Acuity v. M/I Homes of Chi.

234 N.E.3d 97

2023 IL 129087

ACUITY, a Mutual Insurance Company, Appellant,

v.M/I HOMES OF CHICAGO, LLC, et al. (M/I Homes of Chicago, LLC, Appellee).

(Docket No. 129087)

Supreme Court of Illinois.

Opinion Filed November 30, 2023

Rehearing Denied January 22, 2024

Appeal from the Appellate Court for the First District; heard in that court on appeal from the Circuit Court of Cook County, the Hon. Allen P. Walker, Judge, presiding.

Joseph P. Postel, of Lindsay, Pickett & Postel, LLC, and Glenn F. Fend and Garrett L. Boehm Jr., of Johnson & Bell, Ltd., both of Chicago, for appellant.

Eric P. Sparks, Mark D. Brookstein, Alison L. Constantine, and Patrick J. Johnson, of Gould & Ratner LLP, of Chicago, for appellee.

Laura Foggan (pro hac vice) and Rachel A. Jankowski, of Crowell & Moring LLP, of Washington, D.C., for amici curiae Complex Insurance Claims Litigation Association et al.

Clifford J. Shapiro, of Shapiro Dispute Resolution LLC, of Wilmette, and Patrick J. Wielinski (pro hac vice), of Cokinos Young, of Dallas, Texas, for amici curiae Associated General Contractors of America et al.

OPINION

CHIEF JUSTICE THEIS delivered the judgment of the court, with opinion.

¶ 1 In this case, we are asked to consider whether Acuity, a mutual insurance company, has a duty to defend its additional insured, M/I Homes of Chicago, LLC (M/I Homes), under a subcontractor’s commercial general liability (CGL) policy, in connection with an underlying lawsuit brought by a townhome owners’ association for breach of contract and breach of an implied warranty of habitability. The Cook County circuit court granted summary judgment in favor of Acuity, finding no duty to defend because the underlying complaint did not allege "property damage" caused by an "occurrence" under the initial grant of coverage of the insurance policy. The appellate court reversed and remanded, finding that Acuity owed M/I Homes a duty to defend. 2022 IL App (1st) 220023, 461 Ill.Dec. 677, 205 N.E.3d 174. For the following reasons, we affirm the appellate court’s judgment, in part, and reverse and remand in part.

¶ 2 I. BACKGROUND

¶ 3 The underlying litigation stems from alleged construction defects in a residential townhome development in the village of Hanover Park, Illinois. Neumann Homes was the initial developer of the property, but M/I Homes took over the project, constructed additional townhomes, and then sold all the properties after assuming Neumann Homes’ assets and liabilities.

¶ 4 The townhome owners’ association, through its board of directors (Association) subsequently filed an action on behalf of the townhome owners for breach of contract and breach of the implied warranty of habitability against M/I Homes as the general contractor and successor developer/seller of the townhomes. The claim was brought pursuant to section 1-30(j) of the Common Interest Community Association Act (Act), which states, "The Board shall have standing and capacity to act in a representative capacity in relation to matters involving the common areas or more than one unit, on behalf of the members or unit owners as their interests may appear." 765 ILCS 160/1-30(j) (West 2020).

¶ 5 As relevant to this appeal, the Association alleged that M/I Homes’ subcontractors caused construction defects by using defective materials, conducting faulty workmanship, and failing to comply with applicable building codes. As a result, "[t]he [d]efects caused physical injury to the [t]ownhomes (i.e. altered the exterior’s appearance, shape, color or other material dimension) after construction of the [t]ownhome[ ] was completed from repeated exposure to substantially the same general conditions." The defects included "leakage and/or uncontrolled water and/or moisture in locations in the buildings where it was not intended or expected." The Association alleged that the "[d]efects have caused substantial damage to the [t]ownhomes and damage to other property."

¶ 6 The Association further alleged that M/I Homes did not intend to cause the construction defects in the townhomes and that M/I Homes neither expected nor intended "the resulting property damage (such as damage to other building materials, such as windows and patio doors, including but not limited to water damage to the interior of units)." Additionally, the Association alleged that M/I Homes did not perform any of the construction work and that the subcontractors performed all the work on its behalf. According to the Association, the work of subcontractors and the designer "caused damage to other portions of the [t]ownhomes that was not the work of those subcontractors."

¶ 7 As a result, the Association alleged that it would be required to repair both the defects and "the damage to other property caused by the [d]efects." Consequently, the Association sought damages for the cost of repairing or replacing the defects and the cost of repairing the damage to other property caused by the defects.

¶ 8 In response to the lawsuit, M/I Homes demanded a defense from Acuity as the additional insured on a CGL policy that Acuity issued to one of its subcontractors, H&R Exteriors, Inc. (H&R). H&R was the named insured under the policy. M/I Homes was an additional insured by virtue of the contract it entered with H&R to perform certain exterior work on the townhome project. Acuity denied that it had a duty to defend M/I Homes as an additional insured under the CGL policy and filed this declaratory judgment action against M/I Homes and the Association.

¶ 9 In its amended complaint for declaratory judgment, Acuity asserted several bases for denying a duty to defend, including that the underlying amended complaint failed to allege any "property damage" caused by an "occurrence" as those terms are defined by the Acuity policy and interpreted by Illinois law. M/I Homes subsequently filed a counterclaim, seeking a declaration that a duty to defend exists because the allegations in the underlying amended complaint fall within, or potentially within, the coverage provisions of the CGL policy.

¶ 10 Thereafter, Acuity and M/I Homes filed cross-motions for summary judgment. Acuity argued that M/I Homes was responsible for the building of the townhomes and that the damages sought by the Association related to the defective construction of the townhomes and not to any other property damage beyond the buildings. Therefore, Acuity maintained that the underlying complaint merely alleged the natural and ordinary consequence of defectively performed work, rather than an "occurrence," which is defined as an "accident." It further argued that the complaint merely alleged economic loss in the form of the cost of repairing and replacing the defective construction work, rather than "property damage." Accordingly, Acuity argued that the allegations failed to fall within the coverage of the policy.

¶ 11 M/I Homes argued in its cross-motion that the Association’s claim that there was damage to "other property" was a sufficient allegation of property damage beyond the repair and replacement costs of the faulty construction work. Therefore, it maintained that "property damage" caused by an "occurrence" was sufficiently alleged in the underlying amended complaint, triggering Acuity’s duty to defend it.

¶ 12 After briefing and argument, the circuit court granted summary judgment in favor of Acuity and denied summary judgment in favor of M/I Homes. The circuit court found that property damage resulting from the faulty work was not an "occurrence," because it was a natural and ordinary consequence of the construction project and not an accident as required under the policy. While the court posited that faulty workmanship that damaged something other than the townhome project itself could be covered, the court found that was not the case here. Instead, it found that the allegations focused on recovering for damage to the townhomes and "not necessarily other property that could have been damaged by M/I Homes’ faulty work." The circuit court subsequently denied M/I Homes’ motion to reconsider.

¶ 13 On appeal, the parties agreed with the premise that, under current Illinois law, there could be no "property damage" caused by an "occurrence" under the policy unless the underlying complaint alleged property damage to something beyond the townhome construction project. 2022 IL App (1st) 220023, ¶¶ 29, 31, 461 Ill.Dec. 677, 205 N.E.3d 174. With that understanding, M/I Homes argued that the Association’s claim that there was damage to "other property" was sufficiently pled to satisfy that standard. Id. ¶ 29.

¶ 14 The appellate court began its discussion by noting that the parties’ shared understanding of the law, that there must be damage to "other property" beyond the townhomes for a duty to defend to arise, was not "directly tied to the language of the insurance policy" but, rather, is derived from appellate court case law interpreting CGL policies. Id. ¶¶ 32, 35. The court also noted that these cases acknowledge that their analysis has been driven by broad policy considerations and not by the language of the insurance policy. Id. ¶ 36.

¶ 15 The court questioned the different outcomes in the case law based on whether the insured was a general contractor or a subcontractor, and it further questioned "whether, when, and why these terms would mean something different for different parties insured under the same policy." Id. ¶ 42. The court additionally observed that commentators have criticized the approach to coverage taken by Illinois cases, noting that the cases do not adhere to principles of contract interpretation and are inconsistent with the trend of cases throughout the country. Id. ¶¶ 37-38.

¶ 16 Given the parties’ concession, however, the appellate court found it unnecessary to answer these myriad questions but raised them hoping that this court could "bring clarity to these nuanced issues of coverage under CGL policies in construction litigation." Id. ¶ 43. Consequently, the...