The Seventh Circuit Court ruled in Allied Property & Casualty Insurance Company, et al. v. Metro North Condominium Association, No. 16-1868, (7th Cir. March 8, 2017), that a window subcontractor’s insurer had no duty to indemnify for a settlement following alleged water damage to a condominium based on the sole claim of breach of implied warranty of habitability. An earlier claim of negligence by the condominium association against the window subcontract alleging property damage apart from the defectively installed windows was dismissed with prejudice because it was filed after the statute of limitations had expired. When only the breach of implied warranty of habitability claim remained, the parties settled that lawsuit with the window subcontract assigning its rights to any insurance proceeds covering the damage. Ironically, the settlement agreement specified that it was not intended to compensate the condominium association for the cost of repairing or replacing the window subcontractor’s defectively installed windows, but rather for the resultant damage to the other parts of the condominium, including individual unit owner’s personal property.
The Seventh Circuit Court affirmed the District Court’s grant of summary judgment on behalf of the insurers, finding that despite the underlying parties’ attempt to define the damages being covered under the settlement, the measure of damages for breach of implied warranty of habitability is simply the cost of repairing the defective conditions, i.e., the defectively installed windows themselves. The Court, citing several Illinois State Court decisions, held that CGL policies are not intended to pay the costs associated with repairing and replacing an insured’s defective work and products, which are purely economic losses. Moreover, several “your work” exclusions applied to preclude coverage for the defective window installation. Since the breach of the implied warranty of habitability claim was the only legal theory in play at the time of the settlement, that theory did not allow for recovery of damages covered under the CGL policy. “In short, liability for the cost of remedying [the subcontractor’s] defectively installed windows – which is the only cost for which [the subcontractor] was liable based on [the condominium’s] only claim against it – is not covered under [the CGL] policy,” and the insurers had no duty to indemnify for the settlement. The Court additionally noted that even if the subcontractor assumed liability for damages to other parts of the building besides the windows, coverage for those damages would be precluded under the contractual liability exclusion. Furthermore, the Court noted that under Illinois law, the condominium association lacked standing to pursue the individual unit owners’ claims for property damage, and as such, had no right to indemnity for those claims against the insurer.