In the context of construction defect claims, a perennial dispute between commercial general liability, or CGL, carriers and policyholders concerns coverage for liability arising from potential or threatened property damage.
Commonly, this dispute arises when an insured’s faulty work jeopardizes the structural integrity of a building or component thereof. For coverage purposes, a key question in this scenario is whether the weakened structural support is itself a form of property damage that could implicate coverage under a typical CGL policy. In an April 29 decision applying Illinois law, the U.S. Court of Appeals for the Seventh Circuit answered this question in the negative. This article contextualizes the court’s decision and considers its import for CGL carriers and their insureds.
By way of background, CGL policies afford coverage for property damage caused by an occurrence — that is, an accident. CGL policies generally define “property damage” to include “physical injury to tangible property.”[1] In the context of construction defect litigation, courts across the country hold that an insured’s own faulty work does not implicate CGL coverage because deficient workmanship is not property damage.[2]
Conversely, when the insured’s defective work causes damage to property outside of the insured’s scope of work, most jurisdictions agree that this incidental damage qualifies as property damage and therefore falls within a CGL policy’s scope of coverage.
The distinction between an insured’s own defective work, on one hand, and damage to other property as a result thereof, on the other hand, is straightforward in most cases, but it can also be a fine line in certain circumstances. For instance, when an insured’s faulty work is alleged to have compromised the structural integrity of a building as a whole, carriers and their insureds
often disagree about whether resulting structural instability is itself property damage covered under a commercial general liability policy.[3]
This issue was most recently addressed in an April 29 decision in the case of St. Paul Guardian Insurance Co. v. Walsh Construction Co. There, a panel of the Seventh Circuit, applying Illinois law, held that construction defects and their resulting impact on a building’s overall structural integrity did not qualify as property damage for CGL coverage purposes.[4]
The facts underlying Walsh are as follows: In 2003, the city of Chicago contracted with Walsh to manage the construction of a new canopy and curtain wall for Terminals 1, 2, and 3 at the Chicago O’Hare International Airport.[5] Walsh subcontracted with LB Steel LLC to fabricate and install steel columns to support the wall and canopy.[6] Pursuant to its subcontract, LB Steel listed Walsh as an additional insured in LB Steel’s CGL policies.[7]
Several years later, the city discovered cracks in the welds of the steel columns, leading it to question the structural integrity of the canopy system.[8] The city required Walsh to install shoring for the columns at Walsh’s own expense.[9] The city also filed a lawsuit against Walsh for breach of contract.[10]
As is common practice in construction defect litigation, Walsh then sued LB Steel under its subcontract. Additionally, Walsh tendered the city’s lawsuit to LB Steel’s insurers, in its capacity as an additional insured under LB Steel’s CGL policies, but LB Steel’s insurers refused to provide Walsh with additional insured coverage.
Following protracted litigation against LB Steel, Walsh eventually secured a $19,187,304 judgment against LB Steel, which, in turn, caused LB Steel to seek bankruptcy protection. Walsh and LB Steel subsequently reached a bankruptcy settlement that provided Walsh with a $24,132,650 unsecured claim against LB Steel’s bankruptcy estate.
LB Steel’s insurers then filed a declaratory judgment action against Walsh in the U.S. District Court for the Northern District of Illinois, seeking to establish that LB Steel’s CGL policies did not cover the $19 million judgment against LB Steel or the subsequent bankruptcy settlement.[11] In response to the insurers’ declaratory judgment action, Walsh counterclaimed, seeking indemnification under LB Steel’s policies for losses in excess of $30 million, which were allegedly incurred as a result of LB Steel’s faulty work on the project.[12]
On cross-motions for summary judgment, the district court in March found in favor of the insurers, concluding that they had neither the duty to indemnify nor the duty to defend Walsh under the CGL policies.[13] The district court found that “because the physical damage at issue was limited to LB Steel’s own products, it did not constitute ‘property damage’ as that term appears in the policies, thereby precluding coverage.”[14] On appeal, the Seventh Circuit recognized that, to establish property damage, “Walsh must demonstrate some physical injury to tangible property beyond the steel elements fabricated by LB Steel.”[15] This, the court found, Walsh could not demonstrate.
By way of examples, the court noted that “Walsh has not identified any cracks in the glass, damage to concrete, or alterations to any other parts of the canopy or curtain wall not provided by LB Steel.”[16] Additionally, although Walsh argued that it had to retrofit structures around the affected steel columns, the court observed that “those retrofits were only installed to remedy the defects in the columns themselves.”[17]
Walsh’s secondary argument concerned the effects of LB Steel’s faulty work on the canopy’s structural integrity. Specifically, Walsh contended that “once the welding in the columns holding the canopy’s weight cracked, the entire canopy structure became structurally unstable.” According to Walsh, this “structural instability was a ‘harmful physical change to the canopy system’ sufficient to trigger coverage.”[18]
The court, however, rejected this argument, reasoning that although the “defective welds increased the potential for the canopy to collapse,” Walsh “offers no evidence that this ‘structural instability’ had manifested itself in any physical way (other than in the LB Steel columns themselves).”[19] Relying on Illinois case law, the court held that “an increased potential for future property damage does not itself constitute property damage.”[20]
Walsh is not an outlier decision. Courts in other jurisdictions faced with claims for threatened or potential property damage have generally held that such claims do not trigger coverage. For example, on April 2, the Connecticut Appellate Court in Westchester Modular Homes of Fairfield County Inc. v. Arbella Protection Insurance Co. rejected a policyholder’s argument that the failure to insulate a ceiling or install a vapor barrier implicated coverage because the problem, if left unremedied, would cause water condensation and ultimately result in water damage.[21]
On summary judgment at the Arbella trial court level, relying on the underlying pleadings and extrinsic evidence in the form of deposition testimony, the policyholder asserted that such defective work “‘was damaging work that was not itself defective,’ thus triggering the insurer’s duty to defend.”[22] The trial court denied the policyholder’s summary judgment motion on the basis that the evidence submitted “established only the existence of possible defective work that could lead to future property damage if not remedied but that it did not demonstrate the existence of current property damage.”[23]
On appeal, the Arbella appellate court sustained the trial court’s summary judgment decision, finding that
the mere presence of water, without the necessary resulting physical injury to tangible property … did not provide the defendant with actual knowledge of facts establishing a reasonable possibility of coverage because the presence of water does not constitute property damage within the terms of the policy.[24]
Similarly, in 2002 in Amtrol Inc. v. Tudor Insurance Co., the U.S. District Court for the District of Massachusetts found in the insurer’s favor on grounds that CGL coverage may be implicated by actual, existing property damage, but not the potential for property damage.
In Amtrol, the policyholder manufactured residential water heaters.[25] The water heaters began to develop “leaks in various locations in their coil assemblies causing hot water to leak from the units.”[26] The policyholder argued on summary judgment that the leakage of water from the water heater constituted property damage.[27] Stated differently, the policyholder argued that “the unwanted presence of water within the home or building in which the [water heater] was installed is per se physically injurious.”[28] The court disagreed, stating that,
in order to meet the physical damage requirement, one must show that the water has somehow exacted a physical harm upon tangible property that required remediation or otherwise diminished the value of the property itself. … A leak that results in no damage beyond the mere presence of water that can be removed or evaporates without harm does not constitute property damage.[29]
As demonstrated by the foregoing, whether an insured’s faulty work results in tangible property damage outside of the insured’s own work, as opposed to the threat of future property damage, crops up regularly in coverage disputes arising from construction defect claims.
With the recent decision in Walsh, the Seventh Circuit joins a growing consensus that an insured’s faulty work or product does not implicate coverage in the absence of tangible and present damage to other components of the building or project, and that compromised structural integrity is insufficient to bring a construction defect claim within the scope of CGL coverage.
Sarah Abrams is head of claims at Baleen Specialty, a division of Bowhead Specialty Underwriters.
Elan Kandel is a member at Bailey Cavalieri LLC.
James Talbert is an associate at Bailey Cavalieri.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] See, e.g., ISO Form CG 00 01 04 13.
[2] Courts also commonly find that an insured’s own deficient workmanship or product is not the result of an “occurrence” because it is an ordinary and foreseeable business risk, rather than a fortuitous accident.
[3] It should be noted that there are other coverage defense raised by threatened property damage, including but not limited to, whether there is an “occurrence” and whether the “your work” and/or “impaired property” exclusions are potentially applicable. A discussion of those other coverage defenses, however, is beyond the scope of this article.
[4] St. Paul Guardian Insurance Co. v. Walsh Construction Co., 2024 U.S. App. LEXIS 10285
(7th Cir. Apr. 29, 2024).
[5] Id. at *1-2.
[6] Id.
[7] Id.
[8] Id. at *3.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Id. at *6.
[14] Id.
[15] Id. at *9.
[16] Id.
[17] Id. at *9-10.
[18] Id.
[19] Id. at *10-11.
[20] Id. at *10.
[21] Westchester Modular Homes of Fairfield County Inc. v. Arbella Protection Insurance Co., 224 Conn. App. 526, 531-32 (2024).
[22] Id. at 535.
[23] Id. at 536.
[24] Id. at 548-49 (internal quotations omitted).
[25] Amtrol Inc. v. Tudor Insurance Co., 2002 U.S. Dist. LEXIS 186918, *1 (D. Mass. Sept. 10, 2002).
[26] Id. at *2.
[27] Id. at *5.
[28] Id. at *6.
[29] Id.