Board of Education v. International Insurance Co.

Second Division
September 2, 1997

No. 1-97-0122

BOARD OF EDUCATION OF MAINE TOWNSHIP ) Appeal from the
HIGH SCHOOL DISTRICT 207, ) Circuit Court of
) Cook County.
Plaintiff-Appellant, )
)
v. )
)
INTERNATIONAL INSURANCE COMPANY, ) Honorable
) Lester D. Foreman,
Defendant-Appellee. ) Judge Presiding.

JUSTICE RAKOWSKI delivered the opinion of the court:
Plaintiff Board of Education of Maine Township High School
District 207 (the Board) filed a declaratory judgement action
against defendant International Insurance Company (International)
seeking determination of insurance coverage for asbestos-related
property damage to its schools. The circuit court granted
International's motion for partial summary judgment, finding that
the latent defect exclusion of the "all risks" policies barred
coverage. We have jurisdiction pursuant to Supreme Court Rule
308 (155 Ill. 2d R. 308). The issue certified on appeal is
whether the first-party property insurance policies issued by
International provide coverage for the Board's claim of asbestos-
related property damage to its schools, where the insuring
agreement provides for "all risks" coverage and contains a latent
defect exclusion and an exception to the exclusion for "a loss
from covered peril that follows; and then only for the following
loss." We answer this question in the negative and, therefore,
affirm.
FACTS
The Board claims over $16 million in asbestos-related
property damage to its high schools based on "all risks"
insurance policies, which provide that International "agree[s] to
indemnify the Insured [the Board] for all risks of physical loss
or damage to all property of the Insured." The policies contain
certain exclusions, which provide that the insurance does not
cover loss or damage caused by "latent defect." This includes
damage or loss caused by, aggravated by, or added to by asbestos-
related products, including, among others, paint, ceiling tile,
floor tile, insulation, and/or any other sources. The policies
also contain an "exceptions" clause, which states "[t]he only
exception to these exclusions is a loss from covered peril that
follows; and then only for the following loss."
The Board maintains it is entitled to coverage under the
"all risks" policies because forces external to the asbestos
materials themselves caused the property damage. That is to say
the asbestos materials alone did not create hazardous conditions
in the schools. Rather, the asbestos materials became harmful
only when, because of damage, disturbance, or deterioration, they
released carcinogenic fibers into the air. According to the
Board, because external forces, which are not expressly excluded
in the policies, resulted in hazardous conditions in the schools
and caused the Board's loss, the policies provide coverage for
the Board's loss and damage to its schools.
The circuit court disagreed with the Board's contentions,
holding that the latent defect provision excluded coverage of
loss or damage caused by, aggravated by, or added to by asbestos-
related products. The court said it could not think of another
way for International to have made the policies as inclusive as
it did by using the words "caused by, aggravated by, [and] added
to."
The Board filed a motion for certification for review
pursuant to Supreme Court Rule 308 (155 Ill. 2d R. 308). The
circuit court certified the following question for review:
"Whether a policy of first-party property
insurance, as found in International policies
503-075704-5 and 503-086924-8, provides
coverage for the claims for asbestos-related
property damage of the Board of Education of
Maine Township High School District No. 207's
schools at issue in this litigation, where
the insuring agreement provides:
We agree to indemnify the Insured
for all risks of physical loss or
damage to all property of the
insured, wherever located,
occurring during any year of this
insurance. This agreement is
subject to the exclusions,
conditions and definitions of this
insurance.
where the insuring agreement contains a
'Latent Defect Exclusion' that provides:
This insurance also does not cover
loss or damage caused by latent
defect. This includes damage or
loss caused, aggravated by or added
to by asbestos-related products,
including among others:
--paint, ceiling tile, floor tile;
or
--insulation and/or any other
sources.
and where the insuring agreement contains an
exception to the policy exclusions that
provides:
Exceptions. The only exception to
these exclusions is a loss from
covered peril that follows; and
then only for the following loss."
ANALYSIS
The construction of an insurance policy and its provisions
is a question of law, and the court must ascertain the intent of
the parties when construing the policy. Lapham-Hickey Steel
Corp. v. Protection Mutual Insurance Co., 166 Ill. 2d 520, 529
(1995). "To determine 'the meaning of the policy's words and the
intent of the parties, the court must construe the policy as a
whole [citations], with due regard to the risk undertaken, the
subject matter that is insured and the purposes of the entire
contract [citations].' " Lapham-Hickey Steel Corp., 166 Ill. 2d
at 529, quoting Outboard Marine Corp. v. Liberty Mutual Insurance
Co., 154 Ill. 2d 90, 108 (1992). If the words of a policy are
clear and unambiguous, the court must give them their plain,
ordinary, and popular meaning. However, if a policy provision is
ambiguous and susceptible to more than one reasonable meaning,
the policy will be construed in favor of the insured and against
the drafter of the policy. Lapham-Hickey Steel Corp., 166 Ill. 2d at 530; Outboard Marine Corp., 154 Ill. 2d at 108-09.
"Generally, an 'all risk'
insurance policy creates a special
type of coverage extending to risks
not usually covered under other
insurance, and recovery under an
'all risk' policy will, as a rule,
be allowed for all fortuitous
losses not resulting from
misconduct or fraud, unless the
policy contains a specific
provision expressly excluding the
loss from coverage." Sentinel
Management Co. v. New Hampshire
Insurance Co., 563 N.W.2d 296, 299
(Minn. App. 1997), citing 13A Couch
on Insurance Law 2d 48:141 (rev.
1982), and 5 J. Appleman, Insurance
Law & Practice 3092 (rev. 1970 &
Supp. 1997).
See also Village of Rosemont v. Lentin Lumber Co., 144 Ill. App.
3d 651, 664 (1986) ("recovery under an all-risk policy will be
allowed for all fortuitous losses not resulting from misconduct
or fraud"). Fortuitous means happening by chance or accident, or
occurring unexpectedly or without known cause. Black's Law
Dictionary 654 (6th ed. 1990); Mattis v. State Farm Fire &
Casualty Co., 118 Ill. App. 3d 612, 622 (1983). The Restatement
of Contracts defines fortuitous event as an event that, so far as
the parties are aware, is dependent on chance. Restatement of
Contracts 291, Comment a (1932), quoted in Mattis, 118 Ill. App.
3d at 623, and Sentinel Management Co. v. New Hampshire Insurance
Co., 563 N.W.2d 296, 299 (Minn. App. 1997). " 'The determination
of whether a loss is fortuitous is a legal question for the court
to determine.' " Mattis, 118 Ill. App. 3d at 621, quoting
Compagnie des Bauxites de Guinee v. Insurance Co. of North
America, 554 F. Supp. 1080, 1082 (W.D. Pa. 1983), citing Redna
Marine Corp. v. Poland, 46 F.R.D. 81 (S.D.N.Y. 1969).
In this appeal, the parties do not dispute that,
irrespective of the latent defect exclusion, the Board's loss or
damage to its schools is fortuitous and would otherwise be
covered by the "all risks" policies. Rather, our review is
limited under Rule 308 to whether the "exclusions" and
"exceptions" provisions of the policies expressly exclude the
loss from coverage.
A. Latent Defect Exclusions
The "all risks" policies exclude damage caused by "latent
defect," including damage or loss caused by, aggravated by, or
added to by asbestos-related products, including, among others,
paint, ceiling tile, floor tile, insulation, and/or any other
sources. The burden is on International to show that the cause
of the Board's loss is a latent defect specifically excluded by
the policies. See Mattis, 118 Ill. App. 3d at 618.
The parties dispute the meaning of the term latent defect.
The Board defines latent defect according to Mattis v. State Farm
Fire & Casualty Co., 118 Ill. App. 3d 612, 620 (1983), arguing
that a latent defect is limited to some inherent defect in the
materials used in construction that could not be discovered by
any known or customary test and does not include faulty design or
construction. See also Markham v. Nationwide Mutual Fire
Insurance Co., ____ N.C. App. ____, ____, 481 S.E.2d 349, 356-57
(1997) (adopting the Mattis definition of latent defect absent a
contrary definition in the policy). In contrast, International
relies on California's definition of latent defect, contending
that a latent defect is one that is not readily observable or
discoverable to any but the most searching examination. See
Scott v. Continental Insurance Co., 44 Cal. App. 4th 24, 31-32,
51 Cal. Rptr. 2d 566, 570-71 (1996).
In construing the latent defect exclusion, California has
expressly rejected the Mattis definition of latent defect.
Scott, 44 Cal. App. 4th at 31-32, 51 Cal. Rptr. 2d at 571; Poss
v. State Farm Fire & Casualty Co., 22 Cal. Rptr. 2d 149, 153
(Cal. App. 1993); Carty v. American States Insurance Co., 7 Cal. App. 4th 399, 403, 9 Cal. Rptr. 2d 1, 3 (1992). Other
jurisdictions have also rejected the Mattis approach to the
latent defect exclusion. Chubb Group of Insurance Cos. v.
Guyuron, No. 68468 (Ohio App. 1995); Puckett v. State Farm Fire &
Casualty Co., 546 So. 2d 354 (La. App. 1989); Merz v. Allstate
Insurance Co., 677 F. Supp. 388 (W.D. Pa. 1988); Derenzo v. State
Farm Mutual Insurance Co., 141 Misc. 2d 456, 533 N.Y.S.2d 195
(1988). These courts have refused to employ Mattis' narrow
definition of latent defect, reasoning in part that the Mattis
definition does not comport with the ordinary dictionary meaning
of latent defect and that it compels the result that only
nondiscoverable defects are latent.
In determining whether to accept or reject Mattis'
definition of latent defect, we note that Mattis relied on cases
from other jurisdictions in stating:
"[T]he great majority of cases construing
'latent defect' exclusions in policies of
insurance limit the meaning of a latent
defect to some inherent defect in the
materials used in construction which could
not be discovered by any known or customary
test and do not include faulty design or
construction within the meaning of this
provision." Mattis, 118 Ill. App. 3d at 620.
Specifically, Mattis cited to federal cases from New York, Ohio,
and Tennessee. However, since then, the state courts of New
York, Ohio, and Tennessee have rejected the approach that latent
defects are limited to inherent defects in the materials used and
that faulty design or construction is not within the latent
defect exclusion. These state courts have instead held that
defects in design or construction may be latent defects if the
defects are not discoverable upon reasonable inspection. See
Derenzo, 141 Misc. 2d 456, 533 N.Y.S.2d 195; Guyuron, No. 68468;
Patton v. McHone, 822 S.W.2d 608, 614 (Tenn. 1991).
We further note that Mattis was decided on other factors.
In Mattis, the insurance company failed to properly plead the
defense of the latent defect exclusion. Moreover, the defendant
in Mattis did not meet its burden of proving that the cause of
the plaintiffs' loss was a peril specifically excluded under the
policy because the defense experts did not perform the proper
tests upon which they could base their conclusions. Accordingly,
the court held the conclusions drawn by the defendant's experts
were nothing more than speculation. Mattis, 118 Ill. App. 3d at
618.
We also observe that Mattis' definition of latent defect is
inconsistent with the dictionary definition and contrary to its
plain, ordinary, and commonly understood meaning. Webster's
Dictionary defines latent defect as "an unknown defect *** not
discoverable by such inspection or test as the law reasonably
requires under all the circumstances." Webster's Third New
International Dictionary 1275 (1986). Black's Law Dictionary
defines latent defect as a hidden or concealed defect not
discoverable by reasonable and customary inspection or ordinary
care; it is not limited to defects in materials. Black's Law
Dictionary 883 (6th ed. 1990).
Aside from Mattis, other Illinois decisions have employed
the dictionary definition of latent defect. See Petersen v.
Hubschman Construction Co., 76 Ill. 2d 31, 38-40 (1979) (defining
latent defect as one that is not readily discoverable through
reasonable and diligent inspection); Mitchell v. Skubiak, 248
Ill. App. 3d 1000, 1005 (1993) (same); Ollivier v. Alden, 262
Ill. App. 3d 190, 197 (1994) (defining latent defect as one that
could not have been discovered by the exercise of ordinary and
reasonable care); Tassan v. United Development Co., 88 Ill. App.
3d 581, 590 (1980) (same); Heider v. Leewards Creative Crafts,
Inc., 245 Ill. App. 3d 258, 268 (1993) (latent defect is one that
is hidden or concealed). In fact, the court in Heider
specifically held that the presence of asbestos fibers in a
building was a latent defect because the asbestos material was
not detectable by the naked eye and must be subjected to
microscopic analysis. Heider, 245 Ill. App. 3d at 268.
In accord with Heider and the weight of aforementioned
authority, we reject the Mattis definition of latent defect and
hold that, for purposes of the latent defect exclusion, latent
defect means one that is hidden and not readily observable or
discoverable to any but the most searching examination; it is not
limited to inherent defects in the materials used in
construction. To be sure, there is nothing in the term "latent
defect" that limits it to deficiencies in just the structural
material. "Faults, flaws and irregularities can be the result of
design or faulty construction just as much as mere weakness of
material." Scott, 44 Cal. App. 4th at 35, 51 Cal. Rptr. 2d at
573. Therefore, in the instant case, because the presence of
asbestos material in the school buildings is not detectable by
the naked eye and is not apparent to any but the most searching
analysis, it is a latent defect subject to the latent defect
exclusion.
Our conclusion is further supported by the language of the
exclusion in the insurance policies themselves, which implicitly
defines the term latent defect as including loss or damage from
asbestos-related products. The exclusion provides that the
insurance does not cover loss or damage caused by latent defect.
"This includes damage or loss caused, aggravated by or added to
by asbestos related products, including, among others: --paint,
ceiling tile, floor tile; or --insulation and/or any other
sources." It is clear that, for purposes of these policies, loss
or damage caused by, aggravated by, or added to by asbestos-
related products is a latent defect excluded from coverage under
the "exclusions" section of the policies.
Additionally, we reject the Board's argument that the
asbestos-related products themselves did not cause the loss or
damage but, rather, external forces not expressly excluded from
coverage caused the loss. Even assuming external forces, such as
student and maintenance activities, water damage, and air
streams, caused property damage or loss to the schools, that loss
or damage was aggravated or added to by asbestos-related
products. Moreover, all of the events that the Board claims
caused the release of asbestos fibers constitute ordinary wear
and tear. See Sentinel Management Co., 563 N.W.2d at 301 (events
that caused release of asbestos fibers deemed wear and tear, such
as closet doors dislodging and hitting ceiling, screwing bolts
into ceiling to hang plants, residents and maintenance staff
striking ceiling, and air circulating through building).
However, the policies contain an exclusion for loss or damage to
real property caused by "wear, tear and gradual deterioration."
The policies also exclude coverage for loss or damage caused by
contamination. Given these facts, the trial court correctly
concluded that the loss or damage to the schools claimed by the
Board is excluded from coverage by the exclusions enumerated in
the policies.
B. Exceptions to Exclusions
Having determined that the exclusions apply to preclude
coverage for the Board's claimed loss, the next question is
whether the "exceptions" clause excepts the exclusions and give
back coverage under the policies.
Contained within the "exclusions" section of the policies,
there is an "exceptions" clause that states, "[t]he only
exception to these exclusions is a loss from covered peril that
follows; and then only for the following loss." The trial court
held that this clause was so ambiguous and unartfully drawn that
it could not be interpreted. However, the court stated that
whatever the exception meant, it could not mean to except the
latent defect exclusion because it so clearly stated that loss or
damage affected by asbestos was not covered.
The "exceptions" clause may seem confusing, but it is not
ambiguous. Reasonably interpreted, this clause says that if a
nonexcluded loss is caused by perils that either occur after an
excluded peril or are causally related to an excluded peril, the
nonexcluded loss will remain covered. Only the nonexcluded
portion of the loss will be covered, however. The uncovered
peril itself will not be covered. For example, in Allstate
Insurance Co. v. Smith, 450 S.W.2d 957, 959 (Tex. Civ. App.
1970), the court disallowed coverage for the replacement cost of
a defective pipe under the policy exclusion for inherent defects
but allowed coverage for ensuing damage to the wall and floor
that followed when the defective pipe burst.
Accordingly, we find that although the "exceptions" clause
would bring within coverage a loss from a covered peril that
follows an excluded peril, the clause does not operate in this
instance to give back coverage for loss or damage caused by,
aggravated by, or added to by asbestos-related products. Such
loss or damage is not a covered peril.
CONCLUSION
In sum, the "exclusions" and "exceptions" clauses of the
policies are not ambiguous. On the basis of the facts presented,
the policies do not cover loss or damage caused by latent defect,
including loss or damage caused by, aggravated by, or added to by
asbestos-related products. Nor do the policies cover loss or
damage caused by wear and tear or gradual deterioration.
Finally, the "exceptions" clause does not provide coverage for
the release of asbestos fibers that result from excluded perils.
Therefore, in response to the question certified for review, we
find that the "all risks" policies do not provide coverage for
the Board's claim of asbestos-related property damage to its
schools, where the insuring agreement contains latent defect and
wear and tear exclusions and an exception to the exclusions for
"a loss from covered peril that follows; and then only for the
following loss."
Affirmed.
McNULTY, P.J., and TULLY, J., concur.