Acuity v. M/I Homes of Chi., LLC

• Docket Number: 1-22-0023
• Decision Date: 09 September 2022
• Citation: 2022 IL App (1st) 220023,205 N.E.3d 174,461 Ill.Dec. 677
• Parties: ACUITY, a Mutual Insurance Company, Plaintiff and Counterdefendant-Appellee, v. M/I HOMES OF CHICAGO, LLC, and Church Street Station Townhome Owners Association, Defendants, (M/I Homes of Chicago, LLC, Defendant and Counterplaintiff-Appellant).
• Court: United States Appellate Court of Illinois

2022 IL App (1st) 220023

205 N.E.3d 174

461 Ill.Dec. 677

ACUITY, a Mutual Insurance Company, Plaintiff and Counterdefendant-Appellee,

v. M/I HOMES OF CHICAGO, LLC, and Church Street Station Townhome Owners Association, Defendants,(M/I Homes of Chicago, LLC, Defendant and Counterplaintiff-Appellant).

No. 1-22-0023

Appellate Court of Illinois, First District, SIXTH DIVISION.

Filed September 9, 2022

Rehearing Denied October 6, 2022

Eric P. Sparks and Patrick J. Johnson of Gould & Ratner LLP, of Chicago, for appellant.

Joseph P. Postel of Lindsay, Pickett & Postell, LLC, and Glenn F. Fencl and Garrett L. Boehm Jr., of Johnson & Bell, Ltd., both of Chicago, for appellee.

PRESIDING JUSTICE MIKVA delivered the judgment of the court, with opinion.

¶ 1 Appellant M/I Homes of Chicago, LLC (M/I Homes), appeals from the circuit court's entry of summary judgment in favor of Acuity, a mutual insurance company. The circuit court found that Acuity had no duty to defend M/I Homes in an underlying lawsuit—stemming from damages caused by the allegedly defective construction work of one of M/I Homes's subcontractors—because the complaint in that case did not allege "property damage caused by an occurrence." For the following reasons, we reverse the circuit court's grant of summary judgment for Acuity and remand for it to enter summary judgment in favor of M/I Homes on the issue of a duty to defend.

¶ 2 I. BACKGROUND

¶ 3 This case stems from alleged defects in a multiple-building residential townhome development in Hanover, Illinois (the Townhomes). The Townhomes’ owners association filed a suit for breach of contract and the implied warranty of habitability against M/I Homes as the successor developer/seller of the Townhomes, and M/I Homes asked Acuity to defend it in that underlying lawsuit, as the additional insured on a policy Acuity had issued to one of its subcontractors, H&R Exteriors Inc. (H&R). Acuity denied that it had a duty to defend M/I Homes under the policy and filed the declaratory judgment suit that is before the court.

¶ 4 A. The Policy

¶ 5 Acuity issued to H&R a commercial general liability and commercial excess liability policy—policy No. Z60057, effective December 13, 2016, through December 13, 2017—and renewed that policy from December 13, 2017, through December 13, 2018 (collectively, the Policy). M/I Homes was listed as an additional insured on the Policy.

¶ 6 In relevant part, the Policy provided as follows:

"1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies. We will have the right and duty to defend the insured against any suit seeking those damages. However, we will have no duty to defend the insured against any suit seeking damages for bodily injury or property damage to which this insurance does not apply. ***

* * *

b. This insurance applies to bodily injury and property damage only if:

(1) The bodily injury or property damage is caused by an occurrence that takes place in the coverage territory ; [and]

(2) The bodily injury or property damage occurs during the policy period ***[.]

* * *

2. Exclusions

This insurance does not apply to:

* * *

j. Damage to Property

Property damage to:

* * *

(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the property damage arises out of those operations; or

(6) That particular part of any property that must be restored, repaired or replaced because your work was incorrectly performed on it.

* * *

l. Damage to Your Work

Property damage to your work arising out of it or any part of it ***.

This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor." (Emphases in original.)

¶ 7 The definitions section of the Policy further provided:

"13. ‘Occurrence ’ means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

* * *

17. ‘Property damage ’ means:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the occurrence that caused it.

* * *

22. ‘Your work :’

a. Means:

(1) Work or operations performed by you or on your behalf; and

(2) Material, parts or equipment furnished in connection with such work or operations.

b. Includes:

(1) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of your work *** [.]" (Emphases in original.)

¶ 8 B. The Underlying Lawsuit

¶ 9 The Church Street Station Townhome Owners Association (the Association), by its board of directors, filed the underlying lawsuit against M/I Homes on October 4, 2018. On May 1, 2019, the Association filed an amended complaint for breach of contract (count I) and breach of the implied warranty of habitability (count II). The Association alleged that it was the governing body of the Townhomes and stated that "pursuant to its grant of statutory standing," it "assert[ed] claims on behalf of all Townhome buyers and subsequent buyers." The Association cited section 1-30(j) of the Common Interest Community Association Act (Act) ( 765 ILCS 160/1-30(j) (West 2020)), which provides that "[t]he board shall have standing and capacity to act in a representative capacity in relation to matters involving the common areas or more than one unit, on behalf of the members or unit owners as their interests may appear."

¶ 10 In the amended complaint, the Association alleged that M/I Homes was the successor developer/seller for the Townhomes, having succeeded to the entire remaining interests of the initial developer/seller, Neumann Homes Inc. (Neumann). The Association alleged that it "was under Developer Control until November 6, 2014 when owner elected a majority of the members of the Board of the Association." The Association alleged that "Neumann and [M/I Homes] constructed and sold Townhomes with substantial exterior defects," including moisture-damaged or water-damaged fiber board, water-damaged OSB sheathing, deteriorated brick veneer, poor condition of the weather-resistive barrier, improperly installed J-channel and flashing, and prematurely deteriorating "support members below the balcony deck boards." The Association further alleged that Neumann and M/I Homes did not perform the construction work themselves, but that all work on the Townhomes was performed on their behalf by subcontractors and the designer.

¶ 11 The Association alleged:

"The Defects caused physical injury to the Townhomes (i.e. , altered the exteriors’ appearance, shape, color or other material dimension) after construction of the Townhome[s] was completed from repeated exposure to substantially the same general harmful conditions. The property damage was an accident in that [M/I Homes] did not intend to cause the design, material and construction defects in the Townhome[s], and the resulting property damage (such as damage to other building materials, such as windows and patio doors, including but not limited to water damage to the interior of units) was neither expected nor intended from their standpoint. *** The work of the subcontractors and the designer caused damage to other portions of the Townhomes that was not the work of those subcontractors."

¶ 12 In count I, the breach-of-contract claim, the Association specifically alleged:

"9. The Board in its representative capacity on behalf of all the owners of the Townhomes asserts a claim for breach of contract in connection with the Defects against [M/I Homes].

* * *

13. The Defects have caused substantial damage to the Townhomes and damage to other property.

19. [sic ] As a direct and proximate result of the aforesaid breaches of contract resulting in the Defects, the Association has been and will be required to make substantial repairs to the Defects and repairs to damage to other property caused by the Defects."

The Association then requested an award of "[d]amages in an amount equal to the total cost of repair or replacement of the aforesaid Defects, and cost to repair damage to other property."

¶ 13 Similarly, in count II, its claim for breach of the implied warranty of habitability, the Association alleged that "[a]s a direct and proximate result of the aforesaid breaches of warranty, the Association will be required to make substantial repairs to the Defects and to repair damage to other property" and that it was thus seeking "damages in an amount equal to the total cost of repair or replacement of the aforesaid Defects and damage to other property caused by the Defects."

¶ 14 C. The Declaratory Judgment Action

¶ 15 Acuity filed its complaint for declaratory judgment against M/I Homes and the Association on January 8, 2019, and filed the operative amended complaint on November 20, 2019. The Association is not a party to this appeal.

¶ 16 Acuity sought a declaration that it did not have a duty to defend or indemnify M/I Homes. On February 19, 2020, M/I Homes filed a counterclaim against Acuity, asking for a declaration that Acuity did owe it a duty to defend.

¶ 17 The parties filed cross-motions for summary judgment. In Acuity's motion, it argued that it did not owe M/I Homes a duty to defend because " ‘the actual property the insured was working on’ does not constitute covered ‘property damage’ caused by an ‘occurrence’ under the policy" (quoting CMK Development Corp. v. West Bend Mutual Insurance Co. , 395 Ill. App. 3d 830, 842, 335 Ill.Dec. 91, 917 N.E.2d 1155 (2009) ), and because M/I Homes was responsible for all the Townhomes, any allegation of damages "related only to the defective construction of the townhomes and specifically not any damage...