“Your Work” Exclusion Precluded Coverage for Breach of Warranty of Habitability Claim Against Subcontractor, Seventh Circuit Says

April 21, 2017 | General Liability | Insurance Coverage

The U.S. Court of Appeals for the Seventh Circuit has affirmed a decision by a federal district court in Illinois that the “your work” exclusion in a commercial general liability insurance policy precluded coverage for a lawsuit against the insured subcontractor stemming from its allegedly defective installation of windows.

The Case

Metro North Condominium Association hired a developer to build a condominium in Chicago. The developer used two subcontractors, CSC Glass and CSC Construction (together, “CSC”), to install the building’s windows.

CSC allegedly installed the windows defectively, and the building and condominium unit owners sustained damage.

Metro North sued CSC for breach of the implied warranty of habitability. The parties settled and CSC assigned to Metro North CSC’s rights to payment, if any, of up to $700,000 of coverage under its commercial general liability insurance policy. The settlement specified that it was not intended to compensate Metro North for the cost of repairing or replacing CSC’s defectively installed windows but, rather, was for the resultant damage to the remaining parts of Metro North’s condominium and to the unit owners’ personal property.

CSC’s insurer sought a declaration that it was not required to cover the losses claimed in the settlement. The U.S. District Court for the Northern District of Illinois ruled that the settlement damages were not covered under the policy, and Metro North appealed to the Seventh Circuit.

The Seventh Circuit’s Decision

The circuit court affirmed.

In its decision, the Seventh Circuit explained that the measure of damages for a breach of the implied warranty of habitability – which was the cause of action asserted by Metro North against CSC – was the cost of repairing the “defective conditions,” here, the defectively installed windows.

The circuit court reasoned, however, that the insurance policy’s “your work” exclusion specifically excluded the cost of repairing CSC’s defective work. Moreover, it added, the Metro North-CSC settlement indicated that Metro North was not even seeking the cost of repairing CSC’s defectively installed windows. Therefore, the right to payment claimed by CSC did not “aris[e] out of the claims asserted against CSC” by Metro North in the underlying lawsuit or the parties’ agreement, and the insurer had no duty to indemnify CSC.

The case is Allied Property & Cas. Ins. Co. v. Metro North Condominium Ass’n, No. 16-1868 (7th Cir. March 8, 2017).

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