Illinois Supreme Court Expands Insurance Coverage for Construction Defects

On November 30, AGC of America and its Illinois Chapters achieved a major breakthrough as to commercial general liability insurance (CGL) coverage for construction defects under Illinois law with a favorable decision by the state Supreme Court.

Together, AGC of America and its Illinois Chapters have achieved a major breakthrough as to commercial general liability insurance (CGL) coverage for construction defects under Illinois law. The Illinois Supreme Court issued its opinion in Acuity v. M/I Homes of Chicago, LLC, Docket No. 129087 on November 30, 2023. The case involved CGL coverage for construction defects resulting in water damage to a townhome project. In that context, the Supreme Court clarified the law to agree with many state supreme courts that such property damage is an “occurrence” in Illinois. The Supreme Court’s clarification is extremely favorable to the construction industry and was supported by an amici curiae brief sponsored by AGC of America, National Association of Home Builders, American Subcontractors Association and local chapters in Illinois. 

For over twenty years, courts in Illinois had interpreted the definitions of “property damage” and “occurrence” in the standard commercial general liability (“CGL”) policy to deny coverage for property damage arising out of defective construction as to the entire construction project itself. Those courts found coverage only in the unlikely event of damage to other real property, and perhaps to personal property of project owners. In reality, this amounted to little, if any coverage for Illinois insureds, and Illinois has lagged behind numerous other jurisdictions in upholding coverage for unexpected and unintended property damage arising out of faulty workmanship by the insured. The Supreme Court of Illinois noted that such a narrow view of coverage is unsupported by the policy language, and it 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. 

The court further opined that once an occurrence of property damage is found, resort must be had to the property damage exclusions within the policy to determine ultimate coverage, including exclusions relating to that particular part of property damage upon which work is being performed out of which the property damage arises; that particular part of real property that must be repaired or replaced due to incorrect work by the insured; property damage to the insured’s work after completion (subject to an exception for work performed by the insured contractor’s subcontractors); or impaired property or property that has not been physically injured. In doing so, 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 contractor itself. Aligning itself with the majority of jurisdictions, the Court concluded that uninsured business risks are to be sorted out through application of the property damage exclusions. In that regard, it remanded the case to the trial court to determine issues relating to the applicability of those exclusions to the facts before it. 

All in all, AGC, NAHB, and ASA members had a good day before the Illinois Supreme Court. That success is the culmination of nearly twenty years of advocating before numerous state and federal courts throughout the United States on these issues through the filings of amicus curiae briefs. The brief in Acuity v. M/I Homes was primarily authored and filed by Patrick J. Wielinski of Cokinos Young, Dallas, Texas, joined by Clifford Shapiro of Chicago. Patrick and his firm have participated in the filing of such briefs for many years.

The Construction Advocacy Fund of the AGC of America provides the financial resources that the association requires to extend its advocacy into federal and state courtrooms across the country. In conjunction with the association’s legislative, regulatory, and public programs, the association’s litigation program seeks to protect if not enhance the business environment for construction contractors. For more information, please contact AGC’s Leah Pilconis at [email protected].

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