In a landmark decision, on November 30, 2023 the Illinois Supreme Court set forth a new legal framework for analyzing coverage for construction defect claims under Commercial General Liability (CGL) policies. In Acuity v. M/I Homes of Chicago, LLC, 2023 IL 129087, __ N.E.3d __ (2023) (Acuity), the court overturned the longstanding rule that damage to third-party property is required to establish “property damage” caused by an “occurrence.”¹ Instead, the court held that “property damage” to an insured’s faulty work can be an “accident” and, therefore, constitutes an “occurrence” under a liability insurance policy’s initial grant of coverage.

This ruling was in the context of a subcontractor carrier’s obligations to the general contractor under an additional insured endorsement. The case involved a residential townhome development in Hanover Park, Illinois. The HOA sued the developer alleging that faulty work and defective materials resulted in water intrusion and other damages to the units.

Notably, the Illinois Supreme Court’s decision replaces prior Illinois law that had held repair or replacement of the insured’s own defective work did not constitute an occurrence in a standard CGL policy.

The key takeaway of the Acuity opinion is that insurers can no longer disclaim the duty to defend in construction defect cases on the ground that there is no “property damage” caused by an “occurrence,” even where the only damage alleged is to the named insured’s work.

In the ruling, the court left open the possibility that the business risk exclusions can still operate to limit coverage.

Insurers will now need to carefully focus their coverage analysis on whether the business risk exclusions and other coverage limitations are applicable to a project, and to watch for further exposure due to additional insured obligations.

With the Acuity decision, Illinois now joins the majority of states finding “property damage that results inadvertently from faulty work can be caused by an ‘accident’ and therefore constitute an ‘occurrence’.”²

This policyholder win further solidifies the trend in courts finding construction defect claims constitute “property damage” caused by an “occurrence," as we at Gen Re have been tracking for many years.

Further information as to underwriting and claims solutions for construction risks can be found with our dedicated Contractors team. Please reach out to your Gen Re representative to learn more.

Endnotes

1. Stoneridge Dev. Co., Inc. v. Essex Ins. (IL Ct of App., 2008); CMK Dev. Corp. v. West Bend Mut. Ins. Co. (IL Ct of App, 2009).
2. Acuity, conclusory paragraph 65.