Reference to Personal Property Damage Sufficient to Trigger Insurer’s Duty to Defend Defective Work

By: Tina Paries

Illinois courts routinely analyze whether commercial general liability insurance policies cover defective construction work. They look at allegations in a lawsuit to determine whether the alleged damage constitutes “property damage” caused by an “occurrence” or an “accident.” Illinois courts have consistently held that if the complaint against the contractor alleges construction defects that require repair or replacement of the contractor’s work product, then there is no “occurrence” or “accident,” unless the damage alleged extends to other people or things that were not part of the contractor’s work product.

Similarly, to constitute “property damage,” not only must the property’s appearance be altered in some measurable way, but it must also be property beyond that of the contractor’s work product. For example, if the only property damaged is the project on which the contractor was working, then the damages are contractual in nature and not considered “property damage.”

The Illinois Appellate Court again revisited this issue last month in Certain Underwriters at Lloyd’s London v. Metropolitan Builders, Inc., 2019 IL App (1st) 190517 (Dec. 18, 2019). There, the owner of three properties retained a contractor to convert the existing structures into single-family dwellings. While the contractor was performing work on one structure, it collapsed, along with another structure. The City of Chicago ultimately deemed all three structures to be unsafe and required that they all be demolished. The owner’s insurance company then paid over $1 million for damage to “the real property, repairs, demolition, construction and associated expenses” arising from the collapse of the structures.

The owner’s insurance company also filed a lawsuit against the contractor to recover what it had paid. Specifically, it alleged—among other things—that the contractor’s negligence caused “losses including, but not limited to, damage to both real and personal property.” The contractor tendered the lawsuit to its insurer, but the insurer denied it had an obligation to defend the contractor because the collapse of the structures was not an “occurrence” or “accident,” but, instead the result of faulty workmanship on the contractor’s work product. The insurer then filed a lawsuit against the contractor seeking a declaration of its rights and obligations under the policy.

The trial court in that case held that the insurer had no duty defend the contractor because the damage alleged in the underlying lawsuit was a result of the contractor’s defective work. On appeal, the Illinois Appellate Court agreed that most of the damages alleged related to damage to the real property or project itself and were not a result of an “occurrence” or “accident.”

However, the court held that the allegation of damage to personal property could be considered damage to something other than the project itself and the result of an “occurrence” or “accident.” Although the insurer argued that there were no facts alleged with respect to the type or nature of the personal property, the court held it was not necessary to specifically identify that damage to trigger the duty to defend. Rather, the court held that the mere reference to damage to personal property damage was sufficient and reversed the trial court’s decision.

Practice Tip: Certain Underwriters serves as a reminder that depending on the allegations in a lawsuit, there can potentially be coverage—or at a minimum, a duty to defend—for certain damage caused by defective construction.    

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