Illinois Supreme Court Finds Construction Defect Claim Triggers Initial Grant of Coverage

    The Illinois Supreme Court found that the underlying allegations addressing construction defects were sufficient to establish "property damage" caused by an "occurrence."Acuity v. M/I Homes of Chicago, LLC, 2023 Ill. LEXIS 1019 (Ill. Nov. 30, 2023).

    M/I Homes was the general contractor for a residential townhome development. The Owners' Association sued for breach of conract and breach of the implied warranty of habitability against M/I Homes. The complaint alleged that M/I Homes' subcontractors caused construction defects by using defective materials, conducting faulty workmanship and failing to comply with applicable building codes. The defects included leakage and uncontrolled water with moisture in locations in the buildings where it was not intended or expected. The Association further alleged that M/I Homes did not intend to cause the construction defects nor did it expect or intend the resulting property damage, such as damage to other building materials. The complaint further alleged that M/I Homes did not perform any of the construction work and that the subconractors performed all the work on its behalf.    

    M/I Homes demanded a defense from Acuity as the additional insured on a policy issued to one of the subcontractors. Acuity denied a defense to M/I Homes as an additional insured and filed a declartory judgment action against M/I Homes and the Association. Acuity alleged the underlying complaint failed to allege any "property damage" caused by an "occurrence." 

    Acuity and M/I Homes filed cross-motions for summary judgment. The circuit court granted summary judgment to Acuity. It found that property damage resulting from faulty work was not an "occurrence" because it was the natural and ordinary consequence of the construction project and not an accident as required by the policy. The appellate court reversed, finding that the complaint alleged that there was damage to "other property" and consequently no potential for coverage.

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    The Supreme Court found that the underlying complaint, in the light most favorable to the Association, included allegations that the buyers of the complete townhomes suffered water damage to the interior of units because of leaks and moisture damage that arose from the subcontractors' faulty exterior work and defective materials. Under the language of the policy, the resulting water damage to the interior of the completed units plainly constituted physical injury to tangible property. Therefore, the allegations sufficiently sought recovery for "property damage" as that term was defined in the initial grant of coverage under the policy.

    The court next turned to "occurrence." The court had never defined the term "accident" in the context of construction defects that resulted in property damage. Considering various definitions, the court found that the term "accident" reasonably encompassed the unintended and unexpected harm caused by negligent conduct. The allegations indicated that inadvertent construction defects accidentally caused property damage to the completed townhouses. 

    Therefore, property damage that resulted from inadvertent faulty work could be caused by an "accident" and constitute an "occurrence" for purposes of the initial grant of coverage under the insuring agreement. The premise that there could be no "property damage" caused by an "occurrence" under the policy unless the underlying complaint alleged property damage to something beyond the townhouse construction project was erroneous and was not grounded in the language of the initial grant of coverage in the insuring agreement. 

    Next, the exclusions had to be considered. Neither the parties, the trial court, nor the appellate court considered exclusions (j) or (l). To ultimately resolve whether Acuity had a duty to defend, the court remanded to the trial court for further consideration. The parties would then have the opportunity to address whether, comparing the underlying allegations to the language of the polciy, the exclusions in the policy applied to preclude a duty to defend. 

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