A federal appeals court has affirmed an American International Group Inc. unit has no duty to defend a lumber company in a case in which it had sold fire-retardant lumber that was not properly certified.

Montgomery, Illinois-based Chicago Flameproof & Wood Specialties Corp. distributes commercial building materials, including fire-retardant and treated lumber, according to Thursday’s ruling by the 7th U.S. Circuit Court of Appeals in Chicago in Lexington Insurance Co. v. Chicago Flameproof & Wood Specialties Corp.

During the relevant time, Flameproof had a general liability insurance policy with AIG unit Lexington Insurance Co. that provided the insurer had a duty to defend Chicago Flameproof in cases in which there was property damage caused by an occurrence.

The coverage dispute was whether AIG was obligated to defend Chicago Flameproof in three lawsuits stemming from its alleged sale of uncertified lumber to residential and commercial contractors.

According to the underlying complaint, the contractors had contracted with Chicago Flameproof to purchase a particular brand of fire-retardant and treated lumber for use in four projects that was certified by the International Building Code.

But, instead of sending the IBC-compliant lumber, Chicago Flameproof allegedly delivered its in-house brand lumber, which was not IBC compliant, according to the ruling.

Once this was realized, the lumber was removed and replaced, but this resulted in damage to the surrounding materials into which the lumber had been integrated, according to the ruling.

The contractors filed suit against Chicago Flameproof on charges including negligent misrepresentation, fraudulent misrepresentation and deceptive business practices.

Lexington filed suit in U.S. District Court in Chicago seeking a declaratory ruling it owes no duty to defend Chicago Flameproof in the litigation. The district court entered summary judgment for Lexington, which was unanimously affirmed by a three-judge appeals court panel on appeal.

“The underlying complaints do not trigger Lexington’s duty to defend because they do not allege an ‘occurrence,’” which under the policy is an accident that under Illinois law is “an unforeseen occurrence,” said the ruling.
According to the underlying complaints, Chicago Flameproof “deliberately shipped uncertified lumber, concealed that fact, and was aware or should have been aware of the consequences of those actions,” said the ruling.

“The underlying complaints allege no ‘unforeseen,’ ‘undesigned’ or ‘unexpected’ event,” said the ruling.

The alleged damage “was the natural and ordinary result of Chicago Flameproof’s deliberate decision to supply, and conceal that it had supplied, uncertified lumber,” the appeals court panel said in affirming the lower court’s ruling.

Earlier this week, a federal appeals court ruled for the second time against Lexington over the issue of whether it is obligated to reimburse a drilling company for an accident settlement.