Cornice & Rose Int'l v. Acuity

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CORNICE & ROSE INTERNATIONAL, LLC and JAMES A. GRAY, Plaintiffs-Appellants, v. ACUITY, a Mutual Insurance Company, Defendant-Appellee.

No. 23-1152

United States Court of Appeals, Seventh Circuit

November 25, 2024

NONPRECEDENTIAL DISPOSITION

Argued November 3, 2023

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 21-cv-06112 Nancy M. Maldonado, Judge.

Before THOMAS L. KIRSCH II, Circuit Judge CANDACE JACKSON-AKIWUMI Circuit Judge DORIS L. PRYOR, Circuit Judge

ORDER

This case concerns whether an insurance policy requires an insurer to defend an architectural firm against a lawsuit alleging that the firm inadequately designed and oversaw the construction of a building. The district court, interpreting the policy in light of what most appellate courts in Illinois had said about the issue, concluded that the answer was no. Since then, the Illinois Supreme Court has overruled those appellate decisions. See Acuity v. M/I Homes of Chicago LLC, 2023 IL 129087, 234 N.E.3d 97, reh'g denied (Jan. 22, 2024). That intervening decision indicates that the insurer owes the architectural firm a duty of defense. We therefore vacate and remand.

I. Factual Background

A. The Underlying Counterclaim and Complaint

Cornice & Rose International, LLC and James Gray-an architectural firm and its owner-designed and oversaw the construction of a building in Iowa.^[1] According to the contract between Cornice and the building's owner, Cornice agreed to provide the following services:

1. Prepare drawings illustrating the design of the building.

2. Prepare drawings and specifications "setting forth in detail the quality levels of materials and systems and other requirements for the construction" of the building.

3. Evaluate the project regularly to become "familiar with the progress and quality of ... the [w]ork completed" and "to endeavor to guard the [o]wner against the defects and deficiencies in the [w]ork." Cornice, however, was liable only for its own failure to perform and not the failure of construction workers to perform.

Years later, the building's owner and its lender filed a counterclaim against Cornice in an Iowa federal court under several theories, including breach of contract and negligence.^[2] The counterclaim alleged that "construction was not complete" and that Cornice "fail[ed] to provide design in accordance with the standard of care," which left the building with a litany of "defects and design problems." For example, the counterclaim alleged that the elevator did not meet the required code and that kitchen cabinets were built so tall that they blocked the windows. It also alleged that a lack of ventilation in the attic space caused the roof sheathing and the trusses to rot, and that a heater Cornice used left residue on surfaces, which meant the owner had to treat those surfaces. These problems-resulting from what the counterclaim termed was "the negligent provision of architectural services"-cost over three million dollars to fix.

The owner and lender eventually dismissed their counterclaim and sued Cornice in Iowa state court instead. The state court complaint is materially identical to the federal counterclaim.

B. Cornice's Insurance Policy

Cornice did not obtain malpractice insurance. Instead, it acquired successive, annual "commercial general liability" policies from Acuity, an insurance company. These policies covered Cornice during the relevant period and stated that Acuity had a duty to defend Cornice in any suit seeking to recover for "property damage" caused by an "occurrence." The policies defined each term:

1. "[O]ccurrence" meant "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."

2. "Property damage" meant either "[p]hysical injury to tangible property, including all resulting loss of use of that property" or "[l]oss of use of tangible property that is not physically injured."

II. District Court Proceedings

Forty days after the building owner filed its counterclaim, Cornice sued Acuity in federal court based on diversity jurisdiction and sought a declaratory judgment requiring Acuity to defend it under the policies. Cornice also alleged breach of contract, arguing that Acuity was equitably estopped from defending against the breach of contract claim, and sought costs under Section 5/155 of the Illinois Insurance Code. Each party moved for a judgment on the pleadings under Federal Rule of Civil Procedure 12(c).

The district court granted Acuity's motion and denied Cornice's.^[3] The court- relying on how most appellate courts in Illinois had interpreted similar policies- concluded that Acuity had no duty to defend Cornice because the Iowa lawsuit did not seek to recover for "property damage" arising out of an "occurrence." The court also determined that Acuity was neither estopped from defending against the breach of contract claim nor liable for costs.

III. Discussion

On appeal, Cornice contests all three rulings. It argues that Acuity has a duty to defend, that equitable estoppel prevents Acuity from contesting the breach of contract claim, and that Acuity owes costs under the Illinois Insurance Code.

We review the entry of judgment on the pleadings de novo, construing the allegations in the light most favorable to the non-movant. Federated Mut. Ins. Co. v. Coyle Mech. Supply Inc., 983 F.3d 307, 313 (7th Cir. 2020). If it is beyond doubt that the nonmovant cannot prove facts sufficient to prevail, we must rule for the movant. Id.

In addition, because we are sitting in diversity, we apply state substantive law. Mathis v. Metro. Life Ins. Co., 12 F.4th 658, 661 (7th Cir. 2021). Here, the parties agree that Illinois law controls. This means that our task is to resolve the issues as the Illinois Supreme Court would. Mashallah, Inc. v. W. Bend Mut. Ins. Co., 20 F.4th 311, 319 (7th Cir. 2021).

A. Duty to Defend

Cornice first argues that Acuity has a duty to defend it against the Iowa suit.

To analyze whether a party has a duty to defend under Illinois law, we compare the language in the insurance policies with the allegations in the underlying complaint. Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 860 N.E.2d 307, 314 (Ill. 2006). When doing so, we must liberally construe the allegations in favor of the insured. Id. If the complaint alleges facts bringing the suit within or potentially within a policy's coverage, then the insurance company must defend the policyholder. Id. at 315. This holds true even when the allegations are false and even when only one of the theories of recovery in the complaint might trigger the duty to defend. Id.

Here the policies require Acuity to defend Cornice against any lawsuit alleging "property damage" stemming from an "occurrence." As we have discussed, the policies define "property damage" as "[p]hysical injury to tangible property" or the loss of use of that property. And the policies define "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."

Much of the briefing and argument in this case focused on which property was allegedly damaged and how. In particular, the parties considered whether the Iowa lawsuit simply sought to hold Cornice responsible for the cost of repairing and replacing the work that Cornice had contracted to provide. This approach was understandable. Many appellate courts in Illinois had held that, for damage to constitute "property damage," the property in question must fall "beyond [the scope] of the contractor's work product." Certain Underwriters at Lloyd's London v. Metro. Builders, Inc., 158 N.E.3d 1084, 1096 (Ill.App.Ct. 2019). By the same token, several Illinois courts had held that the need to repair or replace work was the "natural and ordinary consequence" of faulty workmanship rather than an unexpected "accident" capable of constituting an "occurrence." Id. at 1093. These interpretations were driven by the idea that commercial general liability policies are meant to protect against freak accidents, not against run-of-the-mill breach of contract claims. Id. at 1093, 1095 ("[T]he case law has focused at least as much on the purposes of CGL policies as it has on textual interpretation and application.").

After we held oral argument, the Illinois Supreme Court rejected the above approach. In doing so, it reiterated the long-standing rule that courts must interpret insurance policies not in light of "policy considerations" but in the way that an "average, ordinary, normal, [and] reasonable person" would read them. M/I Homes, 234 N.E.3d at 105 (citation omitted).

The Illinois Supreme Court accordingly concluded that "property damage" meant only physical injury to tangible property and no more. Id. at 106. If the property "is altered in appearance, shape, color or in other material dimension," that is enough. Under that definition, the complaint in M/I Homes, which sought damages to repair the insured's alleged faulty workmanship on a group of townhomes, alleged "property damage." Id. It did not make a difference that the damage occurred to property that was within the scope of the insured's project. See id.

A similar analysis followed for "occurrence." That term, according to M/I Homes, meant only "an unforeseen occurrence, usually of an untoward or disastrous character, or an undesigned, sudden, or unexpected event of an inflictive or unfortunate character." Id. at 106-07 (citation omitted). So it encompassed "unintended and unexpected harm caused by negligent conduct." Id. In turn, because the contractors in M/I Homes did not intend or anticipate the defects or the resulting harm to the townhomes, the damage was caused...