Over the years, owners and contractors were frequently shocked to learn that there was no insurance that could cover damage caused by inadvertent defective construction. However, that all changed on November 30, when the Illinois Supreme Court, in Acuity v. M/I Homes of Chicago, LLC, aligned Illinois law with the modern trend followed by most other states and acknowledged that there can be coverage for claims arising out of inadvertent defective construction under standard commercial general liability (CGL) insurance policies. This seismic shift was the result of the Court abandoning years of tortured analysis used by Illinois appellate courts to interpret CGL policies in a way that denied coverage for such claims. This change in the law now makes it easier for construction project stakeholders to trigger insurance coverage when construction defect issues arise on a project.

Background

The dispute arose out of a claim by a homeowner’s association against M/I Homes, the developer of a residential townhome development, for damages allegedly caused by construction defects throughout the development. Under the standard CGL policy, in order for an injured party to trigger coverage, that party needs to show two things: (1) property damage and (2) damage caused by an occurrence, i.e., an accident. Historically, under Illinois law, unless the injured party had alleged damage to property other than the building that had been constructed, courts concluded that there was no “property damage.” Further, Illinois courts had held that under no circumstances was defective construction caused by an “occurrence” since, according to the courts, a construction defect was a “natural and ordinary consequence” of the construction process and, therefore, legally speaking, not an accident.  

However, the Supreme Court found that these appellate court decisions were often inconsistent in their analysis and failed to properly interpret the express terms of the insurance policy which thereby freed the Court to rethink the approach to CGL coverage for construction defects in Illinois. The Court emphasized that the “best approach to bringing clarity to these issues is to return to first principles and apply a disciplined legal framework from which we can arrive at the correct legal analysis and the correct result.” The Court then proceeded to examine the express terms of the CGL policy to determine whether the Association’s claim against M/I Homes was covered.

The Decision

In its decision, the Court rejected, wholesale, the longstanding approach that there could be no “property damage” caused by an “occurrence” under a CGL policy “unless the underlying complaint alleged property damage to something beyond the townhome construction project.” Critically, and perhaps most importantly, the Court abandoned the notion that defective construction could never be considered an “accident” and, therefore not an occurrence. The Court held, for the first time, that an inadvertent construction defect is an occurrence After applying this new approach, the Court held that the allegations in the underlying complaint regarding damage to the townhomes themselves sufficiently fell within the initial grant of coverage under the CGL policy for “property damage” caused by an “occurrence,” and remanded to the trial court to determine whether any of the standard exclusions to the CGL policy bar coverage.

Be Alert: Key Takeaways

• The Acuity ruling addresses long standing, real concerns by construction project stakeholders regarding CGL insurance coverage in two significant ways: (1) prior appellate court cases should no longer be relied upon; and (2) going forward, Illinois courts are to apply the plain the language of the policy and nothing more in determining whether there is coverage for damages arising out of defective construction.
• Prior to the Acuity decision, Illinois law on this issue was in flux. For example, some Illinois courts focused on whether the claimant had alleged damage to “other property.” And some courts held that there’s no “occurrence” because construction defects are the natural and expected outcome of bad work (and therefore not accidental). And then some courts held that there’s no coverage unless the damage was to something other than the project itself. The Acuity decision flat out rejects these approaches by telling courts to “read the policy” and “ignore prior appellate decisions.” This is a game changer for construction stakeholders.
• If your CGL carrier recently declined to cover a claim based on allegations of defective construction, that declination may no longer be valid and coverage may now be available.
• At a minimum, you may now be entitled to recover your costs of defense.
• Insurance company letters declining coverage should be reexamined and exclusions analyzed.
• Even though the Acuity decision is a clear win for construction project stakeholders, the Court’s opinion makes it clear that the general rule – which is that even though there may be coverage, there could be a policy exclusion, e.g., the “Your Work” exclusion, that could narrow or even eliminate coverage – remains a hurdle to recovery. So, a careful review of the policy is necessary to ensure your best opportunity to recover.