SDV Insights

Illinois 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’.”

The Illinois Supreme Court’s ruling in Acuity v. M/I Homes of Chicago, LLC¹ (“Acuity v. M/I Homes”) is the first high court ruling in Illinois on this critical coverage issue for contractors. M/I Homes of Chicago, LLC (“M/I Homes”) constructed a townhome development. After completion, water entered the townhomes resulting in interior water damage. The townhome owners’ association filed suit against M/I Homes alleging it, or its subcontractors, caused the damage because it used defective materials, conducted faulty workmanship, and failed to comply with applicable building codes (the “Underlying Action”).  

M/I Homes demanded a defense from Acuity as an additional insured under a general liability policy issued by Acuity to M/I Homes’ subcontractor, H&R Exteriors, Inc. Acuity denied coverage. Acuity then filed suit against M/I Homes seeking a declaration that it did not owe M/I Homes coverage because the Underlying Action did not seek damages for property damage beyond M/I Homes’ work, rather it only alleged economic losses limited to the cost of repairing and replacing defective construction. 

The Court disagreed with Acuity and ruled in favor of M/I Homes. By applying basic principles of policy interpretation to the policy’s insuring agreement, the Court arrived at, what it affirmatively stated to be “the correct legal analysis and the correct result.” 

The Court first looked to the plain language of the Accuity policy. “Occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Because “accident” was not defined within the policy, the Court referred to its well-established definition of “accident”² and then applied it in the context of construction defects. The Court found the Underlying Action sufficiently alleged an “accident,” which, in turn, constitutes an “occurrence.”

Next, the Court reasoned that if all losses because of faulty or defective workmanship can never constitute an “occurrence,” and therefore never trigger coverage under the policy, as Acuity argued, then certain exclusions are rendered meaningless. In dismissing Acuity’s argument, the Court noted that interpreting certain policy language in a way that renders other provisions meaningless is contrary to the well-established policy interpretation principle that all provisions are to be “read together, rather than in isolation, and given effect.” 

Finally, the Court found the Underlying Action was not required to allege property damage to property outside the insured’s scope of work in order to trigger coverage. Requiring damage outside of the insured’s scope of work is not based on the policy language and the Court explicitly stated that any prior cases applying this requirement should no longer be relied upon. 

This policyholder win further solidifies the trend in courts finding construction defect claims constitute “property damage” caused by an “occurrence" under an unamended Insurance Services Offices commercial general liability policy form. Further information on this topic can be found within SDV’s “Defective Construction as an ‘Occurrence’” 50-state survey.

For more information on this topic, contact Anna Perry at APerry@sdvlaw.com.  
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¹ACUITY, a Mut. Ins. Co. v. M/I Homes of Chicago, LLC, et al., 2023 WL 8266295, DKT NO. 129087 (Ill. 2023).
²In Illinois, “the term ‘accident’ in the policies at issue reasonably encompasses the unintended and unexpected harm caused by negligent conduct.”