Illinois Supreme Court Applies ‘RTFP!’ Principle to Faulty Workmanship Claims

As reported by attorney Randy Maniloff in his Coverage Opinions newsletter, the Illinois Supreme Court has finally addressed coverage for construction defects, joining what is probably a slight majority of legal jurisdictions in finding that faulty or defective workmanship CAN trigger the insuring agreement of a commercial general liability (CGL) policy. This overturns the vast majority of lower court decisions in Illinois and perhaps the 7th federal district for cases in Illinois, and it may result in the appealing of cases from at least the last decade.

Many jurisdictions around the country have found that faulty or defective workmanship cannot trigger coverage under a CGL policy because such damage is not caused by an “occurrence” nor does damaging your own work constitute “property damage.” I have written for many years that I believe such decisions are poorly decided, based on the precise language of CGL policies rather than generalizations about what liability insurance should or shouldn’t cover.

This is how the ISO CGL policy defines “occurrence”:

“Occurrence” means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

The Merriam-Webster dictionary defines an “accident” to include:

[A]n unforeseen and unplanned event or circumstance.

[L]ack of intention or necessity.

[A]n unfortunate event resulting especially from carelessness or ignorance.

[A]n unexpected happening causing loss or injury which is not due to any fault or misconduct on the part of the person injured but for which legal relief may be sought.

Black’s Law Dictionary suggests

that “accident” means:

[A]n unusual, fortuitous, unexpected, unforeseen or unlooked for event, happening or occurrence; an unusual or unexpected result attending the operation or performance of a usual or necessary act or event … Insurance contract … [a]n accident within accident insurance policies is an event happening without any human agency, or, if happening through such agency, an event which, under circumstances, is unusual and not expected by the person to whom it happens. A more comprehensive term than “negligence,” and in its common signification the word means an unexpected happening without intention or design.

So, the question addressed by most state and federal courts has been, does faulty or defective workmanship trigger coverage (or at least a defense) under a commercial general liability policy? Over the years, courts have split over this, with arguably a slight majority finding that unintentional faulty or defective workmanship DOES trigger coverage under, for example, an ISO CGL policy.

A notable exception to these decisions has been Illinois where both state and federal (7th district) courts have generally found that faulty or defective workmanship does not constitute an “occurrence” under a CGL policy and, thus, does not trigger the insuring agreement. Most of these courts have also held that such claims do not involve “property damage,” as defined by, for example, the ISO CGL policy, unless it is damage beyond the scope of the project or the contractor’s work.

That is no longer the case.

On Nov. 30, 2023, the Illinois Supreme Court, in Acuity v. M/I Homes of Chicago, No. 129087 ruled that unintentional damage arising from faulty or defective work could trigger the insuring agreement of the CGL policy in question if such physical injury “altered in appearance, shape, color or in other material dimension” ANY tangible property.

This does not necessarily mean that the property damage arising from such faulty or defective workmanship is covered by the policy. What the Court has recognized is the very broad insuring agreement of most CGL policies, but also that such potentially broad coverage can then be whittled down by exclusions. According to the Court: “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.”

Many such erroneous decisions have been cited by other courts based on the CGL policy not being a performance bond, something not explicitly addressed in the language of these policy forms. Citing other appellate-level Illinois cases, the Court acknowledged that “[M]uch of our analysis in those cases has been driven less by literal textual construction and more by considering the overall purpose of CGL policies.”

In other words, the Court noted that lower court decisions that required property damage to property beyond the scope of the work performed was not “directly tied to the language of the insurance policy” and that these decisions were based on broad policy considerations as to the “purpose” of CGL policies rather than on the actual language of the insurance contract. The Court is, in effect, repeating my mantra of, “RTFP!” To determine coverage under an insurance contract, you MUST read the actual policy language.

I first made these arguments many years ago in an article entitled “The ‘No Occurrence’ CGL Claim Denial” (you can access the article from my blog in a post entitled “Insuring Faulty Workmanship.”) It has never made any sense to me that unintentional, inadvertent, negligent property damage is not an accident and, thus, not an occurrence.

We’ve all heard stories of contractors, especially following disasters, intentionally performing shoddy workmanship. Such property damage should never trigger the CGL insuring agreement. However, most viable contracting businesses do not engage in this practice and inadvertent damage should trigger the extremely broad CGL insuring agreement.

Again, this doesn’t necessarily mean that the damage is covered. We have to then look to the exclusions section of the policy to determine if there is coverage. For many such claims, the ISO CGL policy either excludes property damage arising from faulty workmanship during ongoing operations (Exclusion j.(6)) or property damage to “your work” arising after operations are completed (Exclusion l.). In the latter, and more commonly litigated claim, there is an exception for work performed by a subcontractor, though ISO has at least two endorsements that can remove this exception.

Congratulations to the Illinois Supreme Court for using logic and actual form language to establish the correct way to determine whether property damage arising from faulty or defective workmanship is covered by a CGL policy.

Topics Claims Illinois