The Seventh Circuit reversed the district court's finding that the insured architecture firm was not entitled to a defense. Cornice & Rose International, LLC v. Acuity, 2024 U.S. App. LEXIS 29925 (7th Cir. Nov. 25, 2024).
Cornice, an architectural firm, oversaw the construction of a building in Iowa. Under the contract with the building owner, Cornice agreed to "prepare drawings setting forth in detail the quality levels of materials and systems and other requirements for the construction" of the building. Cornice also agreed to evaluate the project regularly to become "familiar with the progress and quality of the work completed."
Years after completion of the building, the building's owners and its lender filed a counterclaim agains Cornice in an Iowa federal court for breach of contract and negligence. The counterclaim alleged that construction was not complete and that Cornice failed to provide design in accordance with the standard of care, which left the building with a litany of defects and design problems. Among other things, the counterclaim alleged that the elevator did not meet the required code and that kitchen cabinets were built so tall that they blocked the windows. It also alleged that a lack of ventilation in the attic space caused the roof sheathing and the trusses to rot. These problems cost over three million dollars to fix.
Cornice held a commercial general liability policy with Acuity. Acuity denied a defense to the counterclaim.
Cornice sued Acuity in federal district court in Illinois seeking a declaratory judgment requiring Acuity to defend it under the policy. The district court granted Acuity's motion for judgment on the pleadings. The district court relied on Illinois appellate decisions which held there was no duty to defend Cornice because the Iowa lawsuit did not seek to recover for "property damage" arising out of an "occurrence."
Cornice appealed. Several Illinois courts had held that the need to repair or replace work was the natural and ordinary consequence of faulty workmanship rather than an unexpected "accident" capable of constituting an "occurrence." After oral argument in this case, the Illinois Supreme Court rejected this approach. It concluded that "property damage" meant only physical injury to tangible property and no more. Acuity v M/I Homes of Chicago, LLC, 234 N.E. 3d 97 (Ill. Jan. 22, 2024). If property was altered in appearance, shape, color or in other material dimensions, that was enough. Further, "occurrence" meant only "an unforeseen occurrence, usually of an untoward or disastrous character, or an undesigned, sudden, or unexpected event of an infective or unfortuate character." So the term encompassed "unintended and unexpected harm caused by negligent conduct."
The Seventh Circuit agreed with Cornice that M/I Homes made it clear that Acutely had to defend Cornice. The underlying complaint alleged "property damage" because it sought to hold Cornice responsible for damaging tangible property. Acuity's counterargument – that Cornice damaged its own project – no longer carried weight.
The same was true for "occurrence." The underlying lawsuit alleged that Cornice negligently designed the building. Nowhere did it claim that Cornice intended or expected the defects. As a result, the supposedly inadequate work that Cornice performed counted as an "accident."
For these reasons, the Seventh Circuit concluded that the Iowa counterclaim alleged "property damage" caused by an "occurrence," meaning Acuity had to defend Cornice against the suit. The judgement of the district court regarding Acuity's duty to defend was vacated.
