Inadvertent Construction Defects are an Occurrence 

The Illinois Supreme Court, in an opinion written by Chief Justice Theis, issued a landmark decision under Illinois law and held 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 CGL insuring agreement. Additionally, the Illinois Supreme Court concluded “[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 construction project—is erroneous.”  

The coverage dispute stemmed from alleged construction defects in a residential townhome development. The townhome owners’ association filed an action on behalf of the townhome owners for breach of contract and breach of the implied warranty of habitability against M/I Homes of Chicago, LLC (“M/I Homes”) as the general contractor and developer of the townhomes. The underlying 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 and that the “[d]efects have caused substantial damage to the [t]ownhomes and damage to other property.” The underlying complaint also alleges that M/I Homes did not intend to cause the construction defects and that M/I Homes neither expected nor intended “the resulting property damage (such as damage to other building materials, such as windows and patio doors, including but not limited to water damage to the interior of units).” 

M/I Homes sought coverage for the underlying action as an additional insured from Acuity, a Mutual Insurance Company (“Acuity”), one of the subcontractors’ commercial general liability insurers. Acuity denied that it had a duty to defend M/I Homes and filed this coverage action. Acuity asserted several bases for its denial, including that the underlying complaint only alleged “property damage” to the townhomes and not any other property beyond the project. Acuity claimed these defects were the natural and ordinary consequences of defectively performed work, which was not an “occurrence,” defined in the policy as an “accident.” 

The circuit court granted summary judgment in favor of Acuity finding the “property damage” was not an “occurrence” because it was a natural and ordinary consequence of a construction project and not an accident. On appeal, the appellate court liberally construed the complaint and insurance policy in the insured’s favor and found that the complaint’s broad allegations of damage to “other property” sufficiently triggered Acuity’s duty to defend.  

The Illinois Supreme Court noted that the appellate courts’ uses of many different rationales and factors in construction defect cases have resulted in inconsistent decisions often based on public policy considerations. The Illinois Supreme Court rejected the argument that unless the complaint alleged damage to “other property” beyond the project, there can be no “property damage” caused by an “occurrence.” It stated that coverage analysis should follow the rules of contract interpretation, which starts with the plain language of the policy.  

The Illinois Supreme Court first determined whether the allegations fell within the scope of coverage. The CGL policy defined “property damage” as “physical injury to tangible property, including all resulting loss of use of that property.” It found that M/I Homes sufficiently alleged the subcontractors’ faulty exterior work and defective materials caused water damage to the townhouses, which constituted physical injury to tangible property. The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” but “accident” was not defined. Based on the dictionary definition and other court interpretations of the definition of “accident,” the Illinois Supreme Court found the term “accident” included the “unintended and unexpected harm caused by negligent conduct.” Because M/I Homes alleged that inadvertent construction defects accidentally caused property damage, the Illinois Supreme Court held that the allegations fell within the CGL’s coverage.  

Acuity asserted that damage to any portion of the completed project caused by faulty workmanship categorically can never be caused by an accident because it is always the natural and probable risk of doing business. The Illinois Supreme Court disagreed and determined that the notions of business risk articulated by Acuity are specifically expressed in the exclusion section of the policy and not found in the language of the initial grant of coverage. “To hold that all construction defects that result in property damage to the completed project are always excluded would mean that the exclusions in the policy related to business risk become meaningless.”  

The Illinois Supreme Court noted two exclusions that generally fall under the “Business Risks Including Damage to Property and Damage to Your Work” heading that could apply to bar the duty to defend. Since neither party addressed these exclusions, the Court remanded the case in part to the circuit court for consideration of whether the exclusions bar coverage and thus the duty to defend. Acuity, a Mutual Ins. Co. v. M/I Homes of Chicago, LLC, 2023 IL 129087 (Nov. 30, 2023).