In its recent decision Lagestee-Mulder, Inc. v. Consol. Ins. Co., 2011 U.S. Dist. LEXIS 129308 (N.D. Ill. Nov. 8, 2011), the United States District Court for the Northern District of Illinois addressed what allegations must be made in a construction defect lawsuit in order to trigger coverage under a general liability policy.
Lagestee, the general contractor on a construction project, was named as a defendant in a construction defect suit. It sought coverage as additional insured under a commercial general liability policy issued to one of its subcontractors by Consolidated Insurance Company. Consolidated denied coverage to Lagestee on the basis that the underlying suit did not allege property damage, but instead was limited to seeking a remedy of the alleged construction defects. Notably, the suit did not allege any particular third-party property damage, although it did allege that as a result of certain of the defects, water was allowed to infiltrate the building. The suit did not, however, identify any particular damage resulting from the water instrusion.
The court began its analysis by noting that Illinois court have long recognized the rule that “[w]here the underlying suit alleges damage to the construction project itself due to a construction defect, there is no coverage; by contrast, where the underlying suit alleges that the construction defect damaged something other than the project itself, there is coverage.” As such, explained the court, the absence of any allegation of specific third-party property damage resulting from the alleged would be fatal to Lagestee’s claim for coverage. Lagestee acknowledged that the underlying suit did not allege third-party property damage per se, as the suit related primarily to use of defective construction materials and faulty workmanship. Lagestee nevertheless argued that a duty to defend was triggered by the water intrusion allegations, since the presence of water at the building raised the potential for resulting property damage.
The court disagreed, concluding that while “[i]t is true that the underlying complaint does not disavow the proposition that the water infiltration damaged something other than the building itself … the mere possibility that such damage occurred does not trigger a duty to defend under Illinois law.” In other words, a court is not permitted under Illinois law to speculate as to what damages might have result from alleged water infiltration. Rather, the duty to defend is determined based solely on the damages actually alleged. Because the underlying suit did not identify any particular damage resulting from the water infiltration, but instead alleged only that the defective construction allowed for water infiltration, it was not permissible for the court to speculate that such infiltration could result in covered property damage. Thus, concluded the court, Consolidated did not have a duty to defend Lagestee in the underlying suit.