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Cracked steel columns are not “property damage,” but are building products that are not covered by a contractor’s general liability policy, the U.S. 7^th Circuit Court of Appeals decided in an opinion that lets St. Paul and other insurers off the hook in a botched construction project at Chicago’s O’Hare International Airport.

While U.S. courts have often found that policy wording is ambiguous, in this case, the lower court and the appeals court concluded that a St. Paul Guardian Å˽ðÁ«´«Ã½Ó³»­ Co. policy for a subcontractor was clear enough and limited coverage only to damage to property owned by “others.” Travelers and Charter Oak policies similarly excluded coverage for the steel-making subcontractor’s own products.

The dispute began in 2003 when the city of Chicago contracted with Walsh Construction Co. to build a canopy and glass-and-steel curtain wall at the airport. Walsh subcontracted with a steel company, which subcontracted with LB Steel LLC to fabricate and install the steel columns to support the wall and canopy.

Per an agreement, LB listed Walsh as an additional insured on its GCL policies. Several years into the project, city inspectors found cracks in the welds on the columns, and the city sued Walsh. Walsh in turn sued LB Steel and won more than $19 million in state court. LB then filed for bankruptcy protection, the appeals court explained.

LB’s insurers and Walsh both asked the federal court in Chicago to decide if the carriers owed coverage and a duty to defend in litigation. The district federal court sided with the insurance companies, finding that the cracked welds did not constitute property damage, as narrowly defined by the policy language.

The three-judge panel of the 7^th Circuit this week agreed.

Walsh had argued that LB’s steel columns were an integral part of the construction project and were destined to become airport property – property owned by others, in other words. The contractor also posited that the cracks threatened the entire project and required it to spend millions on preventive measures, including reinforcing the columns.

But the appellate judges said that Walsh had not met its burden of proving property damage beyond LB’s own products.

“For example, Walsh has not identified any cracks in the glass, damage to concrete, or alterations to any other parts of the canopy or curtain wall not provided by LB Steel. Walsh does note that it had to install retrofit structures around the affected columns, but those retrofits were only installed to remedy the defects in the columns themselves,” appeals court Judge John Lee wrote.

In order to succeed on the coverage question, Walsh “must demonstrate some physical injury to tangible property beyond the steel elements fabricated by LB Steel,” the court wrote.

Walsh also argued that the defective welds increased the potential for the canopy to collapse. “At the same time, it offers no evidence that this ‘structural instability’ had manifested itself in any physical way (other than in the LB Steel columns themselves).”

Under Illinois law, an increased potential for damage does not constitute property damage, the court noted. Citing previous court rulings, the judges found that Walsh’s preventative measures were economic losses not recoverable under the insurance policies.

“To find coverage here would mean that manufacturers like LB Steel could perform defective work without consequence, knowing that they could later recoup any resulting adverse judgments under their CGL policies,” the court concluded. “That can hardly be what the contracting parties intended.”

The opinion can be read here.

Topics Property