Illinois “property damage” caused by an “occurrence”

In Stoneridge Development Co., Inc. v. Essex Ins. Co., No. 2-06-1166  (Ill. App. 2 Dist. May 6, 2008), insured general contractor Stoneridge built and sold a home to Walski.  All of the construction work, including soil preparation, was performed by subcontractors.   Six years later Walski sued Stoneridge alleging that improper soil preparation by Stoneridge resulted in structural damage in the form of cracks to the home.  The suit alleged breach of contract and breach of the implied warranty of habitability causes of action.  Essex, Stoneridge’s CGL insurer, defended under a reservation of rights.   Stoneridge filed suit against Essex seeking declarations on duty to defend and indemnify.  An arbitration award was entered against Stoneridge on the breach of contract claim ordering Stoneridge to repurchase the home from Walski for $200,000.00 which was the amount of the original purchase price plus diminished market value.   The Second District intermediate appellate court held that “the damage to  the Walski home did not constitute an ‘occurrence’ or ‘property damage’.”  Specifically, the cracks did not constitute an “occurrence” “because they were natural and ordinary consequences of defective workmanship, namely, the faulty soil compaction.”   The cracks did not constitute “property damage” because the damages sought by  Walski—the cost to repair the home or the replacement value of the home—are economic losses and “such breach-of-contract damages are not covered by CGL policies.”  The court allowed that, had the defective workmanship resulted in damage to something other than the house itself, there might be coverage for such resulting damage.  The court rejected Stoneridge’s subcontractors work exception to the “your work” exclusion  argument essentially on the basis that an exception to an exclusion cannot create coverage that didn’t exist to begin with.  In other words, without “property damage” caused by an “occurrence,” the exclusions, and any exceptions thereto, are irrelevant.    In a footnote, the court rejects the argument that this construction renders the exception illusory, stating the exception could apply in certain situations, giving the example of a subcontractor confusing job orders and working on the wrong portion of the project.  On the “occurrence” issue, the Stoneridge court distinguished Country Mut. Ins. Co. v. Carr from the 4^th District first on the basis that the underlying action in Carr alleged negligence rather than breach of contract or warranty.  The court also questions Carr’s determination that negligent construction workmanship can constitute an “occurrence.”  The Illinois Supreme Court declined to consider an appeal.  No. 106675 (Ill. Sept. 24, 2008).