Illinois Appellate Court Strays From Established Faulty Construction Precedent To Find A Duty To Defend Vague Allegations Of Damage To “Other Property” In Acuity v. M/I Homes Chi, LLC
By Ilene M. Korey
Illinois has consistently required damage to property other than repair and replacement of faulty construction to implicate coverage under a commercial general liability policy. The basis for doing so is rooted in the insuring language of the typical CGL policy that limits coverage to “property damage” caused by an “occurrence” in the policy period. The concept is best explained by the Illinois Supreme Court in Travelers Ins. Co. v. Eljer, that finding coverage for the cost of replacing or repairing defective work would transform the policy into something akin to a performance bond. Travelers Ins. Co. v. Eljer, 197 Ill. 2d at 312 (2001); see, e.g., Viking Construction Management, Inc. v. Liberty Mutual Insurance Co., 358 Ill. App. 3d 34, 54-55 (Ill. App. 1st Dist. 2005) (“A line of Illinois cases holds that where the underlying complaint alleges only damages in the nature of repair and replacement of the defective product or construction, such damages constitute economic losses and do not constitute ‘property damage.’”). The takeaway from this line of cases is that there is no coverage for “property damage” in a CGL policy for purely economic losses, such as damages for inadequate value, or costs of repair or replacement of faulty work. However, a recent decision issued by the First Appellate District, apparently swayed by criticism from policyholder counsel, held that a vague allegation that there is damage to “other property” triggers a duty to defend a construction defect case.
In Acuity Ins. Co. v. M/I Homes Chi, LLC, 2022 IL App (1st) 220023, the First Appellate District grappled with whether a duty to defend was owed to a general contractor for a lawsuit filed by a townhome homeowners’ association for damages from alleged defects in the design and construction of the townhomes. M/I Homes was an additional insured on a CGL policy issued by Acuity to an exterior finishing subcontractor. Acuity denied that it had a duty to defend M/I Homes under the policy because, among other reasons, the complaint alleged damages “related only to the defective construction of the townhomes and specifically not any damage to any other property beyond the townhomes themselves.” The parties filed cross motions for summary judgment and the trial court held in favor of Acuity.
On appeal, the appellate court examined the underlying pleadings to determine whether Acuity had a duty to defend. Focusing on the plaintiffs’ allegations against the contractors/developers, the Court looked to what was alleged as “property damage.” In reversing the trial court, the First District noted that the underlying complaint alleged property damage from faulty design and construction, and also that damage was incurred to “other property.”
Acuity argued that the “other property” allegations were not enough to trigger a duty to defend because “the underlying complaint does not identify who owned that ‘other property,’ nor does it explain how the Association has standing to sue for that damage.” Acuity pointed out that the First District itself had previously stated, “We do not believe a freestanding reference to a fact, that is not attached to any particular theory of recovery or particular party in the complaint, can trigger a duty to defend.” West Van Buren, 2016 IL App (1st) 140862, ¶ 20.
Nonetheless, the bare allegations of damage to “other property” convinced the First District that the underlying allegations, broadly construed, implicated the duty to defend. “Liberally construing both the complaint and the policy in favor of the insured (Metropolitan Builders, 2019 IL App (1st) 190517, ¶ 28, 442 Ill. Dec. 49, 158 N.E.3d 1084), and applying the well-established principle that “[u]nless the complaint on its face clearly alleges facts which, if true, would exclude coverage,” the potentiality of coverage triggering a duty to defend is present (emphasis added) (Adams County, 179 Ill. App. 3d at 756).” Thus, at the pleading stage, alleging “damage to other property” was enough to potentially satisfy the duty to defend under the policy’s insuring language.
The First District apparently did not consider that the underlying complaint was drafted as a transparent attempt to trigger coverage by alleging elements taken from a CGL policy. For example, the underlying complaint contained the following allegations: “The Defects caused physical injury to the Townhomes (i.e., altered the exteriors’ appearance, shape, color or other material dimension) after construction…was completed from repeated exposure to substantially the same general harmful conditions. The property damage was an accident in that [M/I Homes] did not intend to cause the design, material and construction defects in the Townhome[s], and the resulting property damage…was neither expected nor intended from their standpoint. *** The work of the subcontractors and the designer caused damage to other portions of the Townhomes that was not the work of those subcontractor. Defects have caused substantial damage to the Townhomes and damage to other property.”
Learning Point: The Acuity decision is instructive in that the Appellate Court rejected the insurer’s argument that the underlying claim sought damage for only defective work. Instead, the Court determined that there was a potential for damage to repair not only the defective work, but also the unspecified “other property.” The Acuity court applied the principle of construing allegations and the policy broadly to find a duty to defend. Thus, in this context, simply alleging damage to “other property” satisfied that threshold. A final note: the 1st district’s decision invites other courts and the Illinois Supreme Court to weigh in on these issues in the hope of bringing clarity to the nuances of coverage for construction defect claims.