5 Walworth, LLC v. Engerman Contracting, Inc.

2023 WI 51SUPREME COURT OF WISCONSIN
CASE NO.: 2019AP1085 & 2019AP1086
COMPLETE TITLE: 5 Walworth, LLC,
Plaintiff,
v.
Engerman Contracting, Inc.,
Defendant,
Downes Swimming Pool Co., Inc. and The
Cincinnati Insurance Company,
Defendants-Third-Party Plaintiffs,
West Bend Mutual Insurance Company and General
Casualty Company of Wisconsin,
Defendants-Petitioners,
v.
Otto Jacobs Company, LLC,
Third-Party Defendant-Appellant,
Acuity, A Mutual Insurance Company,
Third-Party
Defendant-Respondent-Petitioner.
5 Walworth, LLC,
Plaintiff,
v.
Engerman Contracting, Inc.,
Defendant-Appellant,
Downes Swimming Pool Co., Inc. and The
Cincinnati Insurance Company,
Defendants-Third-Party Plaintiffs,
West Bend Mutual Insurance Company and General
Casualty Company of Wisconsin,
Defendants-Respondents-Petitioners,
v.
Otto Jacobs Company, LLC,
Third-Party Defendant,
Acuity, A Mutual Insurance Company,
Third-Party Defendant-Petitioner.
REVIEW OF DECISION OF THE COURT OF APPEALS
Reported at 399 Wis. 2d 240, 963 N.W.2d 779PDC No: 2021 WI App 51 - Published
OPINION FILED: June 20, 2023
SUBMITTED ON BRIEFS:
ORAL ARGUMENT: September 12, 2022
SOURCE OF APPEAL:
COURT: Circuit
COUNTY: Walworth
JUDGE: Daniel Steven Johnson
JUSTICES:
HAGEDORN, J., delivered the majority opinion of the Court, in
which ANN WALSH BRADLEY, DALLET, and KAROFSKY, JJ., joined, and
in which ZIEGLER, C.J., joined except for ¶¶5, 7, 39-42, and 49.
ROGGENSACK, filed a concurring opinion. ZIEGLER, C.J., filed an
opinion concurring in part and dissenting in part, in which
REBECCA GRASSL BRADLEY, J., joined.
NOT PARTICIPATING:
ATTORNEYS:
For defendants-petitioners and defendants-respondents-
petitioners, there were briefs filed by Henry E. Koltz, Robert
F. Johnson, Douglas M. Raines, and Schmidt, Darling & Erwin,
Milwaukee, and von Briesen & Roper, S.C., Milwaukee. There was
an oral argument by Henry E. Koltz.
For third-party defendant-respondent-petitioner and third-
party defendant-petitioner, there were briefs filed by Joseph M.
Mirabella and Simpson & Deardorff, S.C. There was an oral
argument by Joseph M. Mirabella.
For third-party defendant-appellant and third-party
defendant, there was a brief filed by Sheila L. Shadman Emerson,
Scott R. Halloin, and Halloin Law Group, S.C., Milwaukee. There
was an oral argument by Sheila L. Shadman Emerson.
For defendant and defendant-appellant, there was a brief
filed by Thomas G. Gardiner and Gardiner, Koch, Weisberg &
Wrona, Lake Geneva. There was an oral argument by Michelle
LaGrota and Douglas M. Raines.
2
2023 WI 51NOTICE
This opinion is subject to further
editing and modification. The final
version will appear in the bound
volume of the official reports.
Nos. 2019AP1085 & 2019AP1086
(L.C. No. 2018CV319)
STATE OF WISCONSIN : IN SUPREME COURT
5 Walworth, LLC,
Plaintiff,
v.
Engerman Contracting, Inc.,
Defendant,
Downes Swimming Pool Co., Inc. and The
Cincinnati Insurance Company,
Defendants-Third-Party Plaintiffs,
FILED
West Bend Mutual Insurance Company and General JUN 20, 2023
Casualty Company of Wisconsin,
Sheila T. Reiff
Clerk of Supreme Court
Defendants-Petitioners,
v.
Otto Jacobs Company, LLC,
Third-Party Defendant-Appellant,
Acuity, A Mutual Insurance Company,
Third-Party
Defendant-Respondent-Petitioner.
5 Walworth, LLC,
Plaintiff,
v.
Engerman Contracting, Inc.,
Defendant-Appellant,
Downes Swimming Pool Co., Inc. and The
Cincinnati Insurance Company,
Defendants-Third-Party Plaintiffs,
West Bend Mutual Insurance Company and General
Casualty Company of Wisconsin,
Defendants-Respondents-Petitioners,
v.
Otto Jacobs Company, LLC,
Third-Party Defendant,
Acuity, A Mutual Insurance Company,
Third-Party Defendant-Petitioner.
HAGEDORN, J., delivered the majority opinion of the Court, in
which ANN WALSH BRADLEY, DALLET, and KAROFSKY, JJ., joined, and
in which ZIEGLER, C.J., joined except for ¶¶5, 7, 39-42, and 49.
ROGGENSACK, filed a concurring opinion. ZIEGLER, C.J., filed an
opinion concurring in part and dissenting in part, in which
REBECCA GRASSL BRADLEY, J., joined.
REVIEW of a decision of the Court of Appeals. Affirmed.
¶1 BRIAN HAGEDORN, J. This is an insurance dispute over
damages allegedly caused by the deficient construction of an in-
ground pool. The pool cracked and caused vast amounts of water
to leak into the surrounding soil. In the end, the homeowner
No. 2019AP1085 & 2019AP1086
had to demolish the entire pool structure and construct a new
one. Two of the insurers in this case issued commercial general
liability (CGL) polices to the general contractor, and the other
issued a CGL policy to the supplier of the shotcrete pump mix
used to construct the pool. In this suit by the homeowner, all
three insurers seek summary judgement declaring that their
policies do not provide coverage to their insureds.
¶2 A threshold question in this case concerns how to
analyze whether there has been "property damage" caused by an
"occurrence" under the three CGL policies. The argument centers
around our decision in Wisconsin Pharmacal Co., LLC v. Nebraska
Cultures of California, Inc., where we stated that "property
damage" under a CGL policy requires damage to "other property"
and utilized the "integrated systems analysis"——a test derived
from tort law——to assess whether other property was damaged.
2016 WI 14, ¶28, 367 Wis. 2d 221, 876 N.W.2d 72. At a basic
level, the integrated systems analysis 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. Wausau Tile, Inc. v. Cnty. Concrete Corp., 226
Wis. 2d 235, 249-50, 593 N.W.2d 445 (1999). The insurers here
argue we must first undertake this analysis to determine whether
any "property damage" occurred for purposes of determining an
initial grant of coverage under their policies.
¶3 We do not see it the same way. With the benefit of
hindsight, we conclude our approach in Pharmacal was a departure
from our well-established law. The decision flatly contradicted
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prior cases without addressing those conflicts head on. See,
e.g., Am. Fam. Mut. Ins. Co. v. Am. Girl, Inc., 2004 WI 2, ¶¶6,
24, 35, 268 Wis. 2d 16, 673 N.W.2d 65. Pharmacal wrongly stated
that "property damage" must be to "other property" for purposes
of determining an initial grant of coverage in a CGL policy. It
then improperly imported the integrated systems analysis to
determine if "other property" was damaged. Accordingly, we
overrule these portions of Pharmacal, and affirm, as we have
repeatedly said, that our task in insurance coverage disputes is
to read the policy and give effect to the parties' agreement.
Therefore, we return to that contract-focused analysis here.
¶4 General Casualty Company of Wisconsin, the insurer for
general contractor Engerman Contracting, Inc., contends that its
policy does not provide an initial grant of coverage because the
issues related to the pool did not constitute "property damage"
caused by an "occurrence" as those terms are defined in the
policy. We disagree. Reviewing the record before us on summary
judgment, we conclude that a trier of fact could conclude that
the water leakage and consequent cracks in the pool and damage
to the surrounding soil constituted property damage caused by an
occurrence. Accordingly, General Casualty is not entitled to
summary judgment.
¶5 West Bend Mutual Insurance Company, which also insures
Engerman, asserts that its policy does not provide an initial
grant of coverage for two reasons. First, it likewise contends
there was no "property damage" caused by an "occurrence" under
its policy. In this regard, West Bend's policy is materially
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identical to General Casualty's policy, and West Bend is not
entitled to summary judgment on this argument for the same
reasons. Alternatively, West Bend claims Engerman knew that the
property damage occurred before the policy period began and
therefore the policy does not provide coverage. We disagree.
The record before us does not conclusively establish that the
property damage here was a continuation, change, or resumption
of the damage Engerman knew about before the policy began.
Therefore, West Bend is not entitled to summary judgment.
¶6 Finally, Acuity, A Mutual Insurance Company is the
insurer for Otto Jacobs Company, the entity that provided the
shotcrete used to construct the floor and walls of the pool.
Acuity argues that its policy does not provide an initial grant
of coverage and that, even if there is an initial grant of
coverage, the "your product" exclusion precludes coverage. We
see it differently. Acuity's policy likewise provides coverage
when "property damage" is caused by an "occurrence." If Otto
Jacobs supplied defective shotcrete, a trier of fact could
determine that it caused the water leakage——an occurrence——and
damaged the surrounding soil and pool structure. Moreover, a
trier of fact could conclude based on this record that the "your
product" exclusion in Acuity's policy does not apply here when
the property damage is to the surrounding soil and pool complex—
—more than just Otto Jacobs' product or arising from the
product. Therefore, Acuity is not entitled to summary judgment.
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¶7 Accordingly, we affirm the decision of the court of
appeals and remand back to the circuit court for further
proceedings.
I. BACKGROUND
¶8 5 Walworth LLC owns lakeshore property in Lake Geneva
and hired Engerman to serve as the general contractor for
construction of an in-ground swimming pool complex. Engerman
subcontracted with Downes Swimming Pool Co., Inc. to construct
the pool complex, which included both a main pool and a
children's pool. Otto Jacobs supplied Downes with a ready-mixed
concrete called shotcrete commonly used in swimming pool
construction. Construction began in June 2012 and finished that
August.
¶9 Shortly after the contractors finished the project, 5
Walworth noticed a leak in the main pool and in the children's
pool. The leaking persisted in the summers of 2013, 2014, and
2015, with Downes attempting to repair the leaks each year. In
2015, 5 Walworth commissioned a report from engineering firm
Wiss, Janney, Elstner Associates, Inc. (WJE). WJE's final
report, which is part of the summary judgment record, 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. It determined that
the cracking would continue, with either new cracks forming or
existing cracks worsening. While the report took samples from
the main pool, WJE concluded that the children's pool faced the
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No. 2019AP1085 & 2019AP1086
same probable cause of cracking. The report also mentioned the
findings of soil reports from neighboring properties which
indicated that water existed at levels above the normal water
table. The report recommended removing unsuitable soils from
one of the neighboring properties. Ultimately, 5 Walworth hired
a new contractor to demolish the old pool and construct a new
one, which was completed in October 2017.
¶10 In 2018, six years after the initial construction, 5
Walworth sought damages for demolition of the old pool and
construction of a new one. It brought a complaint against
subcontractor Downes and its insurer, and against general
contractor Engerman and its insurers——West Bend and General
Casualty. The complaint alleged negligence against Downes, and
breach of contract, breach of implied warranty of
merchantability and fitness, negligence, and violation of Wis.
Stat. § 100.18(1) (2021-22) against Engerman.1 Downes filed a
third-party complaint against shotcrete provider Otto Jacobs and
its insurer Acuity, alleging Otto Jacobs was negligent in
providing Downes inferior shotcrete.2 Engerman and West Bend
then brought a cross-claim against Downes (and its insurer) and
Otto Jacobs for contribution and/or indemnification.
1On appeal, Engerman does not challenge the circuit court's
ruling that there was no coverage arising out of 5 Walworth's
Wis. Stat. § 100.18 claim. Accordingly, we do not address this.
All subsequent references to the Wisconsin Statutes are to
the 2021-22 version.
2Downes did not originally name Acuity in this complaint;
Acuity intervened.
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¶11 General Casualty, West Bend, and Acuity tendered a
defense of their respective insureds. They all moved to
bifurcate and litigate coverage. Each moved for summary
judgment and requested declarations that they did not have a
duty to indemnify or further defend under their policies. With
respect to General Casualty and West Bend's motions, the circuit
court3 concluded that there was no property damage caused by an
occurrence——only faulty workmanship——and therefore the insurers
owed no coverage. And when analyzing Acuity's motion against
shotcrete provider Otto Jacobs, the court applied the integrated
systems analysis we utilized in Pharmacal to conclude there was
no property damage caused by an occurrence and therefore no
coverage. Accordingly, the circuit court granted all three
motions for summary judgment and dismissed the three insurers
from the action.
¶12 The two insureds, Engerman and Otto Jacobs, appealed
the grant of summary judgment against them. The court of
appeals consolidated the appeals and reversed. 5 Walworth, LLC
v. Engerman Contracting, Inc., 2021 WI App 51, 399 Wis. 2d 240,
963 N.W.2d 779. All three insurers then filed separate
petitions for review which we granted.
3The Honorable Daniel S. Johnson of the Walworth County
Circuit Court presided.
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II. ANALYSIS
¶13 This case comes before us on motions for summary
judgment by the insurers seeking a declaration that their
policies do not provide coverage to their insureds. All three
insurers tendered a defense, so we are analyzing if they are
entitled to summary judgment on the question of coverage based
on the full record, not just the complaint. See Est. of
Sustache v. Am. Fam. Mut. Ins. Co., 2008 WI 87, ¶29, 311
Wis. 2d 548, 751 N.W.2d 845. "Summary judgment is appropriate
when there is no genuine issue of material fact and 'the moving
party is entitled to judgment as a matter of law.'" Quick
Charge Kiosk LLC v. Kaul, 2020 WI 54, ¶9, 392 Wis. 2d 35, 944
N.W.2d 598 (quoting Wis. Stat. § 802.08(2)). We review motions
for summary judgment independently, without deference to the
lower courts. Id. The legal issues in this case require us to
interpret the terms of three insurance contracts. This also
presents questions of law we review independently. Am. Girl,
268 Wis. 2d 16, ¶23.
¶14 We begin our analysis by clearing up confusion
engendered by our decision in Pharmacal regarding how to analyze
whether a CGL policy provides an initial grant of coverage. We
then apply the proper framework to this case based on the facts
presented in the summary judgment record, examining the three
policies in turn.
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A. Pharmacal
¶15 Before we explain Pharmacal's errors, we begin by
outlining our standard approach to these kinds of cases. 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." Wis. Label
Corp. v. Northbrook Prop. & Cas. Ins. Co., 2000 WI 26, ¶27, 233
Wis. 2d 314, 607 N.W.2d 276. 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." Id. (quoting another source).
¶16 When analyzing whether an insurance policy provides
coverage, we examine the terms of the policy and compare it to
the facts in the record. See, e.g., Am. Girl, 268 Wis. 2d 16,
¶32 ("[W]hether the insuring agreement confers coverage depends
upon whether there has been 'property damage' resulting from an
'occurrence' within the meaning of the CGL policy language.").4
4See also Day v. Allstate Indem. Co., 2011 WI 24, ¶36, 332
Wis. 2d 571, 798 N.W.2d 199 (noting that a claim fell within a
policy's initial grant of coverage because there was bodily
injury); Everson v. Lorenz, 2005 WI 51, ¶27, 280 Wis. 2d 1, 695
N.W.2d 298 (explaining that the complaint did not allege
property damage and therefore did not trigger insurance
coverage); Wis. Label Corp. v. Northbrook Prop. & Cas. Ins. Co.,
2000 WI 26, ¶¶28-32, 233 Wis. 2d 314, 607 N.W.2d 276 (concluding
the facts in the record did not satisfy the policy definition of
property damage); Acuity v. Soc'y Ins., 2012 WI App 13, ¶15, 339
Wis. 2d 217, 810 N.W.2d 812 (stating "[w]e begin with the policy
language and then examine the factual pleadings to determine
whether there is an initial grant of coverage."); United Co-op.
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We conduct this analysis in three stages. Id., ¶24. First, we
determine if the policy "makes an initial grant of coverage."
Id. If so, we "examine the various exclusions to see whether
any of them preclude coverage." Id. Finally, should any
exclusion apply, we "look to see whether any exception to that
exclusion reinstates coverage." Id.
¶17 In American Girl, this court was faced with several
issues germane to the issues before us today. By way of
background, American Girl involved "a construction project gone
awry." Id., ¶3. A soil engineer had given faulty advice to the
general contractor, leading to problematic soil settlement
underneath the completed warehouse. Id. This then damaged the
building's foundation, which eventually led to the building
being declared unsafe and torn down. Id., ¶¶3, 5.
¶18 The CGL insurer in that case argued that the economic
loss doctrine should bar coverage under the CGL policy. Id.,
¶34. Not so, we concluded. Id., ¶¶34-36. "The economic loss
doctrine operates to restrict contracting parties to contract
rather than tort remedies for recovery of economic losses
associated with the contract relationship." Id., ¶35. It is a
remedies principle applicable in tort cases, and "does not
determine whether an insurance policy covers a claim, which
depends instead upon the policy language." Id. Thus, while the
economic loss doctrine may preclude recovery in tort, it should
v. Frontier FS Co-op., 2007 WI App 197, ¶13, 304 Wis. 2d 750,
738 N.W.2d 578 (indicating that the record established an
occurrence as that term is defined in the policy).
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No. 2019AP1085 & 2019AP1086
not be used to ascertain if a CGL policy——a contract——provides
coverage. Id., ¶36.
¶19 Turning then to the contract language, we examined
whether there was an initial grant of coverage, which (as is the
case here) required an inquiry into whether an "occurrence,"
defined as an "accident," caused "property damage." Id., ¶37.
The insurer argued that the defective work could not constitute
an "occurrence" because CGL policies are not meant to cover an
insured's defective work or product. Id., ¶39. That general
principle is correct, we explained, but not because it is not an
"occurrence" under the policy. Id. Rather, the reason an
insured's defective work or product is generally not covered by
a CGL policy is due to the business risk exclusions in the CGL
policy. Id. This exclusions analysis only comes into play in
the second stage after a determination of an initial grant of
coverage——that an "occurrence" caused "property damage." Id.,
¶47. As such, the insurer incorrectly tried to incorporate the
exclusions analysis into the initial coverage determination.
Id.
¶20 After clarifying these issues, we concluded there was
an accident, i.e., an occurrence, which caused property damage,
thus providing an initial grant of coverage. Id., ¶49. We then
considered the exclusions——step two of the analysis——along with
other issues in the case, the details of which are unnecessary
here. Id., ¶¶50-86. With this background in place, we turn to
Pharmacal.
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¶21 In Pharmacal, the supplier of a supplement tablet sued
two companies that provided an improper species of bacteria.
Pharmacal, 367 Wis. 2d 221, ¶¶4-7. The incorrect bacteria was
blended with the other ingredients of the supplement and
compressed into tablet form; none of the ingredients could be
separated. Id., ¶5. We then considered whether there was
"property damage" caused by an "occurrence" under the terms of
the CGL policies for the insurers of the companies that supplied
the wrong bacteria. Id., ¶¶8-9, 23. Our analysis went wayward
in two respects.
¶22 First, in conducting the initial grant of coverage
analysis, Pharmacal reasoned that to constitute "property
damage" under the CGL policy, the damage must be to "other
property." Id., ¶¶24-27. The policy language in Pharmacal,
however, made no mention of an "other property" requirement.
Like the three policies at issue here, property damage was
defined as, "Physical injury to tangible property, including all
resulting loss of use of that property." Id., ¶23.
¶23 Rather than relying on the language in the CGL policy,
Pharmacal supported this "other property" requirement by citing
two prior opinions: Wisconsin Label Corp., 233 Wis. 2d 314 and
Vogel v. Russo, 2000 WI 85, 236 Wis. 2d 504, 613 N.W.2d 177.
Both were discussed in American Girl, however, and neither
contains such a requirement as part of the initial grant of
coverage analysis. The portions cited in Pharmacal were not in
the initial grant of coverage discussions; they were general
comments on the purpose of a CGL policy. See Wis. Label Corp.,
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233 Wis. 2d 314, ¶27; Vogel, 236 Wis. 2d 504, ¶17. The cited
language simply explains that the risk insured in a CGL policy
includes "damage to property other than to the product or
completed work itself." Wis. Label Corp., 233 Wis. 2d 314, ¶27
(quoting another source). But as American Girl explains in
depth, this is true because of the business risk exclusions, not
the initial coverage determination. See 268 Wis. 2d 16, ¶¶39,
43 (discussing Vogel, 236 Wis. 2d 504). In effect, then,
Pharmacal incorporated an "other property" analysis that may be
relevant to the policy's business exclusions (stage two) into
the determination of whether an "occurrence" caused "property
damage" (stage one). See 367 Wis. 2d 221, ¶¶24-27.
¶24 Pharmacal's second error stems from its first.
Because the court thought it must analyze whether there was
damage to "other property" when analyzing whether "property
damage" occurred, Pharmacal enlisted the assistance of the
integrated systems analysis. Id., ¶27-28. By way of
background, for a tort claim to survive the economic loss
doctrine, the damage alleged must be to other property——
something other than a loss to the defective product itself.
Wausau Tile, 226 Wis. 2d at 247-48. The integrated systems
analysis is used to ascertain whether damage to a defective
component of an integrated system constitutes damage to other
property. Id. at 249. In Wausau Tile, we embraced the
integrated system analysis from the Restatement (Third) of
Torts, which states in part:
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No. 2019AP1085 & 2019AP1086
What constitutes harm to other property rather than
harm to the product itself may be difficult to
determine. A product that nondangerously fails to
function due to a product defect has clearly caused
harm only to itself. A product that fails to function
and causes harm to surrounding property has clearly
caused harm to other property. However, when a
component part of a machine or a system destroys the
rest of the machine or system, the characterization
process becomes more difficult. When the product or
system is deemed to be an integrated whole, courts
treat such damage as harm to the product itself.
Id. at 249 (quoting Restatement (Third) of Torts § 21 cmt. e
(1997)). Again, the purpose of this test is to ascertain if a
party may pursue tort remedies, or whether the economic loss
doctrine bars them, leaving the plaintiff to pursue only
contract remedies.
¶25 So rather than focus its analysis on the policy
language, Pharmacal took this integrated systems analysis from
tort law and held that such an analysis is "necessary when
evaluating coverage under a CGL policy." 367 Wis. 2d 221, ¶28.
Pharmacal painted with a broad brush and seemed to incorporate
the integrated systems analysis into all determinations of
whether "property damage" has occurred under the terms of a CGL
policy. See id.¶26 This move was problematic for several reasons. As
we've noted, it runs headlong into the fundamental principle
running through our insurance cases that policy interpretation
should focus on the language of the insurance policy. See,
e.g., Am. Girl, 268 Wis. 2d 16, ¶¶6, 32, 35; supra ¶16 n.4. And
relatedly, this broad directive flatly contradicts our holding
in American Girl that we resolve whether an insurance policy
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No. 2019AP1085 & 2019AP1086
covers a claim based on the policy language and without resort
to tort principles such as the economic loss doctrine, and by
implication, the integrated systems analysis used to assess its
application. Compare Am. Girl, 268 Wis. 2d 16, ¶¶6, 34-35 with
Pharmacal, 367 Wis. 2d 221, ¶¶28, 34-35.
¶27 This is important because economic loss doctrine
principles are aimed at keeping tort law and contract law
separate. Once again, the "economic loss doctrine generally
operates to confine contracting parties to contract rather than
tort remedies for recovery of purely economic losses associated
with the contract relationship." Am. Girl, 268 Wis. 2d 16, ¶6.
The economic loss doctrine maintains "the fundamental
distinction between tort law and contract law." Hinrichs v. DOW
Chemical Co., 2020 WI 2, ¶29, 389 Wis. 2d 669, 937 N.W.2d 37(quoting another source). By keeping these purely economic
losses in the realm of contract, commercial parties are free to
assess the economic risks and contract accordingly. Id. The
commercial purchaser is empowered to "assume, allocate, or
insure against that risk." Id. (quoting another source).
¶28 This is why we made clear in American Girl that the
economic loss doctrine should not be used to ascertain if a CGL
policy (a contract) provides coverage. We followed the same
approach in Wausau Tile, where even though the tort claims were
barred by the economic loss doctrine, that conclusion was
separate from whether the insurer had a duty to defend based on
the language of the insurance policy. 226 Wis. 2d at 259, 265-
68.
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No. 2019AP1085 & 2019AP1086
¶29 In addition, Pharmacal's conclusion was an outlier,
and raises further doctrinal anomalies. As the Seventh Circuit
recognized in Haley v. Kolbe & Kolbe Millwork Co., "[t]he
economic-loss doctrine generally does not apply to insurance-
coverage disputes." 866 F.3d 824, 828 (7th Cir. 2017). Yet it
recognized that we did exactly that in Pharmacal, while at the
same time affirming our traditional focus on the policy language
in other parts of the opinion. Id. at 828-29. In the end, the
Seventh Circuit seemingly concluded that Pharmacal was not as
broad as its language suggests, and determined the integrated-
systems analysis was not appropriate in an insurance dispute
where the underlying claim concerned leaky windows. Id. The
court of appeals in the decision we are reviewing similarly
struggled with how to square Pharmacal's adoption of the
integrated systems analysis with our standard approach of
applying the facts to the terms of the policy. 5 Walworth, LLC,
399 Wis. 2d 240, ¶37. It could not be, the court of appeals
reasoned, that Pharmacal should be read "as importing language
that does not exist into a policy." Id.¶30 In this case, the insurers ask us to enforce what we
said in Pharmacal——that the integrated systems analysis is
"necessary when evaluating coverage under a CGL policy." 367
Wis. 2d 221, ¶28. The insureds, on the other hand, do not ask
us to overrule Pharmacal. They instead ask that we limit its
application——much like the Seventh Circuit did in Haley and the
court of appeals did below. But while Haley and the court of
appeals made admirable attempts to reconcile our conflicting
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No. 2019AP1085 & 2019AP1086
statements, this case illustrates inconsistencies that cannot be
remedied by affirming both approaches. We are reluctant to
reject the holding of a case so recently decided, and to do so
without being asked by the parties. But as we see it, this case
forces us to choose whether to remain consistent with our prior
cases, or follow the new course charted by Pharmacal. In the
end, we conclude we must bring consistency and clarity to this
area of law that is now muddled by Pharmacal's missteps.
¶31 Therefore, we overrule Pharmacal's holding
incorporating the integrated systems analysis into insurance
policy disputes. We further reject and overrule its
incorporation of an "other property" analysis into the initial
determination of whether an occurrence has caused "property
damage" under an insurance policy.5 The proper approach is the
one we laid out in American Girl and multiple other cases: our
task is to interpret and apply the language of the insurance
policy. In doing so, we follow the three-step process we
outlined above. We first examine if the policy makes an initial
grant of coverage, then analyze if any exclusions preclude
coverage, and finally, review if any exceptions to a particular
exclusion reinstate coverage. Am. Girl, 268 Wis. 2d 16, ¶24.
5 While we overrule Pharmacal's improper incorporation of
the integrated systems analysis into all CGL claims and its
errant focus on damage to "other property" when analyzing if
there is "property damage," we do not address the decision's
analysis on other matters.
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¶32 These clarifications in place, we turn to the
arguments by each of the three insurers that their policies do
not provide coverage and they are entitled to summary judgment.
B. General Casualty's Policy
¶33 General Casualty issued a CGL policy to Engerman, the
general contractor. Engerman faces claims arising out of its
allegedly faulty installation and construction of the pool.
General Casualty moved for summary judgment and contends that
its policy does not provide an initial grant of coverage to
Engerman because "property damage" was not caused by an
"occurrence."
¶34 General Casualty's policy provides that coverage is
triggered by "property damage" if the "'property damage' is
caused by an 'occurrence.'" "Property damage" and "occurrence"
are both defined terms in the policy. "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." "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
18
No. 2019AP1085 & 2019AP1086
Third New Int'l Dictionary of the English Language 11 (2002);
Black's Law Dictionary 15 (7th ed. 1999)).
¶35 When we compare these policy terms to the record, we
conclude a jury could find that property damage caused by an
occurrence existed. We observe and reiterate the basic
principle "that while faulty workmanship is not an 'occurrence,'
faulty workmanship may cause an 'occurrence.'" Acuity v. Soc'y
Ins., 2012 WI App 13, ¶24, 339 Wis. 2d 217, 810 N.W.2d 812. For
example, we held in American Girl that faulty workmanship caused
soil to settle. 268 Wis. 2d 16, ¶5. The settling was an
accident, and therefore an occurrence, that caused property
damage. Id. The court of appeals reasoned similarly in a case
where faulty work by a subcontractor resulted in leaking
windows. Kalchthaler v. Keller Constr. Co., 224 Wis. 2d 387,
391-92, 591 N.W.2d 169 (Ct. App. 1999). The court of appeals
explained that an initial grant of coverage was present because
the window leaking was an accident, and thus an occurrence, that
caused property damage. Id. at 397. The court of appeals again
utilized the same approach in a case where faulty excavation
techniques (faulty workmanship) accidentally caused soil erosion
(an occurrence) which led part of a building to collapse
(property damage). Acuity, 339 Wis. 2d 217, ¶17. The lesson
from our case law examining similar policy language is this:
faulty workmanship is not an occurrence, but faulty workmanship
can lead to an occurrence that causes property damage.
¶36 Turning to the summary judgment record, the WJE report
concluded that cracks in the main pool occurred, and therefore
19
No. 2019AP1085 & 2019AP1086
water leaked into the surrounding soil. This was the result,
according to the report, of less-than-optimal installation of
the shotcrete and poor placement of steel reinforcing bars,
among other reasons. 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.6 In
the end, 5 Walworth claims the whole pool complex was
compromised and needed to be rebuilt. Therefore, a trier of
fact could conclude that General Casualty's policy provides an
initial grant of coverage because there is property damage
caused by an occurrence as those terms are defined in the
policy. As such, General Casualty is not entitled to summary
The WJE report states that while the cracks were initially
6
caused by less-than-optimal installation of the shotcrete and
poor placement of the steel reinforcing bars, among other
reasons, they continued to worsen in part due to the
destabilization of the soil. Thus, while the cracks were
initially an occurrence, their continued growth——caused at least
in part by the water in the surrounding soil——could constitute
property damage.
20
No. 2019AP1085 & 2019AP1086
judgment. And because it does not argue at this stage that any
of its policy's exclusions preclude coverage, we end our inquiry
here.
C. West Bend's Policy
¶37 West Bend also issued a CGL policy to Engerman. It
asserts the policy does not provide an initial grant of coverage
for two reasons: (1) there was no "property damage" caused by
an "occurrence" and (2) Engerman knew about the property damage
before the policy issued.
¶38 With respect to the first argument, West Bend's policy
language granting coverage when "property damage" is caused by
an "occurrence" is identical to General Casualty's policy.
Furthermore, both policies were issued to the same insured
(Engerman) defending against the same claims; West Bend's policy
applies to the facts in the same way. Therefore, for the
reasons explained above, a factfinder could conclude based on
the facts in this summary judgment record that "property damage"
was caused by an "occurrence." West Bend is not entitled to
summary judgment on this argument.
¶39 West Bend's second argument fares no better. West
Bend's policy only insures "property damage" that "occurs during
the policy period." The policy provides that if an insured or
authorized employee "knew, prior to the policy period, that
the . . . 'property damage' occurred, then any continuation,
change or resumption of such . . . 'property damage' during or
after the policy period will be deemed to have been known prior
21
No. 2019AP1085 & 2019AP1086
to the policy period." So, if Engerman knew of the property
damage before the policy issued, West Bend's policy does not
provide coverage.
¶40 West Bend's first policy issued to Engerman commenced
on October 27, 2013. But West Bend argues Engerman knew of the
property damage well before then. After the pool complex was
completed in August 2012, 5 Walworth noticed a leak almost
immediately. John Engerman, the President and CEO of Engerman
and an insured under West Bend's policy, sent and received
emails in August of 2012 that indicate he visited the pool
complex and noted that subcontractor Downes replaced the
stonework that was near the children's pool——the believed source
of the leak. The leak persisted into May of 2013, and Downes
investigated the issue the next month. Emails in June of 2013,
that John Engerman was copied on in August 2013, reveal that
Engerman knew the pool complex, and the children's pool in
particular, was still leaking. These emails state that, "The
auto fill is running 24/7 and cannot keep up with the leak" and
that, "Clearly it is a LEAK." West Bend contends these facts
clearly show that Engerman knew about the property damage at
issue in this case before its policy began.
¶41 Engerman interprets the record differently. It
contends this issue should be remanded because John Engerman
testified in his deposition that he believed the leaking in both
2012 and 2013 referred to waterproofing issues with the
stonework near the children's pool——not the property damage at
issue here. Engerman further maintains the record is
22
No. 2019AP1085 & 2019AP1086
insufficient on whether the leaking that occurred in 2012 and
2013 gave rise to the property damage at issue in this case.
¶42 We conclude the record is insufficient for us to
determine, as a matter of law, that Engerman knew about the
property damage alleged here prior to the commencement of its
policy with West Bend. West Bend's argument relies on the
inference that the property damage in this case was a
"continuation, change or resumption" of the damage Engerman knew
about in 2012 and 2013. But the record does not conclusively
establish this link. The WJE report does not connect the damage
Engerman knew of in 2012 and 2013 to the later cracks in the
pool and damage to the surrounding soil. And John Engerman
testified that he did not know of these specific problems until
2016. On summary judgment, we draw reasonable inferences in the
light most favorable to the non-moving party. Burbank Grease
Servs., LLC v. Sokolowski, 2006 WI 103, ¶40, 294 Wis. 2d 274,
717 N.W.2d 781. Here, that's Engerman. So, while West Bend's
arguments might win the day before a jury, West Bend is not
entitled to summary judgment on the theory that its policy does
not provide an initial grant of coverage.7
D. Acuity's Policy
¶43 Acuity issued a CGL policy to Otto Jacobs, the
shotcrete supplier. According to the third-party complaint,
7 West Bend does not argue at this stage that any of the
policy's exclusions preclude coverage. Its two arguments are
focused solely on the initial grant of coverage.
23
No. 2019AP1085 & 2019AP1086
Otto Jacobs negligently provided subcontractor Downes with
inferior shotcrete to construct the pool. Acuity argues that
its policy does not provide an initial grant of coverage because
there was no "property damage" caused by an "occurrence." And
even if it does, Acuity asserts the policy's "your product"
exclusion precludes coverage. Neither argument prevails at this
stage and on this record.
¶44 Acuity's policy, like those of General Casualty and
West Bend, provides an initial grant of coverage when "property
damage" "is caused by an occurrence." And it has identical
definitions of "property damage" and "occurrence" to those
previously discussed. The analysis is slightly different under
this policy, however, because of the nature of the claim against
Otto Jacobs. Namely, the allegation is that the product
supplied by Otto Jacobs for use in the construction project——the
shotcrete——was defective.
¶45 Acuity's arguments seeking summary judgment largely
ask us to see the allegedly defective shotcrete as part of an
integrated system, the pool complex. We decline to do so.
Rather, the proper analysis based on the language of the policy
is whether the defective shotcrete (assuming this is proven) led
to an accident, which then caused property damage. As we have
discussed, the water leakage, among other things, is sufficient
to constitute an accident. And this led to cracking in the
pool, further leakage, damage to the surrounding soil, and
eventually, replacement of the entire pool complex. If the
shotcrete was defective, a jury could find that it led to an
24
No. 2019AP1085 & 2019AP1086
accident (water leakage at the very least) that caused property
damage. Therefore, at this stage of the proceedings, Acuity's
policy does not preclude an initial grant of coverage to Otto
Jacobs.
¶46 That leads us to Acuity's alternative argument that
its "your product" exclusion precludes coverage. This exclusion
bars coverage to "Property damage to your product arising out of
it or any part of it." We already addressed the definition of
"property damage" above. And relevant here, "'Your product'
means: a. Any goods or products, other than real property,
manufactured, sold, handled, distributed or disposed of by: (1)
You."
¶47 Here, Otto Jacobs' product is the shotcrete. Acuity
argues that the "your product" exclusion applies because of
damage to the shotcrete, and damages necessarily incurred to
repair or replace the allegedly defective shotcrete. However,
the record does not clearly establish this as a matter of
undisputed fact; significant evidence cuts the other way. The
WJE report stated the cracks in the shotcrete arose not from a
deficiency in Otto Jacob's product, but from installation errors
(by a different company with a different insurer), moist
conditions in the soil, and placement of the steel reinforcing
bars. Therefore, Acuity is not entitled to summary judgment on
the theory that its "your product" exclusion bars coverage.
25
No. 2019AP1085 & 2019AP1086
III. CONCLUSION
¶48 Resolution of the parties' dispute requires us to
overrule portions of our decision in Pharmacal. The main
takeaway is this: When analyzing if there is "property damage"
under a CGL policy in the initial grant of coverage stage, we do
not employ the integrated systems analysis nor do we limit our
review of property damage to damage to "other property." We
apply the terms of the policy.
¶49 Doing so here, we affirm the decision of the court of
appeals. With respect to General Casualty's policy, we conclude
it is not entitled to summary judgment because a trier of fact
could conclude there is "property damage" caused by an
"occurrence" as those terms are defined in its policy. For the
same reasons, West Bend is not entitled to summary judgment on
its argument there is no "property damage" caused by an
"occurrence." And West Bend is also not entitled to summary
judgment on its argument that Engerman knew of the property
damage prior to the commencement of West Bend's policy because
the record does not sufficiently establish that the property
damage here was a continuation, change, or resumption of the
damage Engerman knew about before the policy began. Finally, we
conclude that Acuity is not entitled to summary judgment on
either of its arguments. A trier of fact could conclude that
there was "property damage" caused by an "occurrence" and that
the property damage is to more than just Otto Jacobs' product or
arising from the product.
26
No. 2019AP1085 & 2019AP1086
By the Court.—The decision of the court of appeals is
affirmed, and the cause is remanded to the circuit court for
further proceedings consistent with this opinion.
27
Nos. 2019AP1085 & 2019AP1086.pdr
¶50 PATIENCE DRAKE ROGGENSACK, J. (concurring). The
majority opinion appears not to understand the judicial history
of the commercial law doctrines that underlie Wis. Pharmacal
Co., LLC v. Neb. Cultures of Cal., Inc., 2016 WI 14, 367 Wis. 2d
221, 876 N.W.2d 72, Wausau Tile, Inc. v. Cnty. Concrete Corp.,
226 Wis. 2d 235, 593 N.W.2d 445 (1999), Vogel v. Russo, 2000 WI
85, 236 Wis. 2d 504, 613 N.W.2d 177, Am. Fam. Mut. Ins. Co. v.
Am. Girl, Inc., 2004 WI 2, 268 Wis. 2d 16, 673 N.W.2d 65 and
Wis. Label Corp. v. Northbrook Prop. & Cas. Ins. Co., 2000 WI
26, 233 Wis. 2d 314, 607 N.W.2d 276. Because it does not
recognize the judicial history of interpretations of terms in a
Commercial General Liability (CGL) insurance policy, it relies
entirely on American Girl, which decision was a sea change in
judicial interpretations of "property damage" in a CGL policy,
as I explain more fully below.
¶51 At times the majority opinion misuses foundational
commercial analyses such as the integrated system, economic loss
doctrine and their interplay with the three-step process we use
to determine whether there is coverage under a CGL insurance
policy.1 The majority opinion does so, in part, because it does
not factor into its analysis the purpose of a CGL policy, when
1We articulated the three-step process in Wis. Pharmacal
Co., LLC v. Neb. Cultures of Cal., Inc., 2016 WI 14, ¶22, 367
Wis. 2d 221, 876 N.W.2d 72 (citing Preisler v. Gen. Cas. Ins.
Co., 2014 WI 135, ¶22, 360 Wis. 2d 129, 857 N.W.2d 136). First,
we examine the facts of the claim to decide "whether the policy
makes an initial grant of coverage." Pharmacal, 367 Wis. 2d
221, ¶22. If so, we examine whether any policy exclusions
preclude coverage. Id. Lastly, "we analyze exceptions to the
exclusion to determine whether any exception reinstates
coverage." Id.1
Nos. 2019AP1085 & 2019AP1086.pdr
it is purchased by a contractor to cover liability that a
contractor may have to another person, for bodily injury to them
or to their property. Stated otherwise, a CGL policy has been
held to cover the risk of tort liability of a contractor that
could arise from the contractor's acts that injure other persons
or their property.
¶52 I agree that the facts are as yet too undeveloped to
determine each of the coverage defenses mounted by General
Casualty, West Bend Mutual Insurance and Acuity Mutual
Insurance. Therefore, I would affirm the court of appeals. In
so doing, I fully examine the judicial history of the risk that
a CGL policy had been held to cover and the unarticulated change
of potential coverage for a CGL policy that was first
accomplished in American Girl. I also explain the limited
application of the integrated systems analysis employed in
Pharmacal. In so doing, I concur in the remand ordered by the
majority opinion.
I. DISCUSSION
¶53 Insurance policies insure against various risks of
liability that may be generated by the insured. As a general
matter when a contractor is the insured, a CGL policy insures
the risk that the contractor may be negligent and cause damage
to other persons or their property. Restatement of Law,
Liability Insurance, Ch. 1, § 7. If the damages are purely
economic, contract remedies, not tort remedies, are available.
Sunnyslope Grading, Inc. v. Miller, Bradford & Risberg, Inc.,
148 Wis. 2d 910, 916, 437 N.W.2d 213 (1989). This conclusion is
grounded in the economic loss doctrine, which precludes purely
2
Nos. 2019AP1085 & 2019AP1086.pdr
economic damages due to a defective product or service that are
disguised as tort claims unless personal injury or damage to
property other than the defective product are present. Daanen &
Janssen, Inc. v. Cedarapids, Inc., 216 Wis. 2d 395, 402, 573
N.W.2d 842 (1998). Whether the damage to property is to "other
property" is sometimes difficult to ascertain.
¶54 In East River S.S. Corp. v. Transamerica Delaval,
Inc., 476 U.S. 858 (1986), the United States Supreme Court
explained why there are occasions when determining whether the
damaged property was, or was not, that of another is difficult.
In reasoning to its conclusion, the Court employed an integrated
systems analysis.
¶55 There, charterers of supertankers brought suit against
the turbine manufacturer, claiming design and manufacturing
defects that caused supertankers to malfunction while on the
high seas. Damages were sought. Id. at 860. In coming to its
decision the Court said, "In the traditional 'property damage'
cases, the defective product damages other property. In this
case, there was no damage to 'other' property. . . . [The]
supertanker's defectively designed turbine components damaged
only the turbine itself." Id. at 867. In so concluding, the
Court regarded each turbine as a single integrated unit. Id.The Court explained, "Since all but the very simplest of
machines have component parts, [a contrary] holding would
require a finding of 'property damage' in virtually every case
where a product damages itself. Such a holding would eliminate
the distinction between warranty and strict products liability."
Id.3
Nos. 2019AP1085 & 2019AP1086.pdr
¶56 Whether damage that occurs through the acts of the
insured requires damage to other property for CGL coverage
varies state by state. See James Duffy O'Connor, What Every
Court Should Know About Insurance Coverage for Defective
Construction, 5 J. Am. Coll. Constr. L. No. 1 (2011) (explaining
that in states applying the business risk doctrine, the event
insured is "the possibility that the goods, product or work of
the insured . . . will cause bodily injury or damage to property
other than the product or completed work itself, and for which
the insured may be liable."). See also, Jeffrey P. Aken &
Tamara Hayes O'Brien, Contractor Coverage For Construction
Claims Under CGL Policies, 44 Tort Trial & Ins. L.J. 993 (2009)
(reviewing whether property damage must be to property other
than that provided by the insured is decided differently in
different jurisdictions).
¶57 Until American Girl, Wisconsin courts had concluded
that the property damage addressed in a CGL policy was damage to
other property. Reviewing that history is important to
understanding the case before us. I begin with Vogel because it
is an early and clearly stated case: "The risk intended to be
insured [in a CGL policy] is the possibility that the goods,
products or work of the insured . . . 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."
Vogel, 236 Wis. 2d 504, ¶17 (citing Bulen v. West Bend Mut. Ins.
Co., 125 Wis. 2d 259, 264-65, 371 N.W.2d 392 (Ct. App. 1985),
4
Nos. 2019AP1085 & 2019AP1086.pdr
which quoted Weedo v. Stone-E-Brick, Inc., 405 A.2d 788, 791
(N.J. 1979)).2
¶58 Wausau Tile arose in the context of another CGL
coverage dispute. Wausau Tile, 226 Wis. 2d at 266. It involved
breach of warranty/contract, negligence and strict liability
claims. Id. at 242.
¶59 Wausau Tile had combined Medusa concrete, aggregate,
water and other materials to make Terra pavers. The pavers
cracked and Wausau Tile sued County Concrete, claiming the
Medusa concrete was defective. County Concrete referred the
claim to its insurer, Travelers Insurance. Travelers moved to
dismiss, claiming there was no damage to other property, which
is the type of damage that was then necessary for a CGL policy
to afford coverage.
Physical harm to property other than the product
itself may also be measured by the cost of repair or
replacement of the product. Consequently, we must
determine whether Wausau Tile has alleged repair or
replacement costs as a measure of harm to property
other than the defective product.
Id. at 248-49.
¶60 Travelers alleged it had no duty to defend on the
breach of warranty/contract claims. Id. at 243. We agreed
2 The majority dismisses our use of Vogel by adding
"includes" to modify a Wis. Label quote as: "simply explains
that the risk insured in a CGL policy includes 'damage to
property other than to the product or completed work itself.'
[Citing] [Wis. Label Corp. v. Northbrook Prop. & Cas. Ins. Co.,
2000 WI 26, ¶27, 233 Wis. 2d 314, 607 N.W.2d 276]." (Emphasis
added.) Majority op., ¶23. However, in its conclusion that
there was no initial grant of coverage, Wis. Label explained,
"[CGL policies] provide coverage for the insured's liability for
physical injury to, or loss of use of, another's property."
Id., ¶33.
5
Nos. 2019AP1085 & 2019AP1086.pdr
because the damages from those claims were purely economic and
therefore, they were contract damages barred by the economic
loss doctrine. Id. at 259.
¶61 In consideration of whether the insurer had a duty to
defend County Concrete on the remaining tort claims, a key issue
was whether the damage that occurred was to property other than
the contracted for defective property.3 Id. at 247 (the
"economic loss doctrine does not preclude a product purchaser's
claims of personal injury or damage to property other than the
product itself"). "In short, economic loss is damage to a
product itself or monetary loss caused by the defective product,
which does not cause personal injury or damage to other
property." Id. (quoting Daanen, 216 Wis. 2d at 402).
¶62 For many years, it was important to correctly resolve
the question of what type of property damage was at issue
because a CGL policy, prior to American Girl, had insured the
risk of damage to "other property," not damage solely to the
contracted for product or service. Vogel, 236 Wis. 2d 504, ¶17;
Wis. Label, 233 Wis. 2d 314, ¶58. It was a performance bond
that insured risk that the work performed would not meet the
requirements of the contract under which it was performed. See
Gaastra v. Vill. of Fairwater, 77 Wis. 2d 7, 252 N.W.2d 603The majority opinion does not understand the two decisions
we made in Wausau Tile, wherein we denied coverage for the
contract claims and explained potential coverage existed for the
tort claims when a defective product causes "personal injury or
damage to other property." Wausau Tile, Inc. v. Cnty. Concrete
Corp., 226 Wis. 2d 235, 247, 259, 593 N.W.2d 445 (1999).
6
Nos. 2019AP1085 & 2019AP1086.pdr
(1977); Kniess v. Am. Sur. Co. of N.Y., 239 Wis. 261, 300 N.W.
913 (1941).
¶63 Accordingly, we agreed with Travelers, concluding that
damage to the pavers themselves was not damage to other
property. We determined other property was not damaged by the
allegedly defective cement because the pavers constituted an
integrated system or product where one component could not be
separated from the other components. Wausau Tile, 226 Wis. 2d
at 249 (citing Restatement (Third) of Torts § 21 cmt. e (1997),
which acknowledged and explained the use of the integrated
systems rule).
¶64 Our opinion in Wausau Tile reasoned that "[d]amage by
a defective component of an integrated system to either the
system as a whole or other system components is not damage to
'other property.'" Id. (citing East River S.S., 476 U.S. at
867-68). The "United States Supreme Court has recognized that
courts have interpreted the Supreme Court's decision in East
River S.S. as standing for the proposition that when harm
results from a defective component of a product, the product
itself is deemed to have caused the harm." Wausau Tile, 226
Wis. 2d at 250 (citing Saratoga Fishing Co. v. J.M. Martinac &
Co., 520 U.S. 875, 883 (1997)).
¶65 American Girl also involved a CGL coverage claim.
However, American Girl provided coverage for contract damages,
which was an unarticulated sea change from our prior holdings.
Before American Girl, the first step of our three-step coverage
analysis for a CGL policy had been to assess whether there was
damage to property other than or in addition to the insured's
7
Nos. 2019AP1085 & 2019AP1086.pdr
defective work. If that were not the case, as American Girl may
have held but did not articulate, CGL policies would function as
performance bonds. Am. Girl, 268 Wis. 2d 16, ¶94 (Crooks, J.,
dissenting).
¶66 The claim in American Girl was that Renschler, the
general contractor for constructing a building, breached its
warranty by failing to construct a building that was free from
defects as it warranted it would do in the construction
contract. Id., ¶¶4, 21. Breach of warranty is a contract
claim. Tietsworth v. Harley-Davidson, 2007 WI 97, ¶10, 303
Wis. 2d 94, 735 N.W.2d 418.
¶67 American Family Insurance argued that because American
Girl's claim was for breach of warranty/breach of contract it
was not an "occurrence" under its policy because CGL policies
are not intended to cover contract claims arising out of the
insured's defective work. Id., ¶39.4 While acknowledging that
it had been held that CGL policies do not cover claims arising
out of the insured's defective work, American Girl shifted the
focus of the allegation posed by American Family and responded
that the lack of coverage in the past had occurred due to
business risk coverage exclusions in insurance policies.5 Id.
Faulty workmanship is not an accident unless it causes an
4
unexpected harm, and occurrences are defined as accidents.
Smith v. Anderson, 2017 WI 43, ¶91, 374 Wis. 2d 715, 893 N.W.2d
790 (Abrahamson, J., dissenting); Am. Fam. Mut. Ins. Co. v. Am.
Girl, Inc., 2004 WI 2, ¶5, 268 Wis. 2d 16, 673 N.W.2d 65.
It was possible to find an initial grant of coverage due
5
to faulty work of the contractor when that contracted for work
harmed other property and then to deny coverage based on the
policy's business risk exclusion to coverage. However, we had
repeatedly concluded that there was no property damage of the
type required by a CGL policy, when no property of another was
8
Nos. 2019AP1085 & 2019AP1086.pdr
However, business risk exclusions could apply only if there had
been an initial grant of coverage under the first step of our
coverage analysis to which the exclusion was then applied at the
second step of our analysis.
¶68 In shifting the focus of the contention American
Family Insurance actually made, American Girl ignored years of
our decisions that had held that under a CGL policy, the term
"property damage" required damage to property other than or in
addition to damage to the contracted for product or services.
Stated otherwise, nowhere in the American Girl decision does it
reflect any recognition that the words of the policy defining
property damage repeatedly had been interpreted by this court to
require damage to property other than the product Renschler
produced for American Girl.6 The majority opinion got by what
may have been an initial stumbling block by never addressing the
"other property" concern and concluding that the soil settlement
was the result of a subcontractor's alleged negligence. Id.,
¶¶5, 9. However, alleged negligence of a subcontractor would
enter only at the third step of our coverage analysis where we
consider exceptions to any policy exclusions found during the
second step of the analysis.
¶69 American Girl's providing coverage under a CGL policy
for damage because of the defective work of a contractor that
damaged no identified other property was a huge sea change from
damaged. See decisions pre-American Girl discussed above.
6 It was undisputed that the damage at issue in American
Girl was solely to the defective building that Renschler
contracted for and constructed. Id., ¶¶13-16.
9
Nos. 2019AP1085 & 2019AP1086.pdr
our past decisions. In past cases, personal injury or property
damage to another was necessary to afford an initial grant of
coverage under a CGL policy. Wausau Tile, 226 Wis. 2d at 248-
49; Vogel, 236 Wis. 2d 504, ¶17; Bulen, 125 Wis. 2d at 264-65;
Wis. Label, 233 Wis. 2d 314, ¶58. Because American Girl did not
address the question that American Family Insurance posed to
find an initial grant of coverage, American Girl did not address
whether the damaged property was "other property." In so doing,
it effected a significant change in insurance law, and it did
not tell the reader about the change that it was making.7
¶70 Pharmacal presented another CGL policy dispute. The
majority contends that Pharmacal "flatly contradicted prior
cases without addressing those conflicts head on."8 The majority
opinion cites not one single case to support this broad
assertion. However, as I explained above through the use of
this court's past opinions, it is the majority opinion that has
not undertaken a sufficient study of the judicial history of CGL
policies. Our decision in Pharmacal did not recognize the
significant change in the definition of property damage under a
CGL policy that American Girl may have made but did not
articulate. Instead, Pharmacal applied our past requirement
that property damage under a CGL policy must include damage to
more than the insured's work.
7Perhaps the court did not recognize that it was making a
change in CGL insurance law because the court sat five in
American Girl. The majority was three justices, with two
justices dissenting and two justices not participating.
8 Majority op., ¶3.
10
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¶71 In Pharmacal, problems arose when, at Pharmacal's
request, Nutritional Manufacturing provided a probiotic tablet
that incorporated a different species of bacteria than Pharmacal
requested. Pharmacal, 367 Wis. 2d 221, ¶5. Nebraska Cultures
had provided the defective bacterium that Nutritional had used.
Id. Once provided, the bacterium was mixed with other
ingredients and compressed into tablet form. Id. None of the
ingredients could be separated from one another after
compression into a tablet. Id.¶72 Netherlands Insurance and Evanston Insurance moved to
dismiss Pharmacal's complaint. They contended that Pharmacal's
underlying claims arose from incorporating a defective
ingredient into Pharmacal's probiotic supplement tablets. The
insurers asserted that this error did not damage other property
because the tablets were an integrated system and therefore, the
other ingredients in the tablets could not be separated out in a
way that would demonstrate damage to "other property." Damage
to other property was required in order to have an initial grant
of coverage under their CGL policies. Id., ¶24 (citing Wis.
Label, 233 Wis. 2d 314, ¶27).
¶73 In assessing whether the defective ingredient damaged
other property, we identified the usual three steps to determine
whether there was potential policy coverage of the claim.
Pharmacal, 367 Wis. 2d 221, ¶22. We began with whether there
was an initial grant of coverage under the terms of the policy.
Id., ¶23. We addressed the "standard CGL definition of property
damage."
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The risk intended to be insured [in a CGL policy] is
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.
Id., ¶24 (quoting Wis. Label, 233 Wis. 2d 314, ¶27 (alteration
in original)). We reasoned that the damage to "other property"
requirement was important because a "CGL policy. . . is not a
performance bond." Pharmacal, 367 Wis. 2d 221, ¶26.
¶74 In order to assess whether the damage that occurred
from the defective bacterium caused damage to other property, we
analyzed "whether a supplement tablet is an integrated system
because if it is, damage to the system has been defined as
damage to the product itself, not damage to other property."
Id., ¶27 (citing Wausau Tile, 226 Wis. 2d at 249).9 We employed
an integrated systems analysis because of the factual difficulty
in determining whether the defective bacterium damaged only
itself or also damaged other property.
¶75 We reasoned that an integrated system analysis is
sometimes necessary when evaluating whether there is an initial
grant of coverage under a CGL policy because of the historic
requirement that damage to property of another was required for
an initial grant of coverage. Wis. Label, 233 Wis. 2d 314, ¶27;
East River S.S., 476 U.S. at 867-68. Accordingly, whether to
9The majority opinion errs when it implies that Pharmacal
concludes that an integrated systems analysis always is
necessary when evaluating coverage under a CGL policy. Majority
op., ¶31. Whether an integrated systems analysis is appropriate
depends on the factual setting from which CGL coverage is
asserted. Wausau Tile, 266 Wis. 2d at 249; Pharmacal, 367
Wis. 2d 221, ¶31.
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employ an integrated systems analysis depends on the facts under
which the insurance coverage dispute arises. We analyzed the
undisputed facts to decide whether the tablet was to be treated
as a unified whole or "whether a defective component can be
separated out such that the claimed damage constitutes damage to
property other than the defective component itself." Pharmacal,
367 Wis. 2d 221, ¶28; see also East River S.S., 476 U.S. at 867-
68 (explaining that a defective component of a product does not
damage other property when the component is part of an
integrated system). In Pharmacal, we concluded that once
ingredients were compressed into tablets, a unified whole was
created, and therefore, there was no property damage to other
property, which a CGL policy had required for an initial grant
of coverage.
¶76 We discussed how supplying an incorrect bacterium
affected a potential grant of coverage by reviewing whether
supplying that bacterium was an "occurrence" under the
Netherlands policy. Pharmacal, 367 Wis. 2d 221, ¶¶51-56. We
concluded that the breach of contract in supplying an incorrect
bacterium was not an "occurrence" in and of itself. Id., ¶52.
Glendenning's Limestone & Ready-Mix v. Reimer, 2006 WI App 161,
¶39, 295 Wis. 2d 556, 721 N.W.2d 704 (explaining that "faulty
workmanship in itself is not an 'occurrence'——that is, 'an
accident'——within the meaning of the CGL policy"). Property
damage or personal injury resulting from the breach must follow
if there is to be an initial grant of coverage because the
policy at issue was a CGL policy. Pharmacal, 367 Wis. 2d 221,
¶56. Accordingly, the property damage necessary was damage to
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other property, which had not occurred. Id. Therefore, there
was no initial grant of potential coverage.
¶77 The majority opinion overrules Pharmacal, even though
no party asked the court to do so.10 It overrules Pharmacal
because it does not understand the integrated system analysis
and why it was applied in that case to determine whether there
was property damage to other property once tablets were
constructed.11 It also does not understand the sea change that
may have occurred in American Girl, wherein damages for breach
of warranty (a contract claim) were covered by American Family's
CGL policy without a finding that the breach of warranty had
caused damage to other property.
¶78 The majority opinion asserts, "Pharmacal wrongly
stated that 'property damage' must be to 'other property' for
purposes of determining an initial grant of coverage in a CGL
policy."12 The majority cites Kalchthaler v. Keller Constr. Co.,
224 Wis. 2d 387, 591 N.W.2d 169 (Ct. App. 1999), in support of
that contention. However, Kalchthaler employed our pre-American
Girl CGL analysis relating to other property. Kalchthaler
involved poorly installed windows that leaked, and due to that
Majority op., ¶31.
10 It is risky to overrule a past
decision without briefs from the parties and when the majority
does not understand the commercial doctrines that drive the past
decision.
We have held that certain types of contamination provided
11
through the insured's action, when they pose personal injury
dangers, can constitute property damage under a CGL policy.
Northridge Co. v. W.R. Grace & Co., 162 Wis. 2d 918, 937-38, 471
N.W.2d 179 (1991). Pharmacal did not raise those concerns.
12 Majority op., ¶3.
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leakage damaged draperies and wallpaper. Id. at 397. In
explaining its reasoning, Kalchthaler said, "Under well-
established case law, a CGL policy does not cover faulty
workmanship, only faulty workmanship that causes damage to other
property." Id. at 395. The damage to other property was damage
to draperies and wallpaper.
¶79 As it criticizes Pharmacal, the majority opinion
states the proper standard for assessing property damage under a
CGL policy:
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."
(citing Wis. Label, 233 Wis. 2d 314, ¶27 (emphasis in the
original)).13 The majority opinion then relates that when
considering coverage, "we examine the terms of the policy and
compare it to the facts of record. . . . Whether the insuring
agreement confers coverage depends upon whether there has been
'property damage' resulting from an 'occurrence' within the
meaning of the CGL policy language."14
¶80 I agree with all of that, but what the majority misses
is that the words, "property damage," in a CGL policy have had
at least 24 years of interpretation by this court as requiring
damage to property other than the contracted-for product.15 This
13 Id., ¶15.
14 Id., ¶16.
15See e.g., Wausau Tile, 226 Wis. 2d at 248-49; Vogel v.
Russo, 2000 WI 85, ¶17, 236 Wis. 2d 504, 613 N.W.2d 177;
Northridge, 162 Wis. 2d at 932, Wis. Label, 233 Wis. 2d 314,
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requirement serves the purpose of keeping the risk for which a
CGL policy is issued (see Wis. Label quoted above) from risks
that may be insured by a performance bond such as poor contract
performance. The words of the policy are key, but the reader
must understand the judicial history that surrounds their
interpretation. See In re Estate of Atkinson, 19 Wis. 2d 272,
278, 120 N.W.2d 109 (1963) (explaining that the meaning of even
statutory terms are affected by prior judicial interpretations).
¶81 The majority also finds fault with Pharmacal's use of
Vogel and Wis. Label because the "portions cited in Pharmacal
were not in the initial grant of coverage discussions; they were
general comments on the purpose of a CGL policy. . . . The
cited language simply explains that the risk insured in a CGL
policy includes 'damage to property other than to the product or
completed work itself.'"16 The majority is only partially right.
Discussions of property damage were in general comments on the
purpose of a CGL policy, but they were repeated when initial
grants of coverage were discussed. Vogel, 236 Wis. 2d 504,
¶¶17, ¶21; Wis. Label, 233 Wis. 2d 314, ¶¶27, ¶33.
¶82 The majority opinion finds fault with Pharmacal's use
of the integrated systems analysis.17 The majority also
characterizes the economic loss doctrine as "tort principles"
that "[implicate] the integrated systems analysis."18 "Although
¶27.
16 Majority op., ¶23.
17 Id., ¶24.
18 Id., ¶26.
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Nos. 2019AP1085 & 2019AP1086.pdr
both the economic loss doctrine and the integrated systems
analysis may appear in the same opinion, they address different
commercial concerns. Simply stated, the economic loss doctrine
is a judicial doctrine that prevents suing in tort for damages
that are simply breach of contract damages, unless other
property also has been damaged. Foremost Farms USA Coop. v.
Performance Process, Inc., 2006 WI App 246, ¶¶13-14, 297 Wis. 2d
724, 726 N.W.2d 289; Kaloti Enters., Inc. v. Kellogg Sales Co.,
2005 WI 111, ¶27, 283 Wis. 2d 555, 699 N.W.2d 205. The
integrated systems analysis is used to determine whether there
has been damage to property other than the work of the insured,
when an integrated system is alleged to be factually present.
East River S.S., 476 U.S. at 867 (see above). "If damaged
property is not 'other property' under the 'integrated system'
test, the economic loss doctrine applies and tort claims are
barred." Foremost Farms, 297 Wis. 2d 724, ¶16.
¶83 The majority opinion relies on Haley v. Kolbe & Kolbe
Millwork Co., 866 F.3d 824 (7th Cir. 2017), to support its
attack on Pharmacal.19 It quotes Haley as criticizing
Pharmacal's use of the economic loss doctrine in the context of
an insurance coverage dispute.20 Haley has a long way to go in
19 Id., ¶29.
In its discussion of Haley v. Kolbe Millwork Co.,
20
866 F.3d 824 (7th Cir. 2017), the majority approves Haley's
statement that applying the economic loss doctrine to an
insurance coverage dispute is exactly what Pharmacal did.
Majority op., ¶29. What Pharmacal actually says is, "the
economic loss doctrine does not control a coverage dispute and,
therefore is not at issue here." Pharmacal, 367 Wis. 2d 221,
¶32.
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Nos. 2019AP1085 & 2019AP1086.pdr
providing an accurate articulation of commercial doctrines and
in its reading of Pharmacal. First, Haley characterizes the
integrated-system rule as a "common-law rule from the so-called
'economic loss' doctrine." Id. at 827 (emphasis added).
However, they are separate and distinct commercial doctrines
that have been addressed by the United States Supreme Court, as
I have explained above. See East River S.S., 476 U.S. at 866-
68.
¶84 In commenting on Wausau Tile, Haley asserts that,
"[a]s the cement was an integral component of the finished
blocks, the cement had not damaged any 'other property,' and the
economic-loss doctrine applied." Haley, 866 F.3d at 828. Haley
also asserts that "The economic-loss doctrine generally does not
apply to insurance-coverage disputes . . . but in 2016, the
Wisconsin Supreme Court extended Wausau Tile's integrated-system
analysis to an insurance case involving a general-liability
policy similar to the ones at issue here." Id. Those
statements from Haley support its belief that the integrated
systems analysis is part of the economic loss doctrine. That is
an incorrect understanding of both commercial doctrines.
¶85 In regard to the 5 Walworth dispute that is pending
before us, the integrated systems analysis could be discussed in
regard to the pool's use of shotcrete in its construction.
However, the significant and continual water leakage that
followed construction of the pool may well have damaged property
of the owner and therefore damaged other property. This could
support the conclusion that an occurrence (an accident) had
occurred that caused property damage to structures outside of
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Nos. 2019AP1085 & 2019AP1086.pdr
the pool itself. It also is not possible to determine
conclusively whether the re-bars used in the pool construction
were a cause of the cracking that resulted in continual pool
leakage. Those are fact-based determinations. And finally,
because it is not unusual for construction projects of this size
to have some initial problems that are resolved, the question of
when John Engerman discovered the leak that eventually proved so
significant also would benefit from further factual development.
II. CONCLUSION
¶86 Accordingly, given all of the law described above, I
would affirm the court of appeals. In so doing, I have
explained the historic risk that a CGL policy had been purchased
to cover and I affirm the limited use of the integrated systems
analysis employed in Pharmacal. Therefore, I respectfully
concur.
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Nos. 2019AP1085 & 2019AP1086.akz
¶87 ANNETTE KINGSLAND ZIEGLER, C.J. (concurring in part,
dissenting in part). I agree with the majority that Wisconsin
Pharmacal Co. v. Nebraska Cultures of California, Inc.1 should be
overruled. I also agree that General Casualty and Acuity are
not entitled to summary judgment.2 However, I disagree with the
majority's conclusion that West Bend is not entitled to summary
judgment. The undisputed facts demonstrate that West Bend's
insured, Engerman Contracting, Inc.,3 knew of the property damage
at issue in this case prior to the policy period with West Bend.
Before the policy period, Engerman knew the pool complex was
leaking. The leaking was, at least in part, caused by cracking
in the pool walls. Engerman therefore knew of a "resulting loss
of use of th[e] property," which constitutes "property damage"
under West Bend's policy. As a result, Engerman knew of the
property damage prior to the policy period, and the known-loss
provision precludes coverage from West Bend. These undisputed
facts show that West Bend is entitled to summary judgment.
¶88 "We will affirm a grant of summary judgment when there
are no genuine issues of material fact and the moving party is
entitled to judgment as a matter of law." Baumeister v.
Automated Prods., Inc., 2004 WI 148, ¶11, 277 Wis. 2d 21, 690
1 2016 WI 14, 367 Wis. 2d 221, 876 N.W.2d 72.
2 I therefore join the majority opinion except for ¶¶5, 7,
39-42, and 49.
3 Engerman Contracting, Inc., and John Engerman, Engerman
Contracting's President and CEO, are both "insureds" under West
Bend's policy. Accordingly, I refer to them collectively as
"Engerman."
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Nos. 2019AP1085 & 2019AP1086.akz
N.W.2d 1. "A factual issue is 'genuine' if the evidence is such
that a reasonable jury could return a verdict in favor of the
non-moving party." Midwest Neurosciences Assocs., LLC v. Great
Lakes Neurosurgical Assocs., LLC, 2018 WI 112, ¶80, 384
Wis. 2d 669, 920 N.W.2d 767.
¶89 West Bend's policy contains a known-loss provision
precluding coverage for "property damage" if the insured knew
that the property damage "had occurred, in whole or in part."
The full provision precludes coverage unless,
[p]rior to the policy period, no insured . . . and no
"employee" authorized by you to give or receive notice
of an "occurrence" or claim, knew that the "bodily
injury" or "property damage" had occurred, in whole or
in part. If such a listed insured or authorized
"employee" knew, prior to the policy period, that the
"bodily injury" or "property damage" occurred, then
any continuation, change or resumption of such "bodily
injury" or "property damage" during or after the
policy period will be deemed to have been known prior
to the policy period.
The policy also defines "property damage" as "[p]hysical injury
to tangible property, including all resulting loss of use of
that property," and as "[l]oss of use of tangible property that
is not physically injured."
¶90 Engerman has no coverage under West Bend's policy
because Engerman knew of the property damage prior to the policy
period. The policy period commenced on October 27, 2013.
Before that time, Engerman received numerous emails notifying
him of the property damage. He was therefore aware that "loss
of use" of the pool, which constitutes part of the "property
damage" under West Bend's policy, had occurred.
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Nos. 2019AP1085 & 2019AP1086.akz
¶91 On August 19, 2012, Engerman received an email from 5
Walworth, LLC, informing him that "the wading pool was empty"
and "a pool leak was found and supposedly fixed yesterday
morning——unsuccessfully unfortunately." Engerman replied the
next day that he would "like to pay a visit," and he later
stated in his deposition that he did so. Engerman followed up
on August 27, stating "the stone is being replaced [and] that
was also a source of the water leak." Engerman's attempts at
resolving the leak proved unsuccessful. On June 21, 2013,
Engerman was forwarded an email complaining "the kiddie pool has
been leaking since day one, and you guys have come up with all
sorts of excuses. Clearly it is a LEAK. Fix the damn leak."
The email continued, "The auto fill is running 24/7 and
obviously can not keep up with the leak."
¶92 Engerman did aver in his deposition that these emails,
"to the best of [his] knowledge," discussed leaking that was
"always contained to [a] trough issue that [he] thought [was]
rectified at the end of that summer of 2012," and he did "not
[hear of] anything prior – or afterwards of any ongoing pool
issues directly." However, Engerman received one of these
emails after the "summer of 2012" in June 2013, still before the
policy period commenced. Additionally, as stated in the
engineering firm's report, "It was reported that significant
cracking developed in the shotcrete walls and bottom of the
pools soon after construction in 2012, and excessive water
leakage has continued to occur."
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Nos. 2019AP1085 & 2019AP1086.akz
¶93 Based on the evidence in the record, Engerman clearly
knew of the "property damage" before the policy period
commenced. The definition of "property damage" in West Bend's
policy includes "all resulting loss of use of that property."
Such loss of use occurred because, as Engerman undisputedly knew
prior to the policy period, the pool complex was leaking.
Whether Engerman thought this leak was caused by cracking in the
pool walls or a "trough issue" is irrelevant. The cracks in the
pool walls were present since 2012, and the pool continued
leaking notwithstanding Engerman's attempts at rectifying a
"trough issue." The only reasonable conclusion, based on the
evidence in the record, is that at least some of the leaking
Engerman knew about prior to the policy period was caused by
cracks in the pool walls.
¶94 Because Engerman knew there was "resulting loss of use
of th[e] property," he knew there was "property damage" prior to
West Bend's policy period. All further "property damage"
alleged in 5 Walworth's complaint stemmed from the cracking in
the pool walls and therefore constitutes a "continuation, change
or resumption of such . . . 'property damage.'" As a result,
under West Bend's policy, all resulting property damage is
"deemed to have been known [by Engerman] prior to the policy
period," precluding coverage for such property damage. Based on
these undisputed facts, West Bend is entitled to summary
judgment.
¶95 For the foregoing reasons, I respectfully concur in
part and dissent in part.
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Nos. 2019AP1085 & 2019AP1086.akz
¶96 I am authorized to state that Justice REBECCA GRASSL
BRADLEY joins this writing.
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Nos. 2019AP1085 & 2019AP1086.akz
1