Hard Hat Case Notes

• Date: 01 April 2024
• Author: Hugh D. Brown and Lauren P. McLaughlin

Forum on Construction Law The Construction Lawyer Volume 43, Number 2 HARD HAT CASE NOTES By Hugh D. Brown and Lauren P. McLaughlin Illinois Shifts Interpretation of CGL Policies to Align with Majority of Jurisdictions When interpreting commercial general liability (CGL) policies, Illinois courts have long held that “property damage” caused by an “occurrence” is limited to damage to some property other than that being constructed. This approach derived from the increasingly disfavored “business risk” doctrine, which limits coverage for construction defects so as to not cast insurers as sureties, and/or to disincentivize negligent performance. In Acuity v. M/I Homes of Chicago, LLC , however, the Illinois Supreme Court departed from the state’s traditional approach and held that “property damage” caused by an “occurrence” is properly defined by the language of the applicable CGL policy at issue and without regard to how courts have previously defined the term in past cases. In doing so, Illinois joins the majority of jurisdictions that rely on the plain language of the insurance policy without reference to judicially created rules such as the business risk doctrine. In the underlying dispute, a townhome development association’s board of directors (the Association) filed suit on behalf of the townhome owners against M/I Homes (the developer) for breach of contract and breach of the implied warranty of habitability. The Association alleged defects, including leaky roofs and damage to “other property” (such as damage to the interior of units caused by the leaky roofs). M/I Homes sought defense from its CGL insurer Acuity and pursuant to the terms of its policy. Acuity, however, took the position that it did not need to defend M/I Homes for two primary reasons. First, Acuity stated that the underlying complaint failed to properly allege “property damage” caused by an “occurrence” because the alleged damage consisted only of damage to the townhomes, not damage to “other property.” Second, Acuity stated that the damage was a “natural and ordinary consequence” of the defective work, rather than an “accident,” and therefore did not qualify as an “occurrence” under the policy, which defined “occurrence” as an “accident.” M/I Homes countered that the Association’s broad allegation of damage to “other property” constituted “an allegation of property damage beyond the repair and replacement costs of the faulty construction work.” Thus, according to M/I Homes, “property damage” caused by an “occurrence” had been pled sufficiently and triggered defense obligations under the policy. The trial court ruled in favor of Acuity, specifically citing the occurrence/accident argument as persuasive. On appeal, the parties agreed that under Illinois law, “property damage” caused by an “occurrence” required that the underlying complaint allege property damage to something beyond the townhome construction project itself. The appellate court questioned this shared understanding, noting that it arose not out of the language of the insurance policy, but from appellate case law interpreting CGL policies. The appellate court ultimately reversed the trial court decision, favoring an interpretation of the policy and complaint where the Association’s broad allegation of damage to “other property” was sufficient to find Acuity had a duty to defend. On cert, the Supreme Court of Illinois focused its analysis on the plain terms of the CGL policy and the allegations in the underlying complaint. Under this line of inquiry, “if the facts alleged fall potentially within the policy’s coverage, the insurer is obligated to defend its insured.” After looking at the policy terms at issue, the court determined that coverage depends upon whether there has been an allegation of “property damage” that is caused by an “occurrence” within the meaning of the CGL policy language. Two aspects of the court’s decision merit specific consideration. Published in The Construction Lawyer Volume 43, Number 2, ©2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any...