By Barry Zalma, Attorney and Consultant
The Wisconsin Court of Appeal was called upon to resolve a dispute that arose out of damages suffered by VPP Group, LLC the grew from construction work being performed by contractors on a building owned by VPP. VPP was insured by Acuity. Acuity paid the damage claims filed by VPP arising out of the construction work. Acuity then filed a subrogation action against the contractors and their insurer, Society Insurance. Society successfully moved for summary judgment noting that Society's CGL policies did not provide coverage for damages caused VPP by the contractors because there was no "occurrence" within the meaning of the policies under the facts of the case in Acuity, A Mutual Insurance Company v. Society Insurance, A Mutual Company, No. 2009AP2432 (Wis.App. 01/05/2012).
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VPP, Ron Stoikes d/b/a RS Construction (RS), and Terry Luethe d/b/a Flint's Construction (Flint) entered into a contract to remove and reinstall a concrete wall on the south side of the "engine room" building which provided refrigeration and necessary utility services to VPP's entire animal processing plant for a contract sum less than $9,000.
The work contracted for was limited to removal and replacement of the engine room's south wall. VPP supplied all materials; RS and Flint provided all labor. RS and Flint began work in late May 2006. RS first shored up the engine room and removed the existing wall to grade level. The VPP processing plant continued at full operation during this phase of the work.
On June 12, 2006, during Flint's excavation of a trench adjacent to the south wall site, the soil began to erode from under the concrete slab of the first floor of the engine room. As a result, the engine room's first floor slab cracked and a portion deflected downward. The part of the building above the compromised floor, including the second floor and roof, likewise deflected downward. The engine room's masonry walls adjacent to the south wall also sustained damage. As a result of this damage to the engine room, the utility service to the rest of the processing plant was disrupted, including electrical service, anhydrous ammonia, and the refrigeration functions of the engine room's roof top condenser. Also, the roof top condenser was disabled because the water required to run it was too heavy for the damaged roof. Due to this damage, the entire processing plant's refrigeration capacity was reduced by twenty-five percent. In addition to the engine room itself, an adjacent building which shared a common wall incurred large cracks in the cooler housed inside it, which impaired its ability to cool processed beef.
Beef being processed must be rapidly cooled, and the processing is monitored by United States Department of Agriculture (USDA) on-site inspectors during all processing shifts. Because of the reduced refrigeration capacity, VPP had to change its processing schedule, adding an extra animal "kill" day, to ensure that it could fill its customer orders. Because of the need to add another "kill" day, VPP incurred costs for additional personnel hours, additional USDA inspectors' hours, extra freight and fuel charges, and other expenses in the amount of approximately $380,000.
VPP repaired the engine room by replacing that portion of the first floor concrete slab that had cracked, jacking up the second floor level to its original level and replacing portions of the roof slab that had cracked. Only after these repairs were made was RS able to complete the original job of rebuilding the south wall.
The Original Insurance Settlement by Acuity
VPP contacted its insurer, Acuity, following the loss. After adjusting the losses, Acuity paid a total of $636,466.39 to VPP in final settlement of the loss claims, which amount included the $380,000 claimed for the extra expenses and the remainder representing the damages relating to repairs to the building. Not included in this amount were the costs to VPP related to replacing the south wall.
Acuity commenced this subrogation action against RS and Flint and their insurer, Society Insurance, seeking to recover damages arising from the engine room collapse, and alleging breach of contract and negligence.
The issue on appeal is whether there is coverage for VPP's claims under Society's CGL policies issued to RS and Flint.
Acuity argued that the partial collapse of the engine room that resulted from faulty excavation techniques by Flint constitutes an "occurrence" under the CGL policy. Society contends that the circuit court correctly found that there was no "occurrence" under the policy. When interpreting an insurance policy Wisconsin courts use a three step process:
 It examines the facts of the insured's claim to determine whether the policy's insuring agreement makes an initial grant of coverage.
 If an initial grant is triggered, it looks to see if any exclusions apply.
 It then looks to see whether any exception to that exclusion reinstates coverage.
Since neither party contended that any exception to the exclusions applies and the court could not find one so its analysis was limited to the first two steps.
Under the CGL policy, to trigger coverage, there must be "property damage" caused by an occurrence. "Property damage" is defined within the policy as "physical injury to tangible property, including all resulting loss of use of that property." The damage to the engine room, the roof, and the resulting damage to the equipment is plainly "physical injury to tangible property." There was no question that there was property damage as defined by the policy.
An "occurrence" is defined in the policy as "an accident, including continuous or repeated exposure to substantially the same general harmful condition." The factual pleadings in the amended complaint allege "property damage" caused by an "occurrence" within the meaning of Society's CGL policy. The Court of Appeal found it clear that the damage was caused by the accidental soil erosion that occurred because of faulty excavation techniques.
In analyzing whether this was an "occurrence" under the insurance policy, we relied on the analysis in earlier Wisconsin Supreme Court cases and concluded that while faulty workmanship itself is not an "occurrence," where the "damage" was caused by an accident in that the damage was not intended or anticipated it constituted an "occurrence" under the policy. Faulty workmanship may cause an unintended event, such as soil erosion, and that event-the "occurrence"- may result in harm to other property.
The Court of Appeal concluded there was an "occurrence" under the CGL policy issued by Society and therefore there is an initial grant of coverage.
The dispute in this case focused on what constitutes "[t]hat particular part" of the property on which work was being performed. Although the business risk exclusions "have generated substantial litigation," no published case in Wisconsin has specifically interpreted the k.(5) exclusion at issue here, nor has a Wisconsin court construed and applied the phrase "that particular part" as used in both the k.(5) and k.(6) exclusions. The k.(5) exclusion, however, is commonly found in CGL policies written after 1986 and courts from other jurisdictions have construed its precise terms in other policies.
The Court of Appeal was persuaded that the phrase "that particular part" in the k.(5) and k.(6) exclusions applies only to those parts of a building on which the defective work was performed, which is determined based on the scope of the construction agreement. The scope of the contracted work was to remove and replace the south wall of the "engine room." Applying the interpretation of "that particular part" in the business risk exclusions to the scope-of-work the Court of Appeal concluded that the k.(5) exclusion does not apply and that damage to the engine room building and the equipment in that building is covered under the policy.
The Court of Appeal decided that there was an "occurrence" within the meaning of the CGL policies issued to RS and Flint, and that neither exclusion k.(5) nor k.(6) in the policies apply. It, therefore, reversed the circuit court's grant of summary judgment in favor of Society, and remand this case for further proceedings.
This case adopts what I believe has been adopted by the majority of states - although faulty workmanship should never be an "occurrence" under a CGL because if it was the policy would be a guarantee of the work rather than an insurance policy insuring against accidents - if the faulty workmanship is the cause of damage to property not involved in the work there is an "occurrence."
When analyzing coverage all of the facts and all of the wording of the policy must be considered and interpreted to give the parties to the contract the indemnity promised by the policy if doing so is linguistically permissible.
Reprinted with Permission from Zalma on Insurance, (c) 2011, Barry Zalma.
Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, "Heads I Win, Tails You Lose - 2011," "Zalma on Rescission in California," "Zalma on Diminution in Value Damages," "Arson for Profit" and "Zalma on California Claims Regulations," "Murder and Insurance Fraud Don't Mix" and others that are available at Zalma Books.
Mr. Zalma can be contacted at Barry Zalma, firstname.lastname@example.org and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma's Insurance Fraud Letter.
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