(Article from Insurance Law Alert, July/August 2023)
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Holding
The Wisconsin Supreme Court ruled that courts should not employ an “integrated system analysis” in evaluating whether an underlying claim alleges property damage for purposes of determining an initial grant of coverage under a general liability policy, overruling prior Wisconsin precedent. 5 Walworth, LLC v. Engerman Contracting, Inc., 408 Wis.2d 39 (Wis. June 20, 2023).
Background
A property owner sought damages allegedly caused by the deficient construction of a swimming pool complex. The pool cracked, causing water to leak and requiring the pool complex to be demolished and replaced. The property owner sued its general contractor, a concrete subcontractor and those entities’ general liability insurers.
The insurers argued that there was no “property damage” caused by an “occurrence” under the policies. The general contractor’s insurers argued that faulty workmanship does not constitute an “occurrence.” The concrete supplier’s insurer took its defense a step further and claimed the allegedly defective concrete was part of an integrated system, and therefore that there was no damage to “other property”—a prerequisite to coverage under Wisconsin Pharmacal Co. v. Nebraska Cultures of California, Inc., 367 Wis.2d 221 (2016).
In Pharamacal, the Wisconsin Supreme Court enlisted the integrated systems rule, derived from tort law, to determine whether there was “property damage” for insurance coverage purposes. The integrated systems rule asks whether the product is part of an integrated whole such that any damage can be ascribed only to the product itself, rather than to other property. The concrete supplier’s insurer alleged that the integrated systems theory precluded insurance coverage not only to the product (here, the pool) but to the integrated system (the entire pool complex).
The lower court granted the insurers’ motions for summary judgment and an intermediate appellate court reversed. The Wisconsin Supreme Court affirmed the appellate court decision.
Decision
The Wisconsin Supreme Court rejected the insurers’ arguments. Preliminarily, the court reaffirmed the basic principle that “faulty workmanship is not an occurrence, but faulty workmanship can lead to an occurrence.” Here, because the faulty workmanship caused the pool to crack and leak, which in turn damaged the surrounding soil, the court concluded that “property damage” to the soil amounted to an “occurrence.”
The court then turned to the insurers’ integrated systems analysis defense and concluded that it does not apply to insurance coverage disputes. In overruling the relevant portion of Pharmacal, the court explained that utilizing a tort law analysis to determine coverage obligations “runs headlong into the fundamental principle . . . that policy interpretation should focus on the language of the insurance policy.” The definition of “property damage” in the operative policies made no mention of an “other property” requirement as described in the integrated systems analysis. Thus, the court reasoned, damage to “other property” is not relevant to the initial determination of whether there is “property damage” caused by faulty workmanship.
With those clarifications, the court concluded that a jury could find that the underlying claims alleged “property damage” caused by an “occurrence.” The court explained that the record suggested that faulty workmanship resulted in cracks in the pool wall, which worsened over time, and in turn caused damage to surrounding property—facts that could constitute unexpected and unforeseen events, as well as physical injury to tangible property.
Comments
The court’s ruling clarified that faulty workmanship may result in an “occurrence” if it causes consequent, accidental property damage. This is so despite the principle that faulty workmanship itself is not an “occurrence” under Wisconsin law.
The court’s decision is also significant in its holding that tort principles should not displace policy language in determining an insurer’s defense and indemnity obligations. Aside from rejecting the “integrated systems analysis,” in the context of an insurance coverage determination, the court also expressly noted that the economic loss doctrine, which “confines contracting parties to contract rather than tort remedies for recovery of purely economic losses associated with the contract relationship,” should not be used to determine whether a general liability insurer owes coverage.