The number of decisions nationally that have addressed coverage for construction defects is breathtakingly legion.  Yet, until late last week, there had never been one from the Supreme Court of Illinois.   There are lots of decisions from the Illinois Court of Appeals, which the Supreme Court in Acuity v. M/I Homes of Chicago, No. 129087 (Ill. Nov. 30, 2023) noted, but the issue had never made it to Springfield.

At issue was a condo association that sued M/I, a developer/builder for construction defects, and M/I sought coverage, as an additional insured, under a subcontractor’s policy.  The coverage issues were what you would expect, especially with the court addressing whether faulty workmanship qualifies as an “occurrence.”

Nothing that the lower appellate court decisions are “in flux” – addressing the issue “based on a myriad of rationales and factors -- the Supreme Court decided to cast them aside and start from scratch.  Its motivation for doing so was its observation that the cases were not tied to principles of contract interpretation, but, rather, “policy [not insurance policy] considerations” and the purpose of CGL policies.  “Considering the current legal landscape and the unsettled nature of the law in this area,” the court decided that “rather than merely begin with the parties’ premise, the best approach to bringing clarity to these issues is to return to first principles and apply a disciplined legal framework from which we can arrive at the correct legal analysis and the correct result.”

Taking this “return to first principles” approach, the Illinois Supreme Court concluded that faulty workmanship, to an insured’s own work, can qualify as an “occurrence.”  If insurers do not believe that coverage exists for any such property damage, then the place to turn is the potential applicability of policy exclusions:

“Based on these definitions, we find that the term ‘accident’ in the policies at issue reasonably encompasses the unintended and unexpected harm caused by negligent conduct. Our finding aligns with the commonly accepted definitions of ‘accident’ in CGL policies in other jurisdictions considering construction defects. (citations omitted).

“Applying this definition to the Association’s complaint, it does not claim that the subcontractors intentionally performed substandard work that led to the water damage. Rather, taken in the light most favorable to M/I Homes, the allegations indicate that inadvertent construction defects accidentally caused property damage to the completed townhomes. Neither the cause of the harm—the inadvertent defects—nor the harm—the resulting water damage to the walls of the interior of the units—was intended, anticipated, or expected.

“Acuity asserts 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. We disagree with that claim. We acknowledge Acuity’s argument that ultimately the intent of CGL coverage is not to insure the cost to repair or replace defective work or to recover damages within the named insured’s own scope of work. Nevertheless, as we discuss below, these notions of business risk articulated by Acuity are specifically expressed in the exclusion section of the policy as set forth below; they are not found in the language of the initial grant of coverage.