2022 Wisconsin Insurance Case Law Year in Review

Newsletter

Every year, Quarles & Brady LLP's Insurance Recovery Team compiles a list of important decisions by Wisconsin state and federal courts addressing insurance issues. Our goal is to keep you informed of developments and help you anticipate what the future may bring. For additional information, please reach out to any member of Quarles' Insurance Recovery Team.

First-Party Property Coverage:
Colectivo v. Society, 2022 WI 36

In Colectivo, the Wisconsin Supreme Court reversed a trial court decision denying Society’s motion to dismiss a class action complaint that sought coverage for COVID-related business interruption losses. According to the Court, the presence of the virus in and on covered property cannot constitute “physical loss of or damage to” such property—the trigger for coverage under Society’s all-risk policy. The Court construed “physical loss of or damage to” property to require some alteration of “tangible characteristics” of the property—the physical loss of use of the property alone is insufficient. The Court went on to hold that the virus cannot cause any such alteration. 

The Court also held the alleged presence of the virus did not trigger “contamination” coverage because the virus, itself, did not cause the plaintiffs to suspend their operations—government orders did so. Finally, the Court held that none of the government orders in fact caused any loss of use of the insured properties. They instead only limited use by prohibiting the very business activities on which plaintiffs’ operations depended.

The Court apparently found persuasive several federal court decisions reaching the same conclusion. These decisions were issued earlier than state appellate cases. But state courts now are catching up. And a split is emerging. Decisions issued in Louisiana, Vermont, California, and Pennsylvania, for example, distinguish and reject the federal authorities as inconsistent with state pleading standards that require courts to deem a complaint’s factual allegations to be true in analyzing a motion to dismiss. Some of these courts also have determined that if insurers such as Society had intended “physical loss of or damage to” property to require alteration of tangible characteristics, they would have said so. Absent unambiguous language to that effect, the physical loss of use of covered property can constitute “physical loss of” such property, triggering coverage.

Unfortunately, the Wisconsin Supreme Court lacked the benefit of the analysis offered in these later-issued, pro-policyholder state court decisions, which may explain why Society moved to bypass the Court of Appeals to expedite this decision.

Secura v. 33 Allenton Venture, 2022 WL 17479973 (Wis. Ct. App. Dec. 7, 2022)

33 Allenton Venture reaffirms the rule that “the inapplicability of one exclusion will not reinstate coverage where another exclusion has precluded it.”

In 2019, the water service line ruptured under a building owned by the insured, 33 Allenton, flooding the building and causing property damage. 33 Allenton submitted a claim to Secura, which paid to repair the service line itself, but denied coverage for any other damage. Secura then filed suit, seeking a declaration of no coverage. 

On cross motions for summary judgment, the circuit court found coverage. But the Court of Appeals reversed, holding that a water exclusion applied. The exclusion barred coverage for damages caused by “water under the ground surface pressing on, or flowing or seeping through … [f]oundations, walls, floors or paved surfaces … basements … doors, windows or other openings.” 

33 Allenton argued the exclusion did not apply, relying on an example provided in the exclusion to illustrate its scope: a dam failure causing flooding. 33 Allenton claimed that the example meant the exclusion barred coverage only for water damage arising out of external events similar to a dam failure occurring outside the property. The Court of Appeals disagreed, explaining that the example is only that—an example—and did not override the exclusion’s express text stating that it applies to water damage whether it is “caused by an act of nature or is otherwise caused.”

Finally, 33 Allenton also argued an exception to a separate exclusion—the “wear and tear” exclusion—restored coverage otherwise barred by the water exclusion. The wear and tear exclusion barred coverage for losses caused by deterioration of insured property. But an exception to it reinstated coverage for “accidental discharge or leakage of water or steam as the direct result of the breaking apart or cracking of a plumbing, heating, air conditioning or other system or appliance. . .” Again, Court of Appeals disagreed with 33 Allenton. The Court held the exception reinstates coverage otherwise barred by the “wear-and-tear” exclusion only. It does not reinstate coverage for losses barred elsewhere, under separate, stand-alone exclusions such as the water exclusion.  

Horizon West Condominium Homes Association v. Travelers, 2022 WL 17574860 (E.D. Wis.)

Rounding out our first-party property cases, Horizon West is notable mostly because it follows so closely on the heels of the tragic collapse of the Surfside, Florida condo building in 2021 and demonstrates some of the challenges that may exist in securing coverage before a similar tragedy occurs. 

In December 2021, the City of Waukesha ordered that the Horizon West building be evacuated and razed because an inspection had revealed substantial corrosion of the steel beams necessary to maintain the building’s structural stability. The Association thereafter submitted a claim for policy limits to Travelers under a property policy covering the building. When Travelers did not promptly agree to pay, the Association filed suit. Travelers moved to dismiss, arguing that the policy did not cover the Association’s loss. The district court agreed, granting Travelers’ motion. 

The court’s analysis was relatively succinct and straightforward: The Association’s policy covered direct physical loss of, or damage to the building that “commenced” during the policy period. And while the building clearly had suffered physical damage in the form of corrosion to its steel beams, such damage did not commence during the policy period—the Association alleged having noticed evidence of the corrosion years earlier. As a result, the Association was forced to rely on the City’s raze order as the loss triggering coverage—the only loss that commenced during the policy period. And the policy included an “Ordinance or Law” exclusion barring coverage for losses caused by “the enforcement of or compliance with any ordinance or law . . . [r]equiring the tearing down of any property.” The policy also included an exclusion barring coverage for loss or damage caused by rust that the court held would apply, even absent the “Ordinance or Law” exclusion.

The Association was quick to point out that Travelers likely would owe coverage if the building had collapsed during the policy period, as the Surfside building did. But because that did not happen, the court found the Association could not meet the requirements for coverage. 

The Association has appealed the dismissal, which leaves open the possibility of additional developments in the coming year.

Third-Party Liability Coverage:
Pepsi-Cola Metropolitan Bottling Co. v. Employers Ins. Co. of Wausau, Appeal No. 2021AP635 (Wis. Ct. App. July 8, 2022)

2022 also produced several notable decisions addressing coverage under liability policies. In Pepsi, the Court of Appeals reaffirmed long-standing precedent indicating an insured may assign its right to coverage for a loss after the loss has occurred. So-called “anti-assignment” clauses in insurance policies only preclude the assignment of rights under the policy for future losses that have yet to occur.

Pepsi involved coverage for an underlying asbestos suit. In the 1960s, Wausau issued policies covering the underlying suit to Waukesha Foundry Company (“Old Waukesha”) a predecessor of Pepsi. In 1968, after the claimant in the underlying suit already had been exposed to asbestos and begun to suffer undiagnosed bodily injury, Old Waukesha transferred and assigned its assets to Waukesha Foundry Company, Inc. (“New Waukesha”), as part of a corporate reorganization. New Waukesha later merged with and into Abex Corporation, which subsequently transferred and assigned its assets to PA Holdings Corporation (“PAH”). PAH later merged with and into Pneumo Abex, LLC, which assigned its rights under the Wausau policies to Pepsi.

Pepsi sought coverage for the underlying asbestos suit from Wausau. Wausau refused, arguing that Pepsi acquired no rights under the policies because the assignments at issue were made without Wausau’s written consent, which the policies expressly required. The Court of Appeals rejected Wausau’s argument, holding that, under well-established Wisconsin law, “anti-assignment” clauses are unenforceable to bar post-loss assignments of rights to insurance proceeds. 

In so holding, the Court of Appeals clarified its prior dicta in Red Arrow Products Co, Inc. v. Employers Insurance of Wausau, 2000 WI App 36, which Wausau read to mean that an anti-assignment provision precluded the assignee from acquiring rights under a policy. As the Court of Appeals explained, the parties in Red Arrow agreed and stipulated that the purported insured never had received any assignment from its predecessors. As a result, the Court never reached the issue of whether an insured can assign its rights post-loss under Wisconsin law—an issue that nevertheless had been repeatedly addressed in earlier decisions indicating an insured may do so. Wisconsin thus remains one of the majority of states that allow such post-loss transfers.

The Wisconsin Supreme Court has accepted Wausau’s petition for review. So, we likely will report on this case next year too.

Saft America v. Precision Drawn Metals, 2022 WL 3444883 (W.D. Wis.)

In Saft, the United States District Court for the Western District of Wisconsin rejected an insurer’s attempt to avoid coverage under a CGL policy issued to a manufacturer accused of selling defective component parts. Precision, the manufacturer and insured, made steel containers. It sold the containers to Saft, which used them to house finished batteries and sold to Saft customers. Some of the containers failed and leaked, after Saft had used them to assemble finished batteries but before Saft delivered the batteries to customers, causing Saft to incur damages due to the loss of use of its production line. Saft sued Precision for breach of contract.

Precision’s insurer, Acuity, intervened in the suit and sought a declaration that it owed no defense to Precision. Acuity argued that Saft alleged no “property damage” as Acuity defined that term and further argued that several standard business risk exclusions barred coverage, including the “your product,” the “impaired property,” and the “contractually-assumed liability” exclusions.

The district court rejected each of Acuity’s arguments. The court held that Saft’s alleged loss of use of its production line constituted “property damage,” which Acuity’s policy defined to include the loss of use of tangible property not physically injured. The court rejected Acuity’s argument that the “your product” exclusion applied, holding that while the exclusion bars coverage for the costs and expenses associated with the defective containers themselves, it would not exclude coverage for the property damage they caused—i.e., the loss of use of the production line. The court held that the “contractually-assumed liability” exclusion did not apply because it only bars coverage when an insured assumes the liability of another. Here, the exclusion did not apply when the underlying breach of contract claim alleged the insured itself caused the alleged damages at issue through its own conduct, as Saft’s claim did. 

Finally, the court found an exception to the “impaired property” exclusion applied, reinstating coverage. The “impaired property” exclusion generally bars coverage for property damage to property that is not physically injured. But the exclusion carves out circumstances involving the “loss of use of other property arising out of sudden and accidental physical injury to your product . . . after it has been put to its intended use.” The court found that the containers suffered “sudden and accidental” physical injury when they failed and leaked shortly after Saft put them to an intended use—housing finished batteries. The court further held the phrase “intended use” to be ambiguous—it might mean the use intended by Saft of housing finished batteries, or it might mean the use intended by Saft’s end user customers. The court construed the ambiguity against Acuity, holding the exception to the exclusion applied to reinstate coverage.

Wiegert v. TM Carpentry, 2022 WI App 28

Wiegert also involved Acuity and a standard business risk exclusion—the “k.(5) exclusion,” which bars coverage for “[p]roperty damage” to “[t]hat particular part” of real property upon which an insured “is performing operations, if the property damage arises out of those operations.” But here, the Court of Appeals held the exclusion applied to bar coverage.

The Wiegerts hired Stone Creek Builders, a contractor, to perform services during a home renovation project—specifically, to raise the home by lifting it off its existing foundation, installing additional layers of concrete block to the foundation, and lowering the home onto the new, elevated foundation. The Wiegerts later sued Stone Creek, alleging that Stone Creek had “caused significant physical damage to the [house] including cracking of the interior walls and unevenness in the wood flooring” throughout the house.

Acuity intervened in the suit and sought a declaration of no coverage. Acuity argued that the k.(5) exclusion applied because the Wiegerts sought to recover for property damage to “that particular part” of real property on which Stone Creek performed operations. According to Acuity, “that particular part” encompassed the entire house, as Stone Creek’s scope of work included lifting the house off the foundation. The Court of Appeals agreed. Without significant analysis, the Court rejected Stone Creek’s argument that the exclusion was limited and did not apply because Stone Creek performed no work on the “particular part” of the home that suffered the claimed damage—“the interior walls and wood flooring.” 

The Court of Appeals appears to have inadvertently broadened the k.(5) exclusion in applying it to the unique facts at issue—reading it as though it applied to any property damage that arises out of an insured’s operations. And that is somewhat understandable, given the nature and scope of Stone Creek’s operations in lifting the entire home off its existing foundation. However, the exclusion’s plain language applies only to “that particular part” of real property upon which an insured “is performing operations, if the property damage arises out of those operations.” The exclusion therefore requires that the analysis focus narrowly on the property that suffered damage—the walls and floor—and determine whether the insured performed operations on that particular part. Because Stone Creek apparently did not perform any direct operations on the walls and floor, the exclusion would seem to not apply, contrary to the Court of Appeals’ ruling.

The outcome may be limited to the unique facts at issue. But it nevertheless will come as a surprise to many Wisconsin contractors, all of whom reasonably expect the general liability policies they purchase to cover damage to property on which they perform no work even if the damage arises out of work they are performing on adjacent, connected property.

Link v. Link, 2022 WI App 9

In Link, the Wisconsin Court of Appeals held a defending insurer may be relieved of its coverage obligations if the insured asserts his Fifth Amendment right against self-incrimination by refusing to answer discovery requests of his insurer, seeking information material to the insurer’s coverage analysis.

In two separate underlying lawsuits, several women alleged Link created sexually suggestive and derogatory posts about them on a members-only fetish website. They sued Link, asserting claims for invasion of privacy, defamation, and intentional infliction of emotional distress. Link tendered the lawsuits to Midwest under his homeowner’s policy, which provided coverage for suits alleging slander, libel, and invasion of privacy. Midwest agreed to defend Link in both suits under a reservation of rights, but promptly moved to intervene, bifurcate, and stay the merits proceedings, pending a declaration of no coverage. Midwest then issued discovery requests that addressed coverage and the merits of the plaintiffs’ case, including requests asking Link effectively to admit fault. Link refused to answer the requests, invoking his Fifth Amendment privilege to avoid self-incrimination. 

Midwest moved for summary judgment, claiming Link’s refusal to answer the requests triggered a “concealment” condition in its policy barring coverage if the insured concealed or misrepresented any fact upon which Midwest “relied,” “if the concealment or misrepresentation is material and made with intent to deceive.” In the alternative, Midwest argued Link forfeited coverage by breaching his duty to “[c]ooperate with [Midwest] in the investigation, settlement or defense of any claim or suit.”

The Court of Appeals agreed with Midwest’s arguments. In so doing, the Court seemed to absolve Midwest of establishing that it “relied” on some fact that Link concealed, and that Link concealed such fact “with intent to deceive.” The Court instead indicated the concealment condition applied and barred coverage simply because Link had not responded to questions that went to coverage issues.

With respect to the duty to cooperate, the Court held that Link’s refusal to answer Midwest’s requests breached the duty and prejudiced Midwest’s investigation. The Court apparently was not as concerned that the alternative—admitting fault—surely would have prejudiced Link’s defense.

Insurers routinely advise insureds that their duty to cooperate requires that they avoid admitting fault, at least when the plaintiff asks them to admit it. Midwest turned this standard admonition on its head, arguing that Link had an obligation to admit fault because his insurer asked him to do so to support the insurer’s denial of coverage. And that is what is so troubling about the outcome in Link:  Midwest itself created the “Catch-22” circumstance that left Link choosing between liability and no coverage—the sort of “heads I win; tails you lose” proposition that in other contexts, Wisconsin courts have held smacks of bad faith.

Unfortunately, the Court of Appeals was not asked to consider whether Midwest’s conduct amounted to bad faith or a breach of its duty to defend Link. Those questions simply were not raised. But Midwest agreed to defend Link against intentional torts such as invasion of privacy. It seems impossible for Midwest to honor that duty in good faith while simultaneously asking Link to admit fault in the same proceedings and before any determination on the merits of the plaintiffs’ allegations against Link. If other insurers follow suit, we may well see increased insurer bad faith claims, as a result of the Link holding.

For more information, contact your Quarles attorney or a member of our Insurance Recovery Team:

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