Illinois Supreme Court Addresses Duty to Defend Construction Defect Claims

By Ilene M. Korey

Facts

Last year, we reported on the Illinois Appellate decision of Acuity Ins. Co. v. M/I Homes of Chicago, LLC, that held that a CGL insurer owed a duty to defend an additional insured in a construction defect case based on pleadings that alleged damage to “other property.” 2022 IL App (1st) 220023. In the underlying suit for which M/I Homes sought coverage as an additional insured under a subcontractor’s CGL policy, the condominium association alleged that M/I Homes’ subcontractors caused construction defects by using defective materials, conducting faulty workmanship, and failing to comply with applicable building codes. As a result, the defects caused physical injury to the townhomes that included “leakage and/or uncontrolled water and/or moisture in locations in the buildings where it was not intended or expected.” The condo association alleged that the defects caused “substantial damage to the townhomes and damage to other property.” After receiving the request for coverage, Acuity denied the duty to defend on the basis that the property damage was “related only to the defective construction of the townhomes and specifically not any other property beyond the townhomes themselves” asserting therefore that the complaint failed to allege property damage caused by an occurrence. On appeal, the appellate court found that there was a duty to defend because the complaint alleged damage to “other property” thus meeting the threshold pleading requirement. Acuity appealed and the Illinois Supreme Court accepted the appeal to clarify the unsettled nature of the law as to what must be plead to implicate a duty to defend under a construction defect case under a CGL policy.

Analysis

The Illinois Supreme court’s analysis commenced with the cornerstone of any coverage analysis, the policy’s insuring language. It first found that the broad grant of coverage of a CGL policy extends coverage for liability for “property damage” that was satisfied by the Association’s pleading of water damage to the interior of units as it alleged physical injury to tangible property. The court next looked to “occurrence” and ‘accident’ and determined that the term ‘accident’ reasonably encompasses the unintended and unexpected harm caused by negligent conduct. Under this analysis, allegations against the contractors that alleged negligent conduct as opposed to intentional substandard work, falls within an ‘accident’ as neither the cause of the harm, nor the harm, was intended, anticipated, or expected. The court rejected the carrier’s argument that damage to the completed project by faulty workmanship can never be caused by an accident because it is always the natural and probable risk of doing business. Rather, those considerations may be addressed by the business risk exclusions, but not in considering the initial grant of coverage. Thus, property damage that results from inadvertent faulty work can be caused by an ‘accident’ and therefore may constitute an “occurrence” for purposes of the initial grant of coverage. Notably, the court specifically rejected any requirement that coverage can only be implicated when there are allegations of damage beyond the construction project.

Following the analysis for the initial grant of coverage, the court did discuss the potential of applicable exclusions that had not been considered by the lower courts. As those exclusions are fact based, the court remanded the case to the trial court to address whether any of the exclusions may apply to preclude a duty to defend.

Learning Point: The Acuity decision eliminated any requirement that pleadings must contain allegations of property damage beyond the faulty construction work to implicate the duty to defend. However, the opinion did not discuss whether intentional allegations against a contractor would fall outside the CGL broad grant of coverage under the insuring language for purposes of a duty to defend.