CORNICE & ROSE INTERNATIONAL, LLC and JAMES A. GRAY v. Acuity, a Mutual Insurance Company

United States Court of Appeals
For the Seventh Circuit
Chicago, Illinois 60604
Argued November 3, 2023
Decided November 25, 2024
Before
THOMAS L. KIRSCH II, Circuit Judge
CANDACE JACKSON-AKIWUMI, Circuit Judge
DORIS L. PRYOR, Circuit Judge
No. 23-1152
CORNICE & ROSE INTERNATIONAL,
LLC and JAMES A. GRAY,
Plaintiffs-Appellants,
v.
ACUITY, a Mutual Insurance Company,
Defendant-Appellee.
Appeal from the United States District
Court for the Northern District of
Illinois, Eastern Division.
No. 21-cv-06112
Nancy M. Maldonado,
Judge.
O R D E R
This case concerns whether an insurance policy requires an insurer to defend an
architectural firm against a lawsuit alleging that the firm inadequately designed and
oversaw the construction of a building. The district court, interpreting the policy in light
of what most appellate courts in Illinois had said about the issue, concluded that the
answer was no. Since then, the Illinois Supreme Court has overruled those appellate
decisions. See Acuity v. M/I Homes of Chicago, LLC, 2023 IL 129087, 234 N.E.3d 97, reh’g
denied (Jan. 22, 2024). That intervening decision indicates that the insurer owes the
architectural firm a duty of defense. We therefore vacate and remand.
NONPRECEDENTIAL DISPOSITION
To be cited only in accordance with F ED. R. APP . P. 32.1

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No. 23-1152 Page 2
I. Factual Background
A. The Underlying Counterclaim and Complaint
Cornice & Rose International, LLC and James Gray—an architectural firm and its
owner—designed and oversaw the construction of a building in Iowa.1 According to
the contract between Cornice and the building’s owner, Cornice agreed to provide the
following services:
1. Prepare drawings illustrating the design of the building.
2. Prepare drawings and specifications “setting forth in detail the
quality levels of materials and systems and other requirements for the
construction” of the building.
3. Evaluate 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.” Cornice,
however, was liable only for its own failure to perform and not the failure
of construction workers to perform.
Years later, the building’s owner and its lender filed a counterclaim against
Cornice in an Iowa federal court under several theories, including breach of contract
and negligence.2 The counterclaim alleged that “construction was not complete” and
that Cornice “fail[ed] to provide design in accordance with the standard of care,” which
left the building with a litany of “defects and design problems.” For example, 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, and that a
heater Cornice used left residue on surfaces, which meant the owner had to treat those
surfaces. These problems—resulting from what the counterclaim termed was “the
negligent provision of architectural services”—cost over three million dollars to fix.
1 Cornice & Rose International is a Limited Liability Company organized and existing under the laws of
the State of Illinois. (Dkt. 1).
2 See Cornice & Rose, International, LLC v. Four Keys, LLC, Case No. 6:20-cv-2097, United States District
Court for the Northern District of Iowa. (Dkt. 1-8).

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No. 23-1152 Page 3
The owner and lender eventually dismissed their counterclaim and sued Cornice
in Iowa state court instead. The state court complaint is materially identical to the
federal counterclaim.
B. Cornice’s Insurance Policy
Cornice did not obtain malpractice insurance. Instead, it acquired successive,
annual “commercial general liability” policies from Acuity, an insurance company.
These policies covered Cornice during the relevant period and stated that Acuity had a
duty to defend Cornice in any suit seeking to recover for “property damage” caused by
an “occurrence.” The policies defined each term:
1. “[O]ccurrence” meant “an accident, including continuous or
repeated exposure to substantially the same general harmful
conditions.”
2. “Property damage” meant either “[p]hysical injury to tangible
property, including all resulting loss of use of that property” or
“[l]oss of use of tangible property that is not physically injured.”
II. District Court Proceedings
Forty days after the building owner filed its counterclaim, Cornice sued Acuity
in federal court based on diversity jurisdiction and sought a declaratory judgment
requiring Acuity to defend it under the policies. Cornice also alleged breach of contract,
arguing that Acuity was equitably estopped from defending against the breach of
contract claim, and sought costs under Section 5/155 of the Illinois Insurance Code. Each
party moved for a judgment on the pleadings under Federal Rule of Civil Procedure
12(c).
The district court granted Acuity’s motion and denied Cornice’s.3 The court—
relying on how most appellate courts in Illinois had interpreted similar policies—
concluded that Acuity had no duty to defend Cornice because the Iowa lawsuit did not
seek to recover for “property damage” arising out of an “occurrence.” The court also
determined that Acuity was neither estopped from defending against the breach of
contract claim nor liable for costs.
3 This initial ruling concerned only whether Acuity had a duty to defend Cornice in the Iowa federal
court proceeding. Afterward, the parties agreed that the ruling also applied to the Iowa state court
proceeding, leading the district court to enter a judgment deciding the case in favor of Acuity.

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No. 23-1152 Page 4
III. Discussion
On appeal, Cornice contests all three rulings. It argues that Acuity has a duty to
defend, that equitable estoppel prevents Acuity from contesting the breach of contract
claim, and that Acuity owes costs under the Illinois Insurance Code.
We review the entry of judgment on the pleadings de novo, construing the
allegations in the light most favorable to the non-movant. Federated Mut. Ins. Co. v. Coyle
Mech. Supply Inc., 983 F.3d 307, 313 (7th Cir. 2020). If it is beyond doubt that the non-
movant cannot prove facts sufficient to prevail, we must rule for the movant. Id.
In addition, because we are sitting in diversity, we apply state substantive law.
Mathis v. Metro. Life Ins. Co., 12 F.4th 658, 661 (7th Cir. 2021). Here, the parties agree that
Illinois law controls. This means that our task is to resolve the issues as the Illinois
Supreme Court would. Mashallah, Inc. v. W. Bend Mut. Ins. Co., 20 F.4th 311, 319 (7th Cir.
2021).
A. Duty to Defend
Cornice first argues that Acuity has a duty to defend it against the Iowa suit.
To analyze whether a party has a duty to defend under Illinois law, we compare
the language in the insurance policies with the allegations in the underlying complaint.
Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 860 N.E.2d 307, 314 (Ill. 2006). When doing
so, we must liberally construe the allegations in favor of the insured. Id. If the complaint
alleges facts bringing the suit within or potentially within a policy’s coverage, then the
insurance company must defend the policyholder. Id. at 315. This holds true even when
the allegations are false and even when only one of the theories of recovery in the
complaint might trigger the duty to defend. Id.
Here, the policies require Acuity to defend Cornice against any lawsuit alleging
“property damage” stemming from an “occurrence.” As we have discussed, the policies
define “property damage” as “[p]hysical injury to tangible property” or the loss of use
of that property. And the policies define “occurrence” as “an accident, including
continuous or repeated exposure to substantially the same general harmful conditions.”
Much of the briefing and argument in this case focused on which property was
allegedly damaged and how. In particular, the parties considered whether the Iowa

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No. 23-1152 Page 5
lawsuit simply sought to hold Cornice responsible for the cost of repairing and
replacing the work that Cornice had contracted to provide. This approach was
understandable. Many appellate courts in Illinois had held that, for damage to
constitute “property damage,” the property in question must fall “beyond [the scope] of
the contractor’s work product.” Certain Underwriters at Lloyd’s London v. Metro. Builders,
Inc., 158 N.E.3d 1084, 1096 (Ill. App. Ct. 2019). By the same token, 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.” Id. at 1093. These interpretations were driven by the idea
that commercial general liability policies are meant to protect against freak accidents,
not against run-of-the-mill breach of contract claims. Id. at 1093, 1095 (“[T]he case law
has focused at least as much on the purposes of CGL policies as it has on textual
interpretation and application.”).
After we held oral argument, the Illinois Supreme Court rejected the above
approach. In doing so, it reiterated the long-standing rule that courts must interpret
insurance policies not in light of “policy considerations” but in the way that an
“average, ordinary, normal, [and] reasonable person” would read them. M/I Homes, 234
N.E.3d at 105 (citation omitted).
The Illinois Supreme Court accordingly concluded that “property damage”
meant only physical injury to tangible property and no more. Id. at 106. If the property
“is altered in appearance, shape, color or in other material dimension,” that is enough.
Under that definition, the complaint in M/I Homes, which sought damages to repair the
insured’s alleged faulty workmanship on a group of townhomes, alleged “property
damage.” Id. It did not make a difference that the damage occurred to property that was
within the scope of the insured’s project. See id.
A similar analysis followed for “occurrence.” That term, according to M/I Homes,
meant only “an unforeseen occurrence, usually of an untoward or disastrous character,
or an undesigned, sudden, or unexpected event of an inflictive or unfortunate
character.” Id. at 106–07 (citation omitted). So it encompassed “unintended and
unexpected harm caused by negligent conduct.” Id. In turn, because the contractors in
M/I Homes did not intend or anticipate the defects or the resulting harm to the
townhomes, the damage was caused by an “occurrence.” Id. at 108. This reasoning
tracks how we understood the term “occurrence” in Prisco Serena Sturm Architects, Ltd.
v. Liberty Mut. Ins. Co., 126 F.3d 886, 890–91 (7th Cir. 1997).

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No. 23-1152 Page 6
At our request, the parties have submitted supplemental briefing on how M/I
Homes affects this dispute. Cornice argues that M/I Homes clarified what had been the
law in Illinois all along. Acuity concedes that after M/I Homes, the Iowa lawsuit
potentially includes allegations of “property damage” stemming from an “occurrence”
but argues that we should apply the rule of M/I Homes only prospectively.
We agree with Cornice that M/I Homes makes it clear that Acuity must defend
Cornice. To start, the complaint here alleges “property damage” because it seeks to hold
Cornice responsible for damaging tangible property. M/I Homes, 234 N.E.3d at 106. The
most obvious example is the rotted roofing material. This allegation, like the water
damage in M/I Homes, involved tangible property that had been altered in appearance
or in another material dimension. Acuity’s counterargument—that Cornice damaged its
own project—no longer carries weight.
The same is true for “occurrence.” The underlying lawsuit alleges that Cornice
negligently designed the building. Nowhere does it claim that Cornice intended or
expected the defects. As a result, the supposedly inadequate work that Cornice
performed counts as an “accident.” Id. at 107–08; accord Prisco Serena Sturm Architects,
Ltd., 126 F.3d at 890–91. Once again, Acuity’s response—that faulty work is not an
accident—has been rejected by the Illinois Supreme Court.
Finally, we reject Acuity’s position that M/I Homes is an outlier case that falls
outside the presumption of retroactive application because the case changed the law.
See Tzakis v. Maine Twp., 181 N.E.3d 812, 818 (Ill. 2020) (listing factors to consider when
deciding whether to override the presumption that an opinion applies retroactively).
Rather than changing the law, M/I Homes reiterated the long-standing principle that
contracts are to be interpreted as written. M/I Homes, 234 N.E.3d at 105. At most, it
clarified Illinois law and abrogated decisions that interpreted insurance policies based
on their generic purpose instead of their text. See id.
For these reasons, we conclude that the Iowa counterclaim alleges “property
damage” caused by an “occurrence,” meaning Acuity must defend Cornice against the
suit.4
4 Acuity asserts in its post-argument supplemental briefing that we should consider two policy
exclusions that bear on its duty to defend, or at least remand for the district court to consider these
exclusions. We decline this invitation because the argument is waived. See Sullivan v. Flora, Inc., 63 F.4th
1130, 1137–39 (7th Cir. 2023). Acuity has never before argued that the exclusions apply. On the contrary,

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No. 23-1152 Page 7
B. Equitable Estoppel
Under Illinois law, when a complaint alleges facts within or potentially within
the coverage of an insurance policy, the insurer must either defend against the suit or
seek a declaratory judgment stating that it need not do so. Standard Mut. Ins. Co. v. Lay,
989 N.E.2d 591, 596 (Ill. 2013). If the insurer fails to take either of these steps within a
“reasonable time,” it cannot turn around and say that it acted in accordance with the
policy. Korte Constr. Co. v. Am. States Ins., 750 N.E.2d 764, 770 (Ill. App. Ct. 2001).
Whether the insurer sought a declaration within a reasonable time depends on the
circumstances of each case. First Chicago Ins. Co. v. Molda, 36 N.E.3d 400, 419 (Ill. App.
Ct. 2015).
Cornice argues that estoppel applies because the underlying counterclaim
alleged facts potentially within its insurance coverage and Acuity never sought a
declaratory judgment. Although the complaint does involve allegations that the
insurance policies might cover, Cornice did not give Acuity a reasonable amount of
time to seek a declaratory judgment before filing this action.
Cornice sued just forty days after notifying Acuity of the Iowa lawsuit. While the
raw amount of time is not dispositive because each case must be judged on its own
facts, requiring Acuity to seek a declaratory judgment within thirty-nine days would be
at odds with the delays other courts have considered reasonable. See, e.g., Nautilus Ins.
Co. v. Bd. of Directors of Regal Lofts Condo. Ass’n, 764 F.3d 726, 733 (7th Cir. 2014) (in
applying Illinois law the Court concluded that waiting five months was reasonable);
Westchester Fire Ins. Co. v. G. Heileman Brewing Co., 747 N.E.2d 955, 965 (Ill. App. Ct.
2001) (concluding that waiting six months was reasonable). In addition, Acuity moved
for a judgment on the pleadings in this case—arguing that it did not have a duty to
defend—just two months after Cornice sued. See L.A. Connection v. Penn-Am. Ins. Co.,
843 N.E.2d 427, 264–66 (Ill. App. Ct. 2006) (concluding that an insurer discharged its
duty to defend by, within four months of denying coverage, filing a cross claim for
declaratory relief in a suit initiated by the insured). Considering the facts of this case,
we cannot say that Acuity waited an unreasonable amount of time to ask a court to rule
that it need not defend Cornice.
Acuity admitted below Cornice’s allegation that, “[n]one of the Acuity Policies contain an exclusion
barring coverage for any property damage in any way arising out of professional services rendered by
C&R.”

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No. 23-1152 Page 8
C. Section 5/155 of the Illinois Insurance Code
Lastly, Cornice invokes Section 5/155 of the Illinois Insurance Code, which allows
a party to recover costs for a “vexatious and unreasonable delay” in settling a claim. 215
ILCS 5/155. A delay is permissible if a genuine dispute exists over the scope of the
coverage. TKK USA, Inc. v. Safety Nat. Cas. Corp., 727 F.3d 782, 793 (7th Cir. 2013).
Because Acuity presented legitimate arguments, especially considering the state of
Illinois case law at the time, it did not engage in a vexatious or unreasonable delay.
IV. Conclusion
For these reasons, we VACATE the judgment of the district court regarding
Acuity’s duty to defend. We AFFIRM in all other respects. And we REMAND for
further proceedings consistent with this order.

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