The Illinois Court of Appeals has held that a general contractor’s Commercial General Liability (“CGL”) policy does not provide coverage for property damage caused to existing structures which were completely demolished as a result of faulty construction because the general contractor had “overall responsibility for the renovation and conversion of the Properties’ existing structures[.]” The Illinois Court’s opinion suggests that, under Illinois law, the most important fact which will determine coverage for a contractor is the scope of work the defendant agreed (or is alleged in the lawsuit) to have undertaken.
In Certain Underwriters at Lloyd's London v. Metro. Builders, Inc. (“Metro Builders”), a general contractor was hired to convert three existing structures on contiguous lots into three single family dwellings. According to the underlying complaint, the defendant was hired as the general contractor for construction, renovation, demolition and/or other related activities at the three contiguous properties.
While work was being done on one of the three existing structures, the building collapsed causing damage to both the building being worked on as well as damage to the two other buildings included in the project. The collapse caused significant damage to the properties, and all three structures were deemed unsafe and demolished by the city. The owner of the properties turned to its insurer who paid the owner over $1,802,479.88 for repairs, demolition, construction, and other associated expenses arising from the collapse. Its insurer then exercised its right of subrogation and sued the general contractor.
CGL policies on the standard ISO form provide coverage for “bodily injury and property damage […] caused by an ‘occurrence’.” “Occurrence” is defined as an “accident” and “property damage” as “Physical injury to tangible property”. While these are standard definitions in almost every CGL policy issued, courts across the country have split on how these definitions should be applied in construction-defect lawsuits. Illinois follows a version of the minority approach, which holds that allegations of damage solely to the work do not constitute an “occurrence” or “property damage” under the policy and thus there will be no coverage.
The Illinois Court of Appeals employed this minority approach in Metro Builders by holding that there could be no occurrence or property damage under the policy so long as the property allegedly damaged was under the “responsibility” of the contractor. For subcontractors, this will likely have little effect on coverage, as the Court made clear that its ruling only applied to damage to part of “the same project over which that contractor was responsible”. Thus, for example, if a subcontractor is solely responsible for installing windows and defectively installed windows cause damage to walls, then the policy would provide coverage for property damage to the walls because they were not within the responsibility of the subcontractor. For the general contractor who is remodeling the entire house however, the general contractor may not be covered for the damage to the walls if it is determined the entire house was under its overall responsibility, at least in the minority view.
Before undertaking a new contract, general contractors should be aware of the various pitfalls to coverage there may be in the state where the work is to be done. Contact your lawyer if you are new to a jurisdiction, to protect against potential impacts from novel (to you) legal requirements in that jurisdiction. For example, one wonders after reading this case whether any lawsuit would have ever occurred had the general contractor required a waiver of subrogation from the property owner’s insurance or had sought the proper endorsements for its own coverage. Or perhaps the scope of work could have been defined in phases.
This article,"Illinois Court of Appeals Holds that General Contractor is Not Covered for Property Damage to Building which was Demolished Because of Construction Defects," was published in the Bradley Construction and Procurement Law Newsletter for the first quarter of 2020.