Acuity v. Society: A Missed Opportunity
In 2012, the Wisconsin Court of Appeals released its decision in Acuity v. Society, a case that required the court to tackle three issues regarding the applicability and interpretation of a standard commercial general liability policy (CGL policy). Specifically, the court was tasked with determining (1) whether a contractor's faulty workmanship was an "occurrence" under the contractor's CGL policy; (2) whether the CGL policy covered purely economic losses resulting from breach of contract; and (3) whether the "Business Risk" exclusions precluded coverage for damage to property generally, as opposed to the specific property on which the contractor performed work.
Ultimately, the court concluded that the CGL policy did afford coverage for the property damage and that no exclusions precluded coverage. Review was sought and granted by the Wisconsin Supreme Court and the issues were briefed. Fortunately, the parties reached a settlement. Unfortunately, due to the settlement, the appeal was dismissed on November 6, 2012. This dismissal resulted in a missed opportunity to clarify several important and seemingly unsettled issues touching upon commercial and construction litigation and insurance defense. As such, expect these same issues to be the topic of litigation in Wisconsin courts in the future.
VPP, the owner of an animal processing facility, contracted with RS Construction (RS) and Flint's Construction (Flint) to have the two contractors remove and reinstall the south wall of VPP's engine room at its processing plant. RS and Flint were responsible for all work on the project.
RS initially shored up the engine room and removed the existing wall. While a Flint contractor was excavating a trench adjacent to the south wall site, the soil eroded from under the concrete slab making up the first floor of the engine room, causing that slab to crack and shift downward. This also caused the portion of the building above the compromised floor to shift downward, which damaged the adjacent engine room walls and an adjacent building that shared a common wall with the engine room.
This damage disrupted service and reduced refrigeration capacity at VPP's processing plant, causing approximately $380,000 in business costs and expenses. VPP was required to repair the engine room before RS could complete the original project. After submitting a claim with its insurer, Acuity, VPP received more than $600,000 for the property damage.
Acuity then commenced a subrogation action against RS, Flint, and their insurer, Society, seeking to recover amounts paid due to the engine room collapse. Acuity alleged causes of action for negligence and breach of contract.
Society disputed that its policy provided coverage to RS and Flint for Acuity's claims. Society’s CGL policy provided the standard CGL coverage for claims for property damage caused by an “occurrence." The policy included two important "Business Risk" exclusions, providing that insurance would not apply to property damage to:
(1) That particular part of real property on which you or any contractor or subcontractor . . . is performing operations, if the “property damage” arises out of those operations; or
(2) That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.
Society moved for summary judgment, arguing that its CGL policy did not cover VPP’s property damage. The circuit court agreed, concluding that Flint’s faulty excavation was not an “occurrence” under the policy. The court of appeals, in a decision by Judge Higginbotham, reversed. Three issues were addressed on appeal, all of which were decided in favor of coverage:
(1) Whether Flint’s faulty workmanship was covered under Society’s CGL policy;
(2) Whether a breach of contract claim resulting from purely economic loss was a covered “occurrence” under Society’s CGL policy; and
(3) Whether the “Business Risk” exclusions in Society’s CGL policy precluded coverage.
Society successfully petitioned the Wisconsin Supreme Court for review of the court of appeals' decision. However, before a decision could be released, the appeal was dismissed because the parties reached a settlement. This dismissal was unfortunate as the court could have settled several issues regarding CGL coverage, the Economic Loss Doctrine, and the interpretation of an “occurrence” in a CGL policy. The court would also have had an opportunity to interpret the “Business Risk” exclusion commonly found in CGL policies, and provide guidance specifically as to what “that particular part” means in such an exclusion.
What Is an “Occurrence”?
What constitutes an “occurrence”? This is a seemingly simple question that has been and continues to be litigated time and again. Society’s policy used the standard definition of “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful condition.” Relying on the Wisconsin Supreme Court’s decision in American Family Mut. Ins. Co. v. American Girl, Inc., the court concluded there was an “occurrence” under Society's policy—namely, VPP’s damage was caused by accidental soil erosion that occurred due to Flint’s faulty excavation. The court felt that this conclusion was in line with prior decisions in American Girl, Glendenning’s Limestone & Ready-Mix Co., Inc. v. Reimer, and Kalchthaler v. Keller Const. Co.
At first glance, this conclusion may seem like common sense. However, Wisconsin courts have repeatedly determined that faulty workmanship cannot constitute an “occurrence” under a CGL policy. So, how could Flint’s faulty workmanship be covered under a CGL policy that only insured property damage resulting from an “occurrence?” The court of appeals reasoned that faulty workmanship, although not an occurrence, could cause an event such as soil erosion that did constitute an “occurrence” and therefore triggered coverage.
However, Society had a legitimate argument to the contrary. Namely, Society contended that the court of appeals had failed to recognize two very distinct elements—cause and effect—both of which were, by definition, required to trigger coverage. Specifically, Society's position was that its policy covered only property damage that was “caused by an occurrence,” i.e., an accident must have caused the property damage, and it needed to be the accident itself that was the "occurrence," not the result of the accident. Society contended that it was the faulty workmanship, which was undisputedly not an "occurrence," that had caused the soil erosion and structural collapse. Because faulty workmanship could not be an “occurrence,” there should have been no coverage. From Society's perspective, the court of appeals erred because it considered whether the effect (soil erosion) rather than the cause (faulty workmanship) was the “occurrence.” It is unfortunate that the Supreme Court did not have an opportunity to resolve this issue, which remains an open question.
The Economic Loss Doctrine and CGL Coverage
The second issue needing clarification involved the Economic Loss Doctrine. It is well-established that the Economic Loss Doctrine bars recovery in tort for economic losses resulting from a contractual relationship—instead of tort, the remedy lies exclusively in contract. Society contended that the doctrine precluded Acuity from recovering under a tort theory because the contract between VPP, RS, and Flint was for a product—namely, a new wall for its facility. Consequently, Acuity's remedy was to sue under the contract rather than to proceed in tort. Society further contended that such a breach of contract claim would not be covered by its CGL policy because it was not an “occurrence.”
The court of appeals rejected this argument based upon the American Girl decision. Even assuming the economic loss doctrine precluded Acuity’s tort claims, the court concluded that Society’s CGL policy—much like the policy at issue in American Girl—did not differentiate between “occurrences” based on tort or contract. As such, the court concluded that there was no support for Society’s argument that a breach of contract could not constitute an occurrence.
It is arguable that this conclusion disregarded several Wisconsin cases holding otherwise. Specifically, in Wausau Tile, Inc. v. County Concrete Corp., the Wisconsin Supreme Court, recognizing that the plaintiff’s negligence claims were barred by the economic loss doctrine, had concluded that the defendant’s insurance policy did not cover the remaining breach of contract claims. This was so because such claims did not constitute “‘bodily injury’ or ‘property damage’ under the plain language of the policy” and therefore were not “covered occurrences.” The court of appeals came to a similar conclusion in Wisconsin Label Corp. v. Northbrook Prop. & Cas. Ins.
The results in Wausau Tile and Wisconsin Label Corp. seem only natural considering that general liability policies are intended to cover tort liability to injured third parties, not liability arising from a contractual relationship. However, this once seemingly settled legal issue—whether a CGL policy covers a breach of contract claim—has since been called into question by courts that are quick to follow the American Girl decision and, now, the Acuity v. Society decision.
“Business Risk” Exclusions
The third issue in Acuity v. Society involved the “Business Risk” exclusions in Society's CGL policy. After determining that the policy did afford coverage because Flint's faulty workmanship was an "occurrence," the court was tasked with determining whether coverage was nevertheless precluded under a valid exclusion.
Society argued that two exclusions were applicable to preclude coverage for damage to VPP's engine room. The specific exclusions provided that insurance did not apply to property damage to:
That particular part of real property on which you or any contractor or subcontractor working directly or indirectly on your behalf is performing operations, if the "property damage" arises out of those operations; or
That particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.
The main issue for the court was what constituted "that particular part" of the property on which RS and Flint had performed work. The court recognized that there were no published cases in Wisconsin interpreting these exclusions, let alone the particular language at issue. As a result, the court looked to cases from other jurisdictions.
First, the court of appeals considered the North Dakota case of Acuity v. Burd & Smith Const., Inc.,which involved a policy containing identical exclusions. In that case, the insured construction company replaced a roof which later leaked and caused extensive property damage to personal property owned by the building's tenants. In determining whether the “Business Risk” exclusion applied in that case to preclude coverage, the court "recognized that facts in each case are determinative of the particular part of property on which an insured is performing its operations," and that a helpful technique is to look at the scope of the insured's contract with the property owner.
The court of appeals in Acuity v. Society then looked at Fortney & Weygandt, Inc. v. American Mfrs. Mut. Ins. Co., a 6th Circuit case applying Ohio law to interpret the scope of "that particular part." In finding coverage, the Sixth Circuit had held that the exclusion was "trebly restrictive" and only applied "to building parts on which defective work was performed,  not to the building generally."
In light of this case law, the court of appeals in Acuity v. Society then analyzed the contract between VPP, RS, and Flint and narrowly construed its scope as being for the removal of the south engine room wall. Consequently, any damage to the engine room building in general or equipment in the building was not excluded under the CGL policy. In other words, because "the particular part" of VPP's property on which RS and Flint were working was the south engine room wall, only damage to the south engine room wall was excluded under Society's “Business Risk” exclusion.
Before the court of appeals rendered its decision, Society had argued that the exclusion should have been broadly interpreted to exclude coverage for damage to the building on which its insured performed work as a whole; not simply the engine room. Society's position was that, although the contract may have specifically been for work on the south engine room wall, its insureds were required to shore up the rest of the building, which meant that work was actually performed on the building as a whole. Of course, the court of appeals rejected this argument in concluding instead that the exclusion had a very narrow application.
Despite a Missed Opportunity to Settle these Issues, All Is Not Lost.
Because the appeal to the Supreme Court was dismissed, these issues remain unsettled. However, although the court of appeals' decision can be relied upon in the future by plaintiffs seeking recovery under a CGL policy, defense counsel still have plenty of ammunition to put forth a strong argument against coverage.
First, when it comes to whether faulty workmanship constitutes an “occurrence” under a CGL policy, there is a strong argument that the level of generality utilized by the court of appeals gave too broad an interpretation to the definition of “occurrence,” and that the court blurred the line between cause and effect—since only the former should properly be considered a covered “occurrence.” The court in Acuity v. Society also arguably disregarded past Wisconsin case law holding that faulty workmanship was not an “occurrence” under a CGL policy. There is no reason to believe that past case law is not still good law despite Acuity v. Society.
Second, there is favorable case law—namely, Wausau Title and Wisconsin Label—that contradicts the court of appeals’ holding that a CGL policy could cover purely economic losses for which recovery was sought by breach of contract claims.
All that said, the issue that would have benefited the most from Supreme Court review may be the interpretation of Society’s “Business Risk” exclusion, especially considering that no Wisconsin court has fully interpreted the “particular” language. Would the court have followed other states and interpreted the language narrowly—excluding coverage for damage only to the “particular part” of the property on which the tortfeasor worked—or would it have agreed with Society’s broader interpretation—excluding coverage for any part of the building on which the tortfeasor worked? One thing is for sure, these issues are ripe for decision and are likely to be topics of litigation for the foreseeable future.
 2012 WI App 13, 339 Wis. 2d 217, 810 N.W.2d 812.
 Id., ¶¶ 2–3.
 Id., ¶ 2.
 Id., ¶ 3.
 Id., ¶ 4.
 Id., ¶¶ 4–5.
 Id., ¶ 6.
 Id., ¶ 7.
 Id., ¶ 8.
 Id., ¶ 9.
 Id., ¶ 10.
 Id., ¶ 16.
 2004 WI 2, 268 Wis. 2d 16, 673 N.W.2d 65.
 Id., ¶ 17.
 295 Wis. 2d 556, 721 N.W.2d 704 (Ct. App. 2006).
 224 Wis. 2d 387, 591 N.W.2d 169 (Ct. App. 1999).
 See Glendenning’s, 295 Wis. 2d 556; Kalchthaler, 224 Wis. 2d 387; Mantz Automation, Inc. v. Navigators Ins. Co., unpublished slip op., No. 2009AP1681 (Wis. Ct. App. May 12, 2010).
 Acuity, 339 Wis. 2d 217, ¶ 24.
 Id., ¶ 29.
 Id., ¶ 28.
 Id., ¶ 30 (citing American Girl, 268 Wis. 2d 16, ¶ 41).
 Id., ¶ 31.
 226 Wis. 2d 235, 266-69, 593 N.W.2d 445 (1999).
 221 Wis. 2d 800, 586 N.W.2d 29 (Ct. App. 1998).
 Acuity, 339 Wis. 2d 217, ¶ 33.
 Id., ¶ 34 (emphasis added).
 721 N.W.2d 33, 35 (N.D. 2006).
 Id. at 41.
 595 F.3d 308 (6th Cir. 2010).
 Id. at 311.
 Acuity, 339 Wis. 2d 217, ¶ 41.
 Id., ¶ 43.
 Id., ¶ 45.