio Cas. Ins. Co., 2010 U.S. App. LEXIS 25983 (7th Cir. Dec. 22, 2010).
The insured entered into thousands of contracts to build homes. Each contract provided the insured would be the general contractor and warranted that the homes would be free of defects caused by poor workmanship. The insured hired a number of subcontractors to do the actual home construction.
Due to faulty work done by the subcontractors, a number of the homes were plagued with structural problems. These defects allowed water to enter the homes, which in turn resulted in physical damage to the residences and health problems for the occupants. In thirteen different suits, including multiple class actions, the homeowners sued the insured for the costs associated with remedying the subcontractor's deficient work.
The insured had multiple primary CGL policies and an umbrella policy with Cincinnati Insurance Company that covered liability in excess of or not covered by the CGL policies. None of the insurers would defend the insured. When the insured sued, most of the CGL carriers settled for at least 75% of the policy limit, with the insured being responsible for the remainder of the limit, functionally exhausting the CGL policy. Ohio Causality, however, claimed the damage arising from faulty subcontractor work was not "property damage" caused by an "occurrence" within the meaning of its CGL policy. Cincinnati Insurance also argued its umbrella policy was not triggered because a number of the CGL policies were neither completely exhausted nor otherwise unavailable.
On cross motions for summary judgment, the district court ruled for the insurers. Ohio Casualty's policy did not cover the underlying home damage. Cincinnati Insurance was not obligated to provide coverage because the district court ruled some of the CGL policies were still available.
The Seventh Circuit reversed. The summary judgment in favor of Ohio Casualty was reversed in light of Sheehan. The applicability of any exclusions or limitations in the policy was left for the district court on remand.
Turning to the umbrella policy, the insured argued the policy was triggered because no remaining CGL coverage was available. Some of its CGL insurers denied coverage, while others entered into settlement agreements that functionally exhausted the CGL policies. The umbrella policy promised to pay the "'ultimate net loss' which the insured is legally obligated to pay as damages in excess of the 'underlying insurance' . . . ." The Limits of Insurance clause stated once the limits of the underlying insurance were exhausted by payment of claims, the umbrella policy would continue in force as the underlying policy.
Although the district court held that the umbrella policy required exhaustion of the CGL limit by the insurer payout alone, the Seventh Circuit disagreed. While the umbrella policy stated that a CGL policy was exhausted when the policy limit had been completely expended, it did not clearly provide that the full limit must be paid out by a CGL insurer alone. Therefore, the policy was ambiguous. The insurer's interpretation that the CGL policy could be exhausted when an insured and the CGL insurer entered into a settlement agreement where the insurer paid a large percentage of the total limit and the insured paid the remainder was reasonable.