1325 North Van Buren, LLC v. T-3 Group, Ltd.

• Citation: 2005 WI App 121,701 N.W.2d 13,284 Wis.2d 387
• Decision Date: 17 May 2005
• Docket Number: No. 2004AP352.,2004AP352.
• Parties: 1325 NORTH VAN BUREN, LLC, Plaintiff-Appellant, v. T-3 GROUP, LTD., Westport Insurance Corporation and Indiana Insurance Company, Defendants-Respondents, RACINE BUILDING SUPPLY, LLC, and Federal Insurance Company, Defendants.
• Court: Wisconsin Court of Appeals

284 Wis.2d 387

2005 WI App 121

701 N.W.2d 13

1325 NORTH VAN BUREN, LLC, Plaintiff-Appellant, v. T-3 GROUP, LTD., Westport Insurance Corporation¹ and Indiana Insurance Company, Defendants-Respondents,² RACINE BUILDING SUPPLY, LLC, and Federal Insurance Company, Defendants.

No. 2004AP352.

Court of Appeals of Wisconsin.

Oral argument January 4, 2005.

Decided May 17, 2005.

On behalf of the plaintiff-appellant, the cause was submitted on the briefs of Kimberly A. Hurtado and Elizabeth M. Roat of Hurtado, S.C., of Milwaukee, and Patrick O'Connor, pro hac vice, of Faegre & Benson, of Minneapolis, Minnesota, with oral argument by Patrick O'Connor.

On behalf of the defendant-respondent T-3 Group, Inc., the cause was submitted on the brief of David J. Hanus of Hinshaw & Culbertson, LLP, of Milwaukee, and Lawrence J. Drabot of Crivello, Carlson & Mentkowski, S.C., of Milwaukee, with oral argument by David J. Hanus and Lawrence J. Drabot.

On behalf of the defendant-respondent Indiana Insurance Company, the cause was submitted on the brief of Jeffrey A. Schmeckpeper and Matthew W. Moran of Kasdorf, Lewis & Swietlik, S.C., of Milwaukee, with oral argument by Jeffrey A. Schmeckpeper.

On behalf of the defendant-respondent Westport Insurance Corporation, the cause was submitted on the brief of Vincent P. Tomkiewicz and George J. Manos of Bollinger, Ruberry & Garvey, of Chicago, Illinois, with oral argument by Vincent P. Tomkiewicz.

Before Fine, Curley and Kessler, JJ.

¶ 1. CURLEY, J.

1325 North Van Buren, LLC (1325) appeals from the trial court's grant of: (1) summary judgment in favor of Indiana Insurance Company, on the basis of the economic loss doctrine, dismissing all of 1325's coverage claims against Indiana and negligence claims against T-3 Group, Ltd., and (2) declaratory judgment in favor of Westport Insurance Corporation, dismissing all of 1325's claims against Westport and declaring that Westport has no obligation to defend or indemnify the insured, T-3, against 1325's claims in the matter. 1325 contends that the trial court incorrectly applied the economic loss doctrine to dismiss its negligence claims and erroneously ruled that T-3 had no insurance coverage arising from such claims. In regard to Indiana, 1325 argues that the commercial general liability (CGL) policy provides coverage for the contract claims 1325 asserted against T-3 for property damage and loss of use caused by its subcontractors. Finally, 1325 insists that the trial court erred in declaring that Westport has no obligation to defend or indemnify T-3, under the professional liability policy, in regard to 1325's claims that T-3 inadequately provided professional services, and dismissing 1325's claims against Westport. ¶ 2. Because the economic loss doctrine does not apply in this case, as the relevant agreement was a contract for services, to which the economic loss doctrine is inapplicable under Insurance Co. of North America v. Cease Electric Inc., 2004 WI 139, 276 Wis. 2d 361, 688 N.W.2d 462, we conclude that the trial court erred in dismissing all of 1325's negligence claims against T-3. We also conclude that although 1325's claims trigger coverage under the Indiana policy, there are exclusions in the policy that may preclude coverage, though the extent to which that is the case presents factual issues for determination on remand. With regard to 1325's claims against Westport, we conclude that the professional liability policy does require Westport to defend and indemnify T-3 against 1325's claims concerning T-3's failure to provide adequate professional services. Accordingly, we reverse and remand for further proceedings consistent with this opinion.

I. BACKGROUND.

¶ 3. In March 2001, 1325 entered into a contract with T-3 for the purpose of renovating an existing industrial warehouse building into a forty-two unit condominium building with attached parking garages. Essentially, T-3 was to provide professional construction management and administration services and hire subcontractors to renovate the building and complete the project. The contract would have yielded over $6 million dollars to T-3. Pursuant to the agreement, T-3 was to maintain $2 million of commercial general liability coverage for the project. It secured this coverage from Indiana. In addition, T-3 secured professional liability coverage for its construction management services from Westport. ¶ 4. Unfortunately, the construction project did not go as planned. There were numerous accidents and setbacks, and the project did not proceed according to schedule. As a result, 1325 fired T-3 and filed a lawsuit alleging claims in both tort and contract. In its second amended complaint, 1325 alleged several causes of action, against multiple defendants, including: breach of contract; negligence in carrying out professional responsibilities; negligent misrepresentation; intentional misrepresentation; slander of title; failure to indemnify and/or defend against construction liens; theft by contractor; and claims for insurance coverage.³

¶ 5. Indiana moved for declaratory and summary judgment on the pleadings, asking the trial court to declare that Indiana has no duty to defend and indemnify T-3 against 1325's claims because they are not covered or are excluded by the policy. The trial court determined that the second and tenth causes of action—a negligence claim and coverage claim—were "sufficiently [pled] so as to trigger Indiana's duty to defend[,]" and that neither the doctrine of economic loss nor any of the exclusions bar coverage under the policy.

¶ 6. Thereafter, Indiana again filed for summary judgment, alleging that pretrial discovery revealed that "the pertinent exclusions in the Indiana policy act to bar coverage for all damages[,]" and, moreover, "the economic loss doctrine mandates that the damages claimed can only be recovered under a contract theory[,]" and as such, the negligence claims must be dismissed. T-3 also filed a motion for partial summary judgment contending that, absent damages for personal injury or property damage to property beyond the subject matter of the contract between 1325 and T-3, 1325's tort claims for negligence and negligent misrepresentation are barred under the economic loss doctrine. T-3 also insisted that it could not be held vicariously liable for the tortious conduct of the independent subcontractors. The trial court granted both T-3's motion for partial summary judgment⁴ and Indiana's motion for summary judgment, concluding that the economic loss doctrine applied:

The purpose [of the economic loss doctrine], as we know, is to maintain the fundamental distinction between tort law and contract law, to protect commercial parties' freedom to allocate economic risk by contract, and to encourage the parties best situated to assess the risk of economic loss, the commercial purchaser to assume and allocate or insure against the risk.

. . . .

Now, the Court has reviewed all the law that has been provided, and I'm particularly persuaded by the reasons of Bay Breeze Condo Association, 651 North-west 2d 738, and several cases that follow this, that the integrated system rule, which holds that once a party becomes integrated into a completed project or system, the entire project or system ceases to be other property for the purpose of the economic loss doctrine applies here.

And also Wausau Paper Mills, at 789 Federal Supplement 968, states that the economic loss doctrine precludes tort recovery for economic loss where there is [a] contractual relationship between two sophisticated parties, regardless of whether the contract is for products or service. ...

And based on the reasoning of these cases and the arguments put forth by counsel, the Court agrees with T-3 that there is a bar to tort claims under this — under the claims — under the particular circumstances and facts of this case, and that the economic loss doctrine would apply, and that the motion of Indiana Insurance under the economic loss doctrine would also be granted.

. . . .

I'm not going to get into the areas of contract exclusions, because I believe those issues are moot.

Accordingly, all of the tort claims alleged by 1325 against T-3 were dismissed. As such, the only claim that remained was for breach of contract.

¶ 7. Soon thereafter, Westport filed a motion for declaratory relief contending that "[t]he Westport policy insures for legal liability imposed as a result of tort and negligence claims — there is no coverage for breach of contract[,]" and "since the only remaining claim is for breach of contract, Westport is entitled to declaratory relief that it has no duty to defend or indemnify for the sole remaining claim." Westport insisted that the policy provided professional liability insurance to T-3 for losses relating to legal liability incurred by T-3 as a result of negligent acts, errors and omissions, and the policy required third-party liability arising out of tortious conduct, "that is, conduct for which there is a duty, breach of the duty and damages to a third-party." As such, Westport argued that 1325's claim against T-3 for breach of contract was not covered by the policy. The trial court agreed, concluding:

Reviewing all the materials that have been provided by both sides and the arguments that have been presented today, I think that the position of Westport is well supported in Wisconsin law and in the [S]eventh [C]ircuit, that the — they have no obligation under a tort claim, and that the policy excludes cost to repair and replace faulty workmanship.

And ultimately, that is what we have here. We have a contract claim for a product that was not received in the manner in which it was inspected [sic], pursuant to the contract, and that is not — that is — not what this policy was — was set to recover — was — the coverage this policy can take.

The coverage doesn't extend to business risks, and that an insurance coverage of this sort can't be a

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