Different states treat disclosure differently, mostly due to state legislatures whoring themselves out to the realty lobby and to the lack of any locals willing to take up Ralph Nader's cause and be the consumer advocate we need. In fairness, there has to be a broad support to turn the legislature away from the corrupt money of the lobbyist.
The fact that the original inspection passed is now irrelevant, but the situation changed when Zombie essentially directed the contractor to change the configuration. Whereas it is true that the contractor violated code, the property owner is now aware of it and shares an ethical obligation to inform the buyer regardless of whether there is any legal liability.
And, the legal liability could be there too (although I have zilch knowledge of city, county, or state standards for Chicago.) The seller gave the buyer the right of inspection after the offer was accepted for the sale. The sale was contingent (usually) on the inspection(s) not revealing any untenable condition (barring the sale being in As Is condition). It is clear now that the condition of the furnace flue is now changed post-inspection, and with the knowledge of the seller, so the liability would seem likely.
Zombie, I think you are worried for nothing. If I were you, I would get the contractor back, and this time have a letter from your lawyer in hand. Your letter should detail that you hired him, he performed substandard work, and then returned to correct it by performing an illegal alteration that resulted in an unsafe condition. With no smiles, no happy face, and with a witness present, demand that he immediately make correction to the system at his expense lest you proceed to legal action as well as reporting to the licensing authorities for city, county and state.
The first error was somewhat amusing -- this second is too much. It isn't your problem, but his.
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