‘Other Property’ Damage Claim Triggers Defense Obligation For Insured Contractor

October 6, 2022 / Writing and Speaking

By Don R. Sampen, published, Chicago Daily Law Bulletin, October 4, 2022

The 1st District Appellate Court, reversing a trial court decision, recently held that allegations of defective work by a contractor gave rise to an insurer’s duty to defend the contractor, when the allegations stated that the defective work caused damage to “other property” but without identifying what “other property.”

The case is Acuity v. M/I Homes of Chicago, LLC, 2022 IL App (1st) 220023 (Sept. 9). The insurer, Acuity, was represented by Lindsay, Pickett & Postel LLC of Chicago. Gould & Ratner LLP of Chicago represented the insured contractor, M/I Homes of Chicago.

M/I Homes was the successor developer and seller of a multiple-building residential townhome development in Hanover, Illinois. In 2018, the Church Street Station Townhome Owners Association for the development brought suit against M/I Homes alleging defects in construction.

The association’s amended complaint sought damages for breach of contract and breach of implied warranty of habitability. The complaint alleged, among other things, that the construction defects caused damage “to the Townhomes … to other building materials … to other portions of the Townhomes … to other property.” It further alleged that the damage was accidental in that M/I Homes did not intend to cause the defects or resulting property damage.

M/I Homes tendered its defense to Acuity as an additional insured under a commercial general liability policy Acuity issued to a subcontractor on the development, H&R Exteriors. The policy used standard language imposing a duty upon Acuity to defend against property damage caused by an “occurrence.”

In response to the tender, Acuity filed this declaratory action seeking a determination that it did not have a duty to defend M/I Homes. It took the position that the townhomes were M/I Homes’ own work product, and that damage to its own work product did not constitute an “occurrence.”

Upon cross-motions for summary judgment, the trial court agreed with Acuity, and M/I Homes took this appeal.

Analysis

In an opinion by Justice Mary L. Mikva, the 1st District reversed. She observed that the parties were in agreement that, under Illinois case law, an “occurrence” does not occur with respect to an insured’s construction defects causing damage only to its own work product.

She noted this understanding is not tied directly to the language of the insurance policy, but came about by judicial construction of CGL policies. Such damages are construed as economic losses that do not constitute property damage.

Under this interpretation, for coverage to apply to M/I Homes, which served as general contractor for the entire townhome development, the covered property damage must be damage to property beyond the construction project itself. Hence, Acuity argued that the references to “other property” in the underlying complaint failed to identify the relevant property and did not give rise to coverage.

Where a general contractor, such as M/I Homes, seeks coverage under a subcontractor’s policy as an additional insured, Mikva noted at least one case that could have an impact on the foregoing judicial interpretation. Thus, in Westfield Insurance Co. v. National Decorating Service, Inc., 147 F. Supp. 3d 708 (N.D. Ill. 2015), aff’d, 863 F.3d 690 (7th Cir. 2017), the court held that allegations of damage beyond the scope of the subcontractor-named insured’s work — i.e., not the general contractor’s work — could give rise to an occurrence from the subcontractor’s perspective, thereby entitling the general contractor to coverage.

She wrote, however, that no need to apply such an approach existed here. She observed that to the extent the reference in the underlying complaint to “other property” was a reference to townhome owners’ individual property, the association may have standing to pursue such claims in a representative capacity under the Common Interest Community Association Act, 765 ILCS 160/1-30(j).

But even if not, said Mikva, the vague or ambiguous nature of the “damage to other property” allegation was not necessarily limited to the property of unit owners, and any doubts should be resolved in favor of finding a duty to defend. The association clearly had standing to act in a representative capacity regarding common areas, and the “other property” could be a reference to the association’s own property in those areas.

The 1st District therefore found that the allegations, though vague, were sufficient to potentially fall within the policy’s coverage requirement of property damage caused by an “occurrence,” and it reversed in favor of M/I Homes.

Key Point

Vague allegations in an underlying complaint of damage caused by a contractor to “other property” may be sufficient to give rise to an insurer’s duty to defend the contractor, even though damage to the contractor’s own work would not give rise to such a duty.

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