Government Action Excludes Loss: McCann v. Pekin"

Unambiguous Exclusion Effective
Barry Zalma
Aug 28, 2023

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.

UnambiguousPhoto byBarry Zalma

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.

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.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.

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