State fund liable for private property loss

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“We reject the Commissioner’s argument that Wis. Stat. sec. 605.02 plainly prevents the Fund from choosing to insure the Ringle facility after its purchase by Fiber Recovery … where Fiber Recovery has chosen to exercise its option to have the County maintain insurance and where the County has a reversionary interest in the facility because of the installment payments still owing.” Hon. Margaret J. Vergeront Wisconsin Court of Appeals

The Wisconsin Court of Appeals held on Aug. 26 that, where a county owns land, but not the buildings on it, its insurance policy with the Local Government Property Insurance Fund nevertheless covers the building and personal property inside.

The Fund is established in Chapter 605 of the statutes to provide property insurance for local governments.

Marathon County owned a refuse-derived fuel plant on landfill property in the town of Ringle, and insured the property with the Fund. In June 1997, the county sold the building and equipment to Fiber Recovery, Inc., pursuant to an asset purchase agreement and quit claim deed.

The real estate on which the facility was located was not sold to Fiber Recovery but was leased to it for a nominal amount. The terms of payment were $250,000 payable in cash at closing, plus $1,000,000 paid in installments from income generated; the County was entitled to receive a mortgage encumbering the real property assets as security for Fiber Recovery’s performance.

Title to the facility was to indefeasibly vest with Fiber Recovery when full payment was made, and title would automatically revert to the County if Fiber Recovery abandoned the facility, with abandonment defined to include cessation of business for more than a specified number of days.

Paragraph 15 of the agreement required Fiber Recovery to maintain insurance at its expense, but gave Fiber Recovery the option of electing to have the County maintain this insurance, with Fiber Recovery reimbursing it, an option that Fiber Recovery elected.

The agreement also provided that both Fiber Recovery and the County had to indemnify and hold the other harmless for any liabilities arising out of their breach of the agreement.

On March 7, 2000, a fire occurred at the facility, causing significant damages. At the time of the fire there was at least $940,000 still due the County from Fiber Recovery.

The County notified the Fund of the fire loss and provided the asset purchase agreement and the quit claim deed to the adjuster acting on behalf of the Fund.

Although the Fund initially allowed coverage, it later contested it.

At the contested hearing, an ALJ decided there was coverage, and the Wisconsin Commissioner of Insurance sought judicial review. Dane County Circuit Court Judge Michael N. Nowakowski affirmed, and the Commissioner appealed.

The court of appeals affirmed in a decision by Judge Margaret J. Vergeront.

Section 605.02 provides, “Any local government may insure in [the Fund] its property or property for which it may be liable in the event of damage or destruction.”

At issue was the meaning of the phrase, “property for which [the local government] may be liable in the event of damage or destruction.

The court acknowledged two federal cases which limited similar language to property that was in the care, custody, and control of the insured. House of Lloyd, Inc. v. Versa Corp., 86 F.3d 847, 851-52 (8th Cir. 1996)(“property of others for which the insured may be liable”); and Paktank Louisiana, Inc. v. Marsh & McLennan, Inc., 688 F. Supp. 1087, 1090-91 (E.D. La 1988)(“property that the insured does not own for which the insured may be liable”).

Nevertheless, the court declined to adopt the reasoning of the federal courts because, “The Commissioner does not tie the construction of the insurance contract provisions in the above federal cases to the principles of statutory construction that we employ in Wisconsin.”

The court also noted, “neither of the federal cases, nor anything the Commissioner points to in the text or structure of ch. 605, persuades us that the liability the County would have if it had not maintained insurance — as it was obligated to do under the purchase agreement once Fiber Recovery elected that option — is plainly not included in the statutory phrase ‘property for which [the l
ocal governmental unit] may be liable in the event of damage or destruction.’”

The court also found two passages of legislative Committee Notes unpersuasive:

“The expression ‘may be liable’ does not imply that there is coverage for the private owners of the property. Governmental units are protected by this fund but private interests are not, except indirectly to the extent that they are able to establish a right against the governmental unit for damages to or destruction of their property.” Note, 1973, Wis. Stat. sec 605.02.

“The fact that the property fund has no option but to cover public property on request, and in fact to do it at extremely favorable rates, should lead the legislature to protect the fund against unwise contractual assumption of risks that would normally lie elsewhere, such as on a builder… The property fund has no option but to insure and should not be subject to having private persons thrust upon it as insureds, without its consent.” Note, 1973, Wis. Stat. sec. 605.24(3).

Notwithstanding these passages, the court found this history does not bar Fund liability to private parties without its consent. The court reasoned, “Again, the Commissioner does not tie its discussion of these comments to principles of statutory construction. We therefore do not know if the Commissioner views them as extrinsic sources or not, and, if viewed as extrinsic sources, whether the Commissioner views them as reinforcing a plain meaning or, instead, as resolving an ambiguity.”

The court added, “The first note suggests that ‘property for which [the local governmental unit] may be liable’ means property for which private owners ‘are able to establish a right against the governmental unit for damages to or destruction of their property,’ but this meaning simply restates the ambiguity; it does not resolve it. It is reasonable to understand such a right as including Fiber Recovery’s right to recover under a breach of contract theory if the County did not maintain insurance on the Ringle facility. The second note does not appear to limit what the Fund is authorized to do because of the addition of ‘without its consent.’ Thus, it does not support the view that the Fund may not choose to insure a private person, but appears to suggest that it may.”

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The court concluded, “In summary, we reject the Commissioner’s argument that Wis. Stat. Sec. 605.02 plainly prevents the Fund from choosing to insure the Ringle facility after its purchase by Fiber Recovery under the terms of this purchase agreement, where Fiber Recovery has chosen to exercise its option to have the County maintain insurance and where the County has a reversionary interest in the facility because of the installment payments still owing. We also reject the argument that the Commissioner’s interpretation is the more reasonable one. However, we do not arrive at a definitive interpretation of sec. 605.02 because the arguments are not sufficiently developed and, ultimately, a definitive interpretation is unnecessary to the resolution of this appeal.”

Turning to the policy, the court held that the Fund’s policy covered the property, because the Commissioner acknowledged in its reply brief that, before the ALJ, it stipulated that, “Pursuant to Paragraph 15 … Fiber elected to have Marathon County maintain insurance on the building.”

The court wrote, “we conclude that the policy language ‘legally responsible for insuring’ can be understood by a reasonable person in the position of the County to include personal property of another that the insured is obligated to insure by contract. If the Fund wanted the limitation it now seeks, it should have defined the term in the policy more narrowly.”

Accordingly, the court held that the policy covers the entire facility — both the building and the personal property inside it, and affirmed.

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David Ziemer can be reached by email.