In Westfield Ins. Co. v. Nat’l Decorating Service, Inc., 16-1439 , 2017 WL 2979654 (7th Cir. 2017) (Illinois law), the Seventh Circuit held that Westfield Insurance Company (“Westfield”) must defend several contractors and subcontractors that worked on a 24-story condominium building because the underlying complaint alleged “property damage” caused by an “occurrence.” The named insured, National Decorating Service Inc. (“NDS”), was retained as a painting subcontractor for the condominium building and was to apply a waterproof sealant to the exterior of the building. After the building suffered water damage, the condominium association brought suit against the general contractor who, in turn, brought suit against NDS, alleging damages resulted from NDS’s failure to apply a thick enough coat of sealant to the exterior of the building. The district court held Westfield had a duty to defend the defendants in the underlying action.
On appeal, Westfield advanced two arguments in support of its position that the damages alleged do not, as matter of law, constitute an “occurrence” under the policy. First, it argued there was no “accident” or “occurrence” because the damages alleged did not arise from an “unforeseen occurrence.” Although the court recognized that damage to a construction project that occurs as a result of a constructive defect is not an “accident” or “occurrence” under Illinois law because the damages are “the natural and ordinary consequence of faulty construction,” it held that negligently performed work or defective work can give rise to an “occurrence” under a CGL policy where the policy defines “occurrence” to include not only an accident, but also “continuous or repeated exposure to conditions,” as Westfield’s policy did.
Second, Westfield argued that the alleged damage was not covered because it was damage to the building itself. The court agreed that CGL policies are not intended to serve as performance bonds and “economic losses sustained as a result of defects in or damages to the insured’s own work or product are not covered.” However, the court found that when there is “damage to something other than the project itself” an “occurrence” requirement will be satisfied. Because the scope of the project was NDS’s work, and the underlying complaint sought “to recover for damages incurred to other portions of the building, not just the exterior,” the appellate court determined there was “property damage” caused by an “occurrence.”
Westfield suggests that damages resulting from construction defects may in some circumstances trigger the duty to defend when the policy defines “occurrence” to include “continuous or repeated exposure to conditions.” However, Westfield does not abrogate the well settled principle of Illinois law that economic losses are not “property damage” caused by an “occurrence.” In order to satisfy the “occurrence” requirement in a commercial general liability policy, there should have to be damage to something outside the insured’s scope of work.
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