Illinois Supreme Court Decision Expands Insurance Coverage Available for Construction Defect Claims

In a recent decision, Acuity v. M/I Homes of Illinois, LLC, the Illinois Supreme Court held “that property damage that results from inadvertent faulty work can be caused by an ‘accident’ and therefore constitute an ‘occurrence’ for purposes of the initial grant of coverage under [a commercial general liability policy’s] insuring agreement.” 2023 IL 129087, ¶ 51 (“M/I Homes”).

The M/I Homes decision clarified an area of insurance law which was in flux in Illinois, including recent appellate court decisions which have been interpreted to exclude coverage for faulty workmanship and construction defects, unless a contractor’s defective work caused damage to other work or property. In the context of a general contractor, this logic typically led to the entire exclusion of insurance coverage for the general contractor resulting from defective work, because all of the work at the project was performed on the general contractor’s behalf.

Nonetheless, after finding that construction defects could constitute an occurrence to initially grant coverage, the Illinois Supreme Court remanded the M/I Homes case back to the circuit court to determine whether business risk exclusions in the applicable policy may still exclude coverage for the general contractor.

As background, M/I Homes served as general contractor and developer of a residential townhome development in Hanover Park, Illinois. The townhome owners’ association (the “Association”) sued M/I Homes for construction defects which caused physical injury to the homes through water damage – leakage, uncontrolled water and moisture. M/I Homes demanded a defense from Acuity as an additional insured on a CGL policy that Acuity issued to one of M/I Homes’ subcontractors, H&R Exteriors, Inc. Acuity denied coverage and filed a declaratory judgment action.

On cross-motions for summary judgment, Acuity argued that M/I Homes was responsible for building the townhomes and that the damages sought by the Association related to the defective construction of the townhomes and not to any other property damage beyond the buildings. Under existing Illinois law, Acuity argued that the allegations of defective construction did not constitute an “occurrence” under the insurance policy. The circuit court agreed, entering summary judgment in favor of Acuity, finding that property damage resulting from the faulty work was not an “occurrence,” because it was a natural and ordinary consequence of the construction project and not an accident as required under the policy.

The appellate court reversed, finding that the Association sufficiently alleged damage to “other property,” to trigger Acuity’s duty to defend M/I Homes for the alleged construction defects.

On appeal, the Illinois Supreme Court affirmed the appellate court, in part, and remanded the case to the circuit court for further proceedings. The Illinois Supreme Court first concluded that the water damage resulting from alleged construction defects constituted “property damage” – i.e. physical injury to tangible property. The Court then analyzed whether the “property damage” was caused by an “occurrence.” An “occurrence” is defined in the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

The term “accident” is not defined in the policy nor by prior Illinois Supreme Court cases in the context of construction defects that result in property damage. Therefore, the court looked to the definition of “accident” in appellate court decisions and the dictionary, concluding that the term “accident” “reasonably encompasses the unintended and unexpected harm caused by negligent conduct.” M/I Homes, 2023 IL 129087, ¶ 47. Applying this definition to the allegations in the underlying complaint, the allegations indicate that inadvertent construction defects accidentally caused property damage to the completed townhomes. “Neither the cause of the harm – the inadvertent defects – nor the harm – the resulting water damage to the walls of the interior of the units – was intended, anticipated, or expected.” Id. at ¶ 48.

Acknowledging Acuity’s argument that the intent of CGL coverage is not to insure the natural and probable risk of doing business, the court noted “[t]o the extent that inadvertent construction defects that result in property damage are not covered, those limitations are effectuated by operation of the [business risk] exclusions section of the policy.” Id. at ¶¶ 49-50.

Agreeing with M/I Homes, the Court held “that property damage that results from inadvertent faulty work can be caused by an ‘accident’ and therefore constitute an ‘occurrence’ for purposes of the initial grant of coverage under the [commercial general liability policy’s] insuring agreement.” Id. at ¶ 51. To the extent that prior appellate decisions held that there could be no “property damage” caused by an “occurrence” under a policy unless the underlying complaint alleged property damage to something beyond the scope of the work, those decisions “should no longer be relied upon.” Id. at ¶ 52.

Nonetheless, the Court noted that business risk exclusions may still exclude coverage for faulty workmanship, even though coverage is initially granted for property damage caused by an occurrence. Given that the parties did not address potentially applicable exclusions and their exceptions, the Court remanded the case to the circuit court for further consideration of whether the exclusions in the applicable CGL policy bar coverage of M/I Homes’ claim. Id. at ¶¶ 53-65.

The M/I Homes decision represents a significant development in favor in insureds facing construction defect claims in Illinois. Burke Warren attorneys can help you navigate these changes to the law. For more information, contact attorneys Chris Kentra by email at ckentra@burkelaw.com or phone at 312-840-7112 or Blake Roter by email at broter@burkelaw.com or phone at 312-840-7116.