Illinois Federal Court Grants Summary Judgment in Favor of Insurer on “Vexatious and Unreasonable” Claim by Insured

In One Place Condominium, LLC v. Travelers Property Casualty Company of America, 2014 U.S. Dist. LEXIS 33974 (N.D. Ill. March 17, 2014), plaintiffs One Place Condominium LLC, The South Loop Shops LLC, Southblock Development LLC, C&K Partnership, and Southblock Management, Inc. (collectively “Plaintiffs”) filed a suit against Defendant Travelers Property Casualty Company of America (“Travelers”) seeking to recover amounts allegedly due under a Builders’ Risk insurance policy. Among the causes of action alleged by Plaintiffs was a claim for violation of Section 155 of the Illinois Insurance Code, which allows for an award of attorney fees and costs for an insurer’s “unreasonable and vexatious” refusal to comply with policy obligations.  In this decision, the court granted summary judgment in favor of Travelers with respect to Plaintiffs’ claims under Section 155 of the Illinois Insurance Code.

Plaintiffs are owners, developers and managers of property located at One East 8th Street in Chicago, Illinois (the “Property”).  In late 2006, Plaintiffs began construction on the property to erect a 10-story building with a one-story basement containing retail space, a parking garage and residential condominium units.  Travelers issued Plaintiffs a “Builders’ Risk” insurance policy in connection with the construction project for the policy period of November 2, 2006 to November 2, 2007. The policy provided coverage for loss to Covered Property, Soft Costs during a period of delay in completion, and rental value during a period of delay in completion.

In January and February 2007, workers discovered that sheet piling on the earth retention system at the Property had moved significantly to the east.  The workers informed Plaintiffs of the problem, Plaintiffs informed Travelers, and a Stop Work Order was issued on the project.  The sheet piling was redesigned and reinforced. Construction relating to the reinforcement was completed by April 13, 2007, at which time the Stop Work Order was lifted and construction on the project resumed.  Travelers paid for $263,259.04 of the repair costs. In late February 2007, concerns were raised about the fact that soils under the frost walls and the caisson caps had moved away from the concrete, creating voids.   No stop work order was issued, but repairs had to be made to correct these issues. Travelers paid $208,038.65 in repair costs for these issues.

At the same time, Travelers’ adjuster retained construction consultants Madsen Kneppers & Associates (“MKA”) to assist in investigating and evaluating the loss.  The adjuster for Travelers sent a letter to Plaintiffs on March 19, 2007 stating that Travelers had not yet made a determination as to coverage and was still investigating the matter. The letter noted that the Travelers policy contained an exclusion for defective design, and the MKA consultants had some concerns about the design of the earth retention system.  In 2007, Travelers’ experts concluded that the earth retention system was defectively designed, and this defect caused the sheet piling failure, which in turn led to the problems with the frost wall and caissons.  Plaintiffs’ position, however, was that the sheet piling, frost wall and caissons was caused by earth movement, which is covered under the Travelers policy.  Eventually, Travelers sent Plaintiffs a letter denying the claim for damages relating to the earth retention system, but agreeing to pay costs for repairing the frost wall and caissons, including soft costs and rental value incurred during the resulting delay in completing the project, since they were not subject to the faulty design.

In 2008, Plaintiffs challenged the denial of coverage and the parties continued to exchange information and attend meetings to discuss the issue.  On June 16, 2008, Plaintiffs sent Travelers a preliminary partial claim for more than $6.2 million.  Travelers requested more information to evaluate the claim, such as change orders, meeting minutes, subcontractor contracts, daily logs, pay applications, status reports, segregated costs, and project schedules.  After evaluating information provided by Plaintiffs, Travelers’ engineering experts again concluded that the loss was caused by design error associated with the earth retention system. Travelers also retained a geotechnical expert at that time, who advised Travelers that both sides were correct to some degree and that this was a gray area. As a result, Travelers sent Plaintiffs a letter withdrawing Travelers’ denial for coverage for damage to the earth retention system. Travelers also retained a separate “period of delay” expert who opined that the delay of the project was only 31 days, not 105 days as was indicated by reports from MKA. Travelers began issuing payments at this time, and by December 2009, had paid Plaintiffs a total of $1,250,000.

Nonetheless, the dispute regarding payment remained, because Plaintiffs had revised their claim to seek a total of $6.9 million.  Throughout 2010, the parties continued to communicate about the claim and discussed settlement.  On May 13, 2010, Plaintiffs demanded $9.3 million to settle the claim.  In early 2011, the parties attempted to mediate the case, unsuccessfully.  Travelers paid Plaintiffs an additional $95,549.60 on March 28, 2011.

In their Complaint, Plaintiffs alleged that Travelers acted in an unreasonable and vexatious manner by initially denying coverage for the earth retention system, retaining the “period of delay” expert, arguing the $2.5 million Earth Movement Limit of Insurance included soft costs, interpreting the delay exclusion in an unreasonable manner, relying on a “planned substantial completion date” in calculating the period of delay when the policy contemplates a “planned completion date” and “slow-paying” Plaintiffs’ claims over a long period of time. The court noted the standard under Illinois law for summary judgment on claims for violation of Section 155 operates in a unique way, because an insurer must essentially show that it is undisputed that the facts of the case are disputed. Thus, the court analyzed whether the parties had a bona fide dispute regarding each issue.

The court found that, with respect to the initial denial of coverage for the earth retention system, the parties’ experts’ disagreement regarding the cause of damage leads to a finding that there was a bona fide dispute regarding whether the damage was caused by a design defect or earth movement, and that Travelers’ denial was not vexatious or unreasonable. Likewise, the retention of a “period of delay” expert was not vexatious or unreasonable given that there was a genuine dispute regarding the number of days of delay for the project. The court looked at testimony by Plaintiffs’ own project manager, who thought the period of delay was only 70 days, to determine that there was at least a dispute regarding the period of delay. The court further cited the Plaintiffs’ project manager’s testimony providing several different alternative completion dates for the project as evidence the “planned completion date” issue was a bona fide dispute between Plaintiffs and Travelers.

With regard to the Plaintiffs’ assertion that Travelers’ interpretation of the policy provisions was unreasonable or vexatious, the court found that both sides presented legitimate arguments in litigation for the applicability and non-applicability of the policy provisions, and noted Illinois law stating that a Section 155 award is not warranted simply because an insurer takes a position that is unsuccessful in litigation. See Citizens First Nat’l Bank of Princeton v. Cincinnati Ins. Co., 200 F.3d 1102 (7th Cir. 2000). Thus, there existed a bona fide dispute such that Travelers did not act in an unreasonable or vexatious manner by arguing the applicability of policy exclusions.

Finally, with respect to Travelers’ alleged delays in payment, the court found that despite e-mails by Plaintiffs to Travelers stating that Plaintiffs were experiencing financial difficulty and in jeopardy of losing the project, Travelers’ delayed payments were reasonable because Plaintiffs never provided backup or substantiation to support their allegations that they were experiencing financial difficulties due to Travelers’ decision to delay payment. Further, there existed a bona fide coverage dispute and the Plaintiffs were slow in submitting a preliminary partial claim and supporting documentation. Travelers also made payments of more than $1.3 million at the time they believed the payments were due.

Thus, the court granted Travelers’ motion for summary judgment on Plaintiffs’ claims under Section 155 of the Illinois Insurance Code, since the evidence supported genuine disputes for each area in which Plaintiffs alleged Travelers behaved in an unreasonable and vexatious manner.

Topics:  Builder's Risk Exclusion, Condominiums, Insureds, Summary Judgment, Travelers Property Casualty Co.

Published In: Civil Procedure Updates, Civil Remedies Updates, General Business Updates, Construction Updates, Insurance Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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