The Illinois Court of Appeals determined the insurer must defend allegations of property damage arising from faulty workmanship. Milwaukee Mut. Ins. Co. v. J.P. Larsen, Inc., 2011 Ill. App. Unpub. LEXIS 1443 (Ill. Ct. App. June, 20, 2011).
Larsen was a subcontractor for Weather-Tite in a condominium building. Weather-Tite installed windows on the project and hired Larsen to apply sealant to the windows. The windows subsequently leaked and caused water damage within the complex.
The homeowner's association sued Weather-Tite for breach of express and implied warranties. Weather-Tite filed a third-party complaint against Larsen, seeking contribution and alleging that Larsen was in breach of contract by failing to add Weather-Tite as an additional insured under Larsen's CGL policy.
Both Weather-Tite and Larsen tendered to Larsen's insurer. Both tenders were denied because the insurer contended the complaints alleged only construction defects, and not "property damage" or an "occurrence" within the terms of the policy.
The insurer filed suit for a declaratory judgment. The trial court granted the insurer's motion as to Weather-Tite, but granted Larsen's cross-motion for summary judgment.
On appeal, the appellate court looked to the underlying allegations. The homeowner's association alleged individual owners had sustained loss due to the faulty and defective work because Weather-Tite had failed to perform its duties with proper workmanship. Consequently, there was water leakage into the common elements and residential units. Weather-Tite's third party complaint alleged that Larsen's negligence caused the damage claimed by the homeowner's association.
The court first asked whether property damage had been alleged in the third party complaint? The insurer argued that the allegations against Larsen were based in contract. However, the allegations in the third-party complaint repeatedly stated that Larsen negligently performed the job. The allegations of the pleading controlled over its form, and the allegations here sounded in negligence.
Next, the court confronted the insurer's argument that the underlying pleadings did not allege an "occurrence" because the defects alleged were the natural and ordinary consequence of faulty workmanship. Consequently, the resulting damage was not caused by an accident. Looking to its prior decisions, the court noted that damage to something other than the project itself constituted an "occurrence" under a CGL policy. Property damage caused by the negligent sealing of the windows included personal property and water damage throughout a building not constructed by Larsen. The underlying pleadings alleged that Larsen's negligent workmanship caused an accident in the form of continuing water leakage. This was more than an allegation that the window sealant and caulking were defective. Therefore, an "occurrence" was pled and the insurer owed Larsen a defense.
As a side note, some recent decisions have reached the same result with different reasoning regarding whether there was an "occurrence." Unless the insured intentionally failed to seal the windows properly, its faulty workmanship created an occurrence or an accident causing property damage. Coverage would be negated, however, by the business risk exclusions if the property damage was, for example, to the insured's own work or product. See Am. Family Mut. Ins. Co. v. Am Girl, Inc., 673 N.W. 2d 65 (Wis. 2004); Sheehan Constr. Co., Inc., 2010 Ind. LEXIS 557, at *17 (Ind. Sept. 30, 2010); United States Fire Ins. Co. v. J.S.U.B., 979 So.2d 885 (Fla. 2007).