Builder’s insurance must replace faulty building

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“There is nothing in the language of the current CGL policy to support any definitive tort/contract line of demarcation for purposes of determining whether a loss is covered by the CGL’s initial grant of coverage. ‘Occurrence’ is not defined by reference to the legal category of the claim. The term ‘tort’ does not appear in the CGL policy.” Hon. Diane S. Sykes Wisconsin Supreme Court

Sinking soil under a building is an “occurrence” in a builder’s CGL policy, requiring that the insurer provide coverage for the faulty construction, the Wisconsin Supreme Court held on Jan. 9.

The court also held that a “contractually-assumed liability” exclusion in a standard CGL policy only bars coverage if the insured agreed to indemnify or hold another person harmless.

In so holding, the court reversed a published decision of the court of appeals, American Family Mut. Ins. Co. v. Pleasant Co., 2002 WI App 229, 257 Wis.2d 771, 652 N.W.2d 123, which held that any binding contract constitutes an assumption of liability.

In 1994, The Pleasant Company entered into a contract with The Ren-schler Company for the design and construction of a large distribution center warehouse, dubbed the “94DC,” on Pleasant’s Middleton, Wisconsin, campus.

Renschler warranted to Pleasant that the design and structural components of the 94DC would be free from defects, and that Renschler would be liable for any consequential damages caused by any such defects.

Renschler hired Clifton E.R. Lawson , a soils engineer, to conduct an analysis of soil conditions at the site. Lawson concluded that the soil conditions were poor and recommended “rolling surcharging” to prepare the site for construction.

The surcharging was done according to Lawson’s professional advice, and the building was completed in August 1994. Pleasant took occupancy, but soon thereafter, the 94DC began to sink. Ultimately, the building sunk 18 inches, and had to be dismantled. It is undisputed that Lawson’s faulty advice was a substantial factor in causing the settlement.

American Family Insurance Company, Renschler’s insurer, brought a declaratory judgment action regarding coverage under commercial general liability (CGL) and excess policies it had issued.

“The risk that the unstable subsoil conditions would continue was a known risk. If Renschler did not want to shoulder that risk, it could have required a performance bond or a warranty from Lawson similar to the one Pleasant obtained from it.” Hon. Patience D. Roggensack, in dissent

On motions for summary judgment, Dane County Circuit Court Judge John C. Albert concluded that American Family’s CGL policies for the years 1994-95, 1995-96, and 1996-97 provided coverage, and none of the policy exclusions applied, but that the 1993-94 policy did not, as it pre-dated the loss.

The court also concluded that neither the economic loss doctrine nor the known loss doctrines precluded coverage, but that the “professional services liability” exclusions in the excess policies excluded coverage under those policies.

Finally, the court held that the known loss doctrine precluded coverage by four other insurers whose policies did not come into effect until the settlement problem was known.

The court of appeals reversed as to American Family’s base CGL policies for the years 1994-97, relying on its decision in Nelson v. Motor Tech, Inc., 158 Wis.2d 647, 462 N.W.2d 903 (Ct.App.1990), concluding that the contract between Pleasant and Renschler constituted an assumption of liability excluded by the CGL policy.

The Supreme Court accepted review, and reversed in a decision written by Justice Diane S. Sykes and joined by Justices David T. Prosser
and Ann Walsh Bradley.

Justices Patience D. Roggensack and N. Patrick Crooks dissented, and Chief Justice Shirley S. Abrahamson and Justice Jon P. Wilcox did not participate.

Property Damage

The court first held that the damages alleged by Pleasant constitute “property damage” within the meaning of the CGL policies, and that the economic loss doctrine does not affect an insurer’s duty to provide coverage.

The court acknowledged that the economic loss doctrine may preclude any recovery in tort, but found it irrelevant to the coverage issue, stating, “The economic loss doctrine is a remedies principle. It determines how a loss can be recovered — in tort or in contract/warranty law. It does not determine whether an insurance policy covers a claim, which depends instead upon the policy language.”

The court further concluded that the damage constitutes an “occurrence” within the meaning of the CGL policy, reasoning, “No one seriously contends that the property damage to the 94DC was anything but accidental (it was clearly not intentional), nor does anyone argue that it was anticipated by the parties. The damage to the 94DC occurred as a result of the continuous, substantial, and harmful settlement of the soil underneath the building. Lawson’s inadequate site-preparation advice was a cause of this exposure to harm. Neither the cause nor the harm was intended, anticipated, or expected. We conclude that the circumstances of this claim fall within the policy’s definition of ‘occurrence.’”

The court acknowledged that previous case law suggests a loss actionable in contract can never constitute an “occurrence,” but held, nevertheless, “there is nothing in the basic coverage language of the current CGL policy to support any definitive tort/contract line of demarcation for purposes of determining whether a loss is covered by the CGL’s initial grant of coverage. ‘Occurrence’ is not defined by reference to the legal category of the claim. The term ‘tort’ does not appear in the CGL policy.”

The court added that, if a contract loss could never constitute an “occurrence,” then business risk exclusions in policies would be superfluous, reasoning, “The business risk exclusions eliminate coverage for liability for property damage to the insured’s own work or product — liability that is typically actionable between the parties pursuant to the terms of their contract, not in tort. If the insuring agreement never confers coverage for this type of liability as an original definitional matter, then there is no need to specifically exclude it. Why would the insurance industry exclude damage to the insured’s own work or product if the damage could never be considered to have arisen from a covered ‘occurrence’ in the first place?”

Assumed Liability

Turning to the issue on which the court of appeals rested its decision, the court reversed the holding that coverage was excluded under the “contractually-assumed liability” exclusion.

The court of appeals has adopted two different interpretations of su
ch exclusions: Nelson v. Motor Tech, Inc., 158 Wis.2d 647, 462 n.W.2d 903 (Ct.App.1990)(exclusion bars coverage for all contractual liabilities); and Meyer v. U.S. Fire Ins. Co., 218 Wis.2d 499, 582 N.W.2d 40 (Ct.App.1998)(exclusion refers only to indemnification or hold harmless agreements, not general contracts).

Adopting the interpretation in Meyer, the court concluded, “The term ‘assumption’ must be interpreted to add something to the phrase ‘assumption of liability in a contract or agreement.’ Reading the phrase to apply to all liabilities sounding in contract renders the term ‘assumption’ superfluous. We conclude that the contractually-assumed liability exclusion applies where the insured has contractually assumed the liability of a third party, as in an indemnification or hold harmless agreement; it does not operate to exclude coverage for any and all liabilities to which the insured is exposed under the terms of the contracts it makes generally.”

Business Risk

The court further held that coverage was not precluded by the “business risk” exclusion, which applies to property damage to “that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”

The policy contains an exclusion to the exclusion for damage arising from the work of a subcontractor. Thus, the court concluded, “Coverage would be excluded by the business risk exclusionary language, except that the subcontractor exception to the business risk exclusion applies, which operates to restore the otherwise excluded coverage.”

Accordingly, the court held that American Family’s CGL policies provide coverage for Pleasant’s claim, and reversed.

Excess Coverage

However, the court held that the excess liability policies do not provide coverage because of “professional services liability” exclusions in those policies.

The court distinguished the case of Leverence v. United States Fidelity & Guaranty, 158 Wis.2d 64, 462 N.W.2d 218 (Ct.App.1990), in which such an exclusion was held inapplicable, where all professional services were provided by the general contractor.

Distinguishing Leverence, the court reasoned, “This case thus does not pose the analytical dilemma that troubled the court in Leverence; there, the professional services inextricably combined with the manufacturing services to produce the claimed injury. Here, it is undisputed that flawed professional soil engineering services were a substantial factor in causing the excessive soil settlement and resultant property damage to the 94DC. Accordingly, we conclude that the professional services liability exclusion in American Family’s excess policies applies.”

The Dissents

Both Crooks and Roggensack wrote dissents, each joined by the other.

The Crooks dissent discussed the economic loss doctrine, disagreeing with the majority conclusion that the doctrine is irrelevant to coverage issues.

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Crooks reasoned, “Through the contractual warranty, Renschler assumed liability for defects in the construction of building 94DC. Because Renschler’s services allegedly failed in the intended purpose of the contract, Renschler breached the contractual warranty. Breach of a contract or a warranty resulting in economic loss is not a covered ‘occurrence’ under American Family’s CGL policy. Since the CGL policies at issue do not cover the contract claims, and since the economic loss doctrine prevents any tort claim, American Family has no duty to defend or indemnify Renschler against Pleasant’s damage claims.”

The Roggensack dissent argued that there was no “occurrence” within the meaning of the policy, reasoning, “the settling was not an unexpected outcome of construction. It was a known possibility. Furthermore, the settling did not take place due to an unknown cause. It was well recogni
zed that the soil conditions were unfavorable to construction and if they continued there would be problems.”

Discussing the purpose of a CGL policy, Roggensack argued that such a policy “is written to cover the risks of injury to third parties and damage to the property of third parties caused by the insured’s completed work. It is not written to cover the business risk of failing to provide goods or services in a workmanlike manner to the second party to the contract.”

Roggensack added, “the risk that the unstable subsoil conditions would continue was a known risk. If Renschler did not want to shoulder that risk, it could have required a performance bond or a warranty from Lawson similar to the one Pleasant obtained from it.”

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David Ziemer can be reached by email.