By: Tina Paries
In Illinois, courts look at the allegations of a complaint and language of an insurance policy to determine whether the potential for coverage exists. If it does, then an insurer has a duty to defend its insured against those allegations. One area where the courts have been consistent is where property damage is caused by defective construction. Such claims are typically not covered because damage caused by a construction defect is not caused by an “occurrence” or an “accident” and is instead considered the “natural and ordinary consequence” of faulty construction. Similarly, where the damage is to the insured’s own work, rather than to other property, the damage is not considered “property damage” and is instead considered an economic loss which is not covered.
However, in a recent case, Westfield Insurance Company v. National Decorating Service, 863 F.3d 690 (7th Cir. Jul. 13, 2017), a Federal appellate court found that property damage caused by defective construction could potentially be covered. In that case, a condominium association filed a lawsuit against, among others, a contractor alleging that its building had sustained cracking and water infiltration as a result of the contractor’s failure to apply an adequate coat of sealant to the exterior of the building during construction. The association further alleged that such cracking and water infiltration caused damage to the common elements of the building. The contractor tendered the claim to its insurer who denied coverage because the lawsuit purportedly did not allege an “accident” but rather alleged damage as a result of defective construction to the contractor’s own work – i.e., the building.
The Court disagreed with the insurer and found that the insurer had a duty to defend the contractor in the lawsuit. Specifically, the Court held that because the definition of “occurrence” in the insurance policy included “continuous or repeated exposure to conditions,” the allegations of negligence against the contractor were sufficient to constitute an “accident.” The Court also held that the nature of the “property damage” in the context of a construction defect claim should be evaluated by determining the contractor’s scope of work, rather than the nature of the project itself. Under this rationale, the Court found that although the contractor was responsible for applying sealant to the exterior of the building, the lawsuit alleged that the cracking and water infiltration caused damage to other portions of the building, and not just the work the contractor performed to the exterior. The Court further rejected the insurer’s argument that the project should be considered the entire building rather than just the sealant services performed by the contractor.
This recent case serves as a reminder that, depending on the allegations in a lawsuit, there can potentially be coverage even for certain damage caused by defective construction. It is therefore important to tender any such claims or lawsuits to your insurer.