Insurer liable for unfair trade practices

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A standard Commercial General Liability (CGL) policy does not exclude coverage for statutory misrepresentation, the Wisconsin Court of Appeals held on Aug. 23.

The decision effectively renders standard exclusions for the insured’s misrepresentations a nullity.

In 1995, Robert Stuart and his wife, Lin Farquhar-Stuart, contacted Ronald Weisflog, president of Weisflog’s Showroom Gallery, Inc., a corporation in the business of building and remodeling homes, about making additions to their home, including a hot tub/spa room.

Weisflog represented to the Stuarts that they were purchasing quality architectural services and that the specifications in the drawings would comply with all applicable building codes. In fact, nobody at Weisflog was a licensed architect and Weisflog was not familiar with parts of the local building code.

Relying on the representations, the Stuarts entered into a contract for the additions, and Weisflog constructed them.

In 2001, the Stuarts noticed damage in the spa room. An inspector identified several building code violations in the spa room and rest of the project. According to the inspector, the damage was so extensive that it made more sense to demolish the spa room and rebuild than to repair it.

The Stuarts brought suit against Weisflog and its CGL insurer, American Family Mutual Ins. Co., alleging negligence, breach of contract, and violations of Wis. Admin. Code ch. ATCP 110.

American Family moved for summary judgment, arguing that the violations did not constitute an “occurrence” under its policy, and that the economic loss doctrine barred damages for negligence.

The trial court denied the motion, and the case went to a jury on the issues of negligence and the ch. 110 violations. The Stuarts dismissed their breach of contract claims.

The jury found Weisflog negligent, and found that that Weislflog induced the Stuarts to enter the contract by misrepresentations. It attributed 25 percent of the $95,000 damages to the misrepresentations, and 75 percent to the negligence.

The district court thus awarded the double damages authorized by ch. 110 only on 25 percent of the damages.

All parties appealed, and, in a previous decision, the court of appeals held as follows: the economic loss doctrine does not bar recovery; and the apportionment of damages between negligence and misrepresentation was improper, so that the entire award should be doubled. Stuart v. Weislflog’s Showroom Gallery, Inc., 2006 WI App 109.

In the case at bar, the court considered American Family’s appeal, which raised coverage issues.

In a decision by Judge Richard S. Brown, the court held that the CGL policy’s definition of “occurrence” included Weisflog’s misrepresentations, and that the policy’s “your work” exclusion did not bar coverage.

“Your Work” Exclusion

The court first assumed general coverage and addressed the “your work” exclusion, holding that it does not apply.

The CGL defines “your work” to include “warranties or representations made at any time with respect to the fitness, quality, durability, performance of use of ‘your work’”

The court acknowledged that, “at first blush,” the policy seems to preclude coverage for misrepresentations.

However, the court noted that the claim alleged a misrepresentation pursuant to ch. 110, rather than a common law misrepresentation claim.

The court thus concluded, “the legislature intended ch. ATCP 110 misrepresentation to be a cause of action distinct from other forms of misrepresentation. We presume that the insurance industry would be familiar with this legislative intent. Thus, we assume that if an insurer wished to lump this special form of misrepresentation in with the more familiar common-law misrepresentations, it would have specifically mentioned the latter (cite omitted).”

Accordingly, the court held that it could assume American Family did not intend its exclusion to apply to statutory misrepresentation claims.

Initial Coverage

The court then turned to whether the general coverage in the CGL policy encompasses liability for ch. 110 violations, and held that it does.

At issue was whether the misrepresentation constituted an “occurrence,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

American Family argued that, pursuant to Everson v. Lorenz, 2005 WI 51, 280 Wis.2d 1, 695 N.W.2d 298, there is no coverage. In Ev
erson, the court held that, for purposes of insurance liability policies, negligent and strict liability misrepresentation did not constitute “occurrences.”

Rejecting American Family’s argument, the court of appeals again relied on the fact that the Stuarts were alleging statutory misrepresentation pursuant to ch. 110, rather than common law misrepresentation.

Noting that a claim under sec. 100.02 contains no element of knowledge or intent with respect to the misleading nature of a communication, and that consumer protection laws are construed with the goal of providing protection and remedies to consumers, the court held that Everson does not apply.

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The court wrote, “Significantly, Wis. Admin. Code ATCP 110.02(11) also does not contain any language indicating that the defendant must have knowledge of a representation’s potential to mislead. Thus, we agree with the Stuarts that sec. ATCP 110.02(11) is intent-neutral with respect to the false or misleading propensities of a representation. Because we construe the statute to be intent-neutral, we hold that Wis. Admin. Code ch. ATCP 110 violations are not inherently inconsistent with the concept of an ‘occurrence.’”

The court also relied on its holding in Baumann v. Elliott, 2005 WI App 186, 286 Wis. 2d 667, 704 N.W.2d 361, in which the court held that a CGL policy provided coverage for a claim of negligent defamation, notwithstanding an exclusion for defamation. The court of appeal there held that defamation is not always intentional, but may be negligent.

Analogizing the two, the court wrote, “If uttering a defamatory statement can be an “accident” then so can uttering a misleading statement. Thus, a Wis. Admin. Code sec. ATCP 110.02(11) violation can be an accident and therefore an ‘occurrence’ as defined in Weisflog’s American Family CGL policy.”

Accordingly, the court affirmed the trial court’s holding that the policy covers the damages to the Stuarts.

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David Ziemer can be reached by email.