A long line of Illinois court cases has held that damage caused by construction defects isn’t covered by commercial general liability insurance.
Some rulings cited the scope of work, others focused on the nature of the damage and some hinged on whether the property damage was caused by the general contractor or a subcontractor. In each of those examples, appellate courts have relied on public policy considerations to decide that damage caused by construction defects is a business risk and not an “occurrence” (or accident) that requires coverage by a CGL insurance policy.
Perhaps the lower courts should have looked more closely at the language of those policies.
A unanimous decision released Thursday by the Illinois Supreme Court calls the reasoning behind many of the decisions into question. The high court ruled that damage caused by the shoddy work of a subcontractor may trigger coverage under a CGL policy — at least sometimes.
The high court said the premise that property damage to a project that an insured contractor is building can never be a covered occurrence is erroneous.
“To the extent that prior appellate court cases relied upon considerations outside the scope of the insuring agreement’s express language, that analysis, which is not tied to the language of the policy, should no longer be relied upon,” the opinion written by Justice Mary Jane Theis says.
Acuity, a mutual insurance company, sold a commercial general liability insurance policy to H&R Exteriors, a subcontractor on a townhouse project managed by M/I Homes in the Chicago suburb of Hanover Park. M/I filed a claim asking Acuity to defend it after it was sued by the homeowners association for water damage to the interiors of units, which was allegedly caused by H&R’s defective construction.
Acuity denied the claim, saying the alleged damage is the ordinary consequence of defective construction, which can’t be a covered “occurrence” under a commercial liability policy.
The circuit court in Chicago granted a summary judgment motion filed by Acuity. The court said that damage to property other than the townhouse project itself could be covered, but damage to the townhouse project was not an occurrence.
1st District Appellate Court disagreed and ruled in favor M/I. The appellate panel’s opinion called into question other appellate court decisions that damage caused by construction defects isn’t covered by CGL insurance, saying most of those rulings were supported by public policy arguments rather than the wording of the policies.
Acuity appealed to the Supreme Court. Dueling amicus briefs were filed by groups representing insurers and general contractors.
A brief written primarily by Patrick J. Wielinski on behalf of the Associated General Contractors of America and several other construction groups, urged the Supreme Court to look at policy language when deciding the case instead of public policy.
Wielinski, with Cokinos Young in Dallas, wrote most of the court decisions that favored insurers were based on standard policy form language written in 1966 and 1973. He said Acuity’s CGL policy used the standard form written in 1986 which included a “subcontractor exception” that expanded coverage “in order to sell policies and collect additional policies.”
The Supreme Court’s opinion noted the subcontractor exception in its opinion. The court also pointed out other exclusions in the policy that restored coverage to “your work” (meaning the general contractor’s project) that otherwise would be excluded.
“To ultimately resolve whether Acuity has a duty to defend, we think it best to remand to the trial court for further consideration,” the court said.
Policyholder attorney Adrienne Kitchen, an associate with Reed Smith in Chicago who was not involved with the case, said the decision represents “a major win” for policyholders.
“For years, the lower courts (in Illinois) have basically gutted CGL policies for construction defects,” she said.
Kitchen said the series of court decisions that found CGL insurance cannot cover damage caused by construction defects is a legal trend unique to Illinois. In fact, she said, state supreme courts in Florida, Texas and Colorado have each moved in the opposite direction.
In 2007, the Texas Supreme Court specifically rejected an argument that commercial liability policies don’t cover damage caused by construction defects because other lines of insurance provide that protection.
“The CGL policy covers what it covers,” the Texas court said in Lamar Homes v. Mid-Continent Casualty Co. “No rule of construction operates to eliminate coverage simply because similar protection may be available through another insurance product.”
Kitchen said the Illinois Supreme Court’s analysis of the text of the insurance policy overrules years of lower court rulings that relied on other considerations.
“Importantly, Illinois now joins other jurisdictions in its holding – that to find there has been property damage or an occurrence does not require damage to other property,” she said. “Property damage exists so long as there is physical injury to tangible property, including loss of use where physical injury is an alteration in appearance, shape, color or other material dimension.”
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