Assignment of insurance proceeds as part of a settlement against the subcontractor for faulty workmanship was not covered under the CGL policy in accordance with Illinois law. Allied Prop. & Cas. Ins Co v. Metro North Condominium Assoc., 2017 U.S. App. LEXIS 4107 (7th Cir. March 8, 2017).

    Metro North Condominium Association hired a developer to build a condominium. The developer used CSC Glass to install the building's windows. CSC installed the windows defectively, causing the building to sustain significant water damage following a rain storm.

    Metro North sued the developer, who turned out to be insolvent. Metro North amended its complaint to add a claim against CSC for breach of the implied warranty of habitability. Metro North eventually dismissed its lawsuit in exchange for an assignment of CSC's policy with Allied and payment of any right to $700,000 worth of insurance coverage. The settlement 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 damage to the remaining parts of Metro North's condominium. 

    Allied's policy had several "your work" exclusions barring coverage for damage to the particular part of the relevant property worked on by CSC, or for the costs of repairing or replacing CSC's own defective work. Further, Exclusion 2.b 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."

    Allied brought a declaratory judgment lawsuit against Metro North and the parties filed cross-motions for summary judgment. Allied's motion was granted, determining that the settlement damages were not covered under Allied's policy. Metro North appealed.

    The Seventh Circuit affirmed. The breach of the implied warranty of habitability was the only legal theory in play at the time of the settlement, but that theory did not allow for the recovery of damages covered by the policy. The measure of damages for a breach of the implied warranty of habitability was the cost of repairing the defective conditions, here the defectively installed windows. Illinois courts, however, had concluded that CGL policies like Allied's did not cover the cost of repairing the insured's defectively completed work.

    Even if CSC assumed liability for damages to other parts of the building besides the windows themselves, coverage for those damages would be precluded under Exclusion 2.b, since the liability would then have arisen contractually from the settlement agreement.