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Every Exclusion Must be Read as a Part of an Entire Policy

McCann Plumbing, Heating & Cooling, Inc.; Andrew R. McCann; and Wendy McCann, sued defendant, Pekin Insurance Company, for breach of an insurance contract and sought declaratory judgment because the demolition of an adjacent building damaged the McCann’s building.

In McCann Plumbing, Heating & Cooling, Inc., an Illinois Corporation; Andrew R. McCann; and Wendy McCann v. Pekin Insurance Company, an Illinois Corporation, 2023 IL App (3d) 190722, No. 3-19-0722, Court of Appeals of Illinois, Third District (August 23, 2023) the Court of Appeals broke ground with the first ruling on a governmental action exclusion.

BACKGROUND

Andrew R. McCann and Wendy McCann own a commercial building in Onarga, Illinois. They purchased the building in 2011 to use for McCann Plumbing, Heating &Cooling, Inc., their heating, ventilation, and air conditioning business. At the time of purchase, the building was surrounded by two uninhabited properties to its north and south.

Pekin Insurance Company (Pekin) is a licensed provider of personal and business insurance and provides insurance policies to the residents of Illinois. The McCanns and Pekin entered into a commercial lines insurance policy. The policy provided insurance coverage for “direct physical loss of or damage to” the covered property, which included the McCanns’ building and their business’s tangible property stored in the building.

The Village of Onarga declared that the building adjacent and to the south of the McCanns’ property was in an unsafe or unsanitary condition. The Village then ordered the building to be demolished.

On January 23, 2018, a contractor retained by the Village demolished the building. The parties stipulated that, in the course of the adjacent building’s destruction, the McCanns’ building was damaged, leaving a portion of their building open to the elements. The McCanns sought coverage from Pekin for damage incurred from the January 23, 2018, demolition.

In response to the McCanns’ claim, Pekin tendered a letter on March 21, 2018, denying coverage for damage resulting from the demolition based on several exclusionary provisions of their policy, including the governmental action exclusion. In granting Pekin’s motion for judgment on the pleadings, the circuit court found that “the government[al] act[ion] exclu[sion] applies” and dismissed the case.

ANALYSIS

Neither party disputes that the Village’s directive to demolish the adjacent property constitutes an “order of governmental authority.” The parties stipulated that on or about January 23, 2018, the adjacent building was demolished. Both parties also agree, at least to some extent, that the McCanns’ property incurred damage as a result of the adjacent building’s destruction.

The central issue is whether this damage was caused “directly or indirectly” from the destruction and whether that damage falls within the purview of the governmental action exclusion under the parties’ commercial lines insurance policy.

There is no binding authority in Illinois interpreting the applicability of the governmental action exclusion, and as consequence, there is no Illinois case law offering guidance on whether this exclusion may be broadly applied to exclude losses incurred ancillary to a governmental order.  The commercial lines insurance policy before the Court of Appeals  features the adverbial phrase “directly or indirectly” modifying the verb “caused” within the preamble sentence for the exclusions: “We will not pay for loss or damage caused directly or indirectly by any of the following…” including governmental action.

For the exclusion to apply, however, it is necessary that the destruction of property be carried out through an order of governmental authority. Considering the preamble sentence and the relevant exclusion together, the court found, at a minimum, that the McCanns’ property damage is a loss that grew out of and was therefore “caused *** indirectly” from the destruction of the adjacent property. Further the McCanns’ loss falls under the governmental action exclusion because the damage stems from the Village’s demolition order.

The McCanns assert that the Village’s demolition order only sanctioned damage to the adjacent building and not their own. Therefore, a narrow reading of the exclusion’s phrase “by order of governmental authority” does not include the McCanns’ property, as there was never an order of destruction against their property. However, reading the policy in its entirety, the exemption covers “loss or damage caused directly or indirectly” through the “destruction of property by order of governmental authority.” A plain reading of these clauses together does not imply a separate order is required for the exemption to attach.

ZALMA OPINION

The greatest error made by people interpreting an insurance policy is to take a part of a policy without reading it in context with the entire policy. The Court of Appeals read the entire policy and disabused the plaintiffs of their claims trying to take a small part of a policy to change its meaning. The attempt failed because the full policy made it clear that the Plaintiffs property was damaged by the order of the governmental authority to demolish the adjacent property resulting directly in the damage of the plaintiffs property.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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