Diamond State Ins. Co. v. Chester-Jensen Co., Inc.

• Decision Date: 11 February 1993
• Docket Number: No. 1-90-1760,CHESTER-JENSEN,1-90-1760
• Citation: 183 Ill. Dec. 435,611 N.E.2d 1083,243 Ill.App.3d 471
• Parties: , 183 Ill.Dec. 435 DIAMOND STATE INSURANCE COMPANY and Illinois Insurance Exchange, Transco Syndicate # 1, Ltd., Plaintiffs-Appellees, v.COMPANY, INC., Defendant-Appellant (The People of the State of Illinois ex rel. George B. Peters, Chairman of the Capital Development Board, Defendant).
• Court: United States Appellate Court of Illinois

Page 1083

611 N.E.2d 1083

243 Ill.App.3d 471, 183 Ill.Dec. 435

DIAMOND STATE INSURANCE COMPANY and Illinois Insurance

Exchange, Transco Syndicate # 1, Ltd., Plaintiffs-Appellees, v. CHESTER-JENSEN COMPANY, INC., Defendant-Appellant (The

People of the State of Illinois ex rel. George B.

Peters, Chairman of the Capital

Development Board, Defendant).

No. 1-90-1760.

Appellate Court of Illinois,

First District, Fifth Division.

Feb. 11, 1993.

Heineke, Burke, Healy & Bodach, Chicago, L. Barrett Bodach, for plaintiffs-appellees.

Jenner & Block, Keith F. Bode, Joseph Bisceglia, Gabrielle Sigel, Chicago, and Robert R. Reeder, Philadelphia, PA, for defendant-appellant.

Presiding Justice GORDON delivered the opinion of the court.

Plaintiff insurance companies brought this action for declaratory judgment seeking a determination that there was no duty to defend their insured, appellant Chester-Jensen Company, Inc. (Chester-Jensen) in a breach of contract and warranty action filed against Chester-Jensen, by the State of Illinois. The State's complaint in the underlying litigation seeks damages from certain defendants, including Chester-Jensen, resulting from the failure of the air conditioning system installed in the State of Illinois Center to adequately cool the building during the summers of 1985 and 1986. Plaintiffs filed a motion for summary judgment, contending that the insurance policies involved did not cover this potential liability. The trial court granted plaintiffs' motion for summary judgment and Chester-Jensen appeals, contending that Illinois law requires that the policies be interpreted to provide coverage. In the alternative, Chester-Jensen contends that the trial court erred in applying Illinois law and that under Pennsylvania law, plaintiffs would be required to defend it in the underlying litigation.

FACTS

Chester-Jensen is a Pennsylvania corporation which maintains its principal place of business in that state. It is engaged in the manufacture of refrigeration and other heat exchange equipment. In 1982, Chester-Jensen furnished 100,000 lbs. ice builders (thermal energy storage units) and ancillary equipment to be incorporated into the heating, ventilation and air conditioning (HVAC) system of the State of Illinois Center located in Chicago, Illinois. These thermal banks were installed in the building by two subcontractors.

After the air conditioning system failed to perform as expected, the State of Illinois brought suit in People of the State of Illinois ex rel. George Peters v. Murphy-Knight, et al. (Cir.Ct. Cook Co.), No. 87 L 7496, joining as defendants fourteen entities including Chester-Jensen. The State's complaint alleged that in the summers of 1985 and 1986 the building experienced extremely high indoor temperatures of over 90 degrees Fahrenheit on a regular basis and that temperatures of over 110 degrees Fahrenheit were present in some cases. According to the allegations of the State's complaint, these temperatures made the building "virtually uninhabitable" as the temperatures were so high that ordinary office work and retail operations were "impossible."

The complaint alleged that the cause of these excessive temperatures was "an inadequately designed and defectively installed and constructed air conditioning system." Specifically, with respect to Chester-Jensen, the State alleged in count VIII of its complaint that Chester-Jensen had breached its contract to provide thermal banks and ancillary equipment in conformance with the contract specifications. In count IX of its complaint, the State alleged that Chester-Jensen breached its express warranties that the thermal banks would "produce the capacities and meet the specifications" required by the contract and as published by Chester-Jensen. Count X of the complaint charged fraud against Chester-Jensen, alleging that it knowingly misrepresented the output capability of the thermal banks. Chester-Jensen does not contend that the policies cover the allegations contained in the fraud count and it is therefore not a part of this appeal.

According to the complaint, the State "will expend at least $10,000,000 on modification and repairs to the heating, ventilation and air conditioning systems in order to have a habitable state office building in "a. lost rent from commercial tenants who refused to pay their rent because of extreme heat in the building;

                [183 Ill.Dec. 438] Chicago."   The complaint stated that in "addition to economic damages" it suffered other damages including
                

b. lost work days from State employees who became ill and had to go either to a hospital or home because of the heat;

c. lost productivity from State employees who remained at work but who were unable to perform their duties sufficiently because of the heat in the building;

d. excess electrical consumption caused by the widespread use of portable electric fans in the building by employees and by commercial tenants."

During the period of time at issue, Chester-Jensen was covered by two separate insurance policies. Plaintiff Diamond State, a Delaware corporation with its principal place of business in Pennsylvania, issued Chester-Jensen a general liability insurance policy for the period between October 18, 1984, through October 5, 1985. Transco Insurance Services was listed as Diamond State's authorized representative under a Chicago address on the first policy. The second policy was issued by Illinois Insurance Exchange Transco Syndicate # 1 also under a Chicago address. This policy covered the period of October 5, 1985, to October 5, 1986. These policies provided that "the company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of * * * bodily injury or * * * property damage to which this insurance applies, caused by an occurrence."

The policies contain the following definitions among others:

" 'Bodily injury' means injury, sickness or disease sustained by any person which occurs during the policy period, including death at any time resulting therefrom;

" 'occurrence' means an accident including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured;

'property damage' means (1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period * * *."

The policies also contained a number of explicit exclusions from coverage which included exclusion (e) (hereinafter "insured's product exclusion"). This exclusion provides that the insurance does not apply:

"to loss of use of tangible property which has not been physically injured or destroyed resulting from

(1) a delay in or lack of performance by or on behalf of the named insured of any contract or agreement, or

(2) the failure of the named insured's products or work performed by or on behalf of the named insured to meet the level of performance, quality, fitness or durability warranted or represented by the named insured * * *."

Additionally, each policy provided that "[it] shall not be valid unless completed by the attachment hereto of a declarations page * * * and countersigned on the aforesaid declarations page by a duly authorized representative of the company."

Chester-Jensen demanded that plaintiffs defend and indemnify it in the underlying litigation pursuant to its insurance policies. Plaintiffs undertook defendant's defense, but reserved their right under the policies to deny coverage. On June 17, 1988, plaintiffs filed an action for declaratory judgment pursuant to section 2-701 of the Illinois Code of Civil Procedure (Ill.Rev.Stat.1987, ch. 110, par. 2-701), naming Chester-Jensen Inc. and the People of the State of Illinois ex rel. George Peters as defendants. Plaintiffs alleged that the State's claims in the underlying litigation did not arise out of an "occurrence" and were not property damages covered by the policies because such claims were for economic losses which resulted from Chester-Jensen's On February 7, 1990, plaintiffs filed a motion for summary judgment pursuant to section 2-1005 of the Illinois Code of Civil Procedure. (Ill.Rev.Stat.1989, ch. 110, par. 2-1005.) Plaintiffs alleged that they did not have a duty to defend or indemnify Chester-Jensen in the underlying litigation because there was no potential coverage under the insurance policies. The trial court granted plaintiffs' motion for summary judgment finding that no duty to defend was present under the policies with respect to the underlying complaint. Chester-Jensen appeals from the trial court's order granting plaintiffs' motion for summary judgment.

[183 Ill.Dec. 439] breach of contract, breach of express warranty, and fraud.

OPINION

On appeal, appellant Chester-Jensen first contends that the trial court erred in determining that under Illinois law plaintiffs had no obligation to defend it in the underlying action. We disagree. An insurance company's obligation to represent its insureds depends on the allegations of the underlying complaint and the provisions of the insurance policy. (Thornton v. Paul (1978), 74 Ill.2d 132, 23 Ill.Dec. 541, 384 N.E.2d 335; Tuell v. State Farm Fire & Casualty Co. (1985), 132 Ill.App.3d 449, 87 Ill.Dec. 469, 477 N.E.2d 70.) The complaint must be liberally construed and all doubts resolved in favor of coverage for the insured. (Maryland Casualty Co. v. Chicago & North Western Transportation Co. (1984), 126 Ill.App.3d 150, 81 Ill.Dec. 289, 466 N.E.2d 1091.) The "general rules which favor the insured[, however,] must yield to the paramount rule of reasonable construction which guides all contract interpretations." (Travelers Insurance Companies v....