Insurance Coverage

For

Construction Claims Under The

Home Improvement Act

Presented by:

Attorney Paul J. Pytlik

Squires III, Suite 333

N19 W24075 Riverwood Drive

Waukesha, WI 53188

Telephone (262) 347-0167

E-Mail:

Insurance Coverage for Construction Claims Under the Home Improvement Act:

-1-

  1. Types of Claims Under the Home Improvement Act that Give Rise to Coverage Issues.

-1-

  1. Wisconsin Administrative Code Agriculture Trade and Consumer Protection (ATCP) 110.02 [Appendix A]
  1. Any false, deceptive or misleading misrepresentation in order to induce a person to enter into a home improvement contract.
  1. Misrepresentations regarding the products or materials to be used in a home improvement project.
  1. Substituting products or materials for those specified in a home improvement contract.
  1. Misrepresentations that the project will not need periodic repainting, finishing, or maintenance.
  1. Stuart Case: Misrepresentations that building codes will be complied with or that industry standards will be followed.
  1. Stuart Case: Misrepresentations regarding credentials as an architect.
  1. ATCP 110.05(5) requirement to disclose that another entity will serve as the general contractor or perform the contract work. [Appendix B]
  1. Wisconsin Statute § 100.20(5) damages for Home Improvement Act violations [Appendix C]
  1. Double the amount of “pecuniary loss.”
  1. Costs including a reasonable attorney’s fee.
  1. Coverage Issues Raised by a Home Improvement Act Claim.
  1. Are false, deceptive or misleading representations to induce a person to enter into a home improvement contract an “occurrence” under a CGL policy?
  2. Qualman v. Bruckmoser, 163 Wis. 2d 361, 471 N.W.2d 282 (Ct. App. 1991): In action for breach of contract and misrepresentation after purchasers of home found cracks in basement wall and defective kitchen piping, measure of damages was difference between market value and amount actually paid; therefore, damages were pecuniary and not property damage, and there was no coverage under the policy.
  1. Benjamin v. Dohm, 189 Wis. 2d 352, 525 N.W.2d 371 (Ct. App. 1994): In action for negligent and strict responsibility misrepresentations after purchasers of land and buildings discovered that buildings were built on landfill and began to settle prior to closing, damages were entirely pecuniary and property damage was not caused by misrepresentations regarding condition of property, so there was no coverage under the policy.
  1. Smith v. Katz, 226 Wis. 2d 798, 595 N.W.2d 345 (1999): In action for breach of contract and misrepresentations after purchasers of vacant lot discovered underground springs that interfered with their ability to build house, where complaint stated only that “plaintiffs have sustained damages,” did not give insurer fair warning that property damage was involved, and there was no coverage under the policy. (“The decisions on negligence will require this court to decide, at some future date, whether strict responsibility misrepresentation and/or negligent misrepresentation are sufficiently similar to other kinds of negligence to categorize them as ‘accidents’ in liability insurance policies, or whether these torts are sufficiently different from other kinds of negligence to preclude their characterization as ‘accidents.’”Id. at 822).
  1. Jares v. Ullrich, 2003 WI App 156, 266 Wis. 2d 322, 667 N.W.2d 843: In action for misrepresentation after purchasers of home discovered infestation of raccoons and other animals inside home, where complaint alleged loss of use due to misrepresentation and infestation and damage due to infestation, complaint alleged property damage under policy and causal nexus, so insurer had duty to defend.
  1. Everson v. Lorenz, 2004 WL 135822 (Wis. App.) (Not recommended for publication): Action for misrepresentation and breach of contract after purchasers of vacant lot discovered that portions of lot fell within 100 year flood plain to the contrary of seller’s assertions, causing buyers to be unable to build on lot. Questions certified to the Supreme Court:
  1. Whether an alleged strict responsibility misrepresentation and/or negligent misrepresentation in a real estate transaction constitutes an “occurrence” for the purposes of a commercial general liability policy such that the insurer’s duty to defend the insured is triggered.
  1. What allegations must a complaint contain to sufficiently plead “loss of use” within the meaning of a commercial general liability insurance policy?
  1. Under what circumstances does a misrepresentation, negligent or strict responsibility, cause the “loss of use” of property such that a “causation nexus” is established?
  1. Addison Ins. Co. v. Korsmo, Appeal No. 04-1418 (decision dated February 23, 2005): Action for reformation, misrepresentation, unjust enrichment, fraud, and constructive trust after purchasers of property discovered long-term bat infestation and alleged impairment of structural integrity, risk of disease and infection, and other damages. The Court of Appeals found that there was a “causation nexus” between the alleged misrepresentation and the damage claimed because the property had been in control of the sellers until the sale, no third party was involved and no outside negligence was alleged, the chain of causation was single and uninterrupted, and the complaint implied the buyers would not have entered into the contract except for the sellers’ alleged misrepresentations; because a “causation nexus” existed sufficient to create coverage, there was a duty to defend under the policy.
  1. Is the “pecuniary loss” which flows from a home improvement act violation “property damage” under a CGL policy? Insuring agreement: “We will pay those sums that the insured becomes legally obligated to pay as damages because of . . . “property damage” . . . .
  1. Qualman v. Bruckmoser, 163 Wis. 2d 361, 471 N.W.2d 282 (Ct. App. 1991)
  1. Benjamin v. Dohm, 189 Wis. 2d 352, 525 N.W.2d 371 (Ct. App. 1994)
  1. Wausau Tile, Inc. v. County Concrete Corp., 226 Wis. 2d 235, 593 N.W.2d 445 (1999): Action by company manufacturing “pavers” against suppliers of component parts, alleging damage to pavers, property damage and bodily injury to third parties due to defective pavers, and lost profits. Insurer of supplier of cement moved for summary judgment, alleging that all damages were economic in nature and there was no coverage under the policy. Since real parties in interest for bodily injury and property damage claims were not joined in suit, and all other claims were economic in nature, no coverage under policy.
  1. Smith v. Katz, 226 Wis. 2d 798, 595 N.W.2d 345 (1999)
  1. Do the misrepresentations constitute “your work” or “your product” as an exclusion to coverage?
  1. “Your product” cases: we have been unable to locate any cases which discuss whether misrepresentations can constitute “your product” as an exclusion to coverage; courts, in general, are reluctant to apply the “your product” exclusion to real property and construction cases.
  1. “Pro” cases.

(1)In Home Indemnity Co. v. Wil-Freds, Inc., 235 Ill.App.3d 971, 175 Ill.Dec. 884, 601 N.E.2d 281 (1992), the court applied exclusion (n) (a “your product” exclusion) to bar coverage. The Board of Library Directors of the Village of Lombard contracted with Wil-Freds for the construction of a new addition to a library located in Lombard. After the completion of the addition, the Library Board filed a four-count complaint naming as defendants Wil-Freds and the architect who designed the addition. The counts of the complaint pertaining to Wil-Freds alleged a breach of contract based on a myriad of construction defects. Home Indemnity, 235 Ill.App.3d at 974. On appeal, the court held that exclusion (n), standing alone, precluded coverage for the claim asserted in the Library Board's complaint. Home Indemnity held that a completed building fell within the policy's definition of a product as " 'goods or products manufactured, sold, handled or distributed by the named insured.' " Id. at 976. Home Indemnity characterized exclusion (n) as a business risk exclusion premised on the theory that "liability policies are not intended to provide protection against the insured's own faulty workmanship or product, which are normal risks associated with the conduct of the insured's business." Id. at 976. According to Home Indemnity, the rationale for this interpretation of exclusion (n) is that CGL insurance is not intended to take the place of a performance bond. Id.

(2)See also: Home Indemnity Co. v. Miller, 399 F.2d 78 (8th Cir. 1968); Centex Homes Corp. v. Prestressed Systems, Inc., 44 So. 2d 55 (Fla. App. 1984); Indiana Ins. Co. v. DeZutti, 408 N.E.2d 1275 (ind. 1980); Kendall Plumbing, Inc. v. St. Paul Mercury Ins. Co., 189 Kan. 528, 370 P.2d 396 (1962); Vobill Homes, Inc. v. Hartford Accident & Indemnity Co., 179 So. 2d 496 (La. App. 1965); Knutson Const. Co. v. St. Paul Fire & Marine Ins. Co., 396 N.W.2d 229 (Minn. 1986); Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788 (1979); Federated Service Ins. Co. v. R.E.W., Inc., 53 Wash. App. 730, 770 P.2d 654 (1989).

  1. “Con” cases.

(1)No cases appear to hold definitively that a home is “real property” and that the “your product” exclusion does not apply on that basis. Rather, the suggestion has been made. SeePowers, citing to Prisco Serena Sturm Architects, Ltd. v. Liberty Mutual Ins. Co., 126 F.3d 886, 892 (7th Cir.1997) ("your product" exclusion did not preclude coverage to architectural firm for negligence of general contractor's building; even assuming firm's "product" was the building, exclusion (k) presumably would be inapplicable by its terms); see also Emy Poulad Grotell, Understanding the Basics of Commercial General Liability Policies, 652 PLI/Lit 63, 77 (Practising Law Institute, Litigation and Administrative Practice Course Handbook Series, 2001) (where the CGL policy definition of "your product" expressly excludes real property, the "your product" exclusion will not apply to the named insured who is erecting a building); F. Malcolm Cunningham, Jr. & Amy L. Fischer, Insurance Coverage in Construction-The Unanswered Question, 33 Tort & Ins. L.J. 1063, 1094-95 (Summer 1998) ("Real property" was deleted from the definition of "product" in the 1986 form CGL policy, "clarifying that work on homes, buildings, or other structures is not considered to be the insured's 'product.' ").

  1. “Your work” exclusion
  1. Jones v. Sears Roebuck & Co., 80 Wis. 2d 321, 259 N.W.2d 70 (1977): Action for negligence and failure to warn after car battery exploded, injuring the plaintiff. Question addressed by the Supreme Court was whether negligent failure to warn or implied warranties could extend the sale and installation operation beyond the actual transaction to a time when the person to whom the representation was made acted in reliance on the representation. (“We think the contract of insurance is not ambiguous. The contract explicitly denies coverage for bodily injuries arising out of reliance upon representations or warranties made at any time with respect to the insured’s products when the injury occurs away from the insured’s premises and after the possession of the product has been released. Likewise, bodily injuries arising out of reliance upon representations or warranties made with respect to the insured’s operations are clearly excluded from coverage when all operations have been performed by the insured and when the injury occurs away from the insured’ premises. Id. at 330).
  1. American State Ins. Co. v. Aetna Life & Cas. Co., 177 Ind. App. 299, 379 N.E.2d 510 (1978): Action for injuries sustained when a Christmas tree flocked by a florist caught fire after the florist made representations that the flocking material was fireproof. (“Courts are reluctant to consider as a separate operation a representation closely related to a sale or service. Such a representation merges with the completed sale or service; coverage is excluded unless elected under a Products Hazard clause. Other courts have recognized that most accidents (which lead to lawsuits) can be traced to some preexisting negligence. Extension of coverage to all such accidents would render a Products Hazard exclusion meaningless in the many cases in which an insured recommends or makes representations about his products or services, or fails to warn of potential dangers. Id.at 305-306 (internal citations omitted)).
  1. Shelter Mut. Ins. Co. v. Gardner, 872 F. Supp. 622 (W.D. Ark. 1995): Declaratory judgment action to determine whether a CGL policy covered negligent failure to warn or misrepresentations that a system was safe for its intended use. Insured was a plumber who contracted to install the plumbing in a house, including the pipes, valves, and fittings for liquified petroleum. The plumber allegedly refused to allow testing of the valves at the proper pressure, and leaks were discovered, which eventually caused an explosion. Defendants argued that the plumber’s work was not completed because he failed to provide warnings or instructions, and so the products/completed operations hazard was not applicable. Court rejected the argument that the policy provided coverage for a negligent act equated with failure to warn or instruct, or a representation that the system was safe for its intended use. (“[T]he exclusion encompasses negligent acts such as failure to instruct or warn and misrepresentations arising in connection with the contractor’s performance. The term “your work” is defined to include any warranties or representations as well as the failure to provide warnings or instructions. The “products-completed operations hazard” includes, as completed, any operation on which all work called for in the contract was completed or when the work has been put to its intended use.” Id. at 630.)
  1. Laidlaw Environmental Serv., Inc. v. Aetna Cas. & Surety Co. of IL, 338 S.C. 43, 524 S.E.2d 847 (Ct. App. 1999): Action for breach of contract, breach of express warranty, breach of implied warranty of fitness for a particular purpose, negligent/reckless design and installation, and negligent misrepresentation after plaintiff fired Radco to build a “baghouse” for plaintiff’s hazardous waste incineration system and Radco abandoned the project. Radco’s insurer denied coverage on the grounds that the claims fell within the products-completed operations coverage, which Radco did not purchase. (“[T]he policy’s language indicates products-completed coverage applies to damages arising from the insured’s negligence in performing work and any negligent misrepresentations made concerning the work.” Id. at 50).
  1. American States Ins. Co. v. Powers, 262 F. Supp. 2d 1245 (D. Kans. 2003): Action for breach of contract, negligent failure to construct building in a workmanlike/safe manner, negligent failure to construct building according to agreed-upon specifications, negligence failure to construct building within agreed upon time, negligent failure to meet applicable building codes, negligent failure to stay within contract price, and false or negligent misrepresentations.
  1. American Girl and the subcontractor exception to the “your work” exclusion.
  1. Is it enough that the subcontractors worked on the project even if that work is not the defective work that gives rise to the claim?
  1. What if the negligent work of the insured and the negligent work of the subcontractor combine to cause the loss? Does the exclusion apply in a pro-rata fashion?
  1. What if the misrepresentation is made by the insured, but the construction is performed by a subcontractor?
  1. Coverage issues raised by confusion over what entity performed the work under the Home Improvement Contract.
  1. If it is alleged that someone other than the contracting party did the work or if the insured operates under a number of different business entities, who is the insured? Who is the correct defendant in the case? Is the insured covered for the type of claims asserted? (Stuart example: is the insured acting as an individual as opposed to a representative of the insured’s business entity? Is the insured acting in a professional capacity, i.e. an architect?)
  1. Rayner v. Reeves Custom Builders 2004 WI App 231, 691 NW2d 705.
  1. Are the double damage and attorney fee penalties under Wis. Stat. § 100.20(5) covered by insurance?
  1. Is this the same as a dog bite case? SeeHartland Cicero Mut. Ins. Co. v. Elmer, 122 Wis. 2d 481, 363 N.W.2d 252 (Ct. App. 1984), and Cieslewicz v. Mutual Service Cas. Ins. Co., 84 Wis. 2d 91, 267 N.W.2d 595 (1978).
  1. Is the conduct which leads to an award of double damages “intentional” as opposed to “accidental”?
  1. Is the claim for attorney’s fees an element of “costs” which are covered under the policy? CGL supplemental payment provision [Appendix D]
  1. Trying the Insurance Coverage Case Within a Construction Defect Case.
  1. Surviving Summary Judgment.
  1. Form of the Summary Judgment order.
  1. Presenting evidence pertinent to coverage issues.
  1. Verdict formulation. [Appendix E]

-1-