In St. Paul Guardian Insurance Co. et al. v. Walsh Construction Co., No. 23-1662, 2024 WL 1841941 (7th Cir. Apr. 29, 2024), three insurers have no duty to cover a general contractor for defective columns built at O’Hare International Airport, because the defects did not constitute property damage under the contractor’s insurance policies.

A 2-1 panel of the 7th U.S. Circuit Court of Appeals backed a lower court ruling that St. Paul Guardian Insurance Co., Travelers Property Casualty Co. of America and Charter Oak Fire Insurance Co. need not indemnify Walsh Construction Co. for the damage or defend it against the city of Chicago’s lawsuit over the project.

The City of Chicago contracted with Walsh in 2003 to oversee the construction of a canopy and wall system at O’Hare. Walsh then entered into a contract with Carlo Steel Corp., which subcontracted with LB Steel to manufacture and install steel columns to support the canopy and wall.  The subcontract between Carlo and LB Steel required LB Steel to indemnify Walsh for any property damage that arose from its negligent performance.

The City later discovered cracks in the columns’ welds, leading it to question the canopy and wall system’s structural integrity. Walsh agreed to repair the columns at its own expense. The City sued Walsh in 2008 to recoup the costs of investigating and rectifying the defective welds. Walsh sought coverage for the litigation from St. Paul, Travelers and Charter as an additional insured under policies they issued to LB Steel.

The insurers declined to defend Walsh, and the general contractor paid $10 million to settle the city’s suit. Walsh then sued LB Steel for breach of contract, professional negligence and fraud. After LB Steel filed for bankruptcy, the parties reached a settlement that provided Walsh with $3.3 million and a $24 million unsecured claim against LB Steel’s bankruptcy estate.

The insurers then sued Walsh in the U.S. District Court for the Northern District of Illinois, seeking a ruling that they owed no coverage for the lawsuit and the bankruptcy settlement. Summary judgment was granted in favor of the insurers, finding no obligation to defend or indemnify Walsh was owed.

In upholding the District Court, the majority of the 7th Circuit panel noted Walsh had not identified any damage to other parts of the canopy or curtain wall. Walsh only installed retrofit structures around the affected columns to remedy defects in the columns themselves.  The 7th Circuit disagreed that structural instability of the columns constituted “harmful physical change” to the copy system sufficient to trigger coverage.  The majority of the 7th Circuit panel, citing the decisions in Traveler’s Ins. Co. v. Eljer Mfg., 757 N.E.2d 481, 502 (Ill. 2001),  and Acuity v. M/I Homes of Chicago, LLC, 2023 IL 129087, ¶37  (Ill. 2023), found that increased potential for future property damage and proactive repairs did not constitute “property damage” to trigger coverage.

On dissent, one judge disagreed with the majority of the panel, finding that the complaint should not be required to contain an explicit allegation of covered damages when the potential for such damage is clear as a matter of common sense.