Kalchthaler v. Keller Const. Co.

• Decision Date: 10 November 1998
• Docket Number: Nos. 97-2198,98-0258,s. 97-2198
• Citation: 224 Wis.2d 387,591 N.W.2d 169
• Court: Wisconsin Court of Appeals
• Parties: Virgil KALCHTHALER and Morningside Terrace, Inc., Plaintiffs, v. KELLER CONSTRUCTION COMPANY, Wolterstorff Architects, Inc., P.A., and Security Insurance Company of Hartford, Defendants-Respondents, Aetna Casualty & Surety Company,Defendant-Appellant, Mike Koenig Construction, Secura Insurance Company, Windsor Window Company, a division of W. Window Company, and Maryland Insurance Company,Defendants. Virgil Kalchthaler and Morningside Terrace, Inc., Plaintiffs, v. Keller Construction Company, Defendant-Respondent, Wolterstorff Architects, Inc., P.A., and Security Insurance Company of Hartford, Defendants, Aetna Casualty & Surety Company, Defendant-Appellant, Mike Koenig Construction, Secura Insurance Company, Windsor Window Company, a division of W. Window Company and Maryland Insurance Company, Defendants. . Oral Argument

Page 169

591 N.W.2d 169

224 Wis.2d 387

Virgil KALCHTHALER and Morningside Terrace, Inc., Plaintiffs, v. KELLER CONSTRUCTION COMPANY, Wolterstorff Architects, Inc.,

P.A., and Security Insurance Company of Hartford,

Defendants-Respondents,

Aetna Casualty & Surety Company,Defendant-Appellant,

Mike Koenig Construction, Secura Insurance Company, Windsor

Window Company, a division of W. Window Company,

and Maryland Insurance Company,Defendants.

Virgil Kalchthaler and Morningside Terrace, Inc., Plaintiffs, v. Keller Construction Company, Defendant-Respondent,

Wolterstorff Architects, Inc., P.A., and Security Insurance

Company of Hartford, Defendants,

Aetna Casualty & Surety Company, Defendant-Appellant,

Mike Koenig Construction, Secura Insurance Company, Windsor

Window Company, a division of W. Window Company

and Maryland Insurance Company, Defendants.

Nos. 97-2198, 98-0258.

Court of Appeals of Wisconsin.

Oral Argument Nov. 10, 1998.

Opinion Released Jan. 13, 1999.

Opinion Filed Jan. 13, 1999.

On behalf of the defendant-appellant Aetna Casualty & Surety Company, the cause was submitted on the briefs of John D. Bird, Jr. and Kathryn M. Corsmeier of Bird, Martin & Salomon, S.C. of Milwaukee. There was oral argument by John D. Bird, Jr.

On behalf of the defendant-respondent Keller Construction Company, the cause was submitted on the briefs of Linda S. Isnard, David J. Nolden and Gilbert J. Berthelsen of Capwell & Berthelsen of Racine.

On behalf of the defendants-respondents Wolterstorff Architects, Inc., P.A., and Security Insurance Company of Hartford, there were briefs and oral argument by James L. Kirschnik of Law Offices of James L. Kirschnik, S.C. of Brookfield.

Before BROWN, NETTESHEIM and ANDERSON, JJ.

BROWN, J.

This case demands our interpretation of a new exception to the business risk exclusion in a standard form commercial general liability (CGL) insurance policy. In the standard policy, there is an exclusion barring coverage of property damage arising out of the completed work of the insured. An exception to this exclusion was added to standard form CGL policies in 1986, stating that the exclusion does not apply to work done by subcontractors of the insured. The only reasonable reading of this exception is that it restores coverage for damage to completed work caused by the work of a subcontractor. We thus affirm the circuit court's holding that the damage in this case was covered.

Keller Construction Company (Keller) was the general contractor on a project to construct a residential facility for the elderly, Morningside Terrace, Inc. (Morningside). Keller contracted out all the work to subcontractors. The project was completed in August 1989.

The building leaked, causing water damage to the interior. Repair costs were $534,770.68. Virgil Kalchthaler, a co-owner of Morningside, along with Morningside itself, sued Wolterstorff Architects, Inc., P.A. (WAI) and its insurer, Security Insurance Company of Hartford (Security); Keller and its insurer, Aetna Casualty & Surety Company (Aetna); and several of Keller's subcontractors and their respective insurers. Aetna, Keller's insurer, disputed its duty to defend. The circuit court found that Aetna did have a duty to defend but that it had not breached that duty. Prior to trial, all of the defendants except Keller and Aetna entered into settlements with Morningside. As a result, Morningside's claims against Keller and Aetna were assigned to WAI and Security (hereinafter referred to collectively as WAI), and all cross-claims between WAI and the subcontractors were dismissed. The remaining claims, then, were by WAI against Keller and Aetna. Keller then entered into a Loy ¹ covenant not to sue, paying WAI $31,500 in exchange for release from its claims. Under the agreement, WAI reserved all rights against Aetna for any covered claims asserted against Keller. The only remaining issue was whether the damage to the building and its interior was covered by Keller's Aetna policy. The parties submitted this issue to the circuit court, stipulating to all the relevant facts. ²

The circuit court found that there was coverage for the claims under the Aetna policy. First, it found that the general grant of coverage included damage caused by water leaking through windows. It then turned to the exclusions. The work product exclusion, which bars coverage for repairs or restoration due to faulty workmanship, did not apply because it included an exception for completed work. A second exclusion of the insured's work, however, did include completed work. But that exclusion contained additional language stating that the exclusion did not apply to work performed by a subcontractor. The circuit court, relying on O'Shaughnessy v. Smuckler Corp., 543 N.W.2d 99 (Minn.App.1996), found that this exception applied in this case, stating that "[t]he person who acquired this insurance policy with the product-completed operations hazard provisions would reasonably expect coverage in such a situation." The circuit court ordered judgment entered in favor of WAI for $267,135.34. ³ Aetna appeals.

Standard of Review

The interpretation of an insurance policy is a question of contract law we review without deference to the circuit court. See Cardinal v. Leader Nat'l Ins. Co., 166 Wis.2d 375, 382, 480 N.W.2d 1, 3 (1992). The language in an insurance contract should be given its ordinary meaning--the meaning a reasonable person in the position of the insured would give the terms. See Grotelueschen v. American Family Mut. Ins. Co., 171 Wis.2d 437, 447, 492 N.W.2d 131, 134 (1992) (noting that unambiguous terms are given meaning they would have to an insured lay person); Hedtcke v. Sentry Ins. Co., 109 Wis.2d 461, 487, 326 N.W.2d 727, 740 (1982) ("Wisconsin law has long maintained that an insurance policy should be construed as it is understood by a reasonable person in the position of the insured."). A term is ambiguous if it is susceptible to more than one reasonable interpretation by an insured. See Cardinal, 166 Wis.2d at 383, 480 N.W.2d at 4. If the policy terms are unambiguous, we merely apply them to the facts. See Grotelueschen, 171 Wis.2d at 447, 492 N.W.2d at 134. When an ambiguity exists, it should be construed to afford coverage. See Cardinal 166 Wis.2d at 382, 480 N.W.2d at 3. Finally, exclusions should be narrowly construed against the insurer. See id.

Discussion

The parties dispute coverage in light of three different sections of the policy. We include the sections at issue and then recount the competing theories of coverage. The policy language pertinent to this appeal is:

1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies.

.

b. This insurance applies to "bodily injury" and "property damage" only if:

(1) The "bodily injury" or "property damage" is caused by an "occurrence"....

.

2. Exclusions

This insurance does not apply to:

.

h. "Property damage" to:

.

(6) That particular part of any property:

(b) that must be restored, repaired or replaced because "your work" was incorrectly performed on it.

.

Paragraph (6)(b) of this exclusion does not apply to "property damage" included in the "products-completed operations hazard".

.

j. "Property damage" to "your work" arising out of it or any part of it and included in the "products-completed operations hazard".

This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

"Occurrence" is defined as "an accident, including continuous or repeated exposure to ... harmful conditions." Further, " '[p]roperty damage' means ... [p]hysical injury to tangible property...." Finally, " '[p]roducts-completed operations hazard' [PCOH] includes all ... 'property damage' occurring away from premises you own or rent and arising out of ... 'your work' " on work that has already been completed. Here, there is no dispute that construction had been completed when the damage occurred.

Aetna begins by arguing that there is no need to examine the exclusions in the policy because there is no grant of coverage in the first place. Under the policy, Aetna agrees to pay sums that the insured becomes obligated to pay as damages because of property damage "to which this insurance applies." The policy applies only if the damage is caused by an "occurrence" that takes place in the "coverage territory" and during the policy period. ⁴ Under well-established case law, a CGL policy does not cover faulty workmanship, only faulty workmanship that causes damage to other property. See Bulen v. West Bend Mut. Ins. Co., 125 Wis.2d 259, 265, 371 N.W.2d 392, 395 (Ct.App.1985) ("The policy in question does not cover an accident of faulty workmanship but rather faulty workmanship which causes an accident."). Aetna also cites cases from other jurisdictions holding that there is no coverage for the insured general contractor for damage caused by the faulty workmanship of a subcontractor. See, e.g., Dodson v. St. Paul Ins. Co., 812 P.2d 372 (Okla.1991). Aetna argues through these cases that to grant coverage would turn the CGL policy into a performance bond, holding the insurance company liable for the insured's faulty workmanship. Finally, under this first prong of its argument, Aetna contends that here there was no occurrence to trigger coverage. The policy defines occurrence as an accident, and faulty workmanship is no accident. Thus, asserts Aetna, we need not reach the exclusions in the policy because there is no grant of coverage in the first place.

Aetna then argues that, should we reach them, the exclusions effectively deny coverage in this case. First, it argues that the damage is excluded under the business risk exclusion, h. (6)(b). This exclusion contains an exception for property damage to completed works. Aetna argues that the PCOH...