The Illinois Supreme Court has ruled insurers may need to defend home builders and other general contractors as additional parties under subcontractors’ policies when managing certain injury claims, as insurers can't argue building defects amount to uninsurable "business risks."
At issue is a townhome development in suburban Hanover Park.
Neumann Homes started the project before M/I Homes assumed Neumann’s assets and liabilities. M/I built additional homes and sold all the properties, after which a homeowners’ association filed a breach of contract lawsuit, alleging subcontractors used defective materials, had faulty workmanship and didn’t comply with building codes.
Faced with that litigation, M/I demanded Acuity get involved in the defense, citing its status as an additional insured on a commercial general liability policy issued to H&R Exteriors, an M/I subcontractor.
Acuity responded by seeking a declaratory judgment that it had no duty to defend M/I. It later amended that motion to argue the association’s lawsuit didn’t allege “property damage” stemming from an “occurrence” as the policy defines, prompting M/I to file a counterclaim seeking affirmation of the duty to defend because the association’s allegations do fall within the policy’s provisions.
A Cook County court judge ruled in favor of Acuity, finding the property damage was an ordinary consequence of construction, not an accident per policy terms. On appeal, the parties agreed state insurance law would only apply if the association’s complaint alleged damage to property beyond the townhomes, with M/I further arguing the lawsuit met that standard.
However, the appellate panel noted that agreement stemmed not from Acuity’s policy, but rather from established appellate readings of commercial general liability policies. It then raised several questions deemed suitable for review by the Illinois Supreme Court, seeking “clarity to these nuanced issues of coverage under CGL policies in construction litigation.”
Without answering those questions, the appellate panel found the potential for coverage of M/I under H&R’s Acuity policy and said that was sufficient to trigger coverage. Acuity appealed, and several trades organizations filed briefs supporting both parties.
Among those were the Home Builders Association of Illinois, which asked the court to side with M/I's position.
Justice Mary Jane Theis wrote the court’s unanimous opinion, filed Nov. 30.
Citing “the current legal landscape and the unsettled nature of the law in this area,” the court examined insurers’ duty to defend as well as the commercial policies.
“The first task is to determine whether the allegations in the underlying litigation are potentially covered by the language of the insurance agreement’s initial grant of coverage,” Theis wrote. “If it is evident that the policy does not potentially cover the claim asserted, the analysis is complete. If the claim potentially satisfies the initial grant of coverage, the court then examines the various relevant exclusions to determine if any of them limit coverage. If an exclusion applies, the court then looks to see whether any exceptions to that exclusion would apply to reinstate coverage. Generally, the insured bears the burden of proving the claim is covered under the initial grant of coverage, and the insurer bears the burden of proving an exclusion applies.”
Specific to M/I and Acuity, Theis continued, the policy’s reference to “property damage” and “an occurrence” are essential. The court said the homeowners’ allegations of water damage resulting from leaks and moisture damage attributed to defective materials and faulty exterior work “plainly constitutes physical injury to tangible property.”
What matters then is if the association alleged an “occurrence,” which the policy defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Theis noted the policy doesn’t define the term “accident,” but neither has the Supreme Court in context of construction litigation and property damage.
However, Theis continued, an analysis of rulings at several judicial levels, as well as dictionary definitions, established that “accident” in Acuity’s policy “reasonably encompasses the unintended and unexpected harm caused by negligent conduct.” As such, and because the association didn’t allege intentional performance of substandard work, neither the defects nor the water damage were “intended, anticipated or expected.”
Whereas Acuity argued such an outcome “is always the natural and probable risk of doing business,” Theis wrote, and while acknowledging commercial general liability coverage isn’t intended to cover repair or replacement of defective work, the policy’s exclusion section expressly addresses business risk.
“A subcontractor’s defective work that results in property damage to the completed project may be covered and that coverage is ultimately determined by operation of the various exclusions and exceptions,” Theis wrote. “To ultimately resolve whether Acuity has a duty to defend, we think it best to remand to the trial court for further consideration.”
With the complaint back in circuit court, Theis conclude, each side can make arguments about the association’s allegations and the policy’s exclusions, and a judge may address other challenges, including whether the association has standing.
Following the ruling, the Homebuilders Association of Illinois said it was pleased by the state high court's decision.
"Builders buy liability insurance -- and pay substantial premiums -- to protect themselves against claims for unintended and unexpected property damage caused by inadvertent construction defects that can occur in the homes they build, consequently, the Home Builders Association of Illinois is pleased that the Supreme Court of Illinois, in its well-reasoned decision, has joined the majority of jurisdictions in holding that unexpected and unintended physical injury to tangible property arising out of defective work amounts to an occurrence of property damage under a CGL policy, and that the Court rejected the notion that property damage arising out of defective workmanship amounts to an uninsurable 'business risk,' the cost of which is to be borne by the insured builder itself," the HBAI said in a statement provided to The Cook County Record.
Acuity was represented in the case by attorneys Joseph P. Postel, of Lindsay Pickett & Postel, of Chicago; and Glenn F. Fencl and Garrett L. Boehm Jr,m of Johnson & Bell, of Chicago.
M/I Homes was represented by attorneys Eric P. Sparks, Mark D. Brookstein and Alison L. Constantine, of Gould & Ratner LLP, of Chicago.