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October 5, 2021
By: Tina M. Paries

To determine whether commercial general liability insurance policies cover defective construction work, courts look at allegations in a lawsuit to determine whether the alleged damage constitutes “property damage” caused by an “occurrence” or an “accident.” If the complaint against the contractor alleges construction defects that require repair or replacement of the contractor’s work, 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.

To constitute “property damage,” the property’s appearance must be altered in some measurable way and 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 not considered “property damage.”

The Illinois Appellate Court recently revisited this issue in a case Certain Underwriters at Lloyd’s London v. Metropolitan Builders, Inc., where 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, causing another structure to also collapse. The City of Chicago ultimately deemed all three structures unsafe and required that they all be demolished. The owner’s insurance company 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 then filed a separate lawsuit against the contractor seeking to recover what it had paid in damages from the contractor.  The insurance company claimed that the contractor’s negligence caused “losses including damage to both real and personal property.” The contractor tendered the lawsuit to its own insurance company, but the insurance company 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 trial court in that case sided with the contractor’s insurance company and held that the insurer had no duty to defend the contractor because the damage alleged in the underlying lawsuit was a result of the contractor’s defective work. On appeal, the 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 appellate court also 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 contractor’s insurance company argued that there were no facts alleged with respect to the type or nature of the personal property, the appellate court held it was not necessary to specifically identify that damage to trigger the insurer’s duty to defend. Rather, it held that the mere reference to damage to personal property was sufficient and then reversed the trial court’s decision.

This case serves as a reminder that not all damages arising from defective construction are excluded from coverage under a commercial general liability insurance policy.  In the event that damage to property other than that on which the contractor worked is alleged, those allegations may be sufficient to trigger coverage.