Another Win For Policyholders As Illinois Reverses Course And Joins The Majority Of States Recognizing CGL Policies Cover Property Damage Caused By Construction Defects

• Published date: 04 January 2024
• Subject Matter: Insurance, Real Estate and Construction, Insurance Laws and Products, Construction & Planning
• Law Firm: K&L Gates
• Author: Mr Frederic J. Giordano and Seth I. Allen

On 30 November 2023, Illinois joined¹ the majority of states that recognize that commercial general liability (CGL) insurance covers damage to one part of a construction project caused by construction defects in other parts of the project, abrogating longstanding appellate authority requiring damage to something beyond the construction project itself to trigger coverage. The decision is the most recent in a series of high court decisions expanding the duty to defend construction defect actions and continues a positive trend for policyholders.²

In a unanimous decision, the Illinois Supreme Court held that property damage caused by inadvertent construction defects can be caused by an "accident" and may therefore constitute an "occurrence" triggering a policyholder's right to a defense.³ In doing so, the court firmly rejected the argument that damage to a project caused by faulty workmanship can never be an "accident" because it is the "natural and probable risk of doing business."⁴ This is an argument that many insurers rely on to disclaim their duty to defend against construction defect claims. This holding is a welcome win for real estate developers, general contractors, and commercial policyholders seeking insurance coverage for damage caused by the faulty work of their subcontractors.

The insurance coverage dispute arose in connection with a lawsuit filed by the homeowners association of a recently completed townhome development, Church Street Station Townhome Owners Association (the Association), against the developer of the townhome community, M/I Homes of Chicago, LLC (M/I Homes). The Association alleged that the townhomes were built with significant exterior defects (the faulty workmanship).⁵ The Association sought damages for the repair or replacement of the faulty workmanship, which it alleged had also caused physical injury to the townhomes after they were completed.⁶

The insurer, Acuity, denied M/I Homes coverage for the lawsuit on the ground that the damages the Association sought were for faulty workmanship, not for "property damages" caused by an "occurrence" (i.e., an accident) as defined in the CGL policy. Acuity then commenced an action for a declaratory judgment that it did not have a duty to defend M/I Homes, relying on Illinois Court of Appeal cases holding that faulty workmanship is not an "accident" because it is the "natural and ordinary consequence of" doing business. The trial court granted summary judgment in favor of Acuity...