Am. Fam. Mut. Ins. Co. v. American Girl, Inc.

• Decision Date: 09 January 2004
• Docket Number: No. 01-1871.,01-1871.
• Citation: 673 N.W.2d 65,268 Wis.2d 16
• Parties: AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Plaintiff-Appellant-Cross-Respondent, v. AMERICAN GIRL, INC., f/k/a Pleasant Company, Inc. Defendant-Respondent-Cross-Appellant-Petitioner, The RENSCHLER COMPANY, INC., Defendant-Third-Party Plaintiff-Respondent-Cross-Appellant-Petitioner, v. WEST AMERICAN INSURANCE COMPANY, The Ohio Casualty Insurance Company, Regent Insurance Company and General Casualty Company of Wisconsin, Third-Party Defendants-Respondents-Cross-Respondents.
• Court: Wisconsin Supreme Court

268 Wis.2d 16

673 N.W.2d 65

AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Plaintiff-Appellant-Cross-Respondent,¹ v. AMERICAN GIRL, INC., f/k/a Pleasant Company, Inc. Defendant-Respondent-Cross-Appellant-Petitioner, The RENSCHLER COMPANY, INC., Defendant-Third-Party Plaintiff-Respondent-Cross-Appellant-Petitioner, v. WEST AMERICAN INSURANCE COMPANY, The Ohio Casualty Insurance Company, Regent Insurance Company and General Casualty Company of Wisconsin, Third-Party Defendants-Respondents-Cross-Respondents.

No. 01-1871.

Supreme Court of Wisconsin.

Oral argument September 9, 2003.

Decided January 9, 2004.

For the defendant-third-party plaintiff-respondent-cross-appellant-petitioner there were briefs by Robert J. Kay, Robert A. Mich, Jr. and Kay & Andersen, S.C., Madison, and Jeffrey W. Younger, Paul W. Schwarzenbart and Lee, Kilkelly, Paulson & Younger, S.C., Madison, and oral argument by Paul W. Schwarzenbart.

For the defendant-respondent-cross-appellant-petitioner there were briefs by Michael G. Laskis, Michael B. Van Sicklen and Foley & Lardner, Madison, and oral argument by Michael G. Laskis.

For the plaintiff-appellant-cross-respondent there were briefs by Wayne M. Yankala and Mingo & Yankala, S.C., Milwaukee, and oral argument by Wayne M. Yankala.

For the third-party defendants-respondents-cross-respondents, West American Insurance Company and The Ohio Casualty Insurance Company, there was a brief by Michael D. Lawrynk and Gabert, Williams, Konz & Lawrynk, Appleton, and oral argument by Michael D. Lawrynk.

For the third-party defendants-respondents-cross-respondents, Regent Insurance Company and General Casualty Company of Wisconsin, there were briefs by Robert F. Johnson, Lee Anne N. Conta, Colleen M. Fleming and Cook & Franke S.C., Milwaukee, and oral argument by Lee Anne N. Conta.

An amicus curiae brief was filed by Thomas J. Misfeldt, Christine A. Gimber and Weld, Riley, Prenn & Ricci, S.C., Eau Claire, on behalf of Civil Trial Counsel of Wisconsin.

An amicus curiae brief was filed by David A. Krutz, Dereck R. Brower and Michael Best & Friedrich LLP, Waukesha, on behalf of The American Subcontractors Association, Inc.

An amicus curiae brief was filed by William E. McCardell and DeWitt Ross & Stevens S.C., Madison, and Teresa Mueller, Madison, on behalf of Associated General Contractors of Wisconsin, Inc., Associated General Contractors of Greater Milwaukee, and Allied Construction Employers Association.

¶ 1. DIANE S. SYKES, J.

This insurance coverage dispute presents an array of legal issues pertaining to the proper interpretation of coverage and exclusion language in several post-1986 commercial general liability ("CGL") and excess insurance policies.

¶ 2. The dispute initially focuses on the meaning of "property damage" and "occurrence" in the standard CGL insuring agreement's grant of coverage. The parties also dispute the applicability of several exclusions: for "expected or intended" losses; "contractually-assumed liability"; and certain "business risks" (a/k/a "your work" or "your product" exclusions). There is a question about the applicability of the "professional services liability" exclusion in certain excess policies. Finally, the parties dispute the effect of the economic loss doctrine on the availability of insurance coverage, as well as the application of the common law "known loss" doctrine to certain of the policies.

¶ 3. The factual context is a construction project gone awry: a soil engineering subcontractor gave faulty site-preparation advice to a general contractor in connection with the construction of a warehouse. As a result, there was excessive settlement of the soil after the building was completed, causing the building's foundation to sink. This caused the rest of the structure to buckle and crack. Ultimately, the building was declared unsafe and had to be torn down.

¶ 4. The general contractor, potentially liable to the building owner under certain contractual warranties, notified its insurance carriers of the loss. Contractually-required arbitration between the owner and the contractor was initiated and stayed pending resolution of coverage questions involving several of the contractor's insurers. The circuit court, on summary judgment, found coverage under some but not all of the policies. The court of appeals reversed, concluding that the "contractual liability" exclusion in each of the policies excluded coverage.² We reverse.

¶ 5. The threshold question is whether the claim at issue here is for "property damage" caused by an "occurrence" within the meaning of the CGL policies' general grant of coverage. We hold that it is. The CGL policies define "property damage" as "physical injury to tangible property." The sinking, buckling, and cracking of the warehouse was plainly "physical injury to tangible property." An "occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful condition." The damage to the warehouse was caused by substantial soil settlement underneath the completed building, which occurred because of the faulty site-preparation advice of the soil engineering subcontractor. It was accidental, not intentional or anticipated, and it involved the "continuous or repeated exposure" to the "same general harmful condition." Accordingly, there was "property damage" caused by an "occurrence" within the meaning of the CGL policies.

¶ 6. We also conclude that the economic loss doctrine does not preclude coverage. The economic loss doctrine generally operates to confine contracting parties to contract rather than tort remedies for recovery of purely economic losses associated with the contract relationship. The doctrine does not determine insurance coverage, which turns on the policy language. That the property damage at issue here is actionable in contract but not in tort does not make it "non-accidental" or otherwise remove it from the CGL's definition of "occurrence."

¶ 7. We further hold that because the property damage at issue here was neither expected nor intended, the "expected or intended" exclusion does not apply.

¶ 8. The "contractually-assumed liability" exclusion (upon which the court of appeals rested its no-coverage conclusion) eliminates coverage for damages the insured is obligated to pay "by reason of the assumption of liability in a contract or agreement." We conclude that this language does not exclude coverage for all breach of contract liability. Rather, it excludes coverage for liability that arises because the insured has contractually assumed the liability of another, as in an indemnification or hold harmless agreement. There is no indemnification or hold harmless agreement at issue here, so this exclusion does not apply.

¶ 9. We also conclude that while the "business risk" or "your work" exclusions ordinarily would operate to exclude coverage under the circumstances of this case, the "subcontractor" exception applies here. The subcontractor exception to the business risk exclusion restores coverage if "the work out of which the damage arises" was performed by a subcontractor.

¶ 10. In addition, we conclude that the "professional services liability" exclusion in the excess policies applies under the circumstances of this case. And finally, coverage under the policies issued after the property damage loss was substantially known to the parties is barred by the "known loss" doctrine.

I. FACTS AND PROCEDURAL HISTORY

¶ 11. In 1994 The Pleasant Company ("Pleasant") entered into a contract with The Renschler Company for the design and construction of a large distribution center warehouse, dubbed the "94DC," on Pleasant's Middleton, Wisconsin, campus. Under the terms of the contract, 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. (Pleasant changed its name to American Girl, Inc., several days before the issuance of this opinion; we will refer to the company as it was known throughout these proceedings.)

¶ 12. Renschler hired Clifton E.R. Lawson (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. Surcharging is a process by which soils are compressed to achieve the density required to support the weight of a building or other structure. The process usually involves placing large quantities of earth above the soil and allowing the earth to bear down on the soils. Typically this requires bringing in enough earth to cover the entire site, which can be very costly, and so for large projects like the 94DC, small areas of the site are compressed individually, and the earth is rolled from one area to the next.

¶ 13. The surcharging was done according to Lawson's professional advice, and the building was substantially completed in August 1994. Pleasant took occupancy, and soon thereafter the 94DC began to sink. By the spring of 1995 the settlement at one end of the structure had reached eight inches. ¶ 14. Renschler became aware of the problem in March 1995, and Lawson was subsequently advised. In the fall of 1995 Renschler re-hung approximately 30 exterior panels and windows that were leaking as a result of the settlement. The building continued to sink throughout 1996. By early 1997, the settlement approached one foot, the building was buckling, steel supports were deformed, the floor was cracking, and sewer lines had shifted. In January or February 1997, the parties met to discuss the settlement damage and the options for remediation.³ In August 1997 Renschler notified its liability insurance carrier, American Family Mutual Insurance Company.

¶ 15. American Family conducted an investigation of the claim and at first concluded that coverage existed for the...