I think this is a problem with some of the templates in Flare 7. I have been generating Word documents all week, and I haven't had any problems. The first one was created using the Book template, and the other was created using the Empty template. Then I created a new project using the Policies/Procedures template and added a Word target. PDF generated fine, but I got the stylesheet error when I tried to generate the Word output. So I went exploring ....
Error message said I didn't have access to C:\Program Files (x86)\MadCap Software\MadCap Flare V7\Resources\MadCapBlaze.css. So I went over to look at the security permissions. Administrator group had full control, users group had "Read & Execute" and "Read" access. I happen to be an administrator on my machine, so I went ahead and gave the Users group Write and Modify access. Interestingly enough, Flare didn't recognize that I'm a member of the Administrators group AND the Users group. If I recall correctly, if a user has two different security levels assigned to them (like me), Windows is supposed to use the higher set of permissions. However, I have heard of problems where Windows uses the lower set of permissions. That appears to be going on here, but I don't know if that's the root issue. Tried generating Word output again, no problems this time.
And then I noticed something that tells me this definitely a problem with one or more templates (at least the Policies/Procedure template, apparently). The screenshot below is the folder structure for C:\Program Files (x86)\MadCap Software\MadCap Flare V7. I installed the application last week (I'm guessing March 3, judging from the folder creation dates, though I don't recall for sure). Around noon today, I created my project from the Policies/Procedure template.
For comparison, here's the folder structure for Flare 6:
In both Flare 6.1 and Flare 7, the MadCapBlaze.css stylesheet exists under MadCap Flare V<version>\Flare.app\Resources\BlazeTargetCompiler. I imagine this is the stylesheet that the project should point to (and, apparently, does for PDF or other targets), but it's creating a duplicate file in the main Flare directory instead. I'm guessing this is the root of the problem that we're all experiencing, but that still doesn't explain the permissions issue. Flare/Windows should have used my administrator privileges, not my user privileges. So there may be another issue there that you need to investigate.