Another state supreme
court finds coverage under a CGL
[T]he court reasoned that,
by applying dictionary definitions to
certain terms not defined in the policy, inadvertent construction
defects can accidentally cause property damage and thus qualify for CGL coverage.
By Joseph S. Harrington, CPCU
Score another win for insured contractors in their long-running contest with insurers over coverage for construction defects under a standard commercial general liability (CGL) policy.
In November 2023, the Illinois Supreme Court ruled in favor of a home developer seeking coverage for property damage claims lodged by residents of a townhome community.[i] A suit filed on their behalf by their homeowners association alleged that use of faulty materials resulted in the buildup of moisture which damaged their dwelling units.
Those residents were clearly advised about insurance coverage, as the complaint specified that the defendant developer neither expected nor intended to cause the defects or any resulting damage, thus preserving the possibility for coverage. That wasn’t enough for the trial court, however, which upheld an insurer’s denial of coverage for the developer as an additional insured under a subcontractor’s policy.
According to the trial court, the complaint did not allege property damage due to an “occurrence,” but complained of defects that were a “natural and ordinary consequence” of the work, and thus not accidental. Furthermore, there were no allegations of damage other than to the townhome project itself, making the claim subject to the exclusion for damage to an insured’s own work.
Inadvertent = accidental?
An appeals court agreed, but the Illinois Supreme Court did not. For one thing, even if the construction defects themselves were not considered to be insured damage, water damage that arose from them certainly was.
More fundamentally, the court reasoned that, by applying dictionary definitions to certain terms not defined in the policy, inadvertent construction defects can accidentally cause property damage and thus qualify for CGL coverage.
In a twist likely to infuriate policy drafters, the court asserted that the presence of business risk exclusions in CGL policies logically infers that there must be some coverage for damage to a part of a project the insured is working on.
“To hold that all construction defects that result in property damage to the completed project are always excluded would mean that the exclusions in the policy related to business risk become meaningless,” the court ruled. “Business risk exclusions contemplate that some construction defects that result in property damage are covered and some are not.”
Type of property doesn’t matter
The Illinois ruling makes for at least the seventh time a state supreme court has found that a construction defect can qualify as an insured occurrence under a CGL policy. As a ruling from a high court in a large state, it may have precedential value rivaling that of two important state supreme court rulings from 2007, both of them also involving housing developers.
One of them, in Texas, overturned a lower court which held that the defects at issue constituted an economic loss arising from a violation of contract—i.e., failing to build homes as promised—rather than property damage.[ii] In the words of the lower court, the defendant developer “was sued for breaking promises, not for breaking property.”
Maybe so, but the Texas Supreme Court also saw that unintended construction defects could constitute an “accident” or “occurrence” under a CGL policy, and that allegations of damage to a home or loss of its use could constitute “property damage,” thus triggering the duty to defend.
In a Florida case, the insurer had conceded coverage for damage to personal property arising indirectly from a construction defect (water leaks), but denied coverage for structural damage that was embedded in the insured’s work.[iii]
The insurer must have thought that approach was reasonable, even generous, but the Florida Supreme Court turned the insurer’s logic against the insurer. Whether property damage is caused by a covered accident or occurrence does not depend on the type of property, the court reasoned. If the personal property damage qualified for coverage, so must the building property coverage.
Agents and brokers who write construction accounts are aware of the “subcontractor exception,” under which a contractor’s CGL will treat construction defects or faulty workmanship as insured occurrences for the named insured.
The rulings described above suggest something more, an expansion of the scope of coverage for the named insured’s own work, at least from the carrier standpoint. Are form revisions in the offing, or will carriers accept more risk
[i] Acuity v. M/I Homes of Chicago, LLC, 2023 IL 129087 (Nov. 30, 2023)
[ii] Lamar Homes, Inc. v. Mid-Continent Cas. Co., No. 05-0832, 242 S.W.3d 1 (2007)
[iii] U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007)
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.