Travelers Insurance v. Eljer Manufacturing, Inc.

Rule of Law:

Under Illinois law, a comprehensive general liability policy defining 'property damage' as 'physical injury to tangible property' is triggered only by an actual, tangible alteration to the property, not by purely economic losses such as diminution in value or the cost of replacing a defective but functioning product. Under New York law, 'property damage' defined as 'injury to tangible property' can be triggered by the incorporation of a defective component if it causes a diminution in the larger entity's value exceeding the value of the component itself.

Facts:

• Between 1979 and 1990, United States Brass Corporation (a policyholder) manufactured and sold a polybutylene plumbing system called the 'Qest Qick/Sert II' (Qest).
• The Qest system was installed by plumbing contractors in approximately 500,000 to 750,000 housing units across the United States, typically behind walls or between floors.
• The Qest system was allegedly defective and had a propensity to leak, causing water damage.
• Thousands of product liability claims were filed against the policyholders by homeowners whose Qest systems had failed.
• Most claims involved residences that had already experienced leaks and sought recovery for water damage, replacement costs, and diminution in property value.
• A minority of claims involved homes where no leak had occurred, but homeowners sought recovery for the cost of proactively replacing the system and for the alleged diminution in their homes' value.
• During the relevant period, the policyholders were covered by excess comprehensive general liability (CGL) insurance policies from various insurers.
• Policies issued from 1979 through 1981 (pre-1982 policies) defined 'property damage' as 'injury to tangible property,' while policies issued after 1981 (post-1981 policies) defined it as 'physical injury to or destruction of tangible property.'

Procedural Posture:

• Various insurers filed four declaratory judgment actions in the circuit court of Cook County against the policyholders.
• The circuit court consolidated the actions.
• The insurers and policyholders filed cross-motions for partial summary judgment on the trigger-of-coverage issue.
• The circuit court granted summary judgment in favor of the insurers, ruling that coverage is triggered only when a Qest system actually leaks, and denied the policyholders' cross-motion.
• The policyholders, as appellants, appealed to the Illinois Appellate Court.
• The appellate court affirmed in part and reversed in part, finding that for pre-1982 policies, a leak was not required if diminution in value was shown, and for post-1981 policies, coverage could be triggered prior to a leak if replacing the system caused other physical damage.
• The policyholders, as petitioners, were granted leave to appeal to the Supreme Court of Illinois, and the insurers filed briefs as cross-appellants.