(Article from Insurance Law Alert, December 2023)
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Holding
The Illinois Supreme Court ruled that allegations in a construction defect suit fell within the initial grant of coverage in a general liability policy for purposes of triggering the insurer’s duty to defend, but remanded the matter for a determination of whether policy exclusions barred coverage. Acuity v. M/I Homes of Chicago, LLC, 2023 Ill. LEXIS 1019 (Ill. Nov. 30, 2023).
Background
A townhome owners’ association sued M/I Homes, the general contractor and developer and seller of the homes. The suit alleged that M/I Homes’s subcontractors performed faulty workmanship and used defective materials, resulting in property damage. M/I Homes sought a defense from Acuity under a general liability policy issued to one of the subcontractors and under which M/I Homes was an additional insured. Acuity denied coverage and filed a declaratory judgment action, arguing that the underlying complaint did not allege “property damage” caused by an “occurrence,” as required by the policy.
Ruling on the parties’ cross-motions for summary judgment, the trial court held that Acuity had no duty to defend. The trial court reasoned that property damage resulting from faulty workmanship was not an “occurrence” because it was a natural and ordinary consequence of negligent work, rather than an accident. The trial court also held that there was no “property damage” because only the townhomes themselves were damaged, and that “property damage” requires damage to property aside from the project itself. The appellate court reversed, ruling that a liberal construction of the allegations in the complaint alleged “property damage” caused by an “occurrence,” and that Acuity therefore had a duty to defend.
Decision
The Illinois Supreme Court reversed in part and affirmed in part. With respect to whether the policy’s initial grant of coverage encompassed the underlying allegations so as to give rise to a duty to defend, the Illinois Supreme Court affirmed the appellate court’s decision. In particular, the Illinois Supreme Court held that allegations of water damage due to leaks arising from faulty construction and/or defective materials constituted “property damage.” The court expressly rejected the notion that property damage requires damage to property beyond the townhome construction project itself, noting that such reasoning is not grounded in policy language.
Additionally, the court held that the claims alleged an “occurrence,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Emphasizing that an accident is generally understood to mean “an unforeseen occurrence” or “an undesigned, sudden, or unexpected event,” the court concluded that “accident” reasonably encompasses the unintended and unexpected damage caused by negligent construction.
However, the Illinois Supreme Court reversed the appellate court’s decision insofar as it granted summary judgment in favor of M/I Homes. The Illinois Supreme Court noted that policy exclusions relating to “Expected or Intended Injury” and “Business Risks Including Damage to Property and Damage to Your Work” might operate to bar coverage, and remanded the matter for resolution of those issues.
Comments
Ruling on this matter of first impression under Illinois law, the court acknowledged the lack of consistency on rulings in this context, both within Illinois and across jurisdictions. As the court noted, courts have considered a variety of factors in determining whether construction defect suits give rise to general liability coverage,—some of which are not derived from governing policy language—including whether the damage was to property other than the defective work itself and whether the insured was a contractor or subcontractor. With respect to Illinois appellate court decisions holding that “property damage” requires damage to property other than the construction project itself, the court expressly rejected those decisions, stating that such cases “should no longer be relied on.”