(Article from Insurance Law Alert, May 2024)
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Holding
The Seventh Circuit ruled that defects in welds and columns in a construction project did not constitute property damage for purposes of general liability coverage. St. Paul Guardian Ins. Co. v. Walsh Construction Co., 2024 U.S. App. LEXIS 10285 (7th Cir. Apr. 29, 2024).
Background
The City of Chicago hired Walsh as the general contractor for a construction project at O’Hare Airport. Walsh contracted with Carlo Steel for the manufacture of a steel and curtain wall. Carlo Steel, in turn, subcontracted with LB Steel for the production and installation of steel elements of the wall. Under the contract between Carlo Steel and LB Steel, LB Steel was obligated to indemnify Carlo Steel and Walsh for any property damage resulting from LB Steel’s negligent performance. When the City discovered cracks in the welds performed by LB Steel, it sued Walsh, seeking to recover the costs it incurred in investigating and remediating the defective welds. Walsh tendered defense of the suit to insurers that issued policies to LB Steel, on which it was named an additional insured.
The insurers sued Walsh, seeking a declaration that they had no duty to defend Walsh and that their policies did not cover a $19 million judgment that was ultimately issued against LB Steel. Ruling on cross-motions for summary judgment, the district court ruled in the insurers’ favor. The district court reasoned that because the physical damage at issue was limited to LB Steel’s own products, there was no covered “property damage.”
Decision
Affirming the district court decision, the Seventh Circuit held that the policies at issue required physical injury to tangible property, separate and apart from the steel elements manufactured by LB Steel. The court explained that certain policies defined property damage as “physical damage to tangible property of others” and that other policies which did not include the “of others” verbiage included “Your Product” exclusions which barred coverage for property damage arising out of the insured’s product.
The court concluded that Walsh did not allege covered property damage because it failed to identify any damage to glass, concrete or any other parts of the wall that were not manufactured by LB Steel. While Walsh did install retrofit structures to remedy the defects in the columns, the court held that such structures did not establish damage to other property.
Additionally, the court rejected Walsh’s assertion that cracking in the columns created “structural instability,” which constituted a “harmful physical change” sufficient to establish property damage. The court reasoned that a potential for collapse does not constitute property damage and that in any event, there was no evidence that any structural instability had manifested itself in any physical manner.
Finally, the court rejected Walsh’s contention that property damage existed because LB Steel’s parts were so intertwined with the larger structures such that damage to the steel columns necessarily imposed damage to the canopy structure as a whole. Accepting the premise that where a part is so intertwined with the entire mechanism that damage to the part constitutes damage to the whole, the court held that this case did not present such a scenario because damage to the steel columns did not require the entire canopy structure to be removed or rebuilt.
Comments
The decision reinforces the well-established principle that preventative measures do not constitute property damage for purposes of general liability coverage. Rather, such costs are typically considered preventative economic costs, which are outside the scope of general liability policies.
Additionally, the ruling addresses an issue commonly raised in construct defect coverage disputes—namely, whether general liability coverage is implicated when the only damage alleged is damage to the insured’s own product. Courts have reached different conclusions in this context, with numerous courts concluding that damage to the insured’s own property, without more, does not implicate coverage, even where the policy does not contain explicit language requiring damage to “other” property.