2023 IL App (1st) 230147
Ill. App. Ct.2023Background
- City Colleges contracted Moody Nolan for a new academic building; CMO was the general contractor and was required to purchase builder’s risk insurance.
- CMO obtained a builder’s risk policy from Zurich; CMO was the Named Insured and City Colleges was an Additional Named Insured; the policy made CMO the agent for other insureds and contained an express subrogation clause in favor of Zurich.
- During construction, a rainstorm occurred before the stormwater system (designed/installed by Infrastructure Engineering) was completed, flooding the basement and damaging the building and equipment.
- Zurich paid CMO $2,998,929.35 under the policy and sued Infrastructure Engineering as subrogee of City Colleges and CMO, alleging defective design caused the loss.
- Infrastructure Engineering moved for summary judgment arguing Zurich lacked subrogation rights because City Colleges did not suffer or receive payment for the loss and CMO’s subcontract terms disclaimed third-party rights; the trial court granted summary judgment for Infrastructure Engineering.
- On appeal the First District reversed and remanded, holding contractual subrogation provisions govern and Zurich was entitled to pursue City Colleges’ rights under the policy; the court also found City Colleges is a third-party beneficiary of the subcontract.
Issues
| Issue | Plaintiff's Argument (Zurich) | Defendant's Argument (Infrastructure Eng.) | Held |
|---|---|---|---|
| Whether contractual subrogation clause controls or equitable prerequisites apply | The policy’s express subrogation clause governs Zurich’s rights; equitable prerequisites are not required. | Equitable subrogation prerequisites (three-element test) apply to any subrogation claim. | Contractual subrogation controls; courts must enforce the policy terms rather than impose equitable prerequisites. |
| Forfeiture / invited error of contractual-subrogation argument | Zurich preserved and argued the contractual basis in supplemental briefing and motion to reconsider. | Zurich forfeited or invited error by earlier citing equitable prerequisites. | No forfeiture or invited-error; Zurich raised the contractual argument before judgment and the issue was ripe for decision. |
| Whether Zurich may subrogate to City Colleges’ rights though CMO received the insurance payment | Policy defines “Insured” to include City Colleges; CMO acted as agent and received payment on behalf of insureds; Zurich is subrogated to the Insured’s rights to the extent of its payments. | Subrogation is improper because City Colleges did not suffer, claim, or receive payment; CMO (the insured paid) is the only relevant insured. | Zurich entitled to subrogate for City Colleges under the policy’s unambiguous language; owner had insurable interest and suffered loss. |
| Whether City Colleges is a third‑party beneficiary of the subcontract between Moody Nolan and Infrastructure Engineering | Prime contract required subcontractors to make City Colleges a third‑party beneficiary; prime contract terms were incorporated into the subcontract. | Subcontract language disclaims creation of third‑party rights; no enforceable third‑party beneficiary. | City Colleges is a third‑party beneficiary: the subcontract incorporated the prime contract’s provision that expressly made City Colleges a third‑party beneficiary. |
Key Cases Cited
- Trogub v. Robinson, 366 Ill. App. 3d 838 (2006) (describes traditional three‑element subrogation prerequisites)
- State Farm Gen. Ins. Co. v. Stewart, 288 Ill. App. 3d 678 (1997) (articulates prerequisites for subrogation claims)
- American Family Mut. Ins. Co. v. Northern Heritage Builders, L.L.C., 404 Ill. App. 3d 584 (2010) (where policy contains express subrogation clause, the clause controls)
- Schultz v. Gotlund, 138 Ill. 2d 171 (1990) (distinguishes contractual/conventional subrogation from equitable subrogation)
- James River Ins. Co. v. Canal Ins. Co., 534 F. Supp. 3d 962 (N.D. Ill. 2021) (federal district court analysis concluding contractual clause governs, not equitable elements)
- New York Bd. of Fire Underwriters v. Trans Urban Constr. Co., 91 A.D.2d 115 (N.Y. App. Div. 1983) (case distinguished by court where owner had not retained loss and general contractor bore/ repaired the loss)
- Chubb Ins. Co. v. DeChambre, 349 Ill. App. 3d 56 (2004) (an insured is not limited to the named insured; includes additional insureds)