(Article from Insurance Law Alert, March 2020)
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The Seventh Circuit ruled that a policyholder’s shipment of lumber that was not certified in accordance with state testing requirements, resulting in its removal and damage to other property, was not a covered occurrence. Lexington Ins. Co. v. Chicago Flameproof & Wood Specialties Corp., 2020 WL 948509 (7th Cir. Feb. 27, 2020).
Chicago Flameproof, a distributor of fire retardant lumber, was sued in three lawsuits stemming from the company’s sale of lumber to contractors. The complaints alleged that the contractors ordered a specific brand of fire retardant lumber that met the requirements set forth in the International Building Code (“IBC”), but that Chicago Flameproof instead delivered its in-house brand, which was not IBC-approved. The complaints further alleged that the contractors were not aware of this substitution until after the lumber had been installed in the building projects. The lumber was ultimately removed and replaced with IBC-certified lumber, allegedly causing damage to the surrounding materials. Lexington sought a declaration that it had no duty to defend the suits, arguing that Chicago Flameproof’s knowing decision to supply non-IBC-compliant lumber was not a covered “occurrence.” An Illinois federal district court agreed and granted the insurer’s summary judgment motion. The Seventh Circuit affirmed.
The Seventh Circuit reasoned that the underlying complaints did not allege any unforeseen or unexpected insurable events because Chicago Flameproof shipped the uncertified lumber deliberately and was aware or should have been aware of the consequences of that action. The court acknowledged that under Illinois law, faulty workmanship may constitute an occurrence if it results in damages separate and apart from the insured’s work product, or if the insured was unaware of the defective nature of a building component. However, neither of those principles apply where, as here, the policyholder allegedly made a deliberate decision to ship non-conforming products.
The court rejected Chicago Flameproof’s assertion that a duty to defend was triggered based on allegations of negligence in the underlying complaints. The court reasoned that the negligence “label” is of little significance given that the crux of the allegations is that Chicago Flameproof acted deliberately.