Policy wording at heart of state Supreme Court case

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Insurance firms debate meaning of ‘occurrence’ after construction damages building, disrupts utility services

The Wisconsin Supreme Court in fall will hear a construction litigation case in which an insurance company might be compelled to pay more than $600,000 in subrogation claims based on the interpretation of the word “occurrence,” the economic loss doctrine and commercial general liability policy exclusionary language.

In 2006, VPP Group LLC hired two contractors to remove and replace a concrete wall in an engine room building tied to the company’s animal processing plant. VPP supplied the equipment and materials, with local contractors Flint’s Construction and RS Construction supplying the labor.

A short Bid Memo memorialized the agreement: “Bid to include labor for Removal and installation of 49’ x 22’ h concrete wall; Also include shoring and related work.”

The total contract price was $8,500.

On June 12, 2006, earth beneath the VPP engine room on the first floor eroded during a nearby trench excavation, cracking the first-floor slab. Substantial downward-angled damage also affected the second floor and roof.

With key engine room electrical and cooling components compromised, utility service to the rest of the processing plant was disrupted. That cut the processing plant’s refrigeration capacity by 20 percent, disabled a rooftop condenser and cracked a large cooler for processed meat in an adjacent building.

VPP was forced to take on additional costs and temporarily make major changes to its processing schedule, all allegedly costing the company upwards of $380,000.

When adjusted losses were tabulated, Acuity paid out $636,466 to VPP. Acuity then filed a subrogation lawsuit against the two contractors and their insurance company, Society Insurance.

At the circuit court, Society Insurance was granted summary judgment based on its assertion there was no actual “occurrence” that took place within the parameters of its insurance policy.

Acuity appealed, in part claiming an “occurrence” did take place when the soil quickly eroded under the first-floor engine room slab.

The Society Insurance CGL contract policy language at issue was:

“Business Liability: a. We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘property damage’ …to which this insurance applies.

“b. This insurance applies: (1) to … ‘property damage’ only if: (a) The … ‘property damage’ is caused by an ‘occurrence’ that takes place in the ‘coverage area.’”

The Society Insurance policy also contained two exclusionary clauses. According to section k(5), coverage would be excluded if it involved “property damage” to: “that particular part of the real property on which you or any contractor … working directly or indirectly on your behalf is performing operations … if the damages arise out of those operations.”

The second exclusion is section k(6), which would apply when the “property damage” was “that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”

To determine whether liability insurance coverage applied, the appellate court first applied a three-step process. It initially looked at the facts of the underlying insured’s claim to see whether the policy’s insuring agreement “makes a grant of initial coverage.” If yes, then the court “look(s) to see if any exclusions apply.”

Ultimately, the appellate court reversed the circuit court’s summary judgment, finding that an “occurrence” had taken place, that Society Insurance policy coverage did apply, and that its decision was consistent with earlier Wisconsin case law, including American Family Mutual Insurance v. American Girl, v. 2004 WI 2.

The American Girl case involved faulty workmanship by a soil engineer that caused a distribution warehouse to partially sink into the surrounding soil. Among other findings, the court noted that “occurrence” was not the faulty work by the soil engineer, but the actual soil erosion that later took place.

In its brief to the Supreme Court, Society asserted the appellate court was misguided in its determination that an “occurrence” had taken place, that the economic loss doctrine did not apply and that the court had too narrowly applied the CGL exclusionary language.

In part, Society urged the court to adopt the positions of the dissenting justices, Patience Roggensack and N. Patrick Crooks, in American Girl and look at the majority opinion in light of what was considered to be established precedent in other Wisconsin cases and national trends.

In opposition, Acuity alleged the mandate of American Girl is sound and that contract claims can and should be the basis for CGL policy coverage in certain situations.

Additionally, there is a growing trend of case law similar to American Girl, according to Acuity, in which courts around the country more broadly construe the definition of “occurrence.” This would include an increasing number of cases in which an accident or event need not be so calamitous, similar to the soil erosion caused by local contractors.

If the Supreme Court does further clarify its position on “occurrence” and the economic loss doctrine, the court’s decision could affect how insurance company CGL policies are drafted as they apply to Wisconsin projects or to circumstances in which Wisconsin law will be applied.