Recent Illinois Cases Shape the Definition of Occurrence In a CGL Policy

A contractor who precisely follows the directives of an upstream party, but who causes damage to an adjacent property may be without insurance coverage according to several recent Illinois cases.  In Pekin Insurance Company v. Miller, 2006 WL 2265604 (1st Dist., Aug. 8, 2006) and West American Insurance Company v. Kamadulski Excavating & Grading Company, Inc., 2006 WL 1235751 (N.D.Ill., May 4, 2006). Century Surety Company v. Demolition & Development, Ltd., 2006 WL 163174 (N.D. Ill. Jan. 18, 2006), the Illinois courts delve into the thorny issue of what constitutes an “occurrence” in a commercial general liability (CGL) insurance policy.

Most CGL policies cover property damage that results from an “occurrence” unless an exclusion in the policy nullifies coverage.  Most CGL policies define an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Most policies are silent as to what constitutes an “accident.”  Illinois courts have found that “accident” means “an unforeseen occurrence, usually of an untoward or disastrous character or an undesigned, sudden or unexpected event of an inflictive or unfortunate character.” The three recent Illinois cases involve whether an “accident” occurs when an insured acts intentionally but its acts causes property damage to adjacent property. 

In West American Insurance Co. v. Kamadulski Excavating & Grading Co., Inc., a school district hired a contractor to clear and grade a lot. The contractor accidentally cleared trees on an adjacent lot, and the owners of the adjacent property sued for their loss.  The contractor tendered its defense to its insurance carrier under a CGL policy.  The insurer filed suit in federal court, seeking a declaration that it had no duty to defend against the claim for lost trees.  The insurer argued that the cutting down of the trees was an intentional act that, therefore, could not be an “accident” sufficient to qualify as an “occurrence” under the policy. 

The court rejected the argument that there was no “accident,” noting that the real question was “whether the injury is expected or intended by the insured, not whether the acts were performed intentionally.”  Plainly, the contractor intended to remove the trees, but it never intended the injury.  Therefore, the loss was covered under the policy. 

In a remarkably similar case, Pekin Ins. Co. v. Miller, a contractor was hired to clear trees from three suburban lots, but accidentally cleared trees from the wrong lots.  The property owners sued for trespass, violations of the Illinois Wrongful Tree Cutting Act and negligent trespass.  The contractor tendered to his insurer under his CGL policy, and the insurer sought to avoid coverage, arguing that the intentional act of cutting down the trees could not be an “occurrence” under the policy.  The Illinois Appellate Court, too, rejected the insurance company argument, holding that the relevant issue is that the property damage was “neither expected nor intended from the standpoint of the insured” (emphasis added). 

Whether the insured expected the property damage is significant, particularly in light of another recent Illinois case involving clearing the wrong property.  In Century Surety Co. v. Demolition & Development, Ltd., the City hired a demolition contractor to demolish three buildings.  The demolition contractor arrived at the property but could not find buildings with addresses identified in the demolition order.  He spoke with a City representative, who described the particular buildings to be demolished and confirmed that it was targeting the correct locations.  In fact, the City accidentally directed the demolition contractor to tear down the wrong building. The owner of the building subsequently sued in federal court.

The demolition contractor tendered the claim to its insurer, pursuant to a CGL policy.  The insurer rejected the claim and sued for a declaration that it had no duty to cover the loss.  The court agreed with the insurer and concluded that directing the demolition contractor to demolish the wrong building was the City’s mistake.  The insurer had not insured against the risk of an owner’s bad directions causing an injury; it only insured against the risk of damage that the demolition contractor did not expect or intend.  The demolition contractor expected and intended the property damage because the City directed it to knock down the building.  The loss, therefore, was not covered. 

Despite the difference in outcomes, a consistent rule of law is discernible.  The touchstone of each of the cases is the unintended consequence from the insured’s perspective.  All three cases involve intentional acts that harmed adjacent landowners, but they differ in their intended consequences.  In the two tree-clearing cases, Pekin and West American, the courts found that clearing trees on the wrong property was not the intended result of the contractor’s actions.  This loss was the contractor’s mistake and the contractor’s unintended consequence.  Accordingly, the loss was deemed to be covered under the contractor’s CGL policy. 

In the demolition case, Century Surety, the court found that demolishing the wrong building was precisely the result the contractor intended.  This loss was the owner’s mistake and the owner’s unintended consequence, not the contractor’s.  Therefore, that loss was not covered under the contractor’s CGL policy.  Despite this seemingly unfair result, the contractor will likely have several causes of action and defenses that it can assert against the wrongdoing upstream party if it is sued for the property damage on the project. 

Contractors, therefore, should be aware that when they mistakenly act and their actions cause damage to adjacent property, they will likely be covered under a CGL policy (save any applicable exclusions to coverage); whereas, when they act pursuant to the mistaken direction of another party and cause damage to adjacent property, they will likely not be covered under a CGL policy.

Additional Information

Should you have any questions about this topic, please contact the Ogletree Deakins attorney with whom you normally work or the Client Services Department via e-mail at clientservices@ogletreedeakins.com or by phone at 1-866-287-2576. 

Note: This article was published in the October 12, 2006 issue of the Construction eAuthority.