Illinois Joins Majority of Courts Holding that CGL Policies Cover Damages from Faulty Workmanship

A condominium association brought a lawsuit against a builder for defective work resulting in water infiltrating through the building envelope. The builder asserted third-party claims against subcontractors, and one of the CGL insurers for a subcontractor refused to defend the subcontractor and filed a declaratory judgment action seeking a declaration that it owed no duty to defend. A second CGL insurer for that subcontractor defended the subcontractor, settled the claims against the subcontractor, and then intervened in the declaratory judgment action seeking contribution from the non-defending insurer. The trial court ruled there was no duty to defend because there had been no “occurrence” triggering coverage under the CGL policy, and thus, the second insurer had no right to contribution from the first insurer.

Addressing the issue of whether the subcontractor’s CGL policy provided coverage for the construction defect claims, in Acuity Insurance Company v. 950 West Huron Condominium Association, 2019 Il. App. (1st) 180473 (March 29, 2019), the Illinois Appellate Court proceeded to determine whether the claims alleged property damage from an occurrence. The court recognized that while faulty workmanship alone is not an occurrence under a CGL policy, damage to other property resulting from faulty workmanship does constitute an occurrence. The court further recognized that for a subcontractor working on a project, the damage to other property that triggers CGL coverage can be damage to any property the subcontractor did not construct. In doing so, the Illinois court rejected the reasoning in a federal court decision applying Illinois law which held that damage resulting from defective construction is “the natural consequence of faulty workmanship and not caused by an ‘occurrence’ within the meaning of a CGL policy.”

The decision of the Illinois Appellate Court has no direct impact in South Carolina, but the decision is notable because it represents part of the nationwide trend of courts recognizing that CGL policies cover damages from improper construction. South Carolina experienced legal turmoil in this area with several decisions over many years attempting to resolve the issue and with the issue apparently finally resolved by a statute defining “occurrence” for purposes of CGL policies as including “property damage or bodily injury resulting from faulty workmanship, exclusive of faulty workmanship itself.” S.C. Code Ann. § 38-61-70. The Illinois decision hopefully is one more step towards laying to rest any doubt as to whether a CGL policy covers damages from defective construction.