On November 30, 2023, the Illinois Supreme Court issued a decision in the case of Acuity v. M/I Homes of Chicago, LLC, et al., 2023 IL 129087 with significant implications for insurance coverage of construction defects under commercial general liability (CGL) policies.
The Acuity decision stems from a fairly mundane dispute: a homeowners association sued a general contractor for breach of contract arising from alleged construction defects. The general contractor, in turn, brought claims against its subcontractor, and the subcontractor then tendered a claim to its CGL insurer. Acuity, 2023 ILC129087, ¶¶ 1-5. Under the terms of the CGL policy, the subcontractor’s insurance claim hinged on whether the alleged defects constituted “property damage” arising from an “occurrence.” Id. ¶¶ 5, 12-13. Historically, Illinois appellate courts had typically answered that question in the negative, absent some property damage to something other than the project itself. See id. ¶ 22. But in a matter of first impression for the Illinois Supreme Court, the Court ruled in Acuity that construction defects impacting only the project itself can fit within the CGL policy’s definition of “property damage” caused by an “occurrence” and, therefore, may be covered.
The Court began its analysis by acknowledging that “Illinois law has developed from cases that have approached the coverage question based on a myriad of rationales and factors.” Id. ¶ 23. The Court further noted that much of the prior case law “has not been directly tied to the principles of contract interpretation but instead on various policy considerations.” Id. ¶ 25. Rather than follow that line, the Court determined that the “best approach to bringing clarity to these issues is to return to first principles.” Id. ¶ 26. From there, the Court focused its analysis on two key terms typical to many CGL policies: “property damage” and “occurrence.”
First up, property damage. The allegations in Acuity were that defects in the building envelope had allowed water infiltration that caused “water damage to the interior of units,” which the Court ruled “plainly” constituted property damage. Id. ¶¶ 37-39.
Next, the Court turned to whether the property damage resulted from an “occurrence.” As in many CGL policies, the term “occurrence” was defined in this instance as an “accident”—a term not defined in the policy. Id. ¶ 41. Following prior appellate court cases the Court determined that an “accident” is “an unforeseen occurrence, usually of an untoward or disastrous character, or an undesigned, sudden, or unexpected event of an inflictive or unfortunate character.” Id. ¶ 42. Building on this, the Court ruled that the term “occurrence” “reasonably encompasses the unintended and unexpected harm caused by negligent conduct,” id. ¶ 47, which it further ruled includes “inadvertent construction defects,” id. ¶ 48. With this ruling, the Court has announced a significant shift in how Illinois courts should analyze insurance coverage disputes concerning construction defect claims.
The Acuity decision did not fully resolve the case or categorically grant coverage under CGL policies for construction defects—e.g., the Court left open the possibility that policy exclusions could still defeat coverage. Moreover, since the Court’s decision was explicitly built on “first principles” and not policy considerations, it could well have come out differently had the specific policy language been altered even slightly. Nevertheless, the Acuity decision does explicitly diverge from past Illinois Appellate Court decisions on this issue and so breaks new ground.
The full effect of Acuity cannot yet be known; rather, time will tell what impact policy exclusions or alternate CGL policy language will have on the viability of claims like these. But going forward, Acuity will likely be cited by policyholders seeking coverage for construction defects under their CGL policies. It is also likely that further litigation concerning policy exceptions will continue to impact the coverage analysis for both policyholders and insurers.
