Stoneridge Development Co. v. Essex Ins.

888 N.E.2d 633

STONERIDGE DEVELOPMENT COMPANY, INC., and Highland Glen Associates, Plaintiffs and Counterdefendants-Appellees, v. ESSEX INSURANCE COMPANY, Defendant and Counterplaintiff and Counterdefendant-Appellant (Residential Warranty Corporation, Western Pacific Mutual Insurance Company, John Walski, and Marie Walski, Defendants and Counterdefendants and Counterplaintiffs-Appellees).

No. 2-06-1166.

Appellate Court of Illinois, Second District.

May 6, 2008.

Barbara I. Michaelides, Steven N. Novosad, Agelo L. Reppas, Clausen Miller P.C., Chicago, for Essex Insurance Company.

Anne E. Larson, Much Shelist Freed Denenberg Ament & Rubenstein PC, Chicago, for Residential Warranty Corp., Western Pacific Mutual Insurance Co.

Jerry A. Esrig, Zaideman & Esrig, P.C., Chicago, for Estate of John Walski, Marie Walski.

Justice BOWMAN delivered the opinion of the court:

At issue in this case is whether Essex Insurance Company (Essex) is required to provide coverage to its insured, Stoneridge Development Company, Inc., as well as to an additional insured under the policy, Highland Glen Associates (collectively Stoneridge). The policy came into play after homeowners John and Marie Walski brought suit against Stoneridge for damage to their townhome, allegedly caused by Stoneridge's construction of the residence on and/or near improperly compacted soil. The Walskis also sought relief from Residential Warranty Corporation and its underwriter, Western Pacific Mutual Insurance Company (collectively WPIC), which had provided a warranty against structural defects to the home. In the instant case, Essex appeals from the trial court's grant of summary judgment in favor of Stoneridge, WPIC, and the Walskis. The trial court ruled that Essex had an undisclosed conflict of interest with Stoneridge and was therefore estopped from denying coverage. We reverse, concluding that Essex did not have a conflict of interest and that the policy does not otherwise cover Stoneridge's liability.

I. BACKGROUND

Stoneridge is a general contractor in the business of developing and constructing new residential dwellings. Essex insured Stoneridge under a commercial general liability (CGL) policy effective between April 5, 1995, and April 5, 1996. The policy had a general aggregate limit of $2 million, a "Products/Completed Operations Aggregate Limit" of $1 million, and a per occurrence limit of $1 million. The policy coverage relevant here is contained in the following portions of the policy:

"COVERAGE A. BODILY INJURY AND PROPERTY DAMAGE LIABILITY

1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of `bodily injury' or `property damage' to which this insurance applies. We will have the right and duty to defend any `suit' seeking those damages. * * *

b. This insurance applies to `bodily injury' and `property damage' only if:

(1) The `bodily injury' or `property damage' is caused by an `occurrence' that takes place in the `coverage territory;' and

(2) The `bodily injury' or `property damage' occurs during the policy period."

The policy defines "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." It defines "property damage" as:

"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."

The policy excludes "`[p]roperty damage' to `your work'¹ arising out of it or any part of it and included in the `products-completed operations hazard,'"² but the exclusion is inapplicable "if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor."

The Walskis bought a new townhome from Stoneridge in August 1995 for $146,163. In conjunction with the sale, the Walskis and Stoneridge enrolled in a warranty program through WPIC. The warranty insured against major structural defects for 10 years. Stoneridge was the warrantor for the first two years, and WPIC was the warrantor for years 3 through 10. Stoneridge further warranted that the home complied with certain building codes and that, if it did not, Stoneridge would be responsible for the entire 10-year period for warranty claims stemming from noncompliance. Under a membership agreement between Stoneridge and WPIC, if Stoneridge refused or was unable to fulfill its warranty obligations, WPIC was required to do so, and Stoneridge agreed to then indemnify WPIC for such expenses.

On August 6, 2001, the Walskis brought suit against Stoneridge, in McHenry County. They alleged that their house had structural problems because the land underneath it and in portions of the common area "consist[s] of unsuitable structural bearing soils and earth retention" and that "soil movement has caused and is causing the load bearing elements of [the] townhome to move, crack and fail, such that, without substantial repair, [the] townhome will in the very near future become dangerous and uninhabitable." The Walskis alleged claims of breach of the purchase contract and breach of the implied warranty of habitability. On their motion, the action was stayed in November 2001.

In January 2002, the Walskis brought an arbitration action against WPIC, under an arbitration clause in the warranty agreement. They alleged that the "footings" of their townhome had "failed due to unstable subsurface soils causing significant damage to the home." The Walskis sought to recover the home's purchase price.

In October 2002, WPIC brought a third-party action against Stoneridge within the arbitration action. WPIC alleged that the Walskis notified Stoneridge of structural problems in 1996 and notified WPIC of the soil problem in 2000. WPIC further alleged that soil testing revealed that Stoneridge had failed to properly compact the soil "on common property adjacent at or adjacent to" the Walskis' townhome. WPIC claimed that Stoneridge breached the warranty program and membership agreements by failing to properly compact the soil; comply with building codes; properly repair the damage; and obtain a WPIC compliance inspection. WPIC also asserted claims of equitable contribution, subrogation, and partnership indemnification. WPIC sought indemnification for any amounts it paid out and expenses it incurred under the warranty agreement.

In January 2003, the Walskis brought a complaint against Stoneridge within the arbitration action. As in their McHenry County action, the Walskis alleged that Stoneridge had breached the purchase contract and the implied warranty of habitability.

Stoneridge was initially defended in the McHenry County and arbitration actions by its private attorney, Thomas Scherschel of O'Hagan, Smith & Amundsen. Essex then agreed to defend Stoneridge under a reservation of rights, and in February 2003, it retained Jack Riley of Johnson & Bell to defend Stoneridge. Riley substituted his appearance for Scherschel's.

On April 10, 2003, Essex sent to Stoneridge a letter discussing Essex's coverage position and reiterating its reservation of rights. In discussing the Walskis' arbitration complaint, Essex stated that the Walskis were alleging that Stoneridge "breached [its] contract to convey a `Unit' as that term is `understood' by the parties and allegedly breached the implied warranty of habitability." After reciting some of the policy provisions, Essex stated:

"None of the complaints cited above alleges any `bodily injury' within the definition cited above. To the extent, however, the Walski Complaint, both in law and arbitration, and the Highland Glen Counter-Complaint<sup>3</sup> potentially allege[] `property damage,' Essex agrees to participate in the defense of Stone Ridge [sic] under a full and complete reservation of rights. Moreover, we are unable at this point to determine factually whether the potential `property damage' arises out of an `occurrence' as the term is defined by the policy. In the event that our investigation or discovery reveals that the alleged damages did not arise out of an `occurrence' Essex reserves the right to withdraw from the defense of this matter if appropriate."

In relation to WPIC's arbitration third-party complaint against Stoneridge, Essex stated that it similarly did not allege any "bodily injury" under the policy. Essex then stated:

"Moreover, the complaint does not allege `property damage' as that term is defined. The allegations of the complaint clearly indicate that [WPIC is] seeking indemnity and other damages from Stone Ridge [sic] based upon Stone Ridge's [sic] alleged breach of contract. We have determined that this alleged conduct does not fall within the definitions of `bodily injury' or `property damage,' as the claims against Stone Ridge [sic] are contractual in nature. Furthermore, [WPIC's] claim for indemnity does not allege an `occurrence' as that term is defined by the Policy. It is our understanding that [WPIC's] claim arises out of the alleged failure of Stone Ridge [sic] to meet alleged contractual obligations. Accordingly, this alleged breach of contract is not the consequence of any type of `accident' as is required by the Policy." (Emphasis added.)

Essex stated that it would still defend Stoneridge, under a reservation of rights, on these matters but that it reserved the right to withdraw from the defense if it determined that WPIC's allegations did not fall within the policy.

A few months later, on July 29, 2003, the arbitrator entered an interim award. It stated: "Shortly after closing, cracks developed in the foundation of the residence and have continued to develop in other parts of the residence causing varying amounts of damage. It is undisputed that a cause of this cracking is...