The supreme court held that a commercial general liability (CGL) policy did not cover statutory misrepresentation claims because:
(1) the misrepresentations were not accidental occurrences within the meaning of the policy, and
(2) because property damage arising out of their work was excluded from coverage.
The plaintiffs had entered into two contracts with defendants, Weisflog and WSGI, for a home remodeling project that cost about $280,000. The project included an expansion of the living room, family room, master bedroom, garage, an additional bedroom and a spa room.
Four years after the project was completed, problems with the floor in the spa room were discovered and the lawsuit was filed. The complaint included allegations that the defendants had violated the Home Improvement Trade Practices Act (Wis. Admin. Code Ch. ATCP 110). The plaintiffs then amended the complaint and named the insurer of the defendants.
At trial, witnesses testified that the defendants had made assurances that the products were high quality, that they understood local building codes and regulations, and that all of the architectural design work would comply with the codes. The plaintiffs presented evidence of poor quality products and services and produced statements of the defendants allegedly admitting that they were not familiar with the requirements of the applicable residential building code.
The jury found that the defendants had made misrepresentations in order to induce the plaintiffs to enter into the contracts. The jury further found that the defendants were negligent in the design and remodeling of the project. The defendants were found liable for $95,000 in damages, allocating 25% of the damage award to the misrepresentations and 75% to the negligent construction.
On appeal, the appellate court concluded that the entire damage award must be doubled and remanded for a determination of attorney’s fees. It also held that the policy covered the damages award because the statutory misrepresentation claims do not require proof of intent to deceive and are therefore a covered occurrence. The appellate court found that the insurer was responsible for all of the damages because the contract and ensuing negligent construction would not have occurred but for the misrepresentations. The appellate court finally determined that neither of the policy’s business risk exclusions applied to bar coverage.
The supreme court’s reversal of the appellate ruling began with a review of the language of the insuring agreement. The high court noted that the policy pays damages because of property damage caused by an occurrence. Occurrence was defined as “an accident…” The supreme court agreed that “accident” means “an event or condition occurring by chance or one that arises from unknown causes, and is unforeseen and unintended.”
The supreme court noted that Section ATCP 110.02(11) clearly indicates that intent is an element of the statutory misrepresentation violation. As such, the ATCP misrepresentations were not accidental occurrences. Both the ATCP 110 claims and Wisconsin Statute Section 100.18 claims include an element of intent -- to sell or to induce. “As such, ... the act in this case [is] clearly volitional in nature.”
The court noted that the plaintiffs’ attempted to avoid the definition of “intent” by arguing that the representations were false only after the job was completed. However, this characterization was contrary to the plaintiffs’ evidence that the representations were false at the time that they were made and were not merely a promise of future performance.
The court found that case law did not support an interpretation of “accidental occurrence” that would include misrepresentations willingly made with the particular intent to induce a party to act.
The decision is significant not only for its impact on the building/remodeling trade, but also with respect to residential and commercial real estate transactions. The supreme court’s recent ruling that the Economic Loss Doctrine precludes common law misrepresentation claims leaves home buyers who allege leaky basements with only breach of contract or statutory claims, such as Wisconsin Statute Section 100.18 claims. This decision undoubtedly will be applied by litigants in the context of Homeowners policies (with the same insuring agreement language and definition of “occurrences”) to preclude insurance coverage for those leaky basement claims brought under Wisconsin Statute Section 100.18 claims.
Interestingly, the high court appeared to make this decision less broad in its scope by noting that the jury here found that volition and intent existed (apparently because the jury found the misrepresentations had occurred under the Home Improvement Act): “Our holding today does not ... resolve the question of whether an “occurrence” in a future case could involve an accidental misrepresentation, in which a person may have misspoken.” The court went to great lengths to discuss evidence that the defendants’ conduct was a volitional act. Perhaps the court was instructing future litigants what must be shown in order to trigger coverage. To that end, the court provided: “To determine whether an act is accidental within the meaning of the CGL policy....we need only determine whether the occurrence giving rise to the claims was an unintentional act in the sense that it was not volitional.”
Although the misrepresentations did not constitute an occurrence, the court noted that the rule of concurrent risks could still compel coverage due to the negligence claims in the case and the jury’s findings that the negligent construction caused 75% of the damages. Accordingly, it examined the policy’s exclusions and concluded that the “your work” exclusion applied to bar coverage. The supreme court found that the property damage arose out of negligence and misrepresentations, that the damage did not occur on defendants’ property, and that the work was completed at the time that the damages arose.
The court found that the subcontractor exception was “nongermane” as no subcontractors were involved with the initial design other than to implement the design by doing the construction. Per the court, the involvement of subcontractors was insufficient, rather, the negligence of subcontractors was required to have caused the damage in order for the exception to apply to restore coverage. Here, the court found that the subcontractors performed work at the direction and under the supervision of the defendants. Accordingly, the Wisconsin Supreme Court’s finding was that American Family did not have to provide insurance coverage for the damages awarded.
Justice Bradley (joined by Justice Abrahamson) wrote a concurrence which differed from the majority in noting that whether an act is intentional is based upon determining whether the injury or damages are unexpected and unintentional -- not whether there is some intentional act involved somewhere down the line. Further, she wrote that negligent misrepresentations which include a volitional act can be an accident (and hence, may trigger coverage) if: (1) the insured did not intend to make a misrepresentation; (2) if the insured did not intend to cause injury; and if (3) the injury was not foreseeable. In other words, negligent misrepresentations do not give rise to accidents/occurrences where the misrepresentations are akin to fraud.
Justice Roggensack (joined by Justice Ziegler) wrote a concurrence which provided that the jury’s findings did not sustain an actionable claim for misrepresentation because the jury found only promises of future performance (such as that the defendants would comply with the building codes, would build a good product, etc.). She noted that a representation cannot ripen into an actionable misrepresentation if promises are not kept. Justice Roggensack also took issue with the majority for engaging in fact finding (suggesting the court should have looked only to the jury’s special verdict responses), and with the court’s interpretation of Everson, suggesting that the majority read Everson as requiring an intent to deceive along with the volitional act. The justice also stated that the economic loss doctrine should apply to preclude the plaintiffs’ negligent construction claim.
In sum, insurers who are litigating coverage should seek to dismiss Wisconsin Statute Section 100.18 (and other similar statutory misrepresentation claims) based upon this decision.
[The preceding is adapted from "Coverage Issues Involving Statutory Misrepresentation", Hills Legal Group, Ltd., Hearsay newsletter, Volume 8, Issue 2, October 31, 2008 and is used with permission.]