Tamara Bruno and William Miller | Policyholder Pulse Blog
The Illinois Supreme Court handed down a big win for policyholders just in time for the holidays. In Acuity v. M/I Homes of Chicago, LLC, the court joined the mainstream of jurisdictions and reversed years-old precedent that severely limited policyholders’ ability to tap their liability coverage for construction defect and faulty workmanship claims.
In prior years, a number of appellate courts in Illinois ignored the common-sense interpretation of the industry-standard language included in many general liability policies, instead applying a “scope of work” rule holding that in order for there to be “property damage” caused by an “occurrence”—standard terms found within the coverage grant in many liability policies, necessary to trigger coverage—there must be an allegation of damage to something outside the scope of the construction project. In other words, these courts found that a subcontractor’s faulty work that damaged the work of other parts of the project was not sufficient to trigger coverage—there had to be damage to property that was not within the scope of the construction project at all.
In Acuity, the insurer relied in part on that prior precedent to deny coverage. The dispute arose when M/I Homes, a general contractor and developer of a residential townhome project located in Hanover Park, Illinois, was named in a suit filed by the townhome homeowner’s association, alleging that defects in the construction work performed by M/I Homes’ subcontractors caused water intrusion resulting in damage to the townhomes and other property. M/I Homes tendered the suit to Acuity and demanded a defense as an additional insured under a liability policy issued by Acuity to one of M/I Homes’ subcontractors on the project as named insured. Acuity denied its defense obligation, instead filing a declaratory judgment action, in which M/I Homes also filed a counterclaim.
On motions for summary judgment, the trial court sided with Acuity, finding that, although the lawsuit against M/I Homes broadly alleged that the construction defects at issue caused damage to “other property,” the faulty workmanship was not an “occurrence” because it was a “natural and ordinary consequence” of the construction project and not an “accident” as required by the policy language, and ruling that there was no alleged damage to property outside the townhome project. An intermediate appellate court reversed the trial court’s decision, finding that the precedent applied failed to adhere to principles of contract interpretation.
The Illinois Supreme Court agreed, holding that the alleged water intrusion and resulting damage to the townhomes constituted “property damage,” and that the alleged construction defects also constituted an “accident,” and therefore an “occurrence,” within the plain meaning of the policy. The court further found that the “scope of work” rule, dictating that coverage required allegations of damage beyond the townhome project, was “erroneous” and was not grounded in the policy language, dispensing with Acuity’s lead argument. The court then remanded the case for further review pertaining to other policy provisions, that were not at issue on appeal.
The upshot of Acuity is that, under general liability policies that incorporate industry-standard definitions of “property damage” and “occurrence,” insurers are obligated to defend Illinois policyholders when there are allegations of construction defects or faulty work that cause resulting property damage, even if that damage is limited to other aspects of the construction project itself. Policyholders that have received coverage denials from their liability carriers on construction defect and faulty workmanship claims based on the discarded “scope of work” rule should review their coverage correspondence and contact their insurers, and should retain experienced coverage counsel to help ensure they are obtaining the insurance coverage they bargained for.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.