Wisconsin Follows “Cause Theory” in Determining Number of Occurrences

Andrew W. Miller | Brouse McDowell | March 1, 2019

In Secura Insurance v. Lyme St. Croix Forest Company, LLC, No. 2016AP299 (Oct. 30, 2018), the Wisconsin Supreme Court determined the number of occurrences arising from a large forest fire that took place in May of 2013. The fire in question allegedly began in a piece of logging equipment and quickly spread to an adjacent grass pile and eventually the surrounding forest. In total, the fire consumed 7,442 acres over three days, damaging the real and personal property of many individuals and businesses.

Ray Duerr Logging, Inc., the owner of the piece of equipment that ignited and caused the fire, sought coverage for damage to third-party property under a commercial liability policy issued by Secura. That policy contained a general aggregate limit of $2,000,000, but a sub-limit of $500,000 per occurrence “due to fire, arising from logging operations…” The policyholder took the position that the fire constituted several occurrences; specifically each time the fire spread to a new property represented a new occurrence. Secura, in turn, argued that the entire fire constituted a single occurrence.

In finding that the fire was a single occurrence, the court noted that Wisconsin followed the “cause theory” as opposed to the “effect theory” when determining whether an event is a single occurrence or multiple occurrences. Under the cause theory, “‘where a single, uninterrupted cause results in all of the injuries and damage, there is but on accident or occurrence.’”1 Alternatively, “the effect theory suggests that the wording ‘each accident’ ‘must be construed from the point of view of the person whose property was injured.’”2

The policyholder’s position – that each time the fire spread to a new property represented a new occurrence – fit with the effect theory of causation, as from the standpoint of each property owner, the damage to their own property was a new, separate accident. However, the court could not square this view with the cause theory. Here, the cause of the fire in question all traced back to the fire in the logging equipment. Further, the court noted that while the fire spread over a large area, it was all within the same geographic area. And the fire was continuous – there was no temporal break over the three days that the fire spread. In sum, there was no way that the fire could be considered anything other than a single cause, meaning that coverage under Secura’s policy was limited to a single, $500,000 occurrence limit.

This case highlights the importance of purchasing adequate occurrence limits. Here, while the policyholder purchased $2,000,000 in coverage, $1,500,000 of the limits was unavailable due to the triggering of the applicable per-occurrence limit in the policy.

Wisconsin Supreme Court Narrowly Interprets the “ Permanent Property Insurance ” Condition in a Builder’s Risk Policy

Patrick Aul, and Richard M. Mackowsky | Property Insurance Law Observer | July 13, 2016

In Fontana Builders, Inc. v. Assurance Company of America, Case No. 2014AP821, 2016 WL 3526408 (Wis. Jun. 29, 2016), the Wisconsin Supreme Court addressed whether the purchase of a homeowner’s policy by the occupiers and presumptive purchasers of a home that was still under construction terminated coverage under a builder’s risk policy issued to the builder and owner of the home. The builder’s risk policy contained a provision that the coverage will end “[w]hen permanent property insurance applies,” which the court referred to as the “permanent property insurance” condition. In a split decision, the court held that the homeowner’s policy did not “apply” so as to terminate coverage under the builder’s risk policy.

The case arose out of a June 28, 2007 fire that damaged a high-end custom home under construction in Lake Geneva, Wisconsin. At the time of the fire, the home was owned by its builder, Fontana Builders, Inc. The home represented a substantial investment for Fontana, as nearly all of its assets were invested in the house, which the company planned to use to generate new opportunities for itself in the luxury housing market. Fontana purchased a builder’s risk policy issued by Assurance in connection with its construction of the Lake Geneva home. James Accola was the president and sole shareholder of Fontana. Before the final completion of the Lake Geneva house, Mr. Accola and his wife moved into it with the intention of purchasing it upon completion so that they would have unfettered access to an example of Fontana’s finished work for marketing purposes. The Accolas purchased a homeowner’s policy with respect to their interests in the home issued by another insurer.

Following the fire, the Accolas made a claim under their homeowner’s policy and received payment for their personal property, additional living expenses, and some amount for “[a]ny other interest the [Accolas] may have [had] in the premises.” Fontana made a claim for damage to the house under the Assurance builder’s risk policy. Assurance denied Fontana’s claim on the grounds that its coverage ended when the Accolas purchased their homeowner’s policy for the property, pursuant to the builder’s risk policy’s permanent property insurance condition.

Fontana countered Assurance’s denial by arguing that its insurable interests were distinct from the insurable interests of the Accolas, even though Mr. Accola was Fontana’s president and sole shareholder. Therefore, Fontana argued, the purchase of a homeowner’s policy by the Accolas did not constitute “permanent property insurance [that] applies” so as to terminate coverage under the builder’s risk policy. Fontana also argued that allowing third-party potential purchasers like the Accolas to unilaterally terminate the builder’s risk policy by acquiring a homeowner’s policy would be inconsistent with Fontana’s reasonable expectations as a builder that its coverage would remain in place until the property was actually sold, and would give rise to unacceptable gaps in coverage.

The issue was originally decided by a jury, which agreed with Assurance that the purchase of the homeowner’s policy by the Accolas terminated coverage under the builder’s risk policy. The Wisconsin Court of Appeals affirmed the verdict and the trial court’s determination that the interpretation and application of the permanent property insurance condition in the builder’s risk policy was a question of fact for the jury to decide. On June 29, 2016, however, the Wisconsin Supreme Court, in a split decision, reversed the Court of Appeals, holding that the builder’s risk policy was not terminated at the time of the fire as a matter of law. It remanded the case back to the trial court for determination of Fontana’s and its mortgagee’s damages. Id. at ¶ 69.

In reaching this decision, the court first determined that interpretation of the permanent property insurance condition and its application to the underlying facts were questions of law for the court to decide – not a jury. The court acknowledged that there is an exception to the usual rule that interpretation of an insurance contract is a matter for the court, which exception applies when extrinsic evidence is necessary to show a party’s understanding of a policy’s words or terms at the time the insurance policy is initially agreed upon. However, that presents a different question from the application of a policy’s words or terms to a given set of facts. Id.at ¶¶ 44-49. “Thus, where a dispute turns upon application of an insurance policy to underlying facts, interpretation of the insurance policy presents a question of law for the court. In this case, a determination as to whether ‘permanent property insurance applie[d]’ was not an appropriate question for the jury.” Id. at ¶¶ 48-49. This part of the court’s ruling was unanimous.

The court then interpreted the provision at issue, which again provided: “[c]overage will end … when permanent property insurance applies.” The majority noted that the Assurance policy did not define “permanent property insurance,” nor did it “define what it means for permanent property insurance – whatever it may be – to ‘apply.’” Id. at ¶ 52. “Read in isolation, the phrase ‘when permanent property insurance applies,’ seems to present an ambiguity. The policy provides no explicit guidance as to the meaning of the term ‘applies.’ To whom or to what must permanent property insurance apply for coverage to end? The provision is indefinite at best.”Id. at ¶ 54. It then considered the two alternative meanings of that critical term:

On the one hand, an insured builder might reasonably expect builder’s risk coverage to end when the builder completes construction and the owner – be it the builder or a new owner – purchases a policy to provide adequate coverage for the finished structure. On the other hand, a party might conclude that it is reasonable for builder’s risk coverage to end when any other property insurance applies to the property, regardless of the party purchasing coverage or the particular insured. Id. at ¶ 55.

The majority concluded the most reasonable interpretation was that the “permanent property insurance – whatever that means – must ‘apply’ ‘to the builder’s insured interest in the property’” in order to terminate the builder’s risk coverage. Id. at ¶ 58. The court justified its reading by stating that the other conditions terminating coverage in the policy generally only end coverage upon a change in the builder’s insurable interest in the property, and the permanent property insurance condition should be read in that broader context.

The court concluded that Fontana and the Accolas were distinct legal entities insuring different interests in the property. Because the homeowner’s policy “in no way covered Fontana’s interest as a builder and owner … it did not ‘apply’ so as to supersede the builder’s risk coverage.” Id. at ¶ 64. Notably, because it concluded that the homeowner’s policy did not “apply,” the court did not address whether it constituted “permanent property insurance.” Id. at n. 15. However, in a concurring opinion, two justices opined that the homeowner’s policy “could not constitute ‘permanent property insurance [that] applies’ to the covered property,”  because the homeowner’s policy could not cover the damage to the house’s structure as a result of the Accolas not having an insurable interest in the house’s structure at the time of the fire.

The court further reasoned that this reading of the condition comports with the reasonable expectations of builders who purchase such policies that they will be covered throughout the entire construction process. The court stated:

. . . it is standard practice for banks making loans to construction companies to require those companies to maintain builder’s risk insurance throughout the construction process. Testimony at the second trial also indicated that banks making loans to home purchasers generally require purchasers to obtain insurance on the property prior to any dispensation of loan funds. Thus, any builder who procures a policy that terminates “when permanent property insurance applies” could face a time period near the end of construction in which the builder would have no insurance coverage for the property while a prospective purchaser prepares for closing – even if construction on the property continues and the prospective sale ultimately fails to close.

Leaving builders exposed to such uninsured risk of loss would thoroughly frustrate their reasonable expectations . . .  Id. at ¶¶ 66-67.

This case is only the second appellate or federal court decision to interpret the “when permanent property insurance applies” provision contained in many builder’s risk policies. However, its persuasive effect in other jurisdictions may be limited somewhat by a strongly worded dissent, in which one of the justices disputed the majority’s reasoning, stating that:

Under the unambiguous terms of the builder’s risk policy, the homeowner’s policy in effect on the date of loss constituted “property insurance that applies.” Coverage under the builder’s risk policy ended when coverage under the homeowner’s policy took effect. Id. at ¶ 102.

What Constitutes Insurance “Bad Faith” in Wisconsin?

Kenneth Kan | Property Insurance Coverage Law Blog | April 16, 2015

Earlier this week, college hoops fans were treated to a great matchup between the University of Wisconsin and Duke University in the championship game of the 2015 NCAA Basketball Tournament. Last week, in the spirit of the tournament, I wrote about insurance “bad faith” in Kentucky. Perhaps I jinxed the Kentucky Wildcats because they ended up losing to the Badgers of Wisconsin. Well, this week I was initially going to blog about what constitutes insurance “bad faith” in North Carolina (to honor Duke as the champions), but my colleague Nicole Vinson works cases in North Carolina and has blogged extensively about insurance subjects relating to the state. So, it makes sense for me to turn my attention to Wisconsin and share my research on what it takes to establish a claim for bad faith in Wisconsin.

To establish a claim for bad faith in Wisconsin, the insured must show the following:

1) the absence of a reasonable basis for the insurance company’s denial benefits of the policy; and

2) the insurance company’s knowledge or reckless disregard for the lack of a reasonable basis for denying the claim.1

Courts in Wisconsin have classified the above two-prong test applying objective and subjective standards. The first prong is objective and the “insured must establish that under the facts and circumstances, a reasonable insurer could not have denied or delayed payment of the claim.”2 Here, the trier of fact must “determine whether the insurer properly investigated the claim and whether the results of the investigation were subjected to reasonable evaluation and review.”3 Under this analysis, the conduct of that insurer is measured against what a reasonable insurer would have done under the same facts and circumstances. If the insurer violated the first/objective prong of the bad faith test, then we have to turn to the second prong which is a subjective standard. An insurer violates the subjective prong if there are sufficient grounds for the trier of fact to draw the inference that the insurer acted with “a reckless disregard of lack of a reasonable basis for denial or a reckless indifference to facts or to proofs submitted by the insured.4

Like most other states, Wisconsin has statutes governing insurance claim adjustment practices. You can find them enumerated in the Wisconsin Administrative Code, Chapter 6, starting with section 6.11. If an insurance company is engaged in claim settlement practices that are unfair, a policyholder may be able to cite such violations as further indicia of bad faith.

1 Anderson v. Continental Ins. Co., 85 Wis.2d 675, 691 (1978).

2 Weiss v. United Fire and Cas. Co., 197 Wis.2d 365, 378 (1995).

3 Id.

4 Anderson at 693.

via What Constitutes Insurance “Bad Faith” in Wisconsin? : Property Insurance Coverage Law Blog.

No Diagnosis, No “Damages”: Wisconsin’s Construction Statute of Repose in Asbestos Cases

Gregory N. Heinen | Wisconsin Appellate Law | February 2, 2015

How to apply Wisconsin’s construction statute of repose, Wis. Stat. § 893.89, in asbestos cases has recently been a hot topic dividing trial courts. The statute bars a broad category of claims if they are brought more than 10 years after the date of substantial completion of an improvement to real property. Many corporate defendants argue that their involvement in past real property improvements entitles them to the protection of the statute and bars asbestos plaintiffs’ claims. One of the key debates involves the meaning of the exception from the statute’s protection for claims for “[d]amages that were sustained before April 29, 1994.” § 893.89(4)(d). Plaintiffs, some of whom first worked with asbestos-containing products more than 50 years ago, often contend that this exception applies to their claims, making the statutory bar inapplicable.

Last week, in Peter v. Sprinkmann Sons Corp., 2014AP923, the Wisconsin Court of Appeals, District I, held the exception inapplicable to claims made by the estate of the deceased, Mr. Peter. The crux of the issue was the meaning of the phrase “damages that were sustained.” Did “damages” refer to legal damages, as in a legal cause of action that accrues when a cancer diagnosis is made (here, in 2012), as the defendant urged? Or did “damages” mean physical damage, as the plaintiff estate contended, submitting expert testimony that physical damage occurs upon asbestos exposure, which here may have been as far back as 1959. The court agreed with the defendant, for four reasons.

First, the court held that “damages” has a specific meaning: a legally cognizable claim or right to recover for injuries. The decedent had no such claim until his mesothelioma diagnosis in 2012, nearly two decades after April 29, 1994. Second, the court determined that the legislature had used both the word “damages” and the word “injury” in the same sentence in § 893.89(2) (“damages for any injury”), so to give those terms an identical meaning would render a piece of the statute “absurd.” Accordingly, “damages” in this statute had to mean something other than “injury.”

Third, the court approvingly cited an opinion by Judge Griesbach of the Eastern District of Wisconsin, holding that the use of the plural word “damages” in the statute showed that “damages” means legal damages, not physical “damage.” Lastly, the court thought that its interpretation was supported by the purpose of § 893.89: to provide long-term liability protection for those involved in real property improvements by extinguishing all rights of recovery after the 10-year repose period expired. While the court acknowledged the harshness of this result for asbestos plaintiffs who may face a 40-year latency period before their diagnosis, it put the responsibility for constructing any asbestos-related exception in the statute squarely on the legislature.

There is little doubt that Peter will encourage defendants involved in past real property improvements to cite the statute of repose as a defense in asbestos litigation. If the opinion is published, as the panel recommended, it will have statewide precedential effect, Wis. Stat. § 752.41(2), and may well govern the outcome of three other cases of which we are aware, now pending in the Court of Appeals on this same issue, as well as in trial courts throughout the state. We will not be surprised, therefore, to see the plaintiff estate petition for review by the Wisconsin Supreme Court.

via No Diagnosis, No “Damages”: Wisconsin’s Construction Statute of Repose in Asbestos Cases | Wisconsin Appellate Law.