Joe Postel And Lauren Rafferty Win Significant Construction Defect Coverage Case On Hotly Contested Issue Where Court Holds No Coverage For Insured Subcontractor For Construction Defect Suit Because Damage To Portions Of Project Outside Scope Of Insured’s Work Is Not Damage To Property Of Third Party

Joe Postel and Lauren Rafferty won an important insurance coverage case for Acuity, involving coverage for a subcontractor, State Mechanical, faced with a construction defect lawsuit stemming from the remodeling of the Knickerbocker Hotel in downtown Chicago.  Acuity and Selective Insurance insured State Mechanical in different policy periods.  Selective defended State Mechanical and paid a settlement on its behalf.  Acuity denied coverage and filed a declaratory judgment action against State Mechanical and Selective.  Selective sought reimbursement from Acuity.  Acuity and Selective filed cross-motions for judgment on the pleadings.

In their motion, Postel and Rafferty argued that well-settled Illinois law precluded coverage, because the cost of repairing or replacing defective work is not property damage, and is not accidental.  They argued that CGL policies cover the accident of damage to the property of third parties beyond the work itself, but not the economic loss resulting to the building owner from defectively performed work, which is the ordinary and expected result of improperly performed work.  Selective argued that the case law Acuity relied on was inapposite, because at issue in those cases was coverage for a general contractor, whose work would consist of the entire project or building. 

Selective argued that a different approach was called for where the insured was a subcontractor, as in this case, and its allegedly defective work damaged portions of the construction project beyond the scope of the subcontractor’s own work.  Such damage would be “damage to a third party,” and thus covered, Selective contended.  Selective relied on recent federal cases that had accepted this contention—including one case involving the same Knickerbocker Hotel and the same underlying construction defect suit as this case—as well as a state appellate decision that Selective claimed also took the approach advocated by Selective. 

Postel and Rafferty replied that the federal cases relied on by Selective were wrong, and inconsistent with settled state law.  Additionally, Postel and Rafferty argued, there were actually more federal cases rejecting State Mechanical’s approach than accepting it, and the state appellate decision Selective relied on simply did not support Selective’s argument.  Postel and Rafferty argued that accepting Selective’s argument would lead to the absurd result that general contractors would be covered as additional insureds under subcontractors’ policies—even though they would not be covered under their own policies.

The court agreed with Postel and Rafferty, entering judgment on the pleadings for Acuity.  The court agreed with Acuity that the federal cases relied on by Selective were wrongly decided, and the state appellate case did not support Selective’s position because it simply did not decide the issue Selective claimed it decided.  The court also agreed that it would be absurd to find coverage for a general contractor under a subcontractor’s policy but not under its own policy.  Although the case did not involve any question of the general contractor’s coverage, accepting Selective’s argument would logically lead to the same result in cases that do involve coverage for general contractors.   

The court concluded that the distinction between coverage under a general contractor’s policy and coverage under a subcontractor’s policy is meaningless, because the cases “do not turn on which portion of the building was damaged; rather, they turn on the principle that a construction defect is not an accident[,]” quoting from a federal case cited by Postel and Rafferty.

Although this is an unpublished decision of a trial judge—and is thus not binding precedent for other judges to follow—the opinion is unusually thorough and scholarly.  It will undoubtedly be cited and quoted by other insurers in their briefs in other construction defect coverage litigation, and—since the Illinois Appellate Court has not squarely addressed this issue before—this opinion could prove influential once the Appellate Court does take up the issue.

Acuity v. State Mechanical Services LLC and Selective Ins. Co. of S. Carolina, Circuit Court of Cook County, no. 15 CH 14113 (Hon. Sanjay Tailor, Judge), opinion issued February 13, 2018.  A full copy of the opinion can be found here.