The state Supreme Court is considering whether or not an insurer has to cover a claim against a contractor for property damage, which arose out of negligent work performed by a subcontractor, despite a CGL policys contractual liability exclusion.
According to court records, the case involves a claim The Pleasant Company, a Middleton doll manufacturer, made against The Renschler Company for damage to a distribution center, which Renschler built. The damage was due to excessive settling of the building after it was constructed.
Prior to construction, Renschler hired Clifton E.R. Lawson to review soil quality at the site. Lawson suggested dumping dirt on top of the existing soil and letting it settle before beginning construction, a process called surcharging. Lawson then indicated when it was appropriate for Renschler to begin construction.
Construction began in 1994 and by March of the following year, Renschler became aware that the building was settling. Throughout the next few years, uneven settling continued and part of the building began buckling, steel supports were deformed, the floor cracked, sewer lines moved and drywall was damaged.
By 1999, the building had sunken 18 inches. Some of the steel in the building was so overstressed that portions of the building had to be dismantled.
Pleasant filed a demand for arbitration, seeking at least $8 million in damages from Renschler. One claim alleged that Renschler breached its construction contract with Pleasant and another alleged the contractor was responsible for the negligent work of Lawson, a subcontractor on the project.
The arbitration was put on hold while Renschler sought coverage under its comprehensive general liability (CGL) insurance policy with American Family Mutual Insurance Company. A circuit court judge determined coverage under the regular policy, which provided $2 million, was available. However, he found the professional services exclusion in the excess liability policy, which would have provided an additional $4 million, denied coverage for problems arising from the insureds professional services.
All three participants went to the court of appeals, which reversed the determination that American Family was responsible for the $2 million from the CGL policy, since a policy exclusion denies coverage where the insured entered into a contract to perform certain services.
Both Pleasant and Renschler petitioned the Supreme Court for review of that decision to determine whether a construction contractor would be barred from collecting on a claim arising from a subcontractors work due to the contractual liability exclusion typically included in CGL policies.
A Case for Coverage
During Sept. 9 oral arguments, Paul W. Schwarzenbart of the firm Lee, Kilkelly, Paulson & Younger S.C. in Madison, represented Renschler. Schwarzenbart maintained that Lawsons negligent soil analysis and inadequate soil surcharging led to unexpected, unintended and highly unusual building settlement. That settlement caused extensive physical damage to the building.
Schwarzenbart told the court there are four reasons he believed liability arose from these events and warranted coverage from American Family:
1) Renschlers potential legal obligation to pay damages to the owner for physical injury to the building fell within the scope of the insuring clause.
2) The contractual liability exclusion clause relied upon by the court of appeals in this case had no ability to negate coverage in this context.
3) The business risk exclusion which operated here for completed operations also did not apply to negate coverage because under the 1986 version of the CGL policy there was an exception where the damaged work or the work out of which the damage arose was performed by a subcontractor.
4) None of the other exclusions cited by the insurers applied to negate coverage in this context.
Justice Ann Walsh Bradley pointed to a portion of the CGL policy where the insurer would not be liable for coverage once construction was completed. However, Schwarzenbart responded by highlighting an exception to that exclusion for damages arising from the work of a subcontractor conducted on behalf of the insured contractor.
Michael G. Laskis, of the firm Foley & Lardner in Madison, representing Pleasant, also supported the idea that the policy provided coverage for subcontractor negligence. Laskis acknowledged that the exclusion meant the insurance company would not cover the claim if the contractors defective work negatively impacted the project once work was completed. However, given the subcontractor exception to the exclusion, the company should provide coverage, he said.
e got a defective work problem. A subcontractor caused it. It damaged the project. The damages arose after the project was completed. It fell within the projects completed hazard, Laskis said. Therefore, the company should provide coverage.
The Case Against Coverage
Wayne M. Yankala, of Mingo & Yankala S.C. in Milwaukee, represented American Family Mutual Insurance Company. Yankala maintained that looking at an exception to an exclusion could not create coverage. Additionally, he said the breach of contract claim meant it was a contractual issue and did not involve a tort, which would result in coverage.
Its my position that an exception to an exclusion cannot create coverage, Yankala told the court. You have to look at the completed operations coverage. … The completed operations coverage only provides coverage to Renschler if Renschlers work … causes property damage meaning physical injury to tangible property.
That was not the situation in this case, Yankala observed, noting that damages were limited to tearing down a portion of the building and rebuilding it. There was no specified damage to tangible property within the building.
Schwarzenbart challenged the idea that damage to the building did not constitute physical injury to tangible property. There are no other adjectives in the definition of property damage that suggest that property damage is limited to third party property or other property, he said.
If the insureds own work cant be property damage within the definition of the insuring clause, we dont need these business risk exclusions, we dont need an impaired property exclusion, we dont need a sistership exclusion, we dont need an exclusion for damage to your own property.
Yankala defined the issue in terms of a contractual issue where the two parties appreciated the risks and negotiated accordingly. Responding to a question from the court, Yankala said, My decision would read that all that is involved in this case is a contract dispute between two parties. That we have a breach of contract claim.
The economic loss doctrine limits any tort claim that might be existing somewhere. … Commercial general liability policies are not intended to cover breach of contract claims. And there is no occurrence because its strictly a breach of contract claim theres no damage to other property.
Schwarzenbart maintained that there clearly was an occurrence in this case. If you accept the argument that there is no occurrence: it contradicts the plain meaning of the clear and simple language in the policy; it produces absurd and unreasonable results; it renders the business risk exclusions in this policy meaningless; and its contrary to the courts general rule of construction that doubts as to coverage are construed in favor of the insured and that the policy has to be viewed from the standpoint of the insureds reasonable expectations.
The case also brought in West American and Ohio Casualty insurance companies, along with Regent Insurance Company and General Casualty Insurance Company of Wisconsin. Lee Anne N. Conta of Cook & Franke S.C. in Milwaukee represented General Casualty and Michael D. Lawrynk of Gabert, Williams, Konz & Lawrynk in Appleton, represented West American and Ohio Casualty.
Lawrynk argued that his clients provided coverage after construction of the building was completed and that Renschler was aware that it had begun to settle. He pointed to the known-loss doctrine, indicating that, since Renschler knew of the situation, the companies did not have to cover the situation. As the doctrine exists in Wisconsin, Lawrynk said, it does not require a proof of fraud or that damages and liability be established to a certainty.
I would define the known-loss doctrine hand in hand with the doctrine of fortuity, Lawrynk said. That insurance is meant to cover fortuitous losses and that they should not be required to cover a loss that was known…a loss that should have been known under the objective standard.
Conta noted that two years before General Casualtys policy took effect, Renschler had submitted a claim for damages on the project. She agreed that since the problem was known at the time coverage began, that it should not be covered by the policy.
My client did not issue an insurance policy until April 1, 1999 four years after this building began to sink. As Attorney Lawrynk points out, The Pleasant Company has conceded this doctrine bars coverage as to my client.
Both Chief Justice Shirley S. Abrahamson and Justice Jon P. Wilcox recused themselves. Justice Bradley, who is third in seniority on the court, presided over oral arguments for the first time.
The case is 01-1871, American Family Mutual Insurance Co. v. The Pleasant Co. et al. v. West American Insurance Co. et al.
Tony Anderson can be reached by email.