Prisco Serena Sturm Architects, Ltd. v. Liberty Mut. Ins. Co.

• Decision Date: 18 September 1997
• Docket Number: No. 96-2441,96-2441
• Citation: 126 F.3d 886
• Parties: PRISCO SERENA STURM ARCHITECTS, LTD., and Security Insurance Company of Hartford, Plaintiffs-Appellees, v. LIBERTY MUTUAL INSURANCE CO., Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 886

126 F.3d 886

PRISCO SERENA STURM ARCHITECTS, LTD., and Security Insurance Company of Hartford, Plaintiffs-Appellees, v. LIBERTY MUTUAL INSURANCE CO., Defendant-Appellant.

No. 96-2441.

United States Court of Appeals Seventh Circuit.

Argued Jan. 8, 1997.

Decided Sept. 18, 1997.

Hugh C. Griffin, Diane I. Jennings (argued), William T. Weaver, Daniel A. Cotter, Hugh S. Balsam, Lord, Bissell & Brook, Chicago, IL, Timothy R. Conway, Stein, Ray & Conway, Chicago, IL, for Plaintiffs-Appellees.

Joseph P. Postel (argued), Ana Maria L. Downs, Meachum & Hittle, Chicago, IL, for Defendant-Appellant.

Before POSNER, Chief Judge, and COFFEY and DIANE P. WOOD, Circuit Judges.

DIANE P. WOOD, Circuit Judge.

Torn between the desire to use common forms, which ought to lead to consistent results, and the need to tailor coverage to particular situations, the insurance industry often ends up with policies that are, to put it charitably, convoluted. This has led most states, including Illinois, to adopt rules requiring policies to be construed in the light most favorable to a finding of coverage, so that people who reasonably think they have insured themselves are not unpleasantly surprised when they submit a claim. Dora Township v. Indiana Ins. Co., 78 Ill.2d 376, 36 Ill.Dec. 341, 343, 400 N.E.2d 921, 923 (1980); Economy Preferred Ins. Co. v. Grandadam, 275 Ill.App.3d 866, 212 Ill.Dec. 190, 192, 656 N.E.2d 787, 789 (3d Dist.1995).

The present case involves a coverage dispute between Prisco Serena Sturm Architects, Ltd. (PSSA) and Liberty Mutual Insurance Company (Liberty) over Liberty's duty to defend and to indemnify PSSA for certain work it performed as part of a school construction project. The district court, in a series of orders, granted summary judgment for PSSA and decided that Liberty's long delay in informing PSSA of its refusal to defend entitled PSSA to recover fees, costs, and a penalty under 215 ILCS 5/155 ( § 155). Many of the policy provisions on which Liberty relies are ambiguous and must, therefore, be construed to provide coverage. We find, however, that one provision--the one excluding liability for professional services from coverage--clearly applies to the underlying claim and excuses Liberty from the duty to defend the claim. We therefore also reject the district court's conclusion that PSSA was entitled to an award under § 155.

I

In comparison to the insurance dispute they engendered, the background facts are quite straightforward. In 1988, the Montessori School of Lake Forest hired PSSA's predecessor to do the architectural work in connection with a new facility it wanted to build in Lake Forest. Under the contract, PSSA had responsibilities for both the design and construction phase of the project. Section 1.5.4 required it to keep the School informed about the progress of the job and to "endeavor to guard" the School against defects and deficiencies in the contractor's work. Under section 1.5.8, PSSA was to issue periodic certificates for payment, which constituted its representations to the School that the work had in fact progressed to the point indicated and that the quality of the work conformed to the contract documents, thereby entitling the contractor to receive payment.

About a year later, the School chose Axelrod Construction Company to be the general contractor on the project. Work proceeded, but not smoothly. In 1992, the School sued Axelrod, Aetna Casualty & Surety Company (Axelrod's surety), and PSSA in the Circuit Court of Lake County, Illinois. The complaint alleged that Axelrod's performance had been unsatisfactory in a number of ways, which had resulted in the following damage to the School: water penetrated the roof, water penetrated and collected in an underground duct system, the system plenums had partially collapsed, mortar joints had suffered shrinkage cracking and horizontal bed joint cracking, a suspended ceiling had collapsed in several areas, a number of tiles were damaged, and an asphalt surface had already begun to deteriorate. Count IV charged that PSSA was responsible for the same damage, because allegedly it had failed to find out that the quality of Axelrod's work did not conform to the contract, it had failed to ascertain that Axelrod's work was not proceeding in accordance with the contract, it had not kept the School correctly informed about the quality of Axelrod's work, and it had failed to guard against defects and deficiencies in Axelrod's performance. Finally, Count V of the complaint alleged that some of PSSA's design documents were faulty, which resulted in damage to the School.

At this point, the insurance dispute takes center stage. Section 11.1.2.1.2e of the School/Axelrod contract (to which we will refer as the construction contract) required Axelrod to procure commercial general liability (CGL) insurance for both the School and for PSSA. That contract also said that the insurance that Axelrod procured had to provide coverage "not less than" the limits stated in the contract. Finally, the contract limited Axelrod's obligation to provide for PSSA's coverage as follows:

The obligations of the Contractor under the provisions of this article shall not extend to the liability of the Architect, his agents or employees arising out of (1) the preparation or approval of maps, drawings, opinions, reports, surveys, change orders, designs, or specifications, or (2) the giving of or the failure to give directions or instructions by the Architect, his agents or employees, to the extent that such giving or failure to give is the cause of the injury or damage.

Axelrod purchased the required CGL policy from Liberty. The body of the policy is contained in Commercial General Liability Coverage Form CG 00 01 11 88, which near the beginning states that "[t]hroughout this policy the words 'you' and 'your' refer to the Named Insured shown in the Declarations [i.e. Axelrod], and any other person or organization qualifying as a Named Insured under this policy." Appended to this general form were a number of special endorsements, several of which are relevant to this appeal. The first was an endorsement entitled "Additional Insured-Engineers, Architects, or Surveyors," numbered CG 20 07 01 87. Part of that form was preprinted, and part of it contained language that was typed in. The preprinted section read as follows:

1. WHO IS AN INSURED (Section II) is amended to include as an insured any architect, engineer, or surveyor engaged by you but only with respect to liability arising out of your premises or "your work" [a defined term].

2. The insurance with respect to such architects, engineers, or surveyors does not apply to "bodily injury", "property damage", "personal injury" or "advertising injury" [all defined terms] arising out of the rendering of or the failure to render any professional services by or for you, including:

a. The preparing, approving, or failing to prepare or approve maps, drawings, opinions, reports, surveys, change orders, designs or specifications; and

b. Supervisory, inspection, or engineering services.

The typed portion of the form added the following to the group of "named insureds":

Any person or organization to whom the Named Insured is obligated by an agreement to provide insurance such as that afforded by this endorsement.

Limits of Liability

It is further agreed that the Limits of Liability with respect to the insurance afforded by this endorsement are not greater than the Limits of Liability required by the terms of any such agreement, but in no event greater than the Limits of Liability stated in Item 3 of the Declarations.

Professional Liability is specifically excluded.

Endorsement CG 20 07 01 87 was not the last word on "WHO IS AN INSURED," however. Also appended to the general policy was another special endorsement, No. CG 20 26 11 85, which was labeled "Additional Insured--Designated Person or Organization." This one, too, amended Section II, "WHO IS AN INSURED," to include "as an insured the person or organization shown in the Schedule as an insured but only with respect to liability arising out of your operations or premises owned by or rented to you." It was almost entirely typed out, rather than preprinted, and said:

Applies to Location

Any person or organization to whom the Named Insured is obligated by an agreement to provide insurance such as that afforded by this endorsement.

Limits of Liability

It is further agreed that the Limits of Liability with respect to the insurance afforded by this endorsement are not greater than the Limits of Liability required by the terms of any such agreement, but in no event greater than the Limits of Liability stated in Item 3 of the Declarations.

Endorsement CG 20 10 11 85 was almost identical to CG 20 26 11 85, except it was labeled "Additional Insured--Owners, Lessees or Contractors (Form B)."

One final detail of the general policy is relevant to the parties' arguments here. It contained a rather long list of exclusions, which included one for " 'property damage' to 'your product' arising out of it or any part of it." Exclusion (k). Section V of the policy defined the terms used in the policy such as "occurrence," "property damage," and "your product." We refer to those definitions as needed in our discussion.

II

The district court issued a series of opinions which, in the aggregate, explain the judgment before us. See 1995 WL 417531 (N.D.Ill.) (denying Liberty summary judgment on PSSA's duty to defend claim); 1995 WL 729292 (N.D.Ill.) (denying Liberty's second motion on the duty to defend claim and granting PSSA's motion on the same); 1996 WL 167323 (N.D.Ill.) (denying Liberty summary judgment on PSSA's claim that Liberty's actions violated § 155); and 1996 WL 288777 (N.D.Ill.) (granting PSSA summary judgment on § 155 claim). Rather than rehearsing the details of each one of these, we move directly to Liberty's reasons for urging that it had no duty to defend PSSA...