Illinois Supreme Court Clarifies CGL Insurance Coverage for Construction Defects
In a highly-anticipated decision with major significance for the construction industry, the Illinois Supreme Court (Court) issued an opinion on November 30, 2023 clarifying Illinois law on an insurer’s duty to defend in construction defect cases. In Acuity v. M/I Homes of Chicago, LLC, 2023 IL 129087, the Illinois Supreme Court rejected appellate court jurisprudence, which for years had been widely critiqued for being confusing and relying on public policy considerations rather than the Commercial General Liability (CGL) policy’s language. The Court noted these critiques and confusion and held that the appropriate approach is to begin with “first principles” and “apply a disciplined legal framework” to assess an insurer’s duty to defend a construction defect case.
In an underlying lawsuit, a homeowner’s association sued the developer, M/I Homes of Chicago LLC (M/I Homes) for construction defects. A subcontractor listed M/I Homes as an additional insured on a CGL policy Acuity issued. After the association sued, M/I Homes sought defense from Acuity under the subcontractor’s policy based on its status as an additional insured. Acuity sued seeking a declaratory judgment that Acuity had no duty to defend M/I Homes. The case made its way to the Court. The Court found that the proper starting point for analyzing whether there is a duty to defend is to review the policy language as in any other matter of contract interpretation. In construing the CGL policy, the court found the proper approach to determine the duty to defend is: (1) determine if the alleged facts potentially fall within the policy’s broad grant of coverage – was there “property damage” caused by an “occurrence”?; (2) determine whether an exclusion to coverage applies (e.g., the “Your Work” exclusion); and (3) if an exclusion applies, whether there is an exception to the exclusion which would provide coverage (e.g., the “Completed Operations” exception).
The Court then reviewed the allegations of the association’s lawsuit. While the appellate court analyzed, and Acuity emphasized, whether “other property” was damaged by the allegedly defective work, the Court rejected that approach in assessing whether the allegations fell within the broad grant of coverage under a CGL policy. The Court found that association’s allegations of water damage to the interior of the units “plainly constitutes physical injury to tangible property” – property damage. The Court also held that an occurrence was sufficiently alleged rejecting Acuity’s argument that the construction defects were the result of an intentional act and therefore not an accident. Instead the Court observed that neither the cause of the harm – inadvertent defects – nor the resulting water damage to the walls of the interiors of the units – was intended, anticipated or expected.
The Court ultimately held that the Association’s complaint triggered coverage under the broad grant of coverage in Acuity’s CGL policy. However, because the lower courts had not addressed the coverage exclusions (and the exceptions to the exclusions), the Court remanded the case to the circuit court for further findings on those issues, while noting two of the potential exclusions each may have an applicable exception.
This decision settles an area of Illinois law that was chaotic. For those in the construction industry, the decision brings welcome clarity to the evaluation of whether a CGL policy covers construction defects.