The Illinois Appellate Court held that there was no coverage for faulty workmanship causing damage to property, but there was coverage for damage to personal property. Certain Underwriters at Lloyd's London v. Metropolitan Builders, Inc., Ill. App. LEXIS 979 (Ill. Ct. App. Dec. 18, 2019). 

    Metropolitan was the general contractor for a construction job in Chicago. During the construction, a wall adjoining two structures collapsed. The amount of structural damage ultimately led to the City of Chicago to declare the structures unsafe and ordered that they be demolished. 

    The owner of the building turned to its insurer, AIG, for indemnification reimbursement for the damages it suffered. AIG paid the owner over $1,802,479.88 for repairs, demolition, construction, and other expenses arising from the collapse.

    AIG invoked its rights of subrogation and filed suit against Metropolitan. The underlying complaint alleged warranty and contract claims, as well as various tort claims, against Metropolitan. The tort claims included damage to real and personal property caused by negligence. 

    Metropolitan tendered its defense to its carrier, Lloyd's. Coverage was denied and Lloyd's filed its declaratory judgment action. Lloyd's argued that the underlying complaint alleged neither "property damage" nor an "occurrence." The trial court ruled that the underlying complaint alleged "property damage," but failed to allege an "occurrence." Summary judgment was entered in favour of Lloyd's. 

    Illinois jurisprudence held that when the underlying lawsuit against the insured contractor alleged damages beyond repair and replacement, and beyond damage to other parts of the same project over which the contractor was responsible, the additional damages were deemed to be the result of an "accident." The rule for determining an occurrence was as follows: if the underling complaint against the insured contractor merely alleged construction defects that required repair and replacement (or that caused a diminution in value) of the contractor's work product, no "accident," and thus no "occurrence" under the CGL policy, was alleged. But if the damage extended to other people or things that were not part of the contractor's work product, the damage was alleged to have resulted from an "accident," and thus an "occurrence' was alleged to trigger coverage under the CGL policy. Under the court's analysis, finding there is an occurrence if there is damage to the insured's "work product," makes the work product exclusion superfluous.  

    Turning to property damage, when the "property" that was alleged to be "damaged" in the underlying lawsuit against the construction contractor was merely the contractor's work product, then in essence the only damage was the disappointed commercial expectations of the property owner, and the damages alleged were purely economic losses for the cost of repair and replacement of the contractor's work product. To constitute "property damage," the property's appearance must have been altered in some measurable way, but had to also be property beyond that of the contractor's work product.

    Here, Metropolitan's defective construction work resulted in altering the structural integrity and lower level supports of the buildings, causing their collapse. As a result, the buildings were demolished by the City, which deemed them unsafe. Metropolitan's allegedly faulty workmanship led to their collapse and ultimate demolition,. Thus, the collapse of the structures was not an "accident" or "occurrence" but was the natural and ordinary result of faulty workmanship on the contractor's work product.

   The damage to the real property did not constitute "property damage" under the policy, either. The damages suffered by the property owner (as to the real property) was economic loss – the cost of repair and replacing the demolished buildings to fulfill the owner's contractual expectations of Metropolitan to build single-family dwellings. Even if the damage extended to parts of the project on which Metropolitan was not currently working, it was still part of Metropolitan's scope and responsibility and thus part of the project itself. 

    The damage to the property owner's "personal property," however, was damage to something other than the project itself. Because damage to the owner's personal property was beyond a mere contractual damages claim for repair or replacement of the contractor's work product, it constituted "property damage" under the Policy. Therefore, at bottom, Lloyd's duty to defend was triggered.