June 27, 2023 – Answering whether an accident caused damage to another’s property is not appropriate in determining whether the damage is covered by a commercial general liability (CGL) insurance policy, the Wisconsin Supreme Court has ruled (5-2) in 5 Walworth, LLC v. Engerman Contracting, Inc., 2023 WI 51 (June 20, 2023).

Justice Brian Hagedorn wrote the majority opinion, joined by Justice Ann Walsh Bradley, Justice Rebecca Dallet, Justice Jill Karofsky, and Chief Justice Annette Ziegler (except for ¶¶ 5, 7, 39-42, and 49). Justice Patience Roggensack wrote a concurrence. Chief Justice Ziegler wrote an opinion concurring in part and dissenting in part, joined by Justice Rebecca Bradley.

Pool Project Snafu

In 2012, 5 Walworth, LLC (Walworth) hired Engerman Contracting, Inc. (Engerman) to serve as the general contractor for the construction of two swimming pools in Lake Geneva.

After the project was completed, 5 Walworth employees noticed leaks in the pools. Downes Swimming Pool Co., Inc. (Downes) tried to fix the leaks.

In 2015, 5 Walworth hired an engineering firm to investigate the leaks. The firm concluded that the walls of the main pool cracked because of:

• faulty installation;

• moist conditions caused by leakage; and

• the placement of steel reinforcement bars.

In 2018, in Walworth County Circuit Court, 5 Walworth sued Downes and its insurer Acuity, as well as Engerman and its insurers, West Bend Mutual Insurance Company (West Bend) and Casualty Company of Wisconsin (Casualty).

Downes filed a third-party complaint against Otto Jacobs Company, LLC (Otto Jacobs), the company that provided the shotcrete used in the walls of the pools.

General Casualty, West Bend, and Acuity each tendered a defense of their insureds.

The three insurers moved for summary judgment and sought a declaration that they were under no duty to indemnify or further defend under their policies.

The circuit court granted the three motions for summary judgment. Engerman and Otto Jacobs appealed, and the Wisconsin Court of Appeals consolidated the appeals and reversed.

The three insurers appealed to the supreme court.

Two-step Analysis for CGL Coverage

Justice Hagedorn began his opinion for the majority by explaining that, under supreme court precedent, analyzing CGL coverage issues is a two-step process.

That process, he pointed out, requires a court to determine: 1) whether an “occurrence” caused “property damage,” as those terms are defined in the policy; and 2) if an “occurrence” did cause “property damage,” whether the damage was to “other property” such that a business exclusion under the policy did not apply.

Hagedorn concluded that in a 2016 case, Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of California, Inc., 2016 WI 14, 367 Wis. 2d 221, 876 N.W. 2d. 72, the supreme court erred by using the “other property” component (from step two of the GCL coverage rubric) to determine whether an occurrence had caused property damage (step one of the rubric).

The supreme court in Pharmacal compounded that error, Justice Hagedorn concluded, by using an integrated systems analysis in answering the “other property” question.

Use of the integrated systems analysis was erroneous, Hagedorn reasoned, because that analysis is designed to help a court determine whether a party may pursue tort remedies or whether, under the economic loss doctrine, the party is limited to contract remedies.

“Pharmacal painted with a broad brush and seemed to incorporate the integrated systems analysis into all determinations of whether ‘property damage’ has occurred under the terms of a CGL policy,” Justice Hagedorn wrote.

Additionally, Hagedorn reasoned, use of the integrated systems analysis was anathema to a foundational principle established by the supreme court for insurance cases: in interpreting an insurance policy, a court should concentrate on the wording of the policy.

As a result, Justice Hagedorn concluded, Pharmacal’s holding that integrated systems analysis is properly part of resolving an insurance coverage dispute, as well as its holding that an “other property” analysis is proper to help determine whether an occurrence has caused property damage, must be overruled.

Summary Judgment not Warranted

Justice Hagedorn concluded that the circuit court erred by granting summary judgment.

Hagedorn acknowledged that, standing alone, the faulty installation of the shotcrete and the steel bars was no more than poor workmanship.

But, he reasoned, the record supported a conclusion that the poor workmanship led to the cracks and leaks, and the cracks and leaks could be accidents – “occurrences” under the CGL policy – that caused “property damage” as defined in the policy.

The supreme court affirmed the court of appeals and remanded the case to the circuit court.

Roggensack Concurrence: Majority Errs by Overruling Pharmacal

In her concurrence, Justice Roggensack wrote that she agreed that the record was not developed enough to warrant summary judgment.

However, she argued, the majority erred by partially overruling Pharmacal on the issue of employing an integrated systems analysis during the first step of the CGL coverage rubric.

Roggensack pointed out that the supreme court in Pharmacal concluded that using the integrated systems analysis in step one of the CGL coverage rubric was appropriate, given the traditional requirement that coverage did not apply without damage to another entity’s property.

“The words of the policy are key,” Justice Roggensack wrote, “but the reader must understand the judicial history that surrounds their interpretation.”

Ziegler Concurrence/Dissent: Engerman Knew about Damage

In her concurrence, Chief Justice Ziegler wrote that she agreed that: 1) Pharmacal should be partially overruled; and 2) a grant of summary judgment was not warranted for General Casualty and Acuity.

But she argued that summary judgment was warranted for West Bend, because the facts showed that Engerman, West Bend’s insured, knew about the damage to the pools before the effective date of the policy.

“The policy period commenced on October 27, 2013,” Ziegler wrote. “Before that time, Engerman received numerous emails notifying him of the property damage. He was therefore aware that ‘loss of use’ of the pool, which constitutes part of the ‘property damage’ under West Bend’s policy, had occurred.”