1325 North Van Buren, LLC v. T-3 Group, Ltd., 2006 WI 94 (Wis. 7/11/2006)

• Decision Date: 11 July 2006
• Docket Number: No. 2004AP352.,2004AP352.
• Citation: 2006 WI 94
• Parties: 1325 North Van Buren, LLC, Plaintiff-Appellant, v. T-3 Group, Ltd., Defendant-Respondent-Petitioner, Westport Insurance Corporation, Defendant-Respondent-Cross Petitioner, Indiana Insurance Company, Defendant-Respondent, Racine Building Supply, LLC, and Federal Insurance Company, Defendants.
• Court: Wisconsin Supreme Court

Page 1

2006 WI 94

1325 North Van Buren, LLC, Plaintiff-Appellant, v. T-3 Group, Ltd., Defendant-Respondent-Petitioner Westport Insurance Corporation, Defendant-Respondent-Cross Petitioner Indiana Insurance Company, Defendant-Respondent Racine Building Supply, LLC, and Federal Insurance Company, Defendants.

No. 2004AP352.

Supreme Court of Wisconsin.

Opinion Filed: July 11, 2006.

REVIEW of a decision of the Court of Appeals. Reversed in part, affirmed in part, and remanded. 2005 WI App 121 Reported at: 284 Wis. 2d 387, 701 N.W.2d 13 (Ct. App. 2005-Published)

For the defendant-respondent-petitioner there were briefs by David J. Hanus and Hinshaw & Culbertson, LLP, Milwaukee; Lawrence J. Drabot and Crivello, Carlson & Mentkowski, S.C., Milwaukee, and oral argument by David J. Hanus.

For the defendant-respondent-cross petitioner there were briefs by Vincent P. Tomkiewicz, George J. Manos, and Bollinger, Ruberry & Garvey, Chicago, IL, and oral argument by Vincent P. Tomkiewicz.

For the plaintiff-appellant there was a brief by Kimberly A. Hurtado, Nicole M. DeMatteis, and Hurtado, S.C., Wauwatosa; Patrick O'Connor and Faegre & Benson, Minneapolis, MN, and oral argument by Patrick O'Connor.

An amicus curiae brief was filed by W. Wayne Siesennop, Scott J. Thomsen, Corrado Cirillo and Siesennop & Sullivan, Milwaukee, on behalf of the American Council of Engineering Companies of Wisconsin and the Wisconsin Society of Architects, Inc.

JON P. WILCOX, J.

¶ 1 T-3 Group, Ltd. (T-3) seeks review of a court of appeals decision reversing the entry of summary judgment dismissing all negligence claims brought by 1325 North Van Buren, LLC (1325) entered by the Milwaukee County Circuit Court, Mel Flanagan, Judge. See 1325 N. Van Buren, LLC v. T-3 Group, Ltd., 2005 WI App 121, 284 Wis. 2d 387, 701 N.W.2d 13. Westport Insurance Corporation (Westport) seeks review of the court of appeals' reversal of a declaratory judgment in Westport's favor dismissing all of 1325's claims against it and declaring that Westport has no obligation to defend or indemnify T-3 against 1325's claims. Id.

¶ 2 1325 contracted with T-3 for the purpose of substantially renovating an existing industrial warehouse into a 42-unit condominium building with attached parking garages. After numerous accidents and setbacks, 1325 fired T-3 and filed a lawsuit alleging claims in both tort and contract against T-3. 1325 also sued T-3's commercial general liability (CGL) insurer, Indiana Insurance Company (Indiana), and T-3's professional liability insurer, Westport. The circuit court dismissed 1325's tort claims against T-3, concluding that the economic loss doctrine barred such claims. Left with only contract claims, the circuit court also concluded that neither Indiana's CGL policy nor Westport's professional liability policy provided coverage for 1325's contract claims against T-3.

¶ 3 The court of appeals reversed in all respects, concluding: (1) the economic loss doctrine did not apply because the contract between T-3 and 1325 was purely for services; (2) unresolved factual questions precluded a determination of whether Indiana's CGL policy provided coverage; and (3) Westport's professional liability policy provided coverage.

¶ 4 T-3 petitioned for review and contends the economic loss doctrine precludes 1325's negligence claims. Westport joined T-3's petition for review as a direct-action defendant and filed a separate cross-petition contending that the economic loss doctrine precludes 1325's negligence claims and that its policy does not provide T-3 with coverage against breach of contract claims.¹

¶ 5 We conclude that the economic loss doctrine applies to the mixed contract between T-3 and 1325 as the predominant purpose of the contract was to construct a 42-unit condominium complex with adjacent parking garages. Furthermore, Westport has a duty to defend and potentially indemnify T-3 for its breach of contract claim under our interpretation of its professional liability insurance contract. As such, the decision of the court of appeals is reversed with respect to T-3's appeal, affirmed with respect to Westport's cross-appeal, and remanded to the circuit court for further proceedings consistent with this opinion.

I

A. The Contract Between 1325 and T-3

¶ 6 On March 26, 2001,² 1325 and T-3 entered into a comprehensive 102-page contract consisting of the following: (1) a customized American Institute of Architects (AIA) "Standard Form of Agreement Between Owner and Construction Manager where the Construction Manager is also the Constructor;" (2) Amendment No. 1; (3) Contract Addendum; (4) Exhibits; (5) General Conditions of the Contract for Construction—AIA Document A201; (6) Supplement to the General Conditions of the Contract for Construction; and (7) various drawings and finish specifications.

¶ 7 T-3 was hired to renovate an industrial warehouse building owned by 1325 into a 42-unit condominium complex, and construct attached parking garages. In addition to providing the necessary materials for renovation and construction, T-3 was to provide construction management services, meaning it had to hire, coordinate, and supervise the numerous subcontractors, and generally manage the project to ensure the renovation was completed on time and within budget. The contract called for 1325 to pay the cost of the work plus T-3's construction management fee up to a guaranteed maximum price of $6,099,891. Of this price, $176,000 constituted the fee for construction management. Absent change orders, costs in excess of the guaranteed maximum price would be borne exclusively by T-3.

¶ 8 There are a number of contractual provisions worth noting. First, there is a broad warranty clause that reads in part as follows:

The Contractor warrants to the Owner, the condominium association to be formed, the unit owners and Architect that materials and equipment furnished under the Contract will be of good quality and new unless otherwise required or permitted by the Contract Documents, that the Work³ will be free from defects not inherent in the quality required or permitted, and that the Work will conform with the requirements of the Contract Documents.

The contract also contains the following noteworthy provisions:

(1) T-3 agreed to "promptly remedy damage and loss (other than damage or loss insured under property insurance required by the Contract Documents) to property [on the project site] caused in whole or in part by the Contractor, a Subcontractor, a Sub-subcontractor. . . ."

(2) T-3 agreed to indemnify 1325 against any claims for bodily injury or tangible property damage, other than to property that was part of the project, where the loss resulted from the negligent acts or omissions of T-3 or a subcontractor. In addition, the contract required that T-3 purchase contractual liability insurance to cover indemnification claims under § 3.18.1 of the General Conditions.

(3) Explicitly excluded from project costs were "[c]osts due to the negligence or willful acts or omissions of the Construction Manager, any subcontractor, anyone directly or indirectly employed by any of them, or for whose acts any of them may be liable, including but not limited to the correction of defective or non-conforming Work, . . . or making good any damage to property."

(4) The contract listed reasons for which 1325 could withhold payment.

(5) The contract included a liquidated damages provision requiring T-3 to pay $1,000 per day for each condominium unit not delivered on time.

(6) The contract required T-3 to have a CGL policy with limits of $2,000,000.

(7) The contract required T-3 to have an umbrella policy with limits of $4,000,000.

(8) The contract provided circumstances under which it could be terminated before the project was completed.

¶ 9 Construction began in March of 2001. The contract required the first condominium units to be completed by October 15, 2001, and the last condominium units to be completed by January 15, 2002. Near the end of October 2001, however, the project was approximately 28 percent complete and none of the condominiums were substantially completed. Subcontractors caused accidental damage throughout the existing structure, and the project was seriously delayed. Dissatisfied with T-3's progress, 1325 notified T-3 that it was in default under the contract by letter dated October 31, 2001, and T-3 left the project site that same day. 1325 then entered into a contract with C.G. Schmidt, Inc. on January 8, 2002, to complete the project.

¶ 10 Because of T-3's failure to meet the contract milestones and specifications, 1325 alleges it incurred millions of dollars in damages. According to 1325's Amended Itemization of Damages, 1325 sought the following damages:⁴ (1) overpayment to T-3 based on the percentage completion of work; (2) construction damages and defects; (3) completion costs in excess of original guaranteed maximum price contract amount; (4) additional project costs; (5) unrecoverable costs of work claimed by T-3; (6) injury to 1325's business reputation and lost opportunity damages; and (7) liquidated damages. Although the amount of actual damages is in dispute, the circuit court held the contractual liquidated damages provision, under which T-3's liability is $11,060,000, enforceable and that 1325 had elected to pursue liquidated rather than actual damages as its remedy for breach of contract.

B. T-3's Professional Liability Policy with Westport

¶ 11 Westport provided professional liability insurance coverage to T-3 under a policy effective from October 15, 1999, to October 15, 2002. The policy provided limits of liability of $5,000,000 per claim and in the aggregate. The insuring agreement states that Westport "shall pay on behalf of any insured all `loss' in excess of the deductible which any insured becomes legally obligated to pay as a result of' claims' first made against any insured during the `policy period' . . . by reason of...