Does an insurer of a commercial general liability policy owe a duty to defend an architect in a malpractice lawsuit? The US Court of Appeals for the Seventh Circuit recently held, yes. We provide a roadmap for the Court’s controversial decision.

In Cornice & Rose International, LLC v. Acuity, Cornice, an architectural firm based in Illinois, was retained to design and oversee construction of a building in Iowa. According to the contract between Cornice and the building’s owner, Cornice agreed to, among other services, prepare drawings and specifications detailing the quality levels of materials and systems and other requirements for the construction of the building. It also agreed to provide standard construction administration responsibilities, including evaluation of the project regularly to become “familiar with the progress and quality of … the [w]ork completed” and “to endeavor to guard the [o]wner against the defects and deficiencies in the [w]ork.” In typical fashion, Cornice was liable only for its own failure to perform, not for the failure of the construction contractor to properly construct the project.

The building’s owner and its lender asserted claims against Cornice for breach of contract and negligence premised on Cornice failing “to provide design in accordance with the standard of care.” They claimed that the elevator did not meet code and the kitchen cabinets were built so tall that they blocked the windows. The owner and lender also alleged that a lack of ventilation in the attic space caused the roof sheathing and the trusses to rot, and that a heater Cornice used left residue on surfaces, requiring the owner to treat those surfaces. These problems—which allegedly resulted from “negligent provision of architectural services”—cost over $3 million to repair.

Cornice did not purchase professional liability or malpractice insurance. Instead, it purchased commercial general liability insurance and filed a declaratory judgment action against that insurer, Acuity, seeking to force Acuity to defend against the building owner’s and lender’s claims. The Court, in a nonprecedential disposition, looked to the 2023 Illinois Supreme Court decision in  Acuity v. M/I Homes of Chicago, LLC, 2023 IL 129087, 234 N.E.3d 97, reh’g denied (Jan. 22, 2024), in holding that Acuity owed a defense to Cornice.

Under M/I Homes, at least as interpreted by the Cornice Court, “property damage” means physical injury to tangible property, and nothing more. Altered appearance, shape, color or in other material dimension is enough to meet the definition. Further, it is immaterial whether the damage occurred to property that was within the scope of the insured’s project. Akin to the analysis the Texas Supreme Court used nearly 20 years ago, the Illinois Supreme Court in M/I Homes held that an “occurrence” under the CGL policy encompassed “unintended and unexpected harm caused by negligent conduct.”

Using these definitions, the Cornice Court held that the complaint sufficiently alleged property damage, e.g., the alleged rotted roofing material which was altered in appearance or in another material dimension. Similarly, the Court held that the building owner’s and lender’s complaint alleged an occurrence as they asserted that Cornice had negligently designed the building. They did not allege that Cornice intended or expected the defects. In the words of the Court, “the supposedly inadequate work that Cornice performed counts as an ‘accident.’ ”

Notably, Acuity admitted that none of Cornice’s CGL policies contained an exclusion barring coverage for any property damage in any way arising out of professional services. In addition, the Court held that Acuity had waived its right to argue that two business exclusions in the insurance policies bar coverage, finding that Acuity did not assert those defenses at the trial court level.

Acuity has requested the Seventh Circuit rehear and reconsider its opinion, arguing that the Court should have remanded the case to the trial court to examine whether the business risk exclusions bar coverage. According to Acuity, those exclusions were irrelevant prior to the M/I Homes decision which was handed down during the pendency of Cornice’s coverage action. The Court has not yet determined whether to grant Acuity’s request for rehearing.

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