April 04, 2019

Illinois Appellate Court Rejects Federal Insurance Coverage Analysis, Finds Duty to Defend Against Construction Defect Allegations

On March 29, 2019, the Illinois Appellate Court issued an opinion clarifying when a duty to defend against construction defect allegations exists under a subcontractor’s commercial general liability (CGL) policy. The decision reflects a broader shift in how courts have interpreted claims of faulty workmanship under CGL policies.

Case Background and Trial Court Decision

In Acuity Insurance Company v. 950 West Huron Condominium Association, 2019 IL App (1st) 180743, two different CGL insurance carriers reached opposite coverage determinations when their insured, a carpentry subcontractor, was sued for allegedly performing defective work on a condominium building, leading to property damage resulting from water infiltration.

Acuity denied coverage and filed a declaratory judgment action claiming it did not owe the subcontractor, Denk & Roche Builders, Inc. a duty to defend or indemnify it in the underlying defect suit. Acuity argued the underlying suit could not trigger its defense obligation because there was no “occurrence” as required for coverage under the policy. To support its position, Acuity offered several cases which held damages that are the natural and ordinary consequence of poor workmanship are not considered an occurrence under a CGL policy in Illinois.

Cincinnati Insurance Company, which had insured the carpenter for the policy period immediately after Acuity, agreed to defend Denk & Roche and did so through settlement of the underlying claim. Cincinnati then intervened in Acuity’s declaratory judgment action and sought contribution from Acuity.

In a series of rulings on dispositive motions, the trial court sided with Acuity on the basis that faulty workmanship does not give rise to an “occurrence.”

Appellate Court Decision

The appellate court reversed, finding Acuity did owe a duty to defend, and remanded the case for further proceedings to determine the amount of contribution owed to Cincinnati for the underlying defense and settlement. The appellate court observed that the coverage question hinged upon the interpretation of what is meant by “the project” in prior Illinois cases.

In reaching its decision, the appellate court rejected a contrary coverage analysis performed by Judge Jorge Alonso in a federal lawsuit, Acuity v. Lenny Szarek, Inc. In Lenny Szarek, the federal court held that “[d]amage to a structure that results from its defective construction is…the natural consequence of faulty workmanship and not caused by an ‘occurrence’ within the meaning of a CGL policy, regardless of whether the insured contractor is responsible for all or just a portion of the building.” But in a case like Lenny Szarek where the federal court only has what is known as diversity jurisdiction, the court is obligated to apply Illinois state law, and if that law is unclear, determine how the state’s highest court would potentially rule on the matter. The 950 West Huron Court took the opposite view of Illinois law, finding that when the underlying complaint alleges a subcontractor’s negligence caused damage to a part of the project outside of the subcontractor’s scope of work, then that is sufficient to allege an occurrence under a CGL policy.

Faulty Workmanship, ‘Occurrence’ Requirement and CGL Policy Coverage

950 West Huron follows what could be considered a growing trend of United States courts holding that faulty workmanship, even if it only results in damage to the work itself, may meet the “occurrence” requirement in a CGL policy. In the past 15 years, Florida, Texas, Tennessee, Arizona, and Indiana, just to name a few, have all found that faulty workmanship can be considered an occurrence under a CGL policy. This trend has even led certain states to pass legislation regarding this issue. For example, in 2011, the South Carolina legislature passed a bill that defined occurrence for the purposes of a CGL policy to include “property damage or bodily injury resulting from faulty workmanship, exclusive of faulty workmanship itself.” S.C. Code Ann. § 38-61-70. The idea that faulty workmanship can be considered an occurrence under a CGL policy — and sufficient to trigger a duty to defend — is now a majority position in the United States courts.

Until this decision, Illinois appeared to fall on the other side of the debate and generally held, with a few exceptions, that faulty workmanship is not an occurrence under a CGL policy. Now, an insurer’s duty to defend in Illinois may be triggered by allegations of faulty workmanship which damages something outside of the scope of a subcontractor’s “project” (or the scope of its own work). This clarification will surely be welcomed by Illinois subcontractors and those made additional insureds under their CGL policies, as they may find coverage for ongoing defect allegations that may not have previously been apparent.

For more on this topic, or for additional citations, see 8 Bruner & O'Connor On Construction Law §11:212-216 or visit OnConstructionLaw.com.

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