Court Spells Out Scope of Coverage for Defective Construction Work
By Don R. Sampen, published, Chicago Daily Law Bulletin
[August 22, 2017]
The 7th U.S. Circuit Court of Appeals, construing Illinois law, recently held that an insurer had a coverage obligation arising out of its insured’s alleged faulty work in applying a waterproof sealant that resulted in damage to condominium property.
The insurer in Westfield Insurance Co. v. National Decorating Service Inc., 2017 U.S. App. Lexis 12516 (7th Cir. July 13), was represented by Lindsay, Rappaport & Postel. Hinshaw & Culbertson LLP represented the named insured, National Decorating.
Additional insureds, James McHugh Construction Co. and 200 North Jefferson LLC, were represented, respectively, by Franco & Moroney LLC and Stein Ray LLP.
200 North was the developer of the building in question. McHugh Construction was the general contractor. McHugh Construction subcontracted the exterior painting to National Decorating, which also was responsible for applying a waterproof sealant.
In 2012, the condominium association that took control of the building brought suit against 200 North, McHugh Construction, National Decorating and others, alleging defective construction.
An amended complaint claimed interior water damage to common elements of the building and to furniture within individual units. McHugh Construction subsequently filed an amended third-party complaint against National Decorating, claiming that its actions caused the damage.
Westfield issued a commercial general liability policy to National Decorating, on which policy 200 North and McHugh Construction were additional insureds.
Westfield brought the instant action in 2014 seeking a declaration that it had no duty to defend or indemnify any of the insureds. Upon cross motions for summary judgment, the U.S. District Court found in favor of coverage and against Westfield. Westfield filed this appeal.
In an opinion by Judge Ann Claire Williams, the 7th Circuit affirmed. She initially addressed the underlying complaint’s allegation concerning damage to individual unit owners’ property. Based on the language of the Illinois Condominium Property Act, 765 ILCS 605/9.1(b), and the court’s own decision in Allied Property & Casualty Insurance Co. v. Metro North Condominium Association, 850 F.3d 844 (7th Cir. 2017), the court here found that the association lacked standing to recover on behalf of the unit owners. The allegations of damage to unit owners, therefore, did not give rise to coverage.
As to the association property, Westfield advanced two arguments. The first was that National Decorating’s failure to properly coat the exterior of the building did not constitute an “occurrence,” defined to include an “accident,” which was necessary to trigger coverage under the policy.
It relied on case law holding that an “accident” is a sudden or unexpected event and that damage to a construction project that occurs as the result of a construction defect is not an “accident” because it is the natural and ordinary consequence of faulty construction.
Williams rejected the argument, stating that defective work could give rise to an accident or occurrence under a commercial general liability policy where the term “occurrence,” as here, was defined to include not only an accident, but also “continuous or repeated exposure to conditions.”
In addition, National Decorating was alleged to have been negligent. Under these circumstances, Williams said that the policy’s occurrence requirement gave rise to a duty to defend.
Westfield’s second argument was that commercial general liability policies do not serve as performance bonds for a contractor, and that they do not cover economic losses sustained as the result of defects in or damage to the insured’s own work or product. As part of this argument Westfield contended that the entire building constituted the relevant work or product.
Again, Williams disagreed. In doing so, she relied on Ohio Casualty Insurance Co. v. Bazzi Construction Co., 815 F.2d 1146 (7th Cir. 1987). In that case, the court found that a commercial general liability policy provided coverage for a contractor’s work on a building because the underlying complaint alleged that the damage caused by the contractor went beyond the contractor’s own work or product.
Williams rejected Westfield’s argument that Bazzi only involved work on an existing building and did not apply to new construction, such as was involved with the development here. Rather, she said, the relevant inquiry under Bazzi was what the parties contracted for.
She also distinguished CMK Development Corp. v. West Bend Mutual Insurance Co., 395 Ill.App.3d 830 (2009), where the named insured was the developer, and its “product” was clearly the entire home that had sustained damage.
In the case before her, Williams observed that National Decorating was responsible only for painting the exterior of the building, yet the underlying complaint sought to recover for damages incurred to other portions of the building, not just the exterior. The scope of the project for which National Decorating contracted could not be said to have been the entire building.
The court concluded that, because coverage was being sought for work beyond National Decorating’s work or product, Westfield’s duty to defend had been triggered by the allegations of negligence in the underlying complaint. It, therefore, affirmed the judgment of the district court.
- A condominium association in Illinois lacks standing to recover for personal property damage incurred by individual unit owners.
- A commercial general liability policy’s duty to defend may be triggered by allegations that defective work performed by the named insured caused damage beyond the scope of the named insured’s work.