Recent Illinois Decision Fortifies Precedent that Construction Defects Fail to Trigger Occurrence under CGL Policies

A recent decision in the United States District Court for the Northern District of Illinois slammed home standing precedent concerning whether a construction defect triggers an “occurrence” that would be covered under a commercial general liability (“CGL”) policy. In Allied Property & Casualty Insurance Co. v. Metro North Condominium Association, Judge Jorge Alonso granted the plaintiff’s motion for summary judgment and denied the defendant’s motion for summary judgment, essentially rejecting the argument that an underlying construction defect claim was covered under a CGL policy.

Allied Property arose from an underlying lawsuit in Cook County, Illinois, where Metro North Condominium Association (“Metro North”) sued the developer and various contractors and subcontractors of its condominium due to several defects in the construction, including, most notably, water infiltration. As part of its complaint, Metro North alleged that a window installation subcontractor breached its implied warranty of habitability when it defectively and improperly installed windows in the building, which led to severe water infiltration following a large rainstorm in October 2006. Allied Property & Casualty Insurance Co. (“Allied”) had issued a CGL policy to the window installer during the effective policy period, and Allied provided the contractor with an independent defense under a reservation of rights.

During the course of litigation, Metro North entered into a settlement with the window installation contractor for $700,000, the amount of which was to be satisfied “solely through the assignment…of all [its] rights to payment, if any, from Allied” under the applicable CGL policy. The policy required Allied to pay any amount its insured becomes legally obligated to pay “as damages because of…’property damage’…caused by an occurrence.” Allied then filed its motion for summary judgment in the Northern District of Illinois, seeking declaration that there was no coverage available with respect to Metro North’s settlement.

In arriving at its opinion, the Northern District had to delve into Illinois precedent. Specifically, the Illinois Appellate Court in 2011 held that “there is no occurrence when a subcontractor’s defective workmanship necessitates removing and repairing work,” but when the defective workmanship results in damage to something other than the construction project itself, there may be an occurrence (see Milwaukee Mutual Insurance Co. v. J.P. Larsen, Inc., 956 N.E.2d 524, 531 (Ill. App. Ct. 2011)).

Metro North’s claimed damages constituted approximately $2.1 million in damages caused by water infiltration to the common elements of the building, and just under $200,000 in damages to personal or other property. The court, in issuing its opinion, maintained Illinois’ longstanding precedent that a construction defect is not an “occurrence” that would trigger liability under a CGL policy because, here, the damages were the ordinary consequence of the contractor’s defective window installation. Specifically, the Northern District ruled that the severe bulk of the damages sought were not caused by an “occurrence,” but were rather the natural and ordinary consequence of faulty workmanship. In putting the nail in the coffin, the court held: “When a subcontractor who installs windows performs defective work, the natural and ordinary consequence is water infiltration that will damage the rest of the building. There is no accident, so there is no occurrence, so there is no coverage.”

The Allied Property holding is only the most recent cautionary tale for owners and contractors alike who are parties to a construction project in Illinois and who may not be able to realize coverage under a CGL policy for any resulting defect in the construction.