Applying Illinois law, the federal district court ruled that there was no coverage for the insured's settlement of claims based upon breach of the implied warranty of habitability. Allied Prop. & Cas. Ins. Co. v. Metro North Condo. Ass'n, 2016 U.S. Dist. LEXIS 43452 (E.D. Ill. March 31, 2016). Metro North sued the developer of its condominium and a number of its contractors and subcontractors for defective construction that caused various problems, including water infiltration. One subcontractor, CSC, was to provide window and glazing services. After a rainstorm, water infiltrated the project due to CSC's work. Metro North claimed that CSC was liable for breach of the implied warranty of habitability. CSC was insured under a CGL policy with Allied. Allied agreed to defend under a reservation of rights. Allied agreed to "pay those sums that the insured becomes legally obligated to pay as damages because of . . . 'property damage' . . . caused by an occurrence." Metro North settled with CSC for $700,000. As part of the settlement CSC assigned its rights under the Allied policy to Metro North. Allied sued for a declaratory judgment that there was no coverage for the settlement amount. Illinois courts have held that there is no occurrence when a subcontractor's defective workmanship necessitates removing and repairing work. When, however, the defective work results in damage to something other than the construction project itself, there may be an occurrence. The majority of the damages Metro North claimed related to damage caused by water infiltration to common elements of the condominium building and not the windows that CSC actually worked on. The court noted that Metro North's settlement with CSC was covered if CSC settled the case in reasonable anticipation of liability for damages that fell within the policy's definition of "property damage" caused by an "occurrence." Allied argued that Illinois law did not permit the recovery of damages for breach of the implied warranty of habitability, and if the damages that were the basis for the settlement agreement were unrecoverable, the settlement was not entered in reasonable anticipation of liability. The court agreed that damage caused by water infiltration into parts of the building on which CSC did not work was not recoverable based on CSC's breach of the implied warranty of habitability. There was no reasonable anticipation of liability or reasonable potential for the award of damages covered by the policy. Therefore, Allied was not required to pay the Metro North settlement. Even if the damages Metro North sought were recoverable in a breach of the implied warranty of habitability action, the damages related to the common elements other than those on which CSC worked were not caused by an "occurrence." Under Illinois law, when a subcontractor who installed a window performed defective work, the natural and ordinary consequence was water infiltration that would damage the rest of the building. This would not be an accident or occurrence, and hence, there would be no coverage. For example, where the window installer's poor workmanship caused water infiltration which damaged an antique rug, the faulty workmanship would cause an accident; the presence of the rug in the particular location was not something the window installer could have foreseen. But he could foresee that, if his work was defective, the defects would result in damage to the structure in which he was installing windows. Therefore, Allied's motion for summary judgment was granted, while Metro North's motion for summary judgment was denied.
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