Today’s 7th U.S. Circuit Court of Appeals case involves an interesting coverage question under a commercial general liability policy: Is a building materials supplier who contracts to provide International Building Code-certified lumber, but instead furnishes noncertified lumber, which must be torn out and replaced, entitled to coverage for the customer’s property damage?

In Lexington Insurance Co. v. Chicago Flameproof & Wood Specialties Corp., 2020 WL 948509 (7th Cir. 2020), Lexington Insurance Co. insured Chicago Flameproof & Wood Specialties Corp. under a commercial general liability policy.

Chicago Flameproof contracted with JL Schwieters Construction Co., which contracted with two building contractors, to furnish fire retardant and treated, or FRT, lumber certified under the International Building Code.

Chicago Flameproof instead provided “non-IBC compliant FRT” lumber, which had to be torn out and replaced with IBC-certified lumber. The Schwieters companies sued for property damage.

Lexington Insurance Co. denied coverage for the property damage claim, asserting the commercial general liability policy covers only property damage caused by an occurrence or accident.

The claim was not an occurrence or accident, Lexington argued, because it was not an unexpected event, but was the natural and ordinary consequence of providing noncertified lumber that had to be removed.

U.S. District Judge Elaine E. Bucklo granted summary judgment for Lexington, finding no occurrence or accident and concluding that the claim was not one for property damage caused by an occurrence.

In an opinion written by Judge Joel M. Flaum, the 7th U.S. Circuit Court of Appeals, affirmed, holding there was no occurrence, no unforeseen or unexpected event, because the tearing out of the noncertified lumber was the natural and ordinary consequence of failing to supply IBC-certified lumber.

Flaum began the court’s discussion stating:

“The underlying complaints do not trigger Lexington’s duty to defend because they do not allege an ‘occurrence.’ An ‘occurrence’ under the insurance policy is an ‘accident,’ which under Illinois law is ‘an unforeseen occurrence, usually of an untoward or disastrous character or an undesigned sudden or unexpected event of an inflictive or unfortunate character.’ If an act results in an injury that ‘is the rational and probable consequence of the act or, stated differently, the natural and ordinary consequence of the act,’ then the act ‘is not an accident.’”

Finding that the Schwieters’ complaints did not plead an “accident,” the court wrote:

“Chicago Flameproof was or should have been aware of the importance of IBC-certification requirements and the consequences of failing to comply with them. Chicago Flameproof nevertheless made a ‘unilateral decision’ to ship FlameTech — which had not gone through the IBC-certification process — rather than the D-Blaze FRT lumber that Schwieters had ordered and that had gone through the IBC-certification process. Chicago Flameproof then ‘concealed’ that it had shipped lumber that was not IBC-certified.”

Next, observing that the noncompliant lumber had to be replaced thereby causing property damage, Flaum explained:

“The natural and ordinary consequence of supplying and concealing that it had supplied uncertified lumber, given the IBC-certification requirements, was that the lumber would need to be removed and replaced with lumber that had been certified as IBC-compliant. That, in turn, would damage the surrounding materials into which the lumber had been integrated.”

Relying on Viking Construction Management Inc. v. Liberty Mutual Insurance Co., 358 Ill.App.3d 34 (2005), the court found no coverage exists for the ordinary and natural consequences of an intentional act:

“Hence, according to the underlying complaints, Chicago Flameproof deliberately shipped uncertified lumber, concealed that fact and was aware or should have been aware of the consequences of those actions — namely, that the uncertified lumber would need to be ripped and torn from the projects.

“[I]f a contractor uses inadequate building materials … he takes a calculated business risk that no damage will take place. If damage does take place, it flows as an ordinary and natural consequence of the contractor’s failure to perform the construction properly or as contracted and there can be no coverage for such damage.”

Flaum then concluded that the fact that the noncertified lumber had to be torn out and replaced was not “unforeseen or unexpected” by Chicago Flameproof:

“The underlying complaints allege no ‘unforeseen,’ ‘undesigned’ or ‘unexpected’ event. The ripping and tearing out of the FlameTech lumber was the natural and ordinary consequence of supplying lumber that was not IBC-certified.”

The court offered this example by way of comparison:

“(‘[T]he cracks in the floor and the loose paint on the exterior of the building are the natural and ordinary consequences of installing defective concrete flooring and applying the wrong type of paint.’); Bituminous Casualty Corp. v. Gust K. Newberg Construction Co., 218 Ill.App.3d 956 (1991).”

Addressing Chicago Flameproof’s claim that the negligent misrepresentation count showed potential coverage and a duty to defend, Flaum found the argument unmeritorious:

“Although the negligent misrepresentation count in one of the underlying complaints uses the label ‘negligent,’ ‘courts give little weight to the label that characterizes the underlying allegations.’ Regardless of the labels used, the focus of our inquiry remains on whether there was an ‘unforeseen[,] … undesigned, sudden or unexpected event’ and whether the injury alleged was the ‘natural and ordinary’ consequence of Chicago Flameproof’s actions.

Acts that give rise to a negligent misrepresentation claim can result in an occurrence ‘as long as the insured did not expect or intend the injury.’ ‘Expected injuries are those that should have been reasonably anticipated by the insured.’”

Finding no coverage for the negligent misrepresentation count or any count and affirming the district court’s decision, the 7th Circuit stated:

“Even though the count of the underlying complaint was couched in terms of negligence, the complaint alleged a course of conduct that was clearly intentional and not merely negligent or accidental.”