Vol. 75, No. 6, June 2002

Insurance Coverage in Construction Claims

Skillful drafting of the complaint can trigger or avoid insurance coverage in garden-variety construction claims.

by Michael G. Laskis

isconsin attorneys are often asked to pursue claims based on construction deficiencies against contractors, subcontractors, and materials suppliers. This article outlines some of the most common ways in which insurance coverage can be triggered or avoided when garden-variety construction claims are prosecuted in court in Wisconsin.¹

Determine Whether to Pursue Coverage

When the target of the claim is insolvent or the claim is otherwise potentially uncollectible, the claimant's attorney should do his or her best to fashion a demand or complaint that will require the target's commercial liability insurance carrier to cover the claim. If the target of the claim is clearly collectible, however, the attorney must determine if it is wise to trigger insurance coverage. If coverage is triggered, the insurer can help fund a settlement or pay a judgment. But consider that once coverage is triggered, the insurance company will be required to defend the claim at its expense and the insured's staying power will increase.² Consider too that if the insurer initially provides a defense but at the same time seeks a declaratory judgment establishing that coverage is not available, the consequent litigation delays and added costs of contesting coverage issues may more than offset the potential benefit of securing a recovery from the insurer.³ This most often will be true if the arguments for coverage are weak and the insurer, accordingly, is likely to prevail if it seeks declaratory relief. Each case turns on its own facts and requires a careful analysis by claimant's counsel.

In many cases, insurance coverage is not controlled by the underlying facts but rather by the specific claims that counsel elects to pursue on the client's behalf. Accordingly, in deciding whether a particular claim should be pursued, it is critical that counsel fully consider whether the claim likely will be covered by the target defendant's liability insurance.

In Wisconsin, as in most states, an insurer generally must defend its insured contractor, subcontractor, or supplier if the complaint alleges facts that fairly show that as a result of the insured's action or inactions 1) "property damage" was triggered by an "occurrence," as such terms are used in the Commercial General Liability policy form (CGL), and 2) such property damage is not subject to one of the many "business risk" exclusions included in the CGL. Most CGL insurance in the United States is written on standard forms promulgated by the Insurance Services Office Inc.⁴

Insurers face several obstacles if they deny coverage in the face of a complaint that has been well crafted to trigger coverage. Coverage clauses are interpreted broadly in favor of the insured. If there is a possibility of recovery on any covered claim, an insurer must provide a defense to the entire lawsuit, even if other allegations are not covered by insurance. Exclusions are to be narrowly construed against insurers and all ambiguities therein are to be resolved against them.⁵ If the insurer wrongfully fails to provide a defense, it is responsible for all resulting damages to the insured; in some cases, the insured also may be able to recover attorney fees it incurred in establishing coverage.⁶

On the other hand, in resolving whether a claim is covered by insurance, courts will not engage in mind reading. They will not speculate as to what damages or injuries a plaintiff might have pleaded had it been more careful or specific.⁷

Typical Fact Pattern

For example, assume that your client hired a general contractor to build a swimming pool. The contractor subcontracted with an excavator to clear and fill the site before the pool was installed, but otherwise handled the work with its own forces. The contractor purchased concrete for the pool from a local supplier. Your client separately contracted with a landscaper to provide a brick patio around the pool. The pool has cracked and its sidewalls have buckled, resulting in damage to the surrounding patio.

After speaking with your client, reviewing relevant documents, and checking with potential expert witnesses, you may not yet be certain exactly what caused the pool to fail and whether the poor design or workmanship of the contractor, the excavator, or the concrete supplier was solely or primarily responsible for the failure. In such case, as explained below, you are free to select your target defendant or defendants and frame the allegations of your complaint to trigger or avoid insurance coverage so long as the basic facts alleged in your complaint are made in good faith and, even if made on information and belief, are reasonably grounded in fact after due inquiry on your part.⁸

Avoiding Coverage

Following the example above, if the contractor is financially sound and you do not want otherwise to trigger insurance coverage, it would be best to commence suit only against the general contractor and to allege only that your client had suffered damage to the pool furnished by the contractor as a result of its failure to complete the pool in a workmanlike manner as expressly or impliedly warranted and otherwise required by your client's agreement with it.

You would do this because, to paraphrase the CGL, the CGL expressly excludes coverage of property damage to real property on which the general contractor or its subcontractors were working if the damage arose out of such work while it was being performed. The CGL's so-called "business risk" exclusions reflect the common sense notion that liability insurance is intended to insure against accidents or other unexpected events that cause bodily injury or property damage to property other than the contractor's work itself and not to serve as a performance bond that protects the contractor against its poor workmanship and other breaches of its contractual obligations.⁹

Since the allegations of your client's complaint would fall squarely within the business risk exclusions, the contractor's CGL insurer would likely and correctly deny coverage if the contractor tendered your client's claim to it.

Triggering Coverage

Assume that you want to trigger insurance coverage. Under the facts outlined above, there may be at least three ways to do this.

First, you might expand the complaint to allege damage not only to the pool but also to the surrounding patio. Because the patio damage constitutes work on which the insured contractor was not "performing operations" (the CGL language), the exclusions no longer likely apply - at least not to the claim for patio damage. Even though CGL coverage likely extends to only a small portion of your client's total claims, the CGL insurer would be required to defend all of the claims and would, in the author's experience, fund all or a substantial part of a settlement in the usual case.

Michael G. Laskis, Harvard 1973, is the managing partner of the Madison office of Foley & Lardner. He represents medical clinics, HMOs, advanced technology companies, contractors, and engineering firms. He also bills himself as Wisconsin's super golf lawyer.

In order to establish that your client's losses were covered by an "occurrence" within the meaning of the CGL, facts permitting, you should be careful to allege that such losses resulted from an "accident" or exposure to conditions that were neither expected nor intended from the standpoint of the insured. In the case of your client's pool, you would allege that suddenly the pool cracked, the pool walls buckled, and portions of the patio gave way, cracked, and sank as a result of settling and use of poorly mixed concrete.¹⁰ Also, you would be careful to allege that the pool cracks and buckled pool walls caused "physical injury" to the patio and resulted in loss of use of the patio for a time, thereby bringing the claim squarely within the CGL's description of "property damage."

Second, depending on the facts, you may be able to add allegations that the property damage first manifested itself after your client accepted the pool and began using it and was caused, in part, by the excavation subcontractor's failure to adequately compact the fill supporting the pool. Because the damage arose after the contractor completed its work, your client's claim falls within the "products completed operations hazard" exclusion or "PCOH" of the CGL. The business risk exclusions of the CGL do not extend to subcontractors (such as the excavator) in the case of damages falling within the PCOH. Consequently, coverage would be triggered. Indeed, under these circumstances, when the damage occurred after work had been completed on the project, the CGL insurer has essentially undertaken to guarantee the workmanship of all subcontractors' work.

The Wisconsin courts have expressly acknowledged that the subcontractor exceptions to the PCOH exclusion are surprisingly far reaching:

"We realize that under our holding a general contractor who contracts out all the work to subcontractors, remaining on the job in a merely supervisory capacity, can ensure complete coverage for faulty workmanship. However, it is not our holding that creates this result: it is the addition of the new language to the policy. We have not made the policy closer to a performance bond for general contractors, the insurance industry has."¹¹

Third, assume that the general contractor is out of business and did not carry insurance. Even if the damage to the pool and patio manifested itself while the work was still in progress and, therefore, did not fall within the products completed operations hazard, you could consider joining the excavation subcontractor or the concrete supplier in the action in order to trigger insurance coverage. If deficiencies in these subcontractors' work or materials caused damage to the work or property of others, in whole or in part, their policies likely will afford coverage. Triggering coverage in the case of a subcontractor or supplier often is easier than in the case of the primary contractor because subcontractor or supplier activities more typically cause damage to the work or property of others, such as the work or property of the general contractor, other subcontractors, or the owner.

An owner's direct claim against a subcontractor should carefully allege physical injury to property outside the work of the subcontractor or the loss of use of such property. In the case of your client's pool, you should allege that the excavator's failure to properly compact the soil beneath the pool resulted in physical injury to the pool structure itself and to the patio. Using this strategy requires a particularly careful analysis of the underlying facts. It may not be enough to trigger coverage under the excavator's policy if the pool or patio would be damaged in the course of redoing the excavator's work if the excavator's work did not itself damage the pool or patio. In such a situation there may not be coverage because the repair or replacement of the pool or patio would be "directly related to the repair and replacement of the defective work."¹²

When insurance coverage is desired, your client also should consider joining the insurer of the general contractor or subcontractor in the underlying action, pursuant to Wis. Stat. section 632.24.

Economic Loss Doctrine

A "pure economic loss" occurs when a seller delivers a defective product and there is no resulting personal injury or injury to property other than to the product itself.¹³ If your client contracted for construction of a swimming pool and the pool builder supplied a pool that cracked and leaked, and if there was no resulting damage to property other than to the pool itself, such as the patio, your client would have suffered a pure economic loss. Such losses usually are measured by the cost of remedying the defect and, in commercial cases, often by resulting loss of profits.¹⁴ When the damages resulting from a breach of contract are limited to economic loss, the injured party may recover only in contract and not in tort, and such recovery may be reasonably limited by the terms of the contract.¹⁵ In many cases, contract boilerplate language includes provisions limiting a party's liability for breach to the cost of replacement or repair of the defective product and expressly excluding recovery of lost profits or other consequential damages.¹⁶

The Wisconsin Court of Appeals has construed the business law exclusions of the CGL policy to eliminate coverage of economic loss resulting from a contractor's breach of a construction contract.¹⁷ In construction cases, if a claimant desires to avoid application of the economic loss doctrine and thereby help trigger insurance coverage, it is important that the claimant's theories of recovery be framed in tort rather than based on breach of contract and that the damages for which recovery is sought include damages to property other than to the work furnished by the contractor.¹⁸

Given that there is no privity of contract between an owner and a subcontractor or between the owner and a supplier to a contractor or subcontractor, avoiding economic loss doctrine issues ordinarily will be relatively easy to achieve when an owner brings a claim directly against a subcontractor or such a supplier.¹⁹

Conversely, when your client is seeking to secure application of the economic loss doctrine and thereby avoid insurance coverage, the client's claim should be pleaded as a pure breach of contract claim against the general contractor.

Conclusion

In summary, each case is different and turns on its facts. While the CGL is a standard form, the form was revised substantially in 1966, 1973, and 1986 and cases that construe earlier versions of the form should, accordingly, be used cautiously.

Although insurance companies are reluctant to deny coverage in close cases, in most situations, insurance coverage can be triggered or avoided through skillful drafting of the complaint. The key is anticipating and addressing insurance coverage issues before the complaint is drafted rather than afterward, when it may be too late to accomplish your client's goals.

Endnotes

¹For a more detailed analysis of the issues addressed in this article, see Owen J. Shean and Douglas L. Patin, Construction Insurance: Coverages and Disputes (1994); 9 Lee R. Russ & Thomas F. Segalla, Couch on Insurance, sec. 129.11 et seq. (3d ed. 1997); and Allen D. Windt, Insurance Claims and Disputes - Representation of Insurance Companies and Insureds, secs. 11.10 and 11.10A (4th ed. 2001).

²See Bradley Corp. v. Zurich Ins. Co., 984 F. Supp. 1193, 1198 (E.D. Wis. 1997).

³See Elliott v. Donahue, 169 Wis. 2d 310, 316-25, 485 N.W.2d 403, 405-09 (1992).

⁴See Wisconsin Label Corp. v. Northbrook Prop. & Cas. Ins. Co., 2000 WI 26, 233 Wis. 2d 314, 607 N.W.2d 276.

⁵See Mooren v. Economy Fire & Cas. Co., 230 Wis. 2d 624, 632, 601 N.W.2d 853, 856 (Ct. App. 1999).

⁶See Elliott, 169 Wis. 2d at 322-24, 485 N.W.2d at 408-09; but see Reid v. Benz, 2001 WI 106, 245 Wis. 2d 658, 629 N.W.2d 262; see also United States Fire Ins. Co. v. Green Bay Packaging Inc., 66 F. Supp. 2d 987 (E.D. Wis. 1999) (insurer that fails to defend is liable to insured if there is, in fact, coverage under the policy or coverage is "fairly debatable").

⁷See Midway Motor Lodge v. Hartford Ins. Group, 226 Wis. 2d 23, 36-37, 593 N.W.2d 852, 857-58 (Ct. App. 1999) (coverage not triggered because of plaintiff's failure to specifically plead loss of use of tangible property).

⁸See Jandrt v. Jerome Foods Inc., 227 Wis. 2d 531, 597 N.W.2d 744 (1999); see also 5 Charles Alan Wright and Arthur R. Miller, Federal Practice and Procedure §1224 (2d ed. 1980).

⁹See Bulen v. West Bend Mut. Ins. Co., 125 Wis. 2d 259, 264-65, 371 N.W.2d 392, 394 (Ct. App. 1985); Jacob v. Russo Builders, 224 Wis. 2d 436, 445, 592 N.W.2d 271, 275 (Ct. App. 1999). Russo Builders did not involve a standard policy and the result may have been different had a standard CGL been purchased.

¹⁰See Midway Motor Lodge, 226 Wis. 2d at 31-33, 593 N.W.2d at 855-56. For a good discussion of how courts in other jurisdictions have construed the "occurrence" requirement of the CGL policy, see Clifford J. Shapiro, Point/Counterpoint: Inadvertent Construction Defects Are an "Occurrence" Under CGL Policies, 22 Construction Law. 13 (Spring 2002); and Linda B. Foster, Point/Counterpoint: No Coverage Under the CGL Policy for Standard Construction Defect Claims, 22 Construction Law. 18 (Spring 2002).

¹¹Kalchthaler v. Keller Constr. Co., 224 Wis. 2d 387, 400, 591 N.W.2d 169, 174 (Ct. App. 1999).

¹²Jacob, 224 Wis. 2d at 450, 592 N.W.2d at 276.

¹³See City of La Crosse v. Schubert, Schroeder & Assocs. Inc., 72 Wis. 2d 38, 44, 240 N.W.2d 124, 127 (1976), overruled on other grounds, Dannen & Janssen Inc. v. Cedarapids Inc., 216 Wis. 2d 395, 416, 573 N.W.2d 842, 851 (1998).

¹⁴Id.

¹⁵Sunnyslope Grading Inc. v. Miller, Bradford & Risberg Inc., 148 Wis. 2d 910, 915-21, 437 N.W.2d 213, 215-17 (1989).

¹⁶Id. at 913-14, 437 N.W.2d at 215.

¹⁷Jacob, 224 Wis. 2d at 448, 592 N.W.2d at 276 (CGL coverage exists for tort damage but not for economic loss resulting from contractual liability); see also Wausau Tile Inc. v. County Concrete Corp., 226 Wis. 2d 235, 247, 267-68, 593 N.W.2d 445, 451, 459-60 (1999) ("economic loss" is damage to product itself that has not caused damage to other property and therefore cannot constitute "property damage" within meaning of CGL); Vogel v. Russo, 2000 WI 85, ¶ 16, 236 Wis. 2d 504, 511, 613 N.W.2d 177, 181 (insurance coverage dispute does not ordinarily implicate economic loss doctrine although economic loss doctrine cases can sometimes involve coverage questions).

¹⁸See Tony Spychalla Farms Inc. v. Hopkins Agric. Chem. Co., 151 Wis. 2d 431, 436-37, 444 N.W.2d 743, 746-47 (Ct. App. 1989).

¹⁹See Northridge Co. v. W.R. Grace & Co., 162 Wis. 2d 918, 938 n.15, 471 N.W.2d 179, 187 n.15 (1991) (privity of contract required for cause of action based on express or implied warranty).

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