Frankenmuth Mut. Ins. Co. v. Hodsco Constr., Inc.

191 F.Supp.3d 863

FRANKENMUTH MUTUAL INSURANCE COMPANY, a Michigan corporation, Plaintiff,

v.HODSCO CONSTRUCTION, INC., et al., Defendants.

Hodsco Contstruction, Inc., Counter-Plaintiff,

v.Frankenmuth Mutual Insurance Company, Counter-Defendant.

Civil Action No. 15 CV 11029

United States District Court, N.D. Illinois, Eastern Division.

Signed June 8, 2016

John D. Dalton, Emily Rose Norris, Baugh Dalton, LLC, Chicago, IL, for Plaintiff/Counter-Defendant.

Kevin J. Kuhn, Kuhn Firm LLC, Wauconda, IL, David A. Howard, Michael J. Lotus, The Howard Law Firm LLC, Chicago, IL, for Defendants/Counter-Plaintiff.

OPINION AND ORDER

CHARLES RONALD NORGLE, United States District Court Judge

Several years after a residential development was built in Glenview, Illinois, residents discovered water leaking into their homes. As a result, the condominium association. Defendant Tower Crossing Condominium Association (the "Association") sued several contractors in state court, including Defendant Hodsco Construction, Inc. ("Hodsco") (Hodsco and the Association are collectively, "Defendants"). When Hodsco sought to have its insurer, Plaintiff Frankenmuth Mutual Insurance Company ("Frankenmuth") provide its defense, Frankenmuth filed this action, and seeks a declaratory judgment that it does not owe Hodsco a duty to defend.

Frankenmuth is a Michigan Corporation with its principal place of business in that State. The Association and Hodsco are both Illinois corporations, and both have their principal places of business in Illinois. There is more than $75,000 in controversy in the underlying litigation; accordingly, the Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1332(a). Before the Court are Frankenmuth's and Hodsco's cross-motions for judgment on the pleadings, brought pursuant to Federal Rule of Civil Procedure 12(c). For the following reasons, Frankenmuth's motion is denied and Hodsco's motion is granted; the Court finds that Frankenmuth does owe Hodsco a duty to defend.

I. BACKGROUND

A. The Underlying State Court Litigation

Kimball Hill, Inc. ("Kimball Hill") was a residential real estate developer. At some point in 2002, Kimball Hill started development of a 154-unit town home complex called Tower Crossing, which was located in Glenview, Illinois, at the site of the former Glenview Naval Air Station. The Association was subsequently formed to govern the common elements of Tower Crossing and its residents.

To build Tower Crossing, Kimball Hill subcontracted with several firms, including Hodsco. Specifically, Kimball Hill hired Hodsco to build masonry—and concrete-block demising walls for the individual units. Kimball Hill, Hodsco, and the other subcontractors hired by Kimball Hill constructed the Tower Crossing units throughout 2002 and 2003.

In November 2005, Tower Crossing's homeowners assumed control of the Association, via a board of directors. Some time after control of the Association was ceded to the homeowners, the Association discovered numerous defects in Tower Crossing's construction. This discovery culminated in the Association filing suit against several subcontractors, including Hodsco. See Tower Crossing Condominium Assoc., et al. v. Prate Sheet Metal, Inc., et al., 15 L 9475 (Cir. Ct. Cook Cnty. Sept. 16, 2015) [hereinafter the "State Court Litigation"], Ex. A to Compl. Declaratory J. As the allegations pertain to Hodsco, the Association alleges that, due to Hodsco's misfeasance:

"[P]arapet balconies lack and/or were constructed with improperly installed flashing and coping; roof saddle roofing membranes were improperly integrated with chimneys and parapet walls; there was or may have been excessive clogging of the drainage cavity (air space) with mortar between the exterior brick wythe and wood frame structure; masonry chimneys contained defective flashing and/or are not flashed; punched windows were defectively flashed and/or installed; coping was defectively flashed; the rear patio parapet to wall intersections were defectively flashed; concrete chimney caps were defectively flashed or were not flashed; concrete chimney caps were defectively sloped; [and] through-wall masonry flashing at floor line shelf angles was defective."

Compl. Declaratory J. ¶ 18 (quoting State Court Litigation, Third Am. Compl. ¶¶ 29, 31) (internal formatting structures omitted). The Association alleges further that as a result of the above construction defects:

"[S]ome or all of the Defects caused sudden and calamitous water infiltration and/or mold growth within the interior spaces of [the] Homes, which has damaged [the] Homes (including elements of the Homes separate and apart from the defective elements), interior finishes within [the] Homes and personal property of Homeowners located within [the] Homes (collectively "Property Damage"). In some instances, during periods of rain, rapidly infiltrating water cascaded into interior portions of [the] Homes and fell from ceilings and/or other surfaces creating the equivalent of a waterfall within the Home."

Compl. Declaratory J. ¶ 19 (quoting State Court Litigation, Third Am. Compl. ¶ 32). The complaint in the State Court Litigation does not allege that Hodsco's construction defects caused bodily injury to any individuals. At some point, Hodsco gave Frankenmuth notice of the claim filed against it (i.e. the State Court Litigation), and asked Frankenmuth to honor its contractual duty to defend Hodsco in that action.

B. The Contract Between Frankenmuth and Hodsco

From December 31, 2000 until December 31, 2003 (the "Policy Period"), Hodsco was insured by Frankenmuth for indemnification against, inter alia , general commercial liability, pursuant to a written insurance policy [hereinafter the "Agreement"]. See Ex. B to Frankenmuth Mut. Ins. Co.'s Mem. Supp. Mot. J. Pleadings 13 [hereinafter "Frankenmuth's Mot."]. The Agreement was originally for one year, and was renewed twice, using language that was virtually identical to the original agreement. Several terms and conditions of the Agreement are relevant to the issues in this case.

The Agreement specified that Frankenmuth would defend and if necessary, indemnify, Hodsco against any claims of "bodily injury" or "property damage" for which Hodsco is alleged to be liable. See Agreement § I, Coverage A.1.a. This broad grant of indemnity is circumscribed by temporal limitations, outright substantive exclusions from coverage, and technical definitions.

First, the Agreement only requires Frankenmuth to defend and indemnify Hodsco if the claim arises within the Policy Period. Specifically, the claimed bodily injury or property damage must be "caused by an ‘occurrence’ that takes place in the ‘coverage territory’ ... during the [P]olicy [P]eriod." Id.§ I, Coverage A.1.b.

Second, the Agreement excludes many categories of damage from coverage. There are two policy exclusions that are relevant to this case. First is the "contractual liability" exclusion, which excludes from coverage " ‘[b]odily injury’ or ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." Id.§ I, Coverage A.2.b. The contractual liability exclusion, itself, has exclusions, the relevant one of which excludes from the exclusion (i.e. brings back within the scope of coverage) liability that Hodsco would have incurred "in the absence of the contract or agreement." See id.§ I, Coverage A.2.b.(1).

The second exclusion relates to "Damage to Property." Id.§ I, Coverage A.2.j. Specifically, the Agreement does not insure property damage, inter alia , to:

(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the "property damage" arises out of those operations; or

(6) That particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.

Id.§§ I, Coverage A.2.j.(5), (6). Similar to the contractual liability exclusion, the damage-to-property exclusion has its own exceptions. Relevant to this case, " ‘property damage’ included in the ‘products/completed operations hazard’ " does fall within the scope of coverage. See id.§ 1, Coverage A.2.j.

"Property damage," "occurrence," "your work," and "products/completed operations hazard" are all defined terms within the Agreement. "Property damage" means:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it.

Id.§ V. 17. " ‘Occurrence’ means an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Id.§ V.13. " ‘Your work’ means: [ (a) ] work or operations performed by you or on your behalf; and [ (b) ] materials, parts or equipment furnished in connection with such work or operations." Id.§ V.21. The "[p]roducts/completed operations hazard" includes "all ‘bodily injury’ and ‘property damage’ occurring away from the premises you [the insured] own or rent and arising out of ‘your product’ or ‘your work.... Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed.’ " Id.§ V.16.

C. Procedural History

On April 23, 2008, Kimball Hill filed a Chapter 11 bankruptcy petition. Pursuant to the resulting reorganization plan, a new trust was formed called the KHI Liquidation Trust (the "Trust"); Kimball Hill's assets—including contingent claims—were transferred to the Trust. On November 10, 2009, the Association filed suit against Hodsco in the State Court Litigation. The Association and the Trust engaged in litigation, which concluded with the Trust assigning to the Association its right to sue...