Wisconsin Supreme Court Abandons "Integrated Systems Analysis" for Determining Property Damage
The Wisconsin Supreme Court departed from its previous mechanism for determining property damage under the “integrated systems analysis” and found the insurers were not entitled to summary judgment as determined by the trial court. 5 Walworth, LLC v. Engerman Contracting, Inc., 2023 Wis. LEXIS 152 (Wis. June 20, 2023).
5 Walworth LLC hired Engerman as general contractor to construct a swimming pool complex. Engerman subcontracted with Downes Swimming Pool Co., Inc. to construct the pool complex. Otto Jacobs supplied Downes with a ready-mixed concrete called shotcrete, commonly used in swimming poll construction.
After the project was completed, 5 Walworth noticed a leak which persisted over the years. Downes attempted to repair the leaks over the years. 5 Walworth hired Wiss Janney Elsiner Associates (WJE) to do an inspection. WJE’s final report concluded tha 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. The report also mentioned the findings of soil reports from neighbouring properties which indicated that water existed at levels above the normal water table. Ultimately, 5 Walworth hired a new contractor to demolish the old pool and construct a new one.
5 Walworth then sought damages for the demolition of the old pool and construction of a new one. It sued the subcontractor Downes and its insurer, General Casualty, and the general contractor Engerman and its insurers, West Bend and General Casualty. Downes filed a third-party complaint against shotcrete provider Otto Jacobs and its insurer, Acuity. The insureds tendered defences to their respective insurers. Each moved for summary judgment and requested declarations that they did not have a duty to indemnify or further defend. The trial court granted motions filed by West Bend and General Casualty, concluding that there was no property damage caused by an occurrence – only faulty workmanship – and therefore the insurers owed no coverage. When analysing Acuity’s motion against Otto Jacobs, the court applied the integrated systems analysis the Supreme Court had utilized in Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of California, Inc., 876 N.W. 2d 72 (2016). Under this analysis, there was no property damage caused by an occurrence and therefore no coverage.
Engerman and Otto Jacobs appealed and the court of appeals reversed. The Wisconsin Supreme Court granted review.
The integrated systems analysis assessed whether the defective product was part of an integrated whole such that any damage could be ascribed only to the product itself, rather than to other property. Pharmacal therefore incorporated an “other property” analysis that could be relevant to the policy’s business exclusions (stage two of a coverage analysis) into the determination of whether an “occurrence” caused “property damage” (stage one of a coverage analysis). Rather than focus its analysis on the policy language, Pharmacal took the integrated systems analysis from tort law and held that such an analysis was necessary when evaluating coverage under a CGL policy.
The court overruled Pharmacal’s holding incorporating the integrated systems analysis into insurance policy disputes. Also overruled was the incorporation of an “other property” analysis into the initial determination of whether an occurrence had caused “property damage.” The proper approach was to interpret and apply the language of the policy. First, the policy was examined to see if it made an initial grant of coverage. Then the policy was analysed to see if any exclusions precluded coverage. Lastly, the policy was reviewed to see if any exceptions to a particular exclusion reinstated coverage.
Turning to General Casualty’s policy, faulty workmanship was not an occurrence, but faulty workmanship could lead to an occurrence that caused property damage.The WJE report concluded that cracks occurred, and therefore 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 reinforcing bars, among other reasons. These constituted faulty workmanship. But the record could support a conclusion that this faulty work caused the pool to crack and leak and the cracks became worse as the pool leaked and destabilized the surrounding soil. The cracks, leakages and soil damage old constitute accidents – unexpected and unforeseen events – caused by improper installation. And the cracks and the damage to the surrounding soil could also constitute physical injuries to the homeowner’s tangible property. Therefore, a trier of fact could conclude that General Casualty’s policy provided an initial grant of coverage because there was property damage caused by an occurrence as those terms are defined in the policy. As such, General Casualty was not entitled to summary judgment.
West Bend’s policy applied to the facts in the same way. A fact-finder could conclude based on the facts in the summary judgment record that “property damage” was caused by an “occurrence.” West Bend was also not entitled to summary judgment.
Regarding the policy issued to Otto Jacobs, Acuity argued that the policy did not provide an initial grant of coverage because there was no “property damage” caused by an “occurrence.” Acuity’s arguments asked the court to see the allegedly defective shotcrete as part of an integrated system, the pool complex. The court declined to do so. Rather, the proper analysis based on the policy language was whether the defective shotcrete (assuming this was proven) led to an accident, which then caused property damage. The water leakage, among other things, was sufficient to constitute an accident. If the shotcrete was defective, a jury could find that it led to an accident (water leakage at the very least) that caused property damage.
The court concluded that when analyzing if there was “property damage” under a CGL policy in the initial grant of coverage stage, it would not employ the integrated systems analysis nor would the court limit its review of property damage to damage to “other property.” Instead, the court would apply the terms of the policy.
