No Duty to Defend If No Fortuity and No Occurrence

So after just blogging about how tough it is to avoid the duty to defend, the Seventh Circuit issues an opinion concluding that where the underlying allegations lack fortuity and there is no occurrence, there is no obligation for the insurance company to defend.

In Lexington Insurance Co. v. Chicago Flameproof & Wood Specialties Corp., No. 19-1062 (7th Cir. Feb. 27, 2020), a lumber supplier was sued by a commercial contractor that ordered fire retardant and treated lumber (FRT lumber) required by the projects’ architects for several construction projects.  The FRT lumber was required to meet the standards of the International Building Code (IBC).  The allegations in the underlying suit are that the supplier purposely substituted uncertified lumber that did not meet the IBC standards, was not properly labeled, even though the purchase order was for a specific brand that met the IBC standards.

The supplier’s insurance company brought this action for a declaratory judgment that it had no duty to defend the underlying suits.  The district court granted summary judgment to the insurance company holding that the insurance company had no duty to defend.  The Seventh Circuit affirmed.

In affirming, the circuit court described the well-known provisions of a commercial general liability policy requiring the insurer to pay sums that the insured becomes legally obligated to pay as damages because of property damage caused by an occurrence, and defining an “occurrence” as “an accident.”  The court held that the underlying complaints did not trigger the duty to defend because they did not allege an occurrence.  Quoting from several Illinois cases, the court noted that if an injury is the rational and probable consequence of the act or the natural and ordinary consequence of the act, then the act is not an accident. In analyzing the underlying complaints, the court concluded that the allegations were inconsistent with shoddy workmanship or that the lumber shipped had a hidden defect resulting in damage that could not have been reasonably expected.  Rather, said the court, the underlying complaints alleged that the supplier “deliberately shipped uncertified lumber despite knowing the consequences of doing so.”

The court essentially disregarded the negligent misrepresentation count in one of the complaints, stating that the label “negligent” is given little weight by courts and that courts focus on the actual allegations. Here, said the court, there was no unforeseen, sudden or unexpected event.  There was no allegation that the supplier was negligent or failed to exercise reasonable care when it made its unilateral decision to ship uncertified lumber.  Rather, the court found, the underlying complaints allege that the supplier did not exercise reasonable care by representing that it had the specific certified lumber requested by the contractor available for purchase, and by failing to notify the contractor that it supplied uncertified lumber.  The court concluded that the alleged injury stemmed from the supplier’s unilateral decision to supply the uncertified lumber and its concealment of having done so.

Thus, the court affirmed the district court’s summary judgment in favor of the insurer finding that there was no duty to defend because the damage alleged was the natural and ordinary result of the supplier’s deliberate decision to supply, and conceal that it supplied, uncertified lumber.

In a footnote, the court mentioned that the supplier had not even addressed the insurance company’s argument that the policy’s business risk exclusions precluded coverage.  Because the court determined that there was no “occurrence,” the court did not need to rely on the exclusion to resolve the appeal.

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