The circuit court determined that a commercial general liability policy did not provide coverage for a claim against the insured. This case is Yeager v. Polyurethane Foam Insulation, LLC, 338 Wis.2d 484, WL 6033041 (Wis. App.). Note that this opinion is unpublished and will not appear in a printed volume.

Yeager began construction of a new home in 2004. In 2007, Yeager hired PFI to insulate the home's exterior walls using a spray-in foam insulation. About one week after PFI finished the work, Yeager became concerned that the insulation had not been installed correctly. He subsequently sued PFI alleging breach of warranty and negligent breach of contract, charging that PFI failed to install the insulation according to the specifications of the contract and negligently installed the insulation.

Society Insurance had issued a general liability policy and a contractors E&O policy to PFI. The insurer moved for a summary judgment. It conceded that the contractors E&O policy provided coverage for Yeager's claims, but it also argued that there was no other coverage for the claims under the general liability policy because Yeager had not alleged any property damage caused by an occurrence as the general liability policy defined that term. The insurer also argued that it had no further duty to defend PFI because the general liability policy did not provide coverage and it had offered to pay the E&O policy limits to the court in fulfillment of Society's obligations under the E&O policy. The circuit court granted summary judgment to Society and this appeal followed.

The Court of Appeals of Wisconsin agreed that the general liability policy did not make an initial grant of coverage for the claims against PFI. The court said that the claims against PFI do not allege property damage caused by an occurrence since the claims are for faulty workmanship, and faulty workmanship in and of itself is not an occurrence. Yeager argued that PFI's conduct led to unexpected or accidental property damage and so, that was an occurrence. However, the court ruled that a result, though unexpected, is not an occurrence; rather, it is the causal event that must be accidental for the event to be an accidental occurrence. In this instance, PFI's conduct constituted faulty workmanship and that is not an occurrence, period.

Then, the court addressed the E&O policy.

The court concluded that Yeager did not have standing to challenge the circuit court's ruling on Society's duty to defend. The court said that the right to appeal from a judgment or order is confined to parties aggrieved in some appreciable manner by the court action. In other words, the judgment or order appealed from must bear directly and injuriously upon the interests of the appellant; he must be adversely affected in some appreciable manner. Yeager was not adversely affected by the lower court ruling. Society owed a duty to defend only to its insured, PFI, and the duty to defend benefits PFI alone. Yeager was not a party to the insurance contract and so, he was not a beneficiary of the policy's benefits.

Yeager nevertheless argued that he was adversely affected by the lower court ruling because it affected his ability to recover from PFI. The appeals court said that the most Society would have to pay for the claims was the $10,000 E&O policy limits and the insurer had already deposited that amount with the clerk of courts. Moreover, under the language of the E&O policy, the insurer had no duty to defend its insured when the policy limits were used up in the payment of judgments or settlements. This was accomplished when Society deposited the policy limits with the court.

The judgment of the lower court was affirmed.

Editor's Note: The Court of Appeals of Wisconsin affirms the opinion that faulty workmanship, in and of itself, is not an occurrence. It does so with the added point that an unexpected result is not an occurrence; it is the causal event, the action (or inaction) that caused the result, that must be accidental for the event to be an occurrence.

And, with its ruling on the E&O policy, the court makes two points. First, the insurance contract is between the insured and the insurer, not a third party. Second, if the policy states that the duty to defend ends when the policy limits are used up in payment of judgments or settlements, that is exactly what happens.

Court of Appeals Rules on Definition of Counterfeit

The insured bank filed an action against the insurer alleging breach of insurance bond that provided coverage for counterfeit certificates of origin. This case is North Shore Bank, FSB v. Progressive Casualty Insurance Company, 674 F.3d 884 (2012).

A new customer named Ott applied for a loan to finance the purchase of a motor home from the dealership that Ott himself owned. To secure the loan from North Shore Bank, Ott presented the motor home's certificate of origin to the bank and pledged the motor home as collateral. Two years later, Ott defaulted on the loan and when the bank tried to repossess the motor home, the bank discovered that it had been swindled. The certificate of origin was a fake and the motor home actually did not exist. The bank sought to recover the loss from its insurer, Progressive, but the insurer denied coverage because the fake certificate of origin did not meet the definition of a counterfeit as specified in the insurance bond.

The bank filed a lawsuit against Progressive, but the district court ruled in favor of the insurer. This appeal followed.

The Court of Appeals, Seventh Circuit, noted that the Progressive policy applied to loss resulting directly from the insured having, in good faith, acquired or given value or extended credit on the faith of items that are counterfeit. One of the items listed in the policy is a certificate of origin,, and the policy defines “counterfeit” as a “written imitation of an actual, valid original which is intended to deceive and to be taken as the original”. The bank argued that the fraudulent certificate of origin was a counterfeit on which it had relied in granting the loan, and so, the policy applied. Progressive disagreed with that interpretation.

The court then reviewed earlier court rulings on the definition of counterfeit and found that a counterfeit was held not to be simply a fraudulent document meant to deceive, but an imitation or duplicate of a preexisting genuine original document; case law required that there be an actual, valid original that the counterfeit document is imitating. In this instance, the court said, Ott's certificate of origin does not imitate an actual, original certificate of origin for the motor home because it is undisputed by all parties that there never was an actual, valid original certificate of origin. The manufacturer of the motor homes stated that it never issued a certificate and in fact never even produced such a vehicle as Ott claimed to purchase. The certificate of origin shown by Ott was a complete fabrication and did not correspond to any actually existing certificate of origin. Without an actual, original certificate of origin, the court found that Ott's fraudulent certificate cannot be an imitation of an actual, valid original and thus, cannot qualify as a counterfeit under the terms of Progressive's policy.

The ruling of the district court was affirmed.

Editor's Note: This opinion of the U.S. Court of Appeals, Seventh Circuit, is presented to clarify just what a “counterfeit” is considered to be when it comes to coverage for a fraud loss. It would help if the policy or bond specifically defined the term, but if not, there is legal precedent holding that fake documentation pertaining to nonexistent chattels is not counterfeit. For an instrument to be considered a counterfeit, an original has to first exist, and then an imitation of that original instrument, an imitation meant to deceive, has to be made and presented as the original itself.

Economic Loss Versus Property Damage

The insurer brought an action seeking a declaration that it was not obligated to defend and indemnify its insured for a claim based on failure to achieve an anticipated crop yield. This case is Farm Bureau Mutual Insurance Company v. Earthsoils, Inc., 812 N.W.2d 873 (2012).

The Ptaceks operated farm and hired Earthsoils to test and analyze their soil and make fertilizer recommendations for their corn crop. Earthsoils did so and the Ptaceks followed the recommendations. However, the corn crop produced less than one-half of the anticipated yield, so the Ptaceks sued Earthsoils.

Earthsoils was insured by Farm Bureau Mutual and the insured presented the claim to the insurer. Farm Bureau initiated a declaratory judgment action seeking a declaration that it owed no duty to defend or indemnify Earthsoils. The trial court ruled in favor of Earthsoils and this appeal followed.

The Court of Appeals of Minnesota noted that the policy provides that Farm Bureau pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury or property damage. Property damage was defined in the policy as physical injury to tangible property. The insurer argued that the claims against Earthsoils did not equate with property damage because a less-than-anticipated crop yield constitutes an economic loss, not physical injury to tangible property.

The court found that tangible ordinarily means discernible by the touch and that physical injury is damage or harm to the physical condition of a thing. Physical injury to tangible property, therefore, involves damage to the physical condition of a palpable item of property. Consistent with these definitions, the court said that the law distinguishes between physical injury to tangible property and economic loss; economic losses may be recovered as consequential damages from physical injury to tangible property but do not, in and of themselves, constitute property damage.

An investigation of the claims made by the Ptaceks highlighted the absence of any allegation of physical injury to tangible property. The Ptaceks alleged that Earthsoil's fertilizer failed to provide sufficient nitrogen to their corn crop, causing it to produce less than the anticipated yield. The only injury alleged is the failure to achieve anticipated crop yield and this is not property damage as defined in the policy.

Because the claims plainly fell outside the scope of the policy provisions, the appeals court decided that Farm Bureau had no duty to defend or indemnify Earthsoils. The ruling of the lower court was reversed.

Editor's Note: The Court of Appeals of Minnesota emphasizes the point here that the general liability policy applies to property damage as defined, and an economic loss claim is not a property damage claim. Moreover, to answer questions about what physical injury is, the court noted that physical injury involves damage to the physical (that is, material or relating to matter) condition of a tangible item of property.

Your Work Exclusion

In a declaratory judgment action, the insurer seeks a determination as to coverage under its general liability policy. This case is Jessco, Inc. v. Builders Mutual Insurance Company, 2012 WL 1035721. Note that this case was not selected for publication in the Federal Reporter.

The Mazycks hired Jessco to build a house for them. Shortly after moving into the house, the Mazycks provided Jessco with a punch list of mostly minor items to be completed or repaired. The punch list matters were not resolved to the satisfaction of the Mazycks and they filed a lawsuit against Jessco alleging, among other things, that the lot flooded because it was not graded properly to direct surface water into the wetlands area adjacent to the lot. Two years after this complaint was filed, Jessco finally notified its insurer, Builders Mutual, of the underlying claims. The insurer concluded that the claims were not covered by the policy and a declaratory judgment action was filed. The district court decided that the insurer had to pay attorney fees incurred by Jessco in defending against the Mazycks's claims and had to reimburse Jessco for the $10,000 regrading allowance ordered by the arbitrator. This appeal followed.

The U.S. Court of Appeals, Fourth Circuit noted that the policy provides coverage for sums that Jessco becomes legally obligated to pay because of property damage caused by an occurrence. Builders Mutual contended that it had no duty to defend because coverage for the claims was excluded by the policy's “your work” exclusion. The exclusion did not contain the exception for work performed by a subcontractor, and according to the insurer, this meant that all liability insurance coverage for any work done by subcontractors was completely eliminated.

The court said that the primary purpose of the exclusion is to prevent liability policies from insuring against an insured's own faulty workmanship, which is a normal risk associated with operating a business. However, contrary to the insurer's argument, the exclusion does not withdraw coverage for any and all work done by the insured or its subcontractors; it withdraws coverage in cases where the insured causes property damage to the work done by the insured or its subcontractors. As for the elimination of the subcontractor exception in this instance, the court said that this simply means that the subcontractors will not be viewed as third-parties for purposes of determining whose work was damaged; the elimination of the exception does not preclude coverage if Jessco's work in fact damages the work of a third party.

The question then for the court was whether the claims by the Mazycks created a possibility that a third party's work or property was damaged by the faulty workmanship of Jessco or its subcontractors. The court answered in the affirmative. The contract between Jessco and the Mazycks specifically contemplated that Glenn Mazyck would perform some of the work, installing the flooring and the landscaping. The lot-flooding claim first asserted by the Mazycks thus created a possibility of damages to the landscaping, which was Glenn Mazyck's work, not Jessco's. And when the claims expanded to include water damage to the house itself, those claims likewise raised the possibility of damage to the work done by Mazyck. Therefore, the court rejected the insurer's claim that the “your work” exclusion barred coverage for the claims asserted by the Mazycks.

The insurer also argued that the $10,000 regrading allowance was not compensation for loss caused by a covered risk and the lower court erred by requiring the insurer to indemnify Jessco for this payment. In this instance, the court agreed with the insurer. The court found that the flooding was caused by the development and overcapacitation of the wetlands, that this was an unforeseen intervening cause, and that Jessco's work was not the legal proximate cause of the flooding of the property. Because there was no actionable negligence on the part of Jessco, the regarding allowance could only have been awarded as compensation for a breach of contract and the policy unambiguously excludes coverage for breach of contract damages. Therefore, the insurer had no obligation to indemnify Jessco for the regarding allowance.

In summary, the court affirmed the district court's judgment and damages awarded with regard to the duty to defend issue. However, the lower court's conclusion that the insurer had to indemnify Jessco for the regrading was vacated.

Editor's Note: The Fourth Circuit Court of Appeals in this opinion clarifies the primary purpose of the your work exclusion and what happens when the subcontractor exception to that exclusion is eliminated.