Alleged Negligent Application of Sealant Was an “Occurrence” and Caused Damage to Structure Not Just Policyholder’s Own Work

The Seventh Circuit, applying Illinois law, upheld the district court’s ruling that Westfield Insurance Co. (“Westfield”) must defend a construction defect claim against several developers and contractors.  The appellate court found that, in a construction defect case, negligently performed work can constitute an “occurrence” when the policy defines “occurrence” to include “continuous or repeated exposure to conditions.” The appellate court also limited the scope of the project to include only the named insured’s work, compared to the construction of the entire building.  Therefore, because the underlying complaint alleged damage outside of the insured’s own work, which constituted an occurrence, Westfield’s duty to defend was triggered.

The coverage dispute arose out of the new construction of a condominium building which experienced water damage allegedly caused by failure of the painting subcontractor, National Decorating Service, Inc. (“National Decorating”), to apply an adequate coat of sealant to the exterior of the building.  The building’s condominium association sued the general contractor, developer, and various subcontractors to recover for damages to both the interior and exterior of the building.  The defendants tendered the defense to Westfield, National Decorating’s commercial general liability (“CGL”) insurer.  Westfield sought a declaration regarding its duties under the policy.  In response to cross-motions for summary judgment, the district court ruled that Westfield’s duty to defend was triggered.

On appeal, Westfield argued that the complaint did not allege a covered incident under the policy. Westfield’s policy defines an “occurrence” as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  According to Westfield, National Decorating’s failure to apply a thick enough coat of paint to the exterior of the building could not constitute an “accident” and without an “accident” there could not be an “occurrence” under the policy.  The appellate court disagreed with Westfield’s analysis: “Under Illinois law, negligently performed work or defective work can give rise to an ‘occurrence’ under a CGL policy.  This is true where, as is the case here, the policy defines an “occurrence” to include not only an accident, but also ‘continuous or repeated exposure to conditions.’” (internal citations omitted).  Thus, because the underlying complaint alleged National Decorating was negligent, it alleged an “occurrence” which triggered the duty to defend.

Westfield also argued that because the damage alleged was to new construction and not to an existing structure, the scope of National Decorating’s project was the entire building and, thus, there could be no coverage for the claims under Illinois law because all the alleged damage was to National Decorating’s own work.  The appellate court disagreed and found that, because the named insured, National Decorating, was responsible for painting the exterior of the building, the scope of the project was National Decorating’s work, not the construction of the entire building.  Therefore, because National Decorating’s actions were alleged to have damaged parts of the building that were outside of the scope of National Decorating’s project, there was  damage to something other than National Decorating’s work which triggered the duty to defend under the policy. Westfield Ins. Co. v. National Decorating Service, Inc., No. 1:14-cv-01572 (7th Cir. July 13, 2017).