The answer to this question seems obvious. And the answer should be “yes”. However, as demonstrated by the case, 5 Walworth, LLC v. Engerman Contracting, Inc., decided by the Wisconsin Supreme Court on June 20, 2023, it is more complicated than you might have thought.
A commercial general liability policy (CGL) is a type of insurance policy that protects a business against claims for property damage or bodily injury caused by its business operations or products. It pays for the defense of lawsuits as well as judgments that may be entered against the insured. As the Wisconsin Supreme Court said:
CGL policies, like those here, are a particular type of insurance contract that protect “the insured against liability for damages the insured’s negligence causes to third parties.”
This kind of policy is designed to insure against “the possibility that the goods, products or work of the insured, once relinquished or completed, will cause bodily injury or damage to property other than to the product or completed work itself, and for which the insured may be found liable.” (emphasis added).
This definition seems fairly straightforward. So, if my swimming pool is defective, shouldn’t my contractor’s CGL policy cover the cost of repairs or replacement? The answer is maybe. And the reason that the answer is maybe is the underlined phrase above – “to property other than to the product or completed work itself”.
The facts of this case are simple. The plaintiff, 5 Walworth, LLC (Walworth), owned property in Lake Geneva, Wisconsin, a resort community located a short drive from Chicago. Walworth hired the defendant, Engerman Contracting, Inc. (Engerman), to act as general contractor for the construction of an in-ground swimming pool complex. Engerman then engaged Downes Swimming Pool Co., Inc. (Downes) to build two swimming pools. Downes obtained ready-mixed concrete, called shotcrete, which is commonly used in the construction of in-ground swimming pools, from Otto Jacobs Company, LLC (Otto Jacobs).
Shortly after the pool was finished, Walworth noticed that it was leaking. Downes attempted to repair the leak. However, the next summer, the pool leaked again. Downes once more attempted to repair the leak. This happened for several years in a row, until Walworth obtained a report from an engineering firm. The report concluded that “the pool walls cracked because of less than optimal installation, moist conditions due to significant water leakage, and the placement of steel reinforcing bars”. The report also found that the water levels near the swimming pool were higher than normal and determined that the pool would continue to crack and could not be repaired.
In reliance on the report, Walworth hired another construction company to demolish the old pool and to build a new one. Walworth then sued Engerman and Downes, and their insurance companies, for damages. Downes brought a third-party complaint against Otto Jacobs, and its insurance company, for the shoddy shotcrete.
Walworth and Otto Jacobs filed claims under their CGL policies. (The Court’s opinion is silent on whether Downes also filed a claim under any insurance policies, and Downes and its insurers, if any, were not a party to the case in the Wisconsin Supreme Court.) The insurance companies initially agreed to defend Walworth and Otto James, respectively, in the lawsuit under a reservation of rights. However, they subsequently filed motions for summary judgment seeking declarations that they had no obligation to indemnify Walworth or Otto Jacobs against any damages that may be awarded against them in the lawsuit.
The trial court granted the insurers’ motions for summary judgment and ruled that none of the insurance companies involved had an obligation to defend or indemnify its insured. With respect to Engerman, the trial court held that there was no property damage caused by an occurrence, only faulty workmanship and, as a result, no coverage under Engerman’s CGL policies. With respect to Otto Jacobs, the trial court found that its product – the shotcrete – was integrated into the pool as a whole. As a result, there was no damage to property other than its product and no coverage under Otto Jacobs’ CGL policy.
Engerman and Otto Jacobs appealed the summary judgments in favor of their insurers. The appellate court reversed and held that the insurers were not entitled to summary judgment. The insurance companies appealed to the Wisconsin Supreme Court.
Before we get to the decision of the Wisconsin Supreme Court, we need to explain an insurance term. And that term is “reservation of rights”. What is a reservation of rights?
An insurance company generally has two obligations under a CGL policy. The first is the obligation to defend its insured in any lawsuit brought against the insured. The second is the obligation to pay any judgment that may be entered against the insured in the lawsuit. Whether an insurance company has an obligation to defend its insured is determined at the beginning of the lawsuit. It depends upon whether the allegations in the complaint match the coverage terms of the policy. Whether an insurance company has an obligation to indemnify its insured generally cannot be determined until after the facts of the case have been developed and is not limited to the allegations in the complaint.
Most states impose harsh penalties on insurers that wrongly refuse to defend an insured. As a result, insurers often tender a defense to an insured in litigation to avoid penalties for failure to defend. However, they do so under a reservation of rights. In essence, a reservation of rights is like playing a baseball game under protest. The insurance company says that it will provide a defense at the initial stages of the litigation. However, if, at any time, it becomes apparent that there is no coverage under the policy, it will cease its defense of the case and seek repayment of the costs that have been incurred to that point. That is what the insurance companies were trying to accomplish when they made their motions for summary judgment in this case.
The issue for the Wisconsin Supreme Court was not whether Engerman and Otto Jacobs were entitled to coverage under their CGL policies. It was whether their insurers were entitled to summary judgment that the CGL policies provided no coverage to Engerman or Otto Jacobs.
A motion for summary judgment is a procedural ploy to end a lawsuit short of a trial. Summary judgment is appropriate where the moving party establishes that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law.
The dictionary definition of “fact” is “a thing that is known or proved to be true”. In the legal context, a “material fact” is one that is dispositive of a claim. There is a “genuine issue of material fact” when there is a disagreement between the parties as to the dispositive facts of the case and a jury could plausibly find for either party. If a party demonstrate that there is no genuine issue of material fact, then the court can resolve the matter without the need for a jury trial – in other words, as a matter of law.
In the instant matter, the trial court had found that the insurers had demonstrated that there was no genuine issue of material fact that no property damage had been caused by an occurrence. As a result, the insurers were entitled to judgment as a matter of law. The appellate court reversed and ruled that there were genuine issues of material fact about whether there had been an occurrence. As a result, the insurers could not avoid a trial. So, when the insurers appealed to the Wisconsin Supreme Court, the issue was whether there was a genuine issue of material fact that required a jury trial.
An insurance policy is a contract between the insured and the insurer, and the interpretation of an insurance policy is subject to general contract principles. When a court is asked to decide whether a claim is covered under an insurance policy, it looks to the language of the policy. It then compares the allegations of the complaint to the language of the policy in order to determine whether the claim is covered. The court’s job is to give meaning to the intent of the parties. Did the parties intend for this claim to be covered? Any ambiguity is resolved in favor of the insured.
The CGL policies at issue in this case provided coverage for “property damage” caused by an “occurrence”. Both terms were defined in the policy. As the Wisconsin Supreme Court found:
“Property damage,” as relevant here, means “[p]hysical injury to tangible property, including all resulting loss of use of that property.”
And “`Occurrence’ means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
The Court also found that the term “accident” was not defined in the policies. However, it found that courts generally give undefined terms their common meaning.
“Accident” is not a defined term in the policy, but Wisconsin courts have interpreted identical policy language many times. Generally, an “accident” is “an event or condition occurring by chance or arising from unknown or remote causes,” or “an event which takes place without one’s foresight or expectation.” Am. Girl, 268 Wis. 2d 16, ¶37 (quoting Webster’s Third New Int’l Dictionary of the English Language 11 (2002); Black’s Law Dictionary 15 (7th ed. 1999)).
So, the issue for the Court was whether a jury could find that the damage to Walworth’s pool was caused by an occurrence.
In deciding that issue, the Court repeated the legal concept that faulty workmanship is not an occurrence under a CGL policy. This seems counterintuitive. It is generally understood that if your negligence causes bodily injury or property damage to another party, you are responsible for the other party’s damages. However, that is a tort principle. As discussed above, an insurance policy is a contract, and a party’s obligations under an insurance policy are determined according to contract law principles. And a plaintiff in a contract action has a different burden of proof than a plaintiff in a tort claim. So, the issue for the Court was not whether Engerman, Downes or Otto Jacobs are liable to Walworth as a result of building a defective pool. They might be. The issue was whether Engerman and Otto Jacobs have coverage under their CGL policies for their negligence. And that depends upon whether there was an occurrence outside of faulty workmanship.
The Court held that, while faulty workmanship is not an occurrence under a CGL policy, faulty workmanship can lead to an accident that results in an occurrence that causes property damage. In the instant case, the Court found that a jury could find that the faulty workmanship resulted in cracks in the shotcrete, which caused leaks that caused the pool to fail. While the faulty workmanship was not an occurrence under the CGL policies, a jury could find that the leaks were an occurrence and, as a result, Walworth’s claims against Engerman and Downes’ claims against Otto Jacobs could be covered under their CGL policies.
The improper installation of the shotcrete and the incorrect placement of the steel reinforcing bars are not enough on their own to constitute an occurrence; if proven, that is faulty workmanship. But the record can support a conclusion that this faulty work caused the pool to crack and leak, and those cracks became worse as the pool leaked and destabilized the surrounding soil. The cracks, leakage, and soil damage could constitute accidents—unexpected and unforeseen events—caused by improper installation. And these cracks and the damage to the surrounding soil also could constitute physical injuries to the homeowner’s tangible property—i.e., property damage as defined by the policy.
The Wisconsin Supreme Court affirmed the decision of the appellate court, which had reversed the decision of the trial court. Since a jury could plausibly find that an “occurrence”, as that term is defined in the CGL policies, had occurred and caused “property damage”, summary judgment was not appropriate. Instead, the issue of whether the insurers had an obligation to indemnify Engerman and Otto Jacobs, respectively, would have to be decided by a jury.
At this point, we do not know whether Engerman and Otto Jacobs will be entitled to indemnification from their insurers. We have to wait until the case is tried. However, we do know that business insurance is not as straightforward as you might think. If you run a business, you need insurance to protect your business. And, in order to make sure that you have the right and adequate insurance, you need the help of an insurance professional.