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Seventh Circuit determines coverage not illusory in recent Illinois case

7/28/26

By: Austin Anderson

In a recent opinion, the Seventh Circuit, applying Illinois law, held that there was no insurance coverage under a commercial general liability (“CGL”) policy which contained a prior work exclusion despite the insured’s attempts to argue that the exclusion rendered coverage illusory.

In Nautilus Insurance Company v. Bee Quality, Inc., Seventh Circuit Case No. 25-1912, a building collapse caused the death of two individuals. The estates of the decedents sued contractor Bee Quality, alleging that Bee Quality negligently performed work on the structure. The underlying complaint alleged that Bee Quality’s work on the subject structure was conducted after a windstorm which took place on August 2, 2020. It further alleged that the structure collapsed and the two claimants were killed on April 12, 2022.

Bee Quality was insured by Nautilus from February 8, 2022, to February 8, 2023, under a CGL policy which provided coverage for Bee Quality’s “completed operations.” The policy additionally contained a prior work exclusion, which barred coverage for all property damage or bodily injury arising out of work which Bee Quality completed before February 8, 2022.

Bee Quality submitted the underlying complaint to Nautilus, seeking coverage for defense and indemnity. Nautilus, in response, took the position that the prior work exclusion applied and filed a complaint for declaratory relief in the United States District Court for the Northern District of Illinois. The District Court considered not only the underlying complaint, but also Bee Quality’s answer wherein it admitted that its work on the project was completed by December 2020. It ultimately determined that the prior work exclusion barred coverage and granted Nautilus’ judgment on the pleadings.

Bee Quality appealed to the Seventh Circuit, and in doing so notably took no issue with the district court’s decision to look to Bee Quality’s answer in determining whether coverage existed. Instead, it argued in large part, that the prior work exclusion rendered coverage illusory. The Seventh Circuit, in the case of Citizens Ins. Co. of Am. v. Wynndalco Enters., LLC, 70 F.4th 987 (7th Cir. 2023) previously held that in applying Illinois law, “a court should construe a policy so as to harmonize its provisions and avoid reading an exclusion in such a way that it removes the coverage explicitly provided elsewhere in the policy.” Id. at 996.

The Seventh Circuit noted that since Wynndalco, Illinois appellate courts have taken an even more narrow view of the illusory coverage doctrine than the Seventh Circuit predicted in Wynndalco. Most prominently, in the landmark Visual Pak case, the First District appellate court held that “[i]t is only when the exclusion has the effect of ‘swallowing’ … the coverage entirely that the exclusion can be deemed illusory.” Nat’l Fire Ins. Co. of Hartford v. Visual Pak Co. Inc., 243 N.E.3d 888, 905 (Ill. App. Ct. 2023) (emphasis in original). The Court in Bee Quality found that it was ultimately unnecessary to “try to predict whether the Supreme Court of Illinois is more likely to follow Visual Pak than to follow Wynndalco” due to the nature of the case before it. In its estimation, there remained “plenty of room for coverage of the main insured hazards” under either standard and coverage was not illusory because the prior work exclusion did not bar coverage for work completed by Bee Quality after the inception of the Nautilus policy on February 8, 2022. The Seventh Circuit ultimately affirmed the District Court’s ruling in favor of Nautilus.

The most interesting question posed to the Seventh Circuit is the one it did not answer: specifically whether it would predict that the Supreme Court of Illinois would embrace the extremely narrow application of the illusory coverage doctrine as set forth in Visual Pak. This issue remains unsettled as of now, but Bee Quality is the latest in a growing number of cases where insurance coverage in Illinois has not been deemed illusory. Insurance carriers should continue to feel emboldened to challenge illusory coverage arguments statewide.

If you have questions or would like more information, please contact Austin Anderson at austin.anderson@fmglaw.com or your FMG relationship partner.

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