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When a loss occurs on a job site, one of the initial questions stakeholders raise is whether the incident will be covered by insurance.

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According to a new ruling from the Illinois Supreme Court (Acuity, a Mutual Insurance Co. v. M/I Homes of Chicago LLC, 2023 IL 129087 (“Acuity”)), construction defects may now constitute a covered event under commercial general liability (“CGL”) policies, with coverage extending to named additional insured parties (like the project owner).<a href="#_ftn1" id="_ftnref1">[1]</a> This decision deviates from the previous position taken by Illinois courts that CGL policies do not cover faulty workmanship.

Disputes commonly arise in construction projects as delays occur and costs increase, which project participants seek to offload to one another, but redress for defective work is critical to achieve project completion. As such, a firm understanding regarding parameters of project insurance policies, their exclusions, and when the insurer maintains the duty to defend is essential to proper project management. Before Acuity, Illinois state courts maintained a steady judicial philosophy on this concept for many years, where “property damage caused by an occurrence exist[ed]” when “a subcontractor’s negligence cause[d] something to occur” to parts of a project that are outside of the subcontractor’s scope of work.<a href="#_ftn2" id="_ftnref2">[2]</a> However, the Illinois Supreme Court’s decision in Acuity now creates new opportunity for recovery under insurance policies for construction defect claims and sets forth a straightforward analysis for determining same.<a href="#_ftn3" id="_ftnref3">[3]</a>

In Acuity, homebuilder M/I Homes took over a residential townhome development project, proceeding to construct additional homes and sell all the properties.<a href="#_ftn4" id="_ftnref4">[4]</a> Thereafter, the townhome owners’ association sued M/I Homes, alleging that its subcontractors caused water damage from their use of “defective materials, conducting faulty workmanship and failing to comply with applicable building codes” which caused “‘physical injury to the [t]ownhomes.’”<a href="#_ftn5" id="_ftnref5">[5]</a> M/I Homes demanded defense from Acuity as the additional insured on a CGL policy held by a subcontractor on the project.<a href="#_ftn6" id="_ftnref6">[6]</a>

The Illinois Supreme Court employed a two-step analysis in its holding that M/I Homes may be covered under the CGL policy: (1) Determine whether the work is potentially covered by the insurance policy’s initial grant of coverage based on its plain language, and if so, (2) review relevant exclusions and exceptions under the policy to establish if there are any limitations or reinstatements of coverage.<a href="#_ftn7" id="_ftnref7">[7]</a>

For the first step, the court reviewed the initial grant of coverage to determine whether the construction defects involved “property damage” caused by an “occurrence.” Under the language of the CGL policy, “property damage” may include water damage to units due to “leaks and/or moisture damage that arose from the subcontractors’ faulty exterior work and defective materials.”<a href="#_ftn8" id="_ftnref8">[8]</a> Further, the court explored whether an “occurrence” exists as defined under the CGL policy.<a href="#_ftn9" id="_ftnref9">[9]</a> Because an “occurrence” under the CGL policy involves an “accident”, the court then sought to establish the meaning of an “accident” because the term lacked a formal definition in the policy itself.<a href="#_ftn10" id="_ftnref10">[10]</a> Upon a plain reading of the dictionary definition supported by case law, the court held that when negligent conduct causes “unintended and unexpected harm”, an “accident”, and thus an “occurrence” exists, which may be insurable under the CGL policy.<a href="#_ftn11" id="_ftnref11">[11]</a> The court ruled that each happened in the instant case of Acuity.

For the second step, if a claim initially qualifies as a covered and insurable event the analysis then entails whether any explicit policy exclusions and exceptions apply, which may limit or reduce coverage.<a href="#_ftn12" id="_ftnref12">[12]</a> The court in Acuity moved to this step; however, it did not rule on the issue. Instead, the court remanded the case to the trial court to examine the exclusions and exceptions under the CGL policy and whether they applied to the underlying allegations.<a href="#_ftn13" id="_ftnref13">[13]</a>

This case introduces a mechanism opening the door for insurance coverage in claims of faulty workmanship, previously deemed outside the scope of CGL policies. This may apply even where said claims do not fundamentally constitute an “accident” or if the work extends beyond that of the insured’s scope. Policyholders and additional insureds must understand the contents of their policies and their available rights and protections. Though only applicable in Illinois state courts, the new analysis regarding the scope of CGL policies following Acuity may persuade other states to refine their legal analysis of construction defect claims and an insurance carrier’s attendant obligations, including in Wisconsin.

Michael Best has extensive experience assisting developers, property owners, contractors, and other project stakeholders with managing construction‑related risks and defect issues. Our team regularly evaluates insurance coverage and handles disputes involving insurers or other project participants. Please contact us if you need support navigating these matters.

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<a href="#_ftnref1" id="_ftn1">[1]</a> See Acuity, a Mut. Insurance Co. v. M/I Homes of Chicago, LLC, 2023 IL 129087, 473 Ill. Dec. 486, 234 N.E.3d 97 (“Acuity”).

<a href="#_ftnref2" id="_ftn2">[2]</a> Id. at ¶ 24 (citing Acuity v. 950 West Huron Condominium Ass’n, 2019 IL App (1st) 180743).

<a href="#_ftnref3" id="_ftn3">[3]</a> Id. at ¶ 22.

<a href="#_ftnref4" id="_ftn4">[4]</a> Id. at ¶ 3.

<a href="#_ftnref5" id="_ftn5">[5]</a> Id. at ¶ 5.

<a href="#_ftnref6" id="_ftn6">[6]</a> Id. at ¶ 8.

<a href="#_ftnref7" id="_ftn7">[7]</a> Id. at ¶ 33.

<a href="#_ftnref8" id="_ftn8">[8]</a> Id. at ¶ 38.

<a href="#_ftnref9" id="_ftn9">[9]</a> Id. at ¶ 41.

<a href="#_ftnref10" id="_ftn10">[10]</a> Id.

<a href="#_ftnref11" id="_ftn11">[11]</a> Id. at ¶¶ 42-47.

<a href="#_ftnref12" id="_ftn12">[12]</a> Id. at ¶ 33.

<a href="#_ftnref13" id="_ftn13">[13]</a> Id. at ¶ 63.

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