Zurich American Insurance Co. v. Infrastructure Engineering, Inc.
Citation248 N.E.3d 1072, 2024 IL 130242
Date Filed2024-09-19
Docket130242
Cited44 times
StatusPublished
Full Opinion (html_with_citations)
2024 IL 130242
IN THE
SUPREME COURT
OF
THE STATE OF ILLINOIS
(Docket No. 130242)
ZURICH AMERICAN INSURANCE COMPANY, Appellee, v.
INFRASTRUCTURE ENGINEERING, INC., Appellant.
Opinion filed September 19, 2024.
JUSTICE OVERSTREET delivered the judgment of the court, with opinion.
Chief Justice Theis and Justices Neville, Holder White, Cunningham,
Rochford, and OâBrien concurred in the judgment and opinion.
OPINION
¶1 Plaintiff, Zurich American Insurance Company (Zurich), issued a builderâs risk
insurance policy to insure the construction of an academic building for Community
College District No. 508, doing business as City Colleges of Chicago (City
Colleges). Defendant, Infrastructure Engineering, Inc. (IEI), a subcontractor on the
construction project, was hired to design a system for collecting rainwater. While
the building was under construction, a rainstorm caused the basement of the
building to flood, causing significant damage.
¶2 Zurich paid a claim for the resulting damages by submitting payment to CMO,
a joint venture and general contractor on the project, pursuant to the builderâs risk
policy. Zurich, claiming the status of subrogee of City Colleges, then sued IEI for
breach of contract, alleging IEIâs rainwater redesign caused the damage to the
building. IEI moved for summary judgment, arguing that Zurich was not entitled to
subrogation for City Colleges because it issued payment under the policy to CMO,
not City Colleges, and CMO, as general contractor, repaired the physical damages.
The Cook County circuit court agreed and entered summary judgment in IEIâs
favor. Zurich appealed, arguing that the builderâs risk policy entitled it to step into
City Collegesâ shoes pursuant to the policyâs subrogation provisions. The appellate
court agreed, reversed the circuit courtâs judgment, and remanded the cause for
further proceedings. 2023 IL App (1st) 230147.
¶3 We granted IEIâs petition for leave to appeal, and for the following reasons, we
affirm the appellate courtâs judgment and reverse the circuit courtâs judgment.
¶4 BACKGROUND
¶5 City Colleges owns and operates Malcolm X College. In planning the
construction of the approximately 500,000-square-foot academic building and
parking garage for Malcolm X College, City Colleges executed an agreement with
CMO as general contractor and an agreement with Moody Nolan, Inc. (Moody
Nolan), as architect for the project. The project included the development of the
academic building with one or more basement levels to house, among other things,
mechanical and electrical equipment.
¶6 On April 4, 2013, City Colleges entered into the written contract with Moody
Nolan wherein Moody Nolan agreed to provide architectural and engineering
services for the project. The contract contemplated that Moody Nolan may
subcontract engineering consultants to perform some of the design work, subject to
certain conditions. The contract defined âSubcontractorâ as any âentity with whom
[Moody Nolan] contracts to provide any part of the Services *** including
subcontractors and subconsultants of any tier, whether or not in privity withâ
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Moody Nolan. The Moody Nolan contract stated, in part, âIn addition, each
subcontract for the performance of the Services must provide that [City Colleges]
is a third-party beneficiary to the subcontract, and may enforce any of the
subcontract terms including[ ] those pertaining to standard of performance,
indemnity and insurance.â City Collegesâ contract with Moody Nolan did not
include a waiver of subrogation provision, wherein, for example, City Colleges
waived claims against Moody Nolan or its subcontractors for damages covered by
property insurance for the buildingâs construction.
¶7 Moody Nolan entered into a written contract with IEI on April 17, 2013, and
this written agreement incorporated City Collegesâ agreement with Moody Nolan,
referring to it as the âPrime Agreement.â Moody Nolan subcontracted to IEI the
civil engineering work for the project, including the design and specification of the
stormwater management systems. The IEI subcontract stated, in part, âWhere a
provision of the Prime Agreement is inconsistent with a provision of this
Agreement, the Prime Agreement shall govern.â 1 The IEI subcontract required IEI
to maintain general liability, automobile liability, workersâ compensation, and
professional liability insurance.
¶8 On January 8, 2014, City Colleges and CMO entered into an agreement, which
listed Moody Nolan as architect of record for the construction of the new academic
building. In the agreement, CMO agreed to serve as the general contractor for the
construction of the building, providing all necessary labor, material, and equipment
to complete the project. This agreement required CMO to warrant that the work
conformed to the requirements of the contract documents and was free from defects.
¶9 The contract between CMO and City Colleges required CMO to purchase and
maintain a builderâs risk property insurance policy during the period of
construction. 2 Specifically, the contract provided:
1
Because the Prime Agreement between City Colleges and Moody Nolan expressly required
City Colleges to be a third-party beneficiary of any subcontracts Moody Nolan entered into with its
subcontractors, and the Moody Nolan-IEI subcontract provided that the Prime Agreement governed,
the appellate court found that City Colleges was a third-party beneficiary of the Moody Nolan-IEI
subcontract. 2023 IL App (1st) 230147, ¶ 54. IEI does not challenge this finding in this court.
2
A builderâs risk policy is first-party property insurance that provides coverage for a building
under construction before it becomes insurable as a completed structure. 5 Jeffrey E. Thomas, New
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â[CMO] shall purchase and maintain *** property insurance written on a
builderâs risk âall-riskâ or equivalent policy form in the amount of the initial
Contract Sum, plus value of subsequent Contract Modifications and cost
materials supplied or installed by others, comprising total value for the entire
Project at the site on a replacement cost basis without optional deductibles. Such
property insurance shall be maintained, unless otherwise provided in the
Contract Documents or otherwise agreed in writing by all persons and entities
who are beneficiaries of such insurance, until final payment has been made ***
or until no person or entity other than [City Colleges] has an insurable interest
in the property required *** to be covered, whichever is later. This insurance
shall include interests of the Owner, the Contractor, Subcontractors[,] and Sub-
subcontractors in the Project.â
¶ 10 In the January 8, 2014, agreement, City Colleges agreed to pay premiums for
that portion of insurance required by the contract. The agreement further specified
that City Colleges and CMO âwaive all rights against *** each other and any of
their subcontractors, sub-subcontractors, agents and employees, each of the other,
for damages caused by fire or other causes of loss to the extent covered byâ the
builderâs risk insurance policy. 3
¶ 11 In 2014, CMO purchased the builderâs risk policy from Zurich to insure the
construction of the academic building for the policy period of January 20, 2014, to
December 31, 2015. CMO was listed as the âNamed Insuredâ in the policy, and
City Colleges, as owner, was listed as an âAdditional Named Insured.â Specifically,
the policy provided that âAdditional Named Insured(s)â included
âAll owners, all contractors and subcontractors of every tier, and tenants at the
project location, except [CMO], as required by any contract, subcontract or oral
agreement for the INSURED PROJECT [located at West Jackson Boulevard
Appleman on Insurance Law Library Edition § 50.01 (2024). It pays for necessary repairs if the
building is physically damaged during construction. Id.
3
A waiver-of-subrogation clause in a construction contract is intended to allow the parties âto
exculpate each other from personal liability in the event of property loss or damage to the work
occurring during construction, relying instead on the insurance purchased by one of the parties to
provide recovery for that loss.â Intergovernmental Risk Management v. OâDonnell, Wicklund,
Pigozzi & Peterson Architects, Inc., 295 Ill. App. 3d 784, 791(1998); see Behr v. Hook,787 A.2d 499, 503
(Vt. 2001) (by shifting the risk of loss to the insurance company regardless of fault, clauses
seek to avoid prospect of extended litigation that would interfere with construction).
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and described as new construction expansion to existing Malcolm X College],
and then only as their respective interests may appear are recognized as
Additional Named Insureds hereunder. As respects architects, engineers,
manufacturers and suppliers, their interest is limited to their site activities only.â
¶ 12 Under the policy, CMO was deemed to be the âsole and irrevocable agentâ for
all the other entities insured thereunder. The policy stated:
â[CMO] shall be deemed the sole and irrevocable agent of each and every
Insured hereunder for the purpose of giving and receiving notices to/from
[Zurich], giving instruction to or agreeing with [Zurich] as respects Policy
alteration, for making or receiving payments of premium or adjustments to
premium, and as respects the payment for claims.â
¶ 13 The builderâs risk policy provided that it âinsure[d] against all risks of direct
physical loss or damage to Covered Property while at the location of the [insured
project] occurring during the Policy Term.â The policy further provided:
âLoss, if any, shall be adjusted with and made payable to [CMO] and designated
Loss Payees and/or Mortgage Holders *** or as per order of [CMO]. Receipt
of payment by [CMO] shall constitute a release in full of all liability under this
Policy with respect to such loss.â
¶ 14 Section 12 of the builderâs risk insurance policy included provisions involving
subrogation. Specifically, it stated:
âIf [Zurich] pays a claim under this Policy, [it] will be subrogated, to the extent
of such payment, to all the Insuredâs rights of recovery from other persons,
organizations and entities. The Insured will execute and deliver instruments and
papers and do whatever else is necessary to secure such rights.â
This section of the policy further provided that Zurich âwill have no rights of
subrogation against *** [a]ny other person or entity, which the Insured has waived
its rights of subrogation against in writing before the time of loss.â It further
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provided that Zurich âwill have no rights of subrogation against *** [a]ny person
or entity, which is a Named Insured or an Additional Named Insured.â 4
¶ 15 Even so, section 12 of the builderâs risk policy provided as âa condition of th[e]
policyâ that Zurich
âshall be subrogated to all the Insuredâs unwaived rights of recovery, if any,
against any third party Architect or Engineer, whether named as an Insured or
not, for any loss or damage arising out of the performance of professional
services in their capacity as such and caused by any error, omission, deficiency
or act of the third party Architect or Engineer, by any person employed by them
or by any others for whose acts they are legally liable.â
¶ 16 According to the record on appeal, the stormwater detention system designed
by IEI for the new Malcolm X College project relied on underground stormwater
detention vaults called âstorm trapsâ to collect and detain water from roofs and
other surfaces for gradual conveyance to the city sewer. The original stormwater
detention design submitted by IEI included concrete pads underneath the storm trap
chambers. However, IEI approved an alternative design for the stormwater
detention system that specified a stone base under the storm trap chambers. CMO
subcontracted the installation of the stormwater detention system at the project to
Reyes Group, Ltd.
¶ 17 On August 17, 2015, before construction of the academic building was
complete and the stormwater detention system designed by IEI fully connected, a
rainstorm flooded the basement of the academic building, damaging the building
itself and its electrical and mechanical equipment. CMO submitted a claim to
Zurich for the damage that resulted from the flooding, and CMO paid the
deductible. After applying the policy deductible, Zurich made claim payments to
CMO totaling almost $3 million, and CMO repaired the damage.
4
Thus, the policy memorialized the antisubrogation principle that âan insurer may not subrogate
against its own insured or any person or entity who has the status of a co-insured under the insurance
policy.â (Internal quotation marks omitted.) See Sheckler v. Auto-Owners Insurance Co., 2022 IL
128012, ¶ 38.
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¶ 18 Circuit Court
¶ 19 In 2016, Zurich, as subrogee of City Colleges, 5 filed this action against IEI,
among others, to recover its claim payments. In count III of its complaint, Zurich
alleged that IEI breached its subcontract with Moody Nolan, of which City Colleges
was a third-party beneficiary, by designing a defective stormwater management
system that caused the loss at the construction site in August 2015. Zurich alleged
that City Colleges sustained damages as a direct result and that Zurich paid for the
damages sustained by City Colleges. Zurich alleged that it was entitled to stand in
the shoes of City Colleges as a result of making the claim payments under the
builderâs risk policy.
¶ 20 Relevant here, in its second motion for summary judgment filed on July 20,
2022, IEI argued, inter alia, that Zurich could not prevail on a breach of contract
theory as subrogee of City Colleges because City Colleges sustained no loss and
received no loss payments from Zurich pursuant to the policy. IEI argued that,
because CMO paid the policy deductible and received payment from Zurich, Zurich
could not establish âthe third element of a subrogation claim: namely, that it paid
City Colleges under the [b]uilderâs [r]isk [p]olicy.â See Trogub v. Robinson, 366
Ill. App. 3d 838, 842 (2006) (third element of subrogation requires insurer to have
paid the insured under the policy, thereby extinguishing the debt of the third party).
¶ 21 Zurich responded to the motion for summary judgment, contending that IEI was
improperly focusing on whether City Colleges received any claim payments under
the policy instead of analyzing the subrogation provision in the policy itself. Zurich
contended that, under the unambiguous terms of the policy, it, to the extent of its
claim payments, was subrogated to City Collegesâ rights of recovery because City
Colleges was an insured under the policy. Zurich asserted in supplemental briefing
that there was a clear distinction between contractual or conventional subrogation
and equitable subrogation and that it was not required to establish the requirements
for equitable subrogation because the contracts in the case controlled the issue.
5
In its complaint, Zurich also sought to recover its payments as subrogee of CMO, but this
subrogation claim is not at issue in this appeal.
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¶ 22 On October 5, 2022, the circuit court granted IEIâs motion for summary
judgment. In a written order, the circuit court found that Zurich had not shown it
was subrogated to City Collegesâ rights of recovery. The circuit court held that
Zurich âfail[ed] to satisfy the elements of subrogationâ because City Colleges
sustained no loss. The circuit court found persuasive New York Appellate Division
caselaw. See New York Board of Fire Underwriters v. Trans Urban Construction
Co., 458 N.Y.S.2d 216 (App. Div. 1983) (insurers had no right of subrogation
against the general contractor, which was their own insured, on behalf of owner
which ultimately suffered no loss), affâd, 458 N.E.2d 1255 (N.Y. 1983). The circuit
court concluded that City Colleges âsimply sustained no loss and was not paid by
the insurer; two requirements for *** subrogation.â
¶ 23 Zurich filed a motion to reconsider the circuit courtâs grant of summary
judgment in IEIâs favor, arguing that the policy clearly created its right to subrogate
on City Collegesâ behalf. The circuit court denied Zurichâs motion to reconsider,
finding that Zurich failed to establish the three elements required for equitable
subrogation. See SwedishAmerican Hospital Assân of Rockford v. Illinois State
Medical Inter-Insurance Exchange, 395 Ill. App. 3d 80, 105-06 (2009). Zurich filed
its notice of appeal.
¶ 24 Appellate Court
¶ 25 The appellate court reversed the decision of the circuit court. 2023 IL App (1st)
230147, ¶ 1. The appellate court concluded that the requirements set forth in the
builderâs risk insurance policy allowed Zurichâs right to subrogate on City
Collegesâ behalf. Id.
¶ 26 The appellate court noted the three requirements IEI argued must be shown to
entitle Zurich to subrogation, namely, (1) a third party must be primarily liable to
the insured for the loss, (2) the insurer must be secondarily liable to the insured for
the same loss under an insurance policy, and (3) the insurer must have paid the
insured under the policy, thereby extinguishing the debt of the third party. Id. ¶ 35
(citing Trogub, 366 Ill. App. 3d at 842). However, the appellate court held that these
requirements do not control a partyâs right to subrogation when the party meets all
the contractual requirements for subrogation in the contractual provisions at issue.
Id. The appellate court held that â[w]here the right to subrogation is created by an
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enforceable subrogation clause in a contract, the contract terms, rather than
common law or equitable principles, control.â Id. ¶ 39. Finding persuasive the
federal district courtâs analysis in James River Insurance Co. v. Canal Insurance
Co., 534 F. Supp. 3d 962, 967-69 (N.D. Ill. 2021) (where right of insurer to
subrogation is created by enforceable subrogation clause, contract terms control),
the appellate court concluded that the circuit court erred when it required Zurich to
show compliance with principles outside the contract to enforce its right to
subrogation. 2023 IL App (1st) 230147, ¶¶ 38-39.
¶ 27 Addressing IEIâs argument that Zurich could not step into City Collegesâ shoes
because City Colleges did not sustain a loss, claim a loss, or receive payment for a
loss, the appellate court held that, as the owner of the property under construction,
City Colleges maintained a tangible, insurable interest in the insured property at all
times and suffered a loss due to the flooding damage. Id. ¶ 45. The appellate court
concluded that, according to the unambiguous language of the builderâs risk policy
at issue, Zurich had the right to be subrogated for City Colleges, as an insured
pursuant to the policy, under the circumstances. Id. The appellate court therefore
reversed the circuit courtâs entry of summary judgment in IEIâs favor. Id. ¶ 56.
¶ 28 This court thereafter granted IEIâs petition for leave to appeal. See Ill. S. Ct. R.
315(a) (eff. Oct. 1, 2021). We also allowed the National Association of Subrogation
Professionals to file an amicus curiae brief in support of Zurichâs arguments on
appeal. Ill. S. Ct. R. 345 (eff. Sept. 20, 2010).
¶ 29 ANALYSIS
¶ 30 For purposes of its subrogation claim against IEI, Zurich asserts, as subrogee of
City Colleges, that IEI breached its contract with City Colleges, a third-party
beneficiary of IEI and Moody Nolanâs contract, by delivering a defective design
for the stormwater management system.âUnder [the] doctrine of subrogation, a
person who, pursuant to a legal liability, has paid for a loss or injury resulting from
the negligence or wrongful acts of another will be given the rights of the injured
person against the wrongdoer.â Dworak v. Tempel, 17 Ill. 2d 181, 190 (1959). Thus,
Zurich, having paid for the claim of loss under the builderâs risk policy, seeks to
step into the shoes of City Colleges and assert City Collegesâ rights against IEI.
However, IEI argues that Zurich cannot pursue a subrogation claim as subrogee of
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City Colleges because the loss was solely sustained by CMO, another insured under
the policy, as evidenced by CMOâs handling of the insurance claim and repair of
the damage. Accordingly, IEI argues that the circuit court properly entered
summary judgment in its favor.
¶ 31 Summary judgment is appropriate âwhere the pleadings, depositions,
admissions and affidavits on file, when viewed in the light most favorable to the
nonmoving party, show that there is no genuine issue as to any material fact and
that the moving party is clearly entitled to judgment as a matter of law.â Schultz v.
Illinois Farms Insurance Co., 237 Ill. 2d 391, 399 (2010); 735 ILCS 5/2-1005(c)
(West 2022). Construction of the terms of an insurance policy is a question of law
properly decided on a motion for summary judgment. Schultz, 237 Ill. 2d at 399.
Although this court may affirm an order granting summary judgment on any basis
appearing in the record regardless of whether the circuit court relied on that ground
(Home Insurance Co. v. Cincinnati Insurance Co., 213 Ill. 2d 307, 315 (2004)), we
may decline to do so where the record is insufficient. We review de novo an appeal
from an order granting summary judgment. Seymour v. Collins, 2015 IL 118432,
¶ 42.
¶ 32 A builderâs risk policy covers projects under construction against accidental
losses, damages, or destruction of property for which an insured, which may include
an owner, contractor, and/or subcontractor, has an insurable interest. See 1 Jordan
R. Plitt et al., Couch on Insurance § 1:53 (3d ed. June 2024 Update) (âBuilderâs
risk insuranceâ); see also 4 Philip L. Bruner & Patrick J. OâConnor Jr., Construction
Law § 11:418 (Aug. 2023 Update). Builderâs risk policies are intended to shift the
risk of loss to the insurer âto facilitate timely completion of the project and avoid
the prospect of time-consuming and expensive litigation.â Empress Casino Joliet
Corp. v. W.E. OâNeil Construction Co., 2016 IL App (1st) 151166, ¶ 71; see
Factory Mutual Insurance Co. v. PERI Formworks Systems, Inc., 223 F. Supp. 3d
1133, 1142-43 (D. Or. 2016). The owner and contractor seek to insulate themselves
from loss that they might suffer because of damage to a building in the process of
construction. Jay M. Zitter, Insurance: Subrogation of Insurer Compensating
Owner or Contractor for Loss Under âBuilder's Riskâ Policy Against Allegedly
Negligent Contractor or Subcontractor, 22 A.L.R.4th 701, § 2 (1983); see
generally Indiana Insurance Co. v. Carnegie Construction, Inc., 661 N.E.2d 776,
780 (Ohio Ct. App. 1995) (the burden of restoring construction project in the event
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of loss ordinarily falls on contractor, and so both the owner and contractor have
interest in the project to protect with a builderâs risk policy); Midwest Lumber Co.
v. Dwight E. Nelson Construction Co., 196 N.W.2d 377, 379 (Neb. 1972) (parties
intended that risks of both contractor and owner to the construction contract be
covered by builderâs risk insurance). Builderâs risk policies often cover damage to
the structure itself and damage to construction materials on the ground upon which
work has begun. 22 A.L.R.4th 701, § 2 (1983). These policies ordinarily terminate
when construction is complete. Id.
¶ 33 As noted, subrogation simply means substitution of one person for another
regarding a legal claim or right (Blackâs Law Dictionary 1726 (11th ed. 2019);
Sheckler v. Auto-Owners Insurance Co., 2022 IL 128012, ¶ 39); âthat is, one person
is allowed to stand in the shoes of another and assert that personâs rights against the
defendantâ (1 Dan B. Dobbs, Law of Remedies § 4.3(4), at 604 (2d ed. 1993)).
âFactually, the case arises because, for some justifiable reason, [a party] has paid a
debt owed by the defendant.â Id. âHaving paid the defendantâs creditor, the [party]
stands in the creditorâs shoes *** and âis entitled to exercise all the remedies which
the creditor possessedâ against the defendant.â Id. (quoting American Surety Co. of
New York v. Bethlehem National Bank of Bethlehem, 314 U.S. 314, 317 (1941)).
âThus, a subrogee merely succeeds to the legal rights or claims of a subrogor.â 73
Am. Jur. 2d Subrogation § 1, at 542 (2001).
¶ 34 The right of subrogation originated in equity, wherein the courts sought to
achieve substantial justice by placing responsibility for a loss upon the one against
whom in good conscience it ought to fall. Dix Mutual Insurance Co. v.
LaFramboise, 149 Ill. 2d 314, 319 (1991). Nevertheless, subrogation rights may
arise from contract, where they are expressly provided for in an insurance policy or
other instrument, or equity, where they are implied to have been intended where
necessary to avoid an inequitable and unfair result. Schultz v. Gotlund, 138 Ill. 2d
171, 173 (1990). âWhen put into [an insurance] context, subrogation is defined as
â[t]he principle under which an insurer that has paid a loss under an insurance policy
is entitled to all the rights and remedies belonging to the insured against a third
party with respect to any loss covered by the policy.â â Sheckler, 2022 IL 128012,
¶ 39 (quoting Blackâs Law Dictionary 1726 (11th ed. 2019)).
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¶ 35 âAn insurance policy, like any contract, is to be construed as a whole, giving
effect to every provision, if possible, because it must be assumed that every
provision was intended to serve a purpose.â Central Illinois Light Co. v. Home
Insurance Co., 213 Ill. 2d 141, 153 (2004). To ascertain the partiesâ intent and the
meaning of the insurance policyâs words, the court considers the circumstances
surrounding its issuance, such as the type of insurance purchased, the nature of the
risks involved, the subject matter insured, and the purpose for which the policy was
obtained. Crum & Forster Managers Corp. v. Resolution Trust Corp., 156 Ill. 2d
384, 391 (1993).
¶ 36 If the insurance policyâs words are plain and unambiguous, the court will afford
them their plain, ordinary meaning and apply them as written. Central Illinois Light
Co., 213 Ill. 2d at 153; Crum & Forster Managers Corp.,156 Ill. 2d at 391
.
âHowever, if the words used in the policy are reasonably susceptible to more than
one meaning, they are ambiguous and will be strictly construed against the drafter.â
Central Illinois Light Co., 213 Ill. 2d at 153.
¶ 37 Accordingly, where the insurerâs right to subrogation is expressly provided for
in an insurance policy and the subrogation clause in the policy is plain,
unambiguous, and enforceable, the insurerâs right is primarily measured by the
policyâs provisions. See 16 Couch on Insurance § 222:23 (3d ed. June 2024
Update). In this case, section 12 of the builderâs risk policy provides as follows:
âIf [Zurich] pays a claim under this [p]olicy, [it] will be subrogated, to the
extent of such payment, to all the Insuredâs rights of recovery from other
persons, organizations and entities. The Insured will execute and deliver
instruments and papers and do whatever else is necessary to secure such rights.
[Zurich] will have no rights of subrogation against:
A. Any person or entity, which is a Named Insured or an Additional Named
Insured;
B. Any other person or entity, which the Insured has waived its rights of
subrogation against in writing before the time of loss;
It is a condition of this Policy that [Zurich] shall be subrogated to all the
Insuredâs unwaived rights of recovery, if any, against any third party Architect
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or Engineer, whether named as an Insured or not, for any loss or damage arising
out of the performance of professional services in their capacity as such and
caused by any error, omission, deficiency or act of the third party Architect or
Engineer, by any person employed by them or by any others for whose acts they
are legally liable.â
¶ 38 IEI concedes that City Colleges is an âinsuredâ under the builderâs risk policy
and that the policy does not limit Zurichâs subrogation rights to CMO merely
because CMO is the first named insured. IEI argues that the foregoing subrogation
provision does not provide Zurich with the right to subrogation on behalf of City
Colleges because CMO sustained the loss and claimed payment under the insurance
policy. IEI argues that the partiesâ intention in this regard is manifested in the first
sentence of section 12, which limits Zurichâs right of subrogation âto the extent of
such paymentâ and only to âthe Insuredâs rights of recovery.â IEI argues that
section 12 uses the definite article âtheâ and the singular âInsuredâ to manifest the
partiesâ intention that Zurich is only entitled to subrogation on behalf of a single
insuredâs rights of recovery and that single insured was CMO, the insured who
sustained the loss, submitted the insurance claim, and received the insurance
payment from Zurich.
¶ 39 We disagree with IEIâs premise that City Colleges, indisputably an insured
under the builderâs risk policy, did not sustain a loss that was indemnified by Zurich
pursuant to the builderâs risk policy. We are bound to construe the insurance policy
as a whole, taking into account the type of insurance purchased, the nature of the
risks involved, and the overall purpose of the contract. See Nicor, Inc. v. Associated
Electric & Gas Insurance Services Ltd., 223 Ill. 2d 407, 416 (2006). As noted by
the appellate court below, in construction cases, the owner and the contractor have
an insurable interest in the property under construction. 2023 IL App (1st) 230147,
¶ 45; see Intergovernmental Risk Management v. OâDonnell, Wicklund, Pigozzi &
Peterson Architects, Inc., 295 Ill. App. 3d 784, 791 (1998). Thus, City Colleges, as
owner of the academic building under construction, maintained an insurable
interest in the construction of its academic building and in replacing or rebuilding
any of its building that sustained physical damage during the construction process.
See 5 Jeffrey E. Thomas, New Appleman on Insurance Law Library Edition § 41.05
(2024) (entity has an insurable interest in property if it stands to gain advantage by
its continued existence or stands to suffer disadvantage by its destruction).
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¶ 40 Section 12, taken with the builderâs risk policy declarations and ensuing
provisions, reveals that City Colleges was considered an additional named insured
under the policy and that physical damage to City Collegesâ building during
construction was considered a loss. Thus, when City Collegesâ academic building
was physically damaged by water during its construction in 2015, City Colleges
sustained a financial loss, in that the value of its building and equipment diminished
because of its damaged state.
¶ 41 City Colleges had protected its insurable interest in its property with a builderâs
risk policy that afforded coverage for the building under construction. See 11 Couch
on Insurance § 155:42 (3d ed. June 2024 Update) (builderâs risk insurance protects
the property owner, the contractor, and others with an interest in the project against
certain risks of loss to the construction project). Pursuant to the clear language of
the policy, CMO was deemed City Collegesâ agent, and through its agent, City
Colleges received policy proceeds to repair its damaged property, and with the
proceeds, CMO repaired the property.
¶ 42 IEI argues that CMO did not act as City Collegesâ agent when it submitted the
claim under the builderâs risk policy and received payment for the damage resulting
from the August 2015 flood event. However, the builderâs risk policy itself states
that CMO âshall be deemed the sole and irrevocable agent of each and every
Insured hereunder for the purpose ofâ receiving payment for claims. IEI argues,
then, that the contractual language in the policy does not mean what it says. We
decline to so hold. See Schultz, 237 Ill. 2d at 400 (clear and unambiguous insurance
policy terms must be enforced as written unless against public policy).
¶ 43 In support of its argument that even though City Colleges had an insurable
interest in the damaged property, it did not sustain a loss, IEI cites State Farm
Mutual Automobile Insurance Co. v. Rodriguez, 2013 IL App (1st) 121388, ¶¶ 12-
14, 30 (court held that insureds sustained no insurable loss under automobile
insurance policy because policy did not provide coverage for the seizure of
previously stolen vehicles), and Beman v. Springfield Fire & Marine Insurance
Co., 303 Ill. App. 554, 555, 562 (1940) (court held that plaintiffs sustained no loss
because, when property was damaged by fire and repaired, and reimbursement
funds received, plaintiffs did not own the property and had not yet exercised their
option to repurchase the property). These cases are easily distinguishable, however.
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In this case, unlike Rodriguez, the loss was clearly covered by the provisions of the
builderâs risk policy, and the insurer paid accordingly. Here, unlike Beman, City
Colleges owned the property at the time of the flood and, thus, suffered a loss when
its property was damaged.
¶ 44 In arguing that subrogation is prohibited because City Colleges was not
compensated by its insurer for the loss, IEI raises the application of three
subrogation elements found in the appellate court case of Trogub, 366 Ill. App. 3d
at 842, namely (1) a third party is primarily liable to the insured for the loss, (2) the
insurer is secondarily liable to the insured for the loss under an insurance policy,
and (3) the insurer paid the insured under that policy, thereby extinguishing the debt
of the third party. IEI argues that Zurich did not establish the third element because
Zurich issued its claim payments to the general contractor, CMO, rather than City
Colleges, as owner. Zurich counters that these elements are limited to equitable
subrogation, instead of contractual subrogation, and therefore are inapplicable.
¶ 45 Even though these elements have been recited in the context of equitable
subrogation, a contractual subrogation provision does not alter the basic
requirements of subrogation, including that an insurer must pay its insured before
it may maintain suit, in its insuredâs shoes, against an alleged wrongdoer primarily
liable to the insured for a loss. See Dix Mutual Insurance Co., 149 Ill. 2d at 319;
see also James River Insurance Co., 534 F. Supp. 3d at 969 (contractual subrogation
provision does not alter basic requirement that insurer must first pay insured before
maintaining suit against alleged tortfeasor for indemnity (citing Johnson v. State
Farm Fire & Casualty Co., 151 Ill. App. 3d 672, 675 (1987))). These recitations
are not rigid elements only applicable to equitable subrogation because they involve
the definition of subrogation itself. See Dworak, 17 Ill. 2d at 190 (âUnder this
doctrine of subrogation, a person who, pursuant to a legal liability, has paid for a
loss or injury resulting from the negligence or wrongful acts of another will be
given the rights of the injured person against the wrongdoer.â). Even so, the
elements are met here. IEI allegedly damaged City Collegesâ property through
breach of the contract and, thus, is allegedly primarily liable to City Colleges.
Zurich was secondarily liable to City Colleges, an insured who suffered a loss under
its builderâs risk policy, and paid the repair costs for the loss sustained, thereby
extinguishing IEIâs alleged debt to City Colleges. We are persuaded by Zurichâs
assertion that, to the extent that IEI contends City Colleges sustained no financial
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loss here, because Zurich covered the cost of necessary repairs, IEI ignores the fact
that on the day after the flooding incident, City Colleges, an insured under a
builderâs risk policy, was the owner of a damaged building in need of extensive
repairs.
¶ 46 Both City Colleges and CMO sustained a loss compensated by Zurich, from the
claim submitted by CMO, as agent, pursuant to the builderâs risk insurance policyâs
language. Nonetheless, IEI maintains that City Colleges did not sustain a loss,
stating that its argument turns on who had the underlying contractual responsibility
for repairing the damage. IEI explains that City Colleges did not sustain a loss as a
result of the August 17, 2015, flood because the Malcolm X College project was
still under construction at the time and the deadline for CMO to furnish a
substantially completed project had not yet arrived. In support of its argument, IEI
cites Trans Urban Construction Co., 458 N.Y.S.2d at 217. ¶ 47 In Trans Urban Construction Co.,458 N.Y.S.2d at 217
, the builderâs risk
insurers, as subrogees of the State of New York (the owner), sought to recover
against the general contractor and subcontractors after a windstorm loss during
construction of the ownerâs office building. The contract between the owner and
the general contractor stated that the â â[c]ontractor shall bear all such risk of loss
or damage until all of the work *** has been finally acceptedâ â by the owner and
required the general contractor to repair damage occasioned during the construction
of the project. Id. The owner acquired all-risk insurance, naming the general
contractor as an additional insured. Id. at 218. Subsequent to windstorm damage,
the general contractor fulfilled its contractual obligation and made the necessary
repairs and thereby submitted claims to the insurers. Id. The insurers issued checks
payable to both the owner and the general contractor. Id. The owner transmitted full
payment to the general contractor. Id. The insurers thereafter filed an action against
the general contractor for the loss, contending that it was entitled to subrogation for
the ownerâs rights against the general contractor. Id. The general contractor moved
for summary judgment, arguing that no right of subrogation existed because the
owner suffered no loss, in that the general contractor had fully assumed the risk of
loss and then repaired all the damage to the building following the loss event. Id.
The circuit court denied its motion for summary judgment dismissing the
complaint. Id. at 217.
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¶ 48 Citing the well-established antisubrogation principle of insurance law, that
there is no right of subrogation in favor of the insurer against its own insured or a
party named as an additional insured in the policy, 6 the New York Appellate
Division held that the insurers may not be subrogated as against their own named
additional insured on the policy (the general contractor) after they paid a claim
submitted by the insured. Id. at 220 (âno right of subrogation exists in favor of the
insurer as against [the general contractor], its own insuredâ). The appellate division
reversed the denial of motion for summary judgment as against the general
contractor and directed a severance as to the remaining contractor, subcontractors,
and architect. Id. at 221.
¶ 49 Initially, we note that Trans Urban is a decision of a foreign jurisdiction and
decisions of foreign jurisdictions are not binding upon this court. City of Chicago
v. Groffman, 68 Ill. 2d 112, 118 (1971). Even so, Trans Urban is distinguishable in
that IEI did not fully assume all risk of loss regarding the construction of City
Collegesâ academic building and then make repairs pursuant to its obligation and
the insurance proceeds. Here, the insurer seeks to step into the shoes of the owner,
to file an action against a subcontractor, not the general contractor, which in Trans
Urban had assumed the risk of loss and was required under the contract to repair
all damages.
¶ 50 Moreover, unlike Trans Urban, IEI, neither in its motion for summary judgment
below nor on appeal, has argued that Zurichâs subrogation claim against it is barred
by antisubrogation principles (see 2 Allan D. Windt, Insurance Claims and
Disputes: Representation of Insurance Companies and Insureds § 10:7 (6th ed. Mar.
2024 Update) (antisubrogation rule âis intended to prevent an insurer from
recovering back from its insured that loss or damage the risk of which the insured
had passed along to the insurer under the policyâ) on the basis that IEI is an
additional insured under the âsubcontractor of every tierâ language in the builderâs
risk policy. See Chubb Insurance Co. v. DeChambre, 349 Ill. App. 3d 56, 58 (2004)
(antisubrogation doctrine precluded insurerâs subrogation claim against
subcontractor where builderâs risk policy naming âadditional named insuredâ as
6
Likewise, in Illinois, â[i]t is well settled that an insurer may not subrogate against its own
insured or any person or entity who has the status of a co-insured under the insurance policy.â Dix
Mutual Insurance Co., 149 Ill. 2d at 323.
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â âcontractors and subcontractors of any [sic] all tiersâ â meant subcontractor was
an additional insured under the policy, conflict of interest would arise if insurer had
incentive to pursue its own insured for a risk covered in the policy and for which
subcontractor paid premium, if perhaps indirectly, and loss should fall on insurer
pursuant to policy and not general contractor and subcontractor insured for the same
risks under the policy); see, e.g., 1700 Lincoln Ltd. v. Denver Marble & Tile Co.,
741 P.2d 1270, 1271 (Colo. Ct. App. 1987) (builderâs risk insurer of an owner-
builder prohibited from subrogating against a negligent coinsured subcontractor for
damage incurred during construction of the ownerâs building); Baugh-Belarde
Construction Co. v. College Utilities Corp., 561 P.2d 1211, 1213 (Alaska 1977)
(pursuant to antisubrogation principles, subcontractors insured â âonly as regards
(their) propertyâ â and â âas their interests may appearâ â were nevertheless insureds
preventing them from being liable in subrogation claims for property not their own).
But see Western Washington Corp. of Seventh-Day Adventists v. Ferrellgas, Inc.,
7 P.3d 861, 869-70 (Wash. Ct. App. 2000) (courts are split on the extent to which
âco-insuredâ status insulates a negligent contractor or subcontractor from liability).
IEI also has not asserted that the subrogation language in the policy or contracts is
ambiguous. See generally Certain Underwriters at Lloydâs, London v. Sunbelt
Rentals, Inc., 790 Fed. Appâx 723 (6th Cir. 2019) (court prohibited insurerâs
subrogation claim against its insured subcontractor, resolving builderâs risk
policyâs ambiguity against insurer).
¶ 51 Instead, IEI argued, and the circuit court improperly agreed, that Zurich could
not step into City Collegesâ shoes for two reasons: (1) City Colleges sustained no
loss, even though its building suffered physical damage constituting a loss under
the insurance policy wherein it was an insured, and (2) City Colleges was not
compensated for its loss by its insurer, even though City Collegesâ agent under clear
terms of the policy accepted claim payments from Zurich on City Collegesâ behalf.
Although this court may affirm the circuit court on any basis in the record, IEI has
not developed alternative bases to do so. See People ex rel. Illinois Department of
Labor v. E.R.H. Enterprises, Inc., 2013 IL 115106, ¶ 56 (âa reviewing court is not
simply a depository into which a party may dump the burden of argument and
researchâ).
¶ 52 In sum, we hold here that the circuit court erred in entering summary judgment
in favor of IEI on the basis that City Colleges did not suffer a loss and was not
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compensated by Zurich for its loss. As an insured and owner of an academic
building damaged while under construction, City Colleges suffered a loss and,
pursuant to the builderâs risk insurance policy, was compensated for its damages
by the insurer, Zurich, through its agent, CMO, who handled the claim pursuant to
its obligations under the policy and subsequently made the repairs. None of these
facts or provisions precluded Zurichâs subrogation action against IEI. Accordingly,
we affirm the appellate courtâs judgment, reverse the circuit courtâs order entering
summary judgment in IEIâs favor, and remand for further proceedings.
¶ 53 CONCLUSION
¶ 54 For the foregoing reasons, we affirm the appellate courtâs judgment finding that
the circuit court erred in entering summary judgment in favor of IEI. We reverse
the circuit courtâs judgment and remand the cause to the circuit court for further
proceedings consistent with this opinion.
¶ 55 Appellate court judgment affirmed.
¶ 56 Circuit court judgment reversed.
¶ 57 Cause remanded.
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