Who Paid Whom?

In Zurich American Insurance Company v. Infrastructure Engineering, Inc., 2024 IL 130242, the Illinois Supreme Court affirmed the appellate court’s decision to allow the insurance company the right to be subrogated for the insured under the builder’s risk insurance policy despite having paid the general contractor, not the City of Chicago on whose behalf it was subrogating. 

City Colleges of Chicago was planning for the construction of a building and parking garage. In doing so, City Colleges had a contract with CMO and Moody Nolan, Inc., both as general contractors. Moody Nolan, Inc. then subcontracted to Infrastructure Engineering, Inc. (IEI) to develop a stormwater management system. The contract between City Colleges and CMO required CMO to have a builder’s risk property insurance policy. CMO purchased this policy from Zurich American Insurance Company (Zurich). The policy included a subrogation provision. Before the completion of the building and stormwater management system, the basement was flooded. As a result, “CMO submitted a claim to Zurich for the damage that resulted from the flooding.” Zurich then made these claim payments to CMO. 

Zurich brought an action against IEI to recover claim payments, on the basis that it was a subrogee of City Colleges. Zurich argued that since it made these payments under the builder’s risk property insurance policy, it was able to “stand in the shoes of City Colleges.” However, IEI argued in its motion for summary judgment that Zurich could not claim to be a subrogee of City Colleges for two reasons: (1) City Colleges sustained no loss, and (2) City Colleges itself did not actually receive any payments from Zurich under the policy (rather, CMO received these payments). 

The circuit court agreed with IEI, granting its motion for summary judgment. Specifically, the circuit court determined that City Colleges did not sustain any loss, meaning that the elements for subrogation were not met. However, the appellate court reversed on the grounds that the contract—namely, the builder’s risk insurance policy—itself gives Zurich the right to subrogation.  

The Illinois Supreme Court affirmed the appellate court’s decision. First, the court found that City Colleges did sustain a loss. In agreeing with the appellate court, the Illinois Supreme Court explained that both the owner and the contractor in construction cases have an “insurable interest” in the property. Thus, because City Colleges was the owner of the building here, it had an insurable interest, and therefore it sustained a loss. 

Second, the court disagreed with IEI’s argument that Zurich does not have a right to subrogation because City Colleges itself was not paid by Zurich. IEI argues that the elements of subrogation are not met here. In response, Zurich asserts that such elements only apply to equitable subrogation, and not to contractual subrogation. The court disagreed with Zurich and held that these elements do, in fact, apply to contractual subrogation, but the court determined that these elements were still met.  

IEI cited Trans Urban Construction Co., 458 N.Y.S.2d 216 (App. Div. 1983), which the Illinois Supreme Court stated, “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.” After noting that this case is not binding, the Illinois Supreme Court explained that in this case Zurich wants to “step into the shoes of” City Colleges, the building owner, “to file an action against” IEI, the subcontractor—who did not assume all risk of loss—rather than filing an action against CMO, the general contractor. But in Trans Urban, the insurer filed an action against the general contractor, who “had assumed the risk of loss and was required under the contract to repair all damages.” As a result, the court determined that City Colleges was compensated by Zurich through CMO, its agent. 

Because City Colleges suffered a loss and was compensated for that loss, the court determined that Zurich should not have been prevented from pursuing a subrogation claim against IEI. 

This article originally appeared on Freeman Mathis & Gary LLP.

About the Authors: 

Donald Patrick Eckler is a partner at Freeman Mathis & Gary LLP. patrick.eckler@fmglaw.com

Sophie Stevanovich is an associate at Freeman Mathis & Gary LLP. sophie.stevanovich@fmglaw.com