A.O. Smith Corp. v. Allstate Ins. Companies

Decision Date08 July 1998
Docket NumberNo. 96-3496,96-3496
Citation222 Wis.2d 475,588 N.W.2d 285
PartiesA.O. SMITH CORPORATION, a Delaware corporation, A.O. Smith Harvestore Products, Inc., a Delaware corporation, Agristor Credit Corporation, a Delaware corporation and Agristor Leasing, a Wisconsin partnership, Plaintiffs-Respondents, d v. ALLSTATE INSURANCE COMPANIES, an Illinois corporation, Defendant-Appellant, Continental Casualty Company, a Delaware corporation, Defendant-Co-Appellant, Wausau Insurance Companies, a Wisconsin corporation, Defendant. . Oral Argument
CourtWisconsin Court of Appeals

On behalf of the defendant-appellant, the cause was submitted on the briefs of Joseph D. McDevitt of Borgelt, Powell, Peterson & Frauen, S.C. of Milwaukee, Mitchell S. Goldgehn and James A. Smith of Aronberg, Goldgehn, Davis & Garmisa, of counsel, of Chicago, IL and Stephen M. Compton of Brennan, Steil, Basting & MacDougall, S.C. of Janesville. There was oral argument by Stephen M. Compton.

On behalf of the defendant-co-appellant, the cause was submitted on the briefs of Donald M. Lieb and Paul J. Pytlik of Otjen, Van Ert, Stangle, Lieb & Weir, S.C. of Milwaukee and Terry M. Cosgrove and Arthur J. McColgan, of counsel, of Chicago, IL. There was oral argument by Terry M. Cosgrove.

On behalf of the plaintiffs-respondents, the cause was submitted on the brief of Scott W. Hansen of Reinhart, Boerner, Van Deuren, Before WEDEMEYER, P.J., SCHUDSON and MYSE, JJ.

Norris & Rieselbach, S.C. of Milwaukee, and J.W. Montgomery III and Curt Vazquez of Jones, Day, Reavis & Pogue of Pittsburgh, PA. There was oral argument by J.W. Montgomery III. Professor Kenneth S. Abraham of Charlottesville, VA also participated on behalf of plaintiffs-respondents.

WEDEMEYER, P.J.

Allstate Insurance Companies and Continental Casualty Company appeal from an order granting summary judgment in favor of A.O. Smith Corporation and its subsidiary, A.O. Smith Harvestore Products, Inc. 1 The trial court granted Smith's motion seeking indemnification for defense costs and indemnification for underlying settlements, ruling that claims of fraud, conspiracy to defraud, and mail fraud alleged in several complaints against Smith were covered occurrences, triggering a duty to defend and a duty to indemnify. Allstate contends that the trial court erred in assuming that fraud, conspiracy to defraud, and mail fraud are covered "occurrences." 2 Continental argues that the fraud claims do not state facts which constitute an "occurrence" under its policy and the trial court erred in concluding that Wisconsin law should be applied. Because fraud claims do not constitute an occurrence under the policies at issue here, we reverse and remand with directions. Continental also challenges the trial court's conflicts of law determination that Wisconsin, rather than Illinois, insurance law applies. Because there is no actual conflict between the laws of these two states regarding the coverage issues, we reject Continental's assertion and apply Wisconsin law. This case also presents a novel issue regarding a party raising an argument during oral argument that it failed to raise in its appellate brief. In addressing this issue, we conclude that when a party does not brief an argument in its appeal brief, the party is precluded from presenting that argument for the first time on appeal at the oral argument.

I. BACKGROUND

This case arises from three lawsuits in which Smith was sued for fraudulently representing that its Harvestore feed storage silos provided special oxygen limiting capabilities. The lawsuits alleged that the feed stored in the Harvestores was damaged by excessive exposure to oxygen, which caused mold growth and damaged the feed. As a result, dairy cattle that fed on the damaged feed suffered increased veterinary problems and reduced milk production.

The lawsuits underlying this appeal were filed by Telois Miles, Walter, Barbara and Greg Mohr, and Arthur and Molly Thiss. The Mohr and Thiss complaints were filed in Michigan. The Miles case was filed in Arkansas.

Miles claimed that she and her late husband had purchased and installed two Harvestore structures on their farm. The first structure was installed in 1973, and the second in 1981. She alleged that following the installation, rotten and moldy feed adversely affected their cattle herd. The Miles complaint alleged that Smith committed fraud and conspiracy to commit fraud by overstating the capabilities of the Harvestore structures. Smith was able to secure a dismissal of the Miles complaint on statute of limitations grounds.

The Mohrs leased two Harvestore structures that were installed in September 1979. When they were sued for breach of the lease agreement, the Mohrs counterclaimed against Smith alleging that the Harvestores The Thisses sued Smith over the two Harvestore structures they had purchased, the first in 1977, and the second in October 1980. The complaint alleged fraud, conspiracy to commit fraud, and violations of the RICO act under 18 U.S.C. § 1962(a) & (c). The Thisses alleged that the feed fed from the Harvestore system was damaged because of exposure to oxygen. As a result, they alleged their dairy herd was nutritionally compromised, experienced lower milk production, breeding problems, general malaise, and higher than normal cull rates. Smith settled this claim in 1993.

caused feed to spoil resulting in harm to their cattle. The counterclaim pled causes of action for fraud, conspiracy to commit fraud, innocent misrepresentation and violations under 18 U.S.C. § 1962(a) & (c) of the RICO act. Smith filed a motion to dismiss the counterclaim. In January 1991, the court dismissed all but the fraud, conspiracy to commit fraud, and RICO mail fraud allegations. The fraud claims alleged that, contrary to Smith's representations, the Harvestores did not limit the amount of oxygen to which stored feed was exposed, causing the feed to spoil, which, in turn, [222 Wis.2d 481] caused loss of milk production, decreased number of offspring, and increased labor costs. Continental indemnified Smith for its defense costs on this claim until March 1992, when Continental informed Smith it would no longer continue to indemnify Smith for defense expenses. Continental's basis for this change was that the only remaining claims involved fraud actions, which were not covered by its policy. Smith settled the Mohrs' claim for $1,855,000 in October 1993.

In July 1991, Smith sued Allstate, Continental and Wausau seeking to recover judgments, settlements, and defense costs incurred in fifteen underlying claims involving Harvestore lawsuits. Only three of those claims are at issue in this appeal. The underlying complaints at issue in this appeal alleged in pertinent part: 3

[Count I: Fraud] representations made by [Smith] to plaintiffs in sales literature and through [the sales agent] regarding the Harvestore system, how it operates and the impact its operation would have on plaintiffs' farm performance were material to plaintiffs' decision to purchase the Harvestore system.

48. These written and oral representations were false in that:

(a) The Harvestore System was not "oxygen limiting" in that it did not protect the feed stored within it from oxygen during normal operation.

(b) The feed fed from the Harvestore system was damaged because of exposure to oxygen nutritionally compromising plaintiffs' herd and as a result insidiously and adversely affecting its productivity and health.

(c) The decreased production and increased costs associated with installing and using the Harvestore system all but destroyed plaintiffs' farm operation.

49. Through its conduct, [Smith] assisted, instigated and participated in the false representations made by [the sales agent] to the plaintiffs.

50. [Smith] knew the representations it was making to plaintiffs through [the sales agent] were false or made recklessly, without any knowledge of the truth of these representations.

51. [Smith] made these representations through [the sales agent] as part of their overall marketing program and intended that plaintiffs rely on these representations.

52. Plaintiffs relied on the representations of [Smith] in purchasing the Harvestore system.

53. As a direct and proximate result of [Smith's] misrepresentations, plaintiffs have suffered severe economic and non-economic damages.

54. [Smith's] conduct was voluntary, malicious and so willful and wanton as to demonstrate a reckless disregard of plaintiffs' rights, and that conduct inspired in plaintiffs feelings of humiliation, outrage .

indignity, emotional distress and mental anguish.

[Count III: Conspiracy to Commit Fraud]

69. During all times relevant to this matter, AOS has been directly involved in the research, development and marketing of the Harvestore system such as the one purchased by plaintiffs, including approval of the content of the sales literature utilized by AOSHPI and its dealers which contained representations that the Harvestore system was "oxygen limiting" and prevented oxygen from coming in contact with the feed during normal operations.

70. Since at least 1965 through 1986, AOS and AOSHPI conducted, participated in and/or were aware of research and development studies which demonstrated that the representations AOSHPI was making through its dealers to prospective purchasers about the Harvestore system, how it operated and the impact its operation would have on plaintiffs' farm performance, such as the representations made by [the sales agent] to plaintiffs, were false.

71. AOS in concert with AOSHPI decided not to disclose the findings of these research and development studies to prior or prospective purchasers of the Harvestore system.

72. AOS in concert with AOSHPI continued making representations to prospective purchasers of the Harvestore system, such as those representations made by [the sales agent] to plaintiffs,...

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