On November 30, 2023, the Illinois Supreme Court, in Acuity v. M/I Homes of Chicago, LLC (Acuity), handed a victory to policyholders seeking coverage for construction defect and faulty workmanship claims under their general liability (“GL”) insurance. For years, the Illinois courts interpreted GL policies in a way that denied coverage for such claims because those courts would only find the “property damage” and “occurrence” needed to trigger coverage if the damage went beyond the scope of the project, i.e., damage to other real property.
The issue in Acuity was whether Acuity had a duty to defend its additional insured, M/I Homes of Chicago under a subcontractor’s GL policy, in connection with an underling lawsuit brought by a townhouse owners’ association for breach of contract and breach of implied warranty of habitability that resulted in water damage to a townhome project. In holding that Acuity had a duty to defend, the Illinois Supreme Court aligned Illinois law with the modern trend followed by most other states and acknowledged that there can be coverage for claims arising out of inadvertent defective construction under a standard GL policy.
In its analysis, the Illinois Supreme Court abandoned the notion that defective construction could never be considered an “accident” and, therefore not an occurrence. The Court held, for the first time, that an inadvertence construction defect is an occurrence. Note that the Acuity police defined occurrence in part as an accident. The court interpreted accident to mean an unintended or unexpected result through carelessness, unawareness, or ignorance. Because the complaint did not allege the subcontractors intentionally performed substandard work, by policy definition, the damage resulted from an occurrence.
The court noted that the parties appeal focused on the initial grant of coverage and did not seek to address policy exclusions. The court further noted that once an occurrence of property damage is found, exclusions within the policy will ultimately determine coverage. Standard property exclusions include that part of property damage upon which work is being performed out of which the damage arises; that part of real property that must be repaired or replaced because of incorrect work; property damage to the insured’ work subsequent to completion; or impaired property that has been physically injured. The Illinois Supreme Court remanded the case to the trial court to determine issues relating to applicability of those exclusions to the facts in Acuity.
Key Takeaways:
- The Acuity decision means that insurance policies with similar provisions, insurers now owe a duty to defend Illinois policyholders when construction defects of faulty workmanship cause physical damage within the scope of a project, unless an exclusion applies.
- If your GL carrier recently declined to cover a claim based on allegations of defective construction, that declination may no longer be valid, and coverage may now be available.
- At a minimum, you may now be entitled to recover your costs of defenses.
- Although Acuity is a win for the construction industry, the Court’s opinion makes it clear that the general rule, which is even though there may be coverage there could be a policy exclusion, e.g., the “your work” exclusion, could narrow or eliminate coverage.
Stay tuned for our next blog post to understand how this decision could impact insurability and rates.
Contact an MMA advisor to ensure you are properly protected on your next project.
