Lexington Insurance Company v. Chicago Flameproof & Wood Spec

Citation: Not availableDocket: 19-1062

Court: Court of Appeals for the Seventh Circuit; February 26, 2020; Federal Appellate Court

Original Court Document: View Document

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The United States Court of Appeals for the Seventh Circuit reviewed the case of Lexington Insurance Company v. Chicago Flameproof, Wood Specialties Corporation, affirming the district court's ruling that Lexington had no duty to defend Chicago Flameproof in three lawsuits. The court determined that the underlying complaints did not allege an "occurrence" (an accident) necessary to trigger Lexington's duty under the insurance policy. Chicago Flameproof, an Illinois distributor of fire retardant treated lumber, held a general liability insurance policy with Lexington, which required coverage for damages from occurrences within the coverage territory. The policy defined "occurrence" as an accident, while "property damage" included physical injury to tangible property.

The disputes arose from lawsuits related to Chicago Flameproof's sale of lumber to Minnesota contractors, who were required to use materials compliant with the International Building Code (IBC). The IBC mandates specific labeling and performance standards for fire retardant treated lumber. The complaints alleged that Chicago Flameproof was aware that the lumber was intended for IBC-compliant projects, raising questions about its obligations under the policy. However, the court concluded that the allegations did not meet the policy's definition of occurrence, thus negating Lexington's duty to provide a defense.

Chicago Flameproof made a unilateral decision to deliver its FlameTech brand lumber instead of the IBC-compliant D-Blaze FRT lumber ordered by Schwieters. The FlameTech lumber was not tested, certified, or labeled according to IBC requirements, leading to its classification as non-compliant FRT lumber. Chicago Flameproof allegedly concealed this lack of compliance from Schwieters, who unknowingly installed the lumber in four building projects. Upon discovering the issue, the general contractors and building owners instructed Schwieters to remove the FlameTech lumber and replace it with compliant materials. Chicago Flameproof later admitted to shipping the FlameTech lumber instead of the D-Blaze FRT lumber that was advertised. Allegations against Chicago Flameproof include negligent and fraudulent misrepresentation, claiming it failed to communicate the unavailability of D-Blaze FRT lumber and the substitution of the non-compliant FlameTech product. Schwieters also filed third-party complaints in state court seeking contribution and indemnification for damages incurred during the replacement process, which included harm to adjacent materials. Lexington initiated a declaratory judgment action to establish it had no duty to defend Chicago Flameproof against these claims. The district court granted summary judgment for Lexington, determining that if Chicago Flameproof knowingly supplied non-compliant lumber and concealed this fact, any resulting property damage from its removal was a foreseeable consequence, thereby falling outside the coverage of the insurance policy.

Chicago Flameproof appeals the district court’s summary judgment favoring Lexington, asserting that Lexington has a duty to defend it due to the alleged property damage resulting from its shipment and subsequent removal of lumber. Lexington counters that the underlying complaints do not invoke its duty to defend, as they fail to assert property damage caused by an occurrence, and coverage is further barred by business risk exclusions in the insurance policy.

The court reviews the insurance policy interpretation and summary judgment de novo, emphasizing a liberal construction of the underlying allegations in favor of Chicago Flameproof. The duty to defend is engaged if the allegations potentially fall within the policy’s coverage but is not triggered if the complaints clearly do not meet coverage requirements. An insurer must defend if any recovery theory is potentially covered, focusing primarily on the conduct alleged rather than the legal labels used.

The court finds that the underlying complaints do not establish an 'occurrence' as defined by the insurance policy, which describes an 'occurrence' as an unforeseen accident. Under Illinois law, if an act leads to an injury that is a natural consequence of that act, it is not considered an accident. The complaints indicate that Chicago Flameproof, as a supplier, was aware of the importance of IBC certification but chose to ship uncertified lumber, subsequently concealing this fact. The expected consequence of this action was the necessity to remove and replace the non-compliant lumber, resulting in damage to surrounding materials, thus failing to qualify as an unforeseen occurrence under the policy’s terms.

Chicago Flameproof is accused of knowingly shipping uncertified lumber and concealing this fact, which would necessitate its removal from construction projects. Contractors assume risks when using inadequate materials, and any resulting damage is typically deemed a natural consequence of their failure to fulfill contractual obligations, making it ineligible for coverage. The complaints do not allege any unforeseen events; instead, the need to remove the uncertified lumber is seen as a direct consequence of its non-compliance with IBC certification. Previous case law indicates that defective workmanship may be considered an occurrence if it causes damage outside the insured’s work scope or if the insured was unaware of defects until after incorporation into a product. However, the complaints against Chicago Flameproof suggest deliberate action rather than mere negligence or hidden defects, as they assert that the company was aware of IBC certification requirements and represented itself as knowledgeable in treated wood products. Both Illinois and Minnesota have adopted IBC certification standards, applicable across all states.

Chicago Flameproof was aware or should have been aware of the necessity for IBC certification for its lumber sales, particularly regarding specific projects requiring certified materials. The company shipped uncertified FlameTech lumber, despite knowing the implications, which were neither hidden nor unknown. Although Chicago Flameproof might have preferred that the lumber remain in place pending certification, it could reasonably expect that contractors or building owners would require its removal rather than wait. The allegations indicate that Chicago Flameproof understood the critical nature of IBC certification requirements, contrasting its belief that supplying FlameTech lumber met its obligations. The complaints assert that Schwieters specifically ordered D-Blaze FRT lumber, highlighting Chicago Flameproof's knowledge of the importance of IBC certification.

Despite the negligent misrepresentation claim labeling, courts focus on the underlying allegations' nature. The inquiry centers on whether Chicago Flameproof's actions led to unforeseen consequences of the injury claimed. The complaints assert that Chicago Flameproof acted deliberately by shipping uncertified lumber and concealing this fact, which resulted in property damage. Even though terms like "negligence" were used, the actions described were intentional. Chicago Flameproof's failure to inform Schwieters about the uncertified status of the lumber is seen not merely as negligent but as a deliberate choice that caused the resultant damages. The district court's judgment is affirmed, concluding that there was no "occurrence" under the insurance policy, making the discussion of business risk exclusions unnecessary.