American Family Mutual Insurance Company v. American Girl, Inc.

REVIEW of a decision of the Court of Appeals. Reversed and cause remanded for further proceedings consistent with this opinion.

¶1 DIANE S. SYKES, J. This insurance coverage dispute presents an array of legal issues pertaining to the proper interpretation of coverage and exclusion language in several post-1986 commercial general liability ("CGL") and excess insurance policies.

¶2 The dispute initially focuses on the meaning of "property damage" and "occurrence" in the standard CGL insuring agreement's grant of coverage. The parties also dispute the applicability of several exclusions: for "expected or intended" losses; "contractually-assumed liability"; and certain "business risks" (a/k/a "your work" or "your product" exclusions). There is a question about the applicability of the "professional services liability" exclusion in certain excess policies. Finally, the parties dispute the effect of the economic loss doctrine on the availability of insurance coverage, as well as the application of the common law "known loss" doctrine to certain of the policies.

¶3 The factual context is a construction project gone awry: a soil engineering subcontractor gave faulty site-preparation advice to a general contractor in connection with the construction of a warehouse. As a result, there was excessive settlement of the soil after the building was completed, causing the building's foundation to sink. This caused the rest of the structure to buckle and crack. Ultimately, the building was declared unsafe and had to be torn down.

¶4 The general contractor, potentially liable to the building owner under certain contractual warranties, notified its insurance carriers of the loss. Contractually-required arbitration between the owner and the contractor was initiated and stayed pending resolution of coverage questions involving several of the contractor's insurers. The circuit court, on summary judgment, found coverage under some but not all of the policies. The court of appeals reversed, concluding that the "contractual liability" exclusion in each of the policies excluded coverage.[1] We reverse.

¶5 The threshold question is whether the claim at issue here is for "property damage" caused by an "occurrence" within the meaning of the CGL policies' general grant of coverage. We hold that it is. The CGL policies define "property damage" as "physical injury to tangible property." The sinking, buckling, and cracking of the warehouse was plainly "physical injury to tangible property." An "occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful condition." The damage to the warehouse was caused by substantial soil settlement underneath the completed building, which occurred because of the faulty site-preparation advice of the soil engineering subcontractor. It was accidental, not intentional or anticipated, and it involved the "continuous or repeated exposure" to the "same general harmful condition." Accordingly, there was "property damage" caused by an "occurrence" within the meaning of the CGL policies.

¶6 We also conclude that the economic loss doctrine does not preclude coverage. The economic loss doctrine generally operates to confine contracting parties to contract rather than tort remedies for recovery of purely economic losses associated with the contract relationship. The doctrine does not determine insurance coverage, which turns on the policy language. That the property damage at issue here is actionable in contract but not in tort does not make it "non-accidental" or otherwise remove it from the CGL's definition of "occurrence."

¶7 We further hold that because the property damage at issue here was neither expected nor intended, the "expected or intended" exclusion does not apply.

¶8 The "contractually-assumed liability" exclusion (upon which the court of appeals rested its no-coverage conclusion) eliminates coverage for damages the insured is obligated to pay "by reason of the assumption of liability in a contract or agreement." We conclude that this language does not exclude coverage for all breach of contract liability. Rather, it excludes coverage for liability that arises because the insured has contractually assumed the liability of another, as in an indemnification or hold harmless agreement. There is no indemnification or hold harmless agreement at issue here, so this exclusion does not apply.

¶9 We also conclude that while the "business risk" or "your work" exclusions ordinarily would operate to exclude coverage under the circumstances of this case, the "subcontractor" exception applies here. The subcontractor exception to the business risk exclusion restores coverage if "the work out of which the damage arises" was performed by a subcontractor.

¶10 In addition, we conclude that the "professional services liability" exclusion in the excess policies applies under the circumstances of this case. And finally, coverage under the policies issued after the property damage loss was substantially known to the parties is barred by the "known loss" doctrine.

I. FACTS AND PROCEDURAL HISTORY

¶11 In 1994 The Pleasant Company ("Pleasant") entered into a contract with The Renschler Company for the design and construction of a large distribution center warehouse, dubbed the "94DC," on Pleasant's Middleton, Wisconsin, campus. Under the terms of the contract, Renschler warranted to Pleasant that the design and structural components of the 94DC would be free from defects, and that Renschler would be liable for any consequential damages caused by any such defects. (Pleasant changed its name to American Girl, Inc., several days before the issuance of this opinion; we will refer to the company as it was known throughout these proceedings.)

¶12 Renschler hired Clifton E.R. Lawson (Lawson), a soils engineer, to conduct an analysis of soil conditions at the site. Lawson concluded that the soil conditions were poor and recommended "rolling surcharging" to prepare the site for construction. Surcharging is a process by which soils are compressed to achieve the density required to support the weight of a building or other structure. The process usually involves placing large quantities of earth above the soil and allowing the earth to bear down on the soils. Typically this requires bringing in enough earth to cover the entire site, which can be very costly, and so for large projects like the 94DC, small areas of the site are compressed individually, and the earth is rolled from one area to the next.

¶13 The surcharging was done according to Lawson's professional advice, and the building was substantially completed in August 1994. Pleasant took occupancy, and soon thereafter the 94DC began to sink. By the spring of 1995 the settlement at one end of the structure had reached eight inches.

¶14 Renschler became aware of the problem in March 1995, and Lawson was subsequently advised. In the fall of 1995 Renschler re-hung approximately 30 exterior panels and windows that were leaking as a result of the settlement. The building continued to sink throughout 1996. By early 1997, the settlement approached one foot, the building was buckling, steel supports were deformed, the floor was cracking, and sewer lines had shifted. In January or February 1997, the parties met to discuss the settlement damage and the options for remediation.[2] In August 1997 Renschler notified its liability insurance carrier, American Family Mutual Insurance Company.

¶15 American Family conducted an investigation of the claim and at first concluded that coverage existed for the claim. In January 1998 the insurer reserved $750,000 for the claim, and in May 1998 paid Renschler $27,501 for services performed relating to remediation of the damage that had occurred up to that point. In early 1999 remediation alternatives were estimated to cost between $4.1 and $5.9 million.

¶16 Renschler hired engineers to conduct evaluations of the floor from March through September 1999. The engineers advised Renschler that the structural steel was so over-stressed that the building was no longer safe for occupancy. In late 1999 or early 2000 the building was dismantled. By that time, the settlement was approximately 18 inches. Renschler's geotechnical expert concluded that Lawson was negligent in the performance of his engineering/geotechnical work. It is undisputed that Lawson's faulty soil engineering advice was a substantial factor in causing the settlement of the 94DC.[3]

¶17 The contract between Pleasant and Renschler provided for arbitration of disputes. Pleasant filed a demand for arbitration in December 1999 asserting breach of contract and negligence theories of recovery. Pleasant alleged that Lawson's negligence caused excessive settlement, resulting in damage to the building, and that Renschler thereby breached its contract with Pleasant.

¶18 In March 2000 American Family filed this action in Dane County Circuit Court seeking a declaratory judgment regarding coverage under the CGL and excess policies it had issued to Renschler from March 1993 to March 1997. Renschler joined four additional insurers: Ohio Casualty Insurance Company and West American Insurance Company, which had issued CGL and excess liability policies for April 1, 1997, through April 1, 1999, respectively, and General Casualty Insurance Company and Regent Insurance Company, which had issued CGL and umbrella liability policies thereafter. Arbitration was stayed pending resolution of the coverage issues.

¶19 Cross-motions for summary judgment were filed. The Honorable John C. Albert concluded that American Family's CGL policies for the years 1994-95, 1995-96, and 1996-97 provided coverage, but its 1993-94 policy did not, as it pre-dated the loss.

¶20 The circuit court held that Pleasant's claim against Renschler was covered under the language of the insuring agreement in the 1994-97 policies, and that none of the policy exclusions applied. The court also concluded that neither the economic loss doctrine nor the known loss doctrines precluded coverage under these policies. The circuit court also concluded that the "professional services liability" exclusions in American Family's excess policies excluded coverage under those policies. With respect to the four other insurers, the circuit court held that the known loss doctrine precluded coverage, because the extent of the settlement problem was known before any of those policies came into effect.

¶21 The court of appeals reversed as to American Family's CGL base policies for the years 1994-97. Relying on its decision in Nelson v. Motor Tech, Inc., 158 Wis. 2d 647, 462 N.W.2d 903 (Ct. App. 1990), the court held that the exclusion for property damage "for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement" precluded coverage, because Renschler's liability to Pleasant derived entirely from its obligations under the construction contract. Id. at 650. The court of appeals also held that there was no coverage under American Family's excess policies, as well as the policies of the other insurers, on the basis of identical "contractual liability" exclusions in those policies. The court did not address the other coverage issues. American Family Mut. Ins. Co. v. Pleasant Co., 2002 WI App 229, ¶26, 257 Wis. 2d 771, 652 N.W.2d 123. We accepted review.

II. STANDARD OF REVIEW AND PRINCIPLES OF INTERPRETATION

¶22 We review a summary judgment pursuant to the same standards and methodology as the circuit court. Frost v. Whitbeck, 2002 WI 129, ¶4, 257 Wis. 2d 80, 654 N.W.2d 225. Summary judgment is properly granted if there is no genuine issue of material fact in dispute and the moving party is entitled to judgment as a matter of law. Id.

¶23 This case involves the interpretation of an insurance contract and thus presents a question of law that we review de novo. Id., ¶5. Judicial interpretation of a contract, including an insurance policy, seeks to determine and give effect to the intent of the contracting parties. Wisconsin Label Corp. v. Northbrook Property & Cas. Ins. Co., 2000 WI 26, ¶23, 233 Wis. 2d 314, 607 N.W.2d 276. Insurance polices are construed as they would be understood by a reasonable person in the position of the insured. Kremers-Urban Co. v. American Employers Ins. Co., 119 Wis. 2d 722, 735, 351 N.W.2d 156 (1984). However, we do not interpret insurance policies to provide coverage for risks that the insurer did not contemplate or underwrite and for which it has not received a premium. Wisconsin Label, 233 Wis. 2d 314, ¶25.

¶24 Our procedure follows three steps. First, we examine the facts of the insured's claim to determine whether the policy's insuring agreement makes an initial grant of coverage. If it is clear that the policy was not intended to cover the claim asserted, the analysis ends there. If the claim triggers the initial grant of coverage in the insuring agreement, we next examine the various exclusions to see whether any of them preclude coverage of the present claim. Exclusions are narrowly or strictly construed against the insurer if their effect is uncertain. Cardinal v. Leader Nat'l Ins. Co., 166 Wis. 2d 375, 382, 480 N.W.2d 1 (1992). We analyze each exclusion separately; the inapplicability of one exclusion will not reinstate coverage where another exclusion has precluded it. Exclusions sometimes have exceptions; if a particular exclusion applies, we then look to see whether any exception to that exclusion reinstates coverage. An exception pertains only to the exclusion clause within which it appears; the applicability of an exception will not create coverage if the insuring agreement precludes it or if a separate exclusion applies. Silverton Enters. v. Gen. Cas. Co., 143 Wis. 2d 661, 422 N.W.2d 154 (Ct. App. 1988).

III. DISCUSSION

A. The CGL policies

¶25 The precursor of today's standard commercial liability insurance contract was promulgated in 1940 and has since undergone five principal revisions, the most recent of which came into use in 1986. Today, most CGL insurance in the United States is written on standardized forms developed by the Insurances Services Office, Inc. (ISO). Wisconsin Label, 233 Wis. 2d 26, ¶26. See also 2 Jeffrey W. Stempel, Law of Insurance Contract Disputes §§ 14.01, 14.02 (2d ed. 1999).

¶26 Until 1966, standard CGL policies provided coverage for liabilities arising out of injury or damage "caused by an accident." 16 Eric Mills Holmes, Holmes' Appelman on Insurance § 117.3, 240 (2d ed. 2000). In response to uncertainty over whether the term "accident" included harm caused by gradual processes, the insurance industry removed the "accident" language from the insuring agreement and replaced it with the broader term "occurrence," defined as an accident, but also including gradual accidental harm; this coverage language is used to this day. 16 Holmes, supra, § 117.4, 297.

¶27 Standard CGL policies, including those at issue in this case, now cover "sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' . . . caused by an 'occurrence' that takes place in the 'coverage territory.'"

¶28 The CGL insuring agreement is a broad statement of coverage, and insurers limit their exposure to risk through a series of specific exclusions. There are exclusions for intended or expected losses; for contractually-assumed liabilities; for obligations under worker's compensation and related laws; for injury and damage arising out of aircraft and automobiles; and for several so-called "business risks."

¶29 The "business risk" exclusions, also known as "your work," "your product," and "your property" exclusions, have generated substantial litigation. 2 Stempel, supra, § 14.13, 14-127. "[I]nsurers draft liability policies with an eye toward preventing policyholders from . . . converting their liability insurance into protection from nonfortuitous losses such as claims based on poor business operations. The 'own work' and 'owned property' exclusions are two important and frequently litigated policy provisions designed to accomplish this purpose." Id. The 1986 version of the CGL contains a modified "business risk" exclusion that provides an exception for the work of subcontractors, id., and will be discussed in greater detail below.

¶30 The CGL policies at issue here contain 15 separate exclusions lettered "a" through "n" of subsection I.A.2. This case requires an examination of several of these: exclusion (a), for expected or intended losses; exclusion (b), for contractually-assumed liabilities; and exclusions (j) and (l), the business risk exclusions for property damage to the insured's work. As we have noted, however, our first task is to determine whether the claimed loss is covered by the language of the insuring agreement's initial grant of coverage.

B. The CGL's insuring agreement

¶31 The insuring agreement in American Family's CGL policies states that the insurer "will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies." It further states that "[t]his insurance applies to 'bodily injury' and 'property damage' only if: . . . The 'bodily injury' or 'property damage' is caused by an 'occurrence' that takes place in the 'coverage territory.'"

¶32 The parties do not dispute that Renschler's liability to Pleasant arose within the coverage territory. Therefore, whether the insuring agreement confers coverage depends upon whether there has been "property damage" resulting from an "occurrence" within the meaning of the CGL policy language.

i. "Property damage" and the economic loss doctrine

¶33 The policy defines "property damage" as "physical injury to tangible property, including all resulting loss of use of that property." The sinking, buckling, and cracking of the 94DC as a result of the soil settlement qualifies as "physical injury to tangible property."

¶34 American Family characterizes Pleasant's claim against Renschler as one for economic loss rather than property damage, and argues that the economic loss doctrine bars coverage. The economic loss doctrine generally precludes recovery in tort for economic losses resulting from the failure of a product to live up to contractual expectations. Wausau Tile, Inc. v. County Concrete Corp., 226 Wis. 2d 235, 245-46, 593 N.W.2d 445 (1999). The economic loss doctrine is "based on an understanding that contract law and the law of warranty, in particular, is better suited than tort law for dealing with purely economic loss in the commercial arena." Daanen & Janssen, Inc. v. Cedarapids, Inc., 216 Wis. 2d 395, 403-04, 573 N.W.2d 842 (1998).

¶35 The economic loss doctrine operates to restrict contracting parties to contract rather than tort remedies for recovery of economic losses associated with the contract relationship. Vogel v. Russo, 2000 WI 85, ¶15, 236 Wis. 2d 504, 613 N.W.2d 177. The economic loss doctrine is a remedies principle. It determines how a loss can be recovered——in tort or in contract/warranty law. It does not determine whether an insurance policy covers a claim, which depends instead upon the policy language. Id. at ¶16.

¶36 The economic loss doctrine may indeed preclude tort recovery here (the underlying claim is in arbitration and not before us); regardless, everyone agrees that the loss remains actionable in contract, pursuant to specific warranties in the construction agreement between Pleasant and Renschler.[4] To the extent that American Family is arguing categorically that a loss giving rise to a breach of contract or warranty claim can never constitute "property damage" within the meaning of the CGL's coverage grant, we disagree. "The language of the CGL policy and the purpose of the CGL insuring agreement will provide coverage for claims sounding in part in breach-of-contract/breach-of-warranty under some circumstances." 2 Stempel, supra, § 14A.02[d],14A-10. This is such a circumstance. Pleasant's claim against Renschler for the damage to the 94DC is a claim for "property damage" within the meaning of the CGL's coverage grant.

ii. "Occurrence"

¶37 Liability for "property damage" is covered by the CGL policy if it resulted from an "occurrence." "Occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." The term "accident" is not defined in the policy. The dictionary definition of "accident" is: "an event or condition occurring by chance or arising from unknown or remote causes." Webster's Third New International Dictionary of the English Language 11 (2002). Black's Law Dictionary defines "accident" as follows: "The word 'accident,' in accident policies, means an event which takes place without one's foresight or expectation. A result, though unexpected, is not an accident; the means or cause must be accidental." Black's Law Dictionary 15 (7th ed. 1999).

¶38 No one seriously contends that the property damage to the 94DC was anything but accidental (it was clearly not intentional), nor does anyone argue that it was anticipated by the parties. The damage to the 94DC occurred as a result of the continuous, substantial, and harmful settlement of the soil underneath the building. Lawson's inadequate site-preparation advice was a cause of this exposure to harm. Neither the cause nor the harm was intended, anticipated, or expected.[5] We conclude that the circumstances of this claim fall within the policy's definition of "occurrence."

¶39 American Family argues that because Pleasant's claim is for breach of contract/breach of warranty it cannot be an "occurrence," because the CGL is not intended to cover contract claims arising out of the insured's defective work or product. We agree that CGL policies generally do not cover contract claims arising out of the insured's defective work or product, but this is by operation of the CGL's business risk exclusions, not because a loss actionable only in contract can never be the result of an "occurrence" within the meaning of the CGL's initial grant of coverage. This distinction is sometimes overlooked, and has resulted in some regrettably overbroad generalizations about CGL policies in our case law.

¶40 For example, in Bulen v. West Bend Mut. Ins. Co., 125 Wis. 2d 259, 371 N.W.2d 392 (Ct. App. 1985), the court of appeals found no coverage under a CGL policy for damage caused by the collapse of a basement wall during construction of a private residence. The court held that certain of the policy's business risk exclusions applied to the circumstances presented. In doing so, the court quoted from Weedo v. Stone-E-Brick, Inc., 405 A.2d 788 (N.J. 1979):

The insured, as a source of goods or services, may be liable as a matter of contract law to make good on products or work which is defective or otherwise unsuitable because it is lacking in some capacity. This may even extend to an obligation to completely replace or rebuild the deficient product or work. This liability, however, is not what the coverages in question are designed to protect against. The coverage is for tort liability for physical damages to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained.

Bulen, 125 Wis. 2d at 265 (quoting Weedo, 405 A.2d at 791). In this passage, the Weedo court was itself quoting Dean Henderson, Insurance Protection for Products Liability and Completed Operations: What Every Lawyer Should Know, 50 Neb. L. Rev. 415, 441 (1971). Bulen, and the Weedo passage it cited (derived from Henderson), re-appear continually in CGL coverage litigation. See Vogel, 236 Wis. 2d 504, ¶17; Wisconsin Label, 233 Wis. 2d 314, ¶27.

¶41 Despite this broad generalization, however, there is nothing in the basic coverage language of the current CGL policy to support any definitive tort/contract line of demarcation for purposes of determining whether a loss is covered by the CGL's initial grant of coverage. "Occurrence" is not defined by reference to the legal category of the claim. The term "tort" does not appear in the CGL policy.[6]

¶42 Bulen and Weedo, interpreting pre-1986 CGL policies, never discussed the insuring agreement's initial grant of coverage; rather, the cases were decided on the basis of the business risk exclusions. Indeed, the Weedo court explicitly stated that "but for the exclusions in the policy, coverage would obtain. Hence we need not address the validity of one of the carrier's initially-offered grounds of non-coverage, namely, that the policy did not extend coverage for the claims made even absent the exclusions." Weedo, 405 A.2d at 790 n.2. In short, Weedo does not hold that losses actionable as breaches of contract cannot be CGL "occurrences," and therefore neither does Bulen.

¶43 For the same reason, our decision in Vogel, which relied at length on the broad Bulen/Weedo quote from Henderson, is not controlling on the meaning of "occurrence" in a CGL policy. In Vogel, we held that the business risk exclusions in a CGL policy precluded coverage for damage caused by the faulty masonry work of a subcontractor. Vogel, 236 Wis. 2d 504, ¶19. Our no-coverage conclusion in Vogel rested on the business risk exclusion, not on any inherent limitation in the initial grant of coverage. Accordingly, we caution that neither Bulen nor Vogel should be read for the conclusion that a loss actionable in contract rather than tort can never constitute a covered "occurrence" under a CGL policy.

¶44 Indeed, this court has never held that the CGL insuring agreement only covers torts. In Doyle v. Engelke, 219 Wis. 2d 277, 580 N.W.2d 245 (1998), for instance, we decided a CGL coverage dispute involving a policy that used the term "event" instead of "occurrence," but which defined "event" in exactly the same way that "occurrence" is defined in the CGL policy here. We took note of the "common, everyday meaning" of "accident:" "'an unexpected, undesirable event' or 'an 'unforeseen incident' which is characterized by a 'lack of intention.'" Id. at 289 (quoting The American Heritage Dictionary of the English Language 11 (3d ed. 1992)). We also noted the commonalities in the standard dictionary definitions of "accident" and "negligence," and remarked that "[I]t is significant that both definitions center on an unintentional occurrence leading to undesirable results." Doyle, 219 Wis. 2d at 289-90.

¶45 Doyle did not, however, equate the term "accident," as used in the CGL policy, with negligence as a form of legal liability; we simply held that negligent acts were "accidental" within the meaning of the CGL's definition of "event." Id. ("[W]e have little trouble concluding that a reasonable insured would expect the Policy provision defining 'event' to include negligent acts.") Doyle did not imply that there could never be CGL coverage unless the accidental "event" (here, "occurrence") was actionable in tort as negligence.

¶46 Furthermore, contrary to American Family's suggestion, Wausau Tile did not establish a "generally accepted" rule that a breach of contract or warranty cannot be an "occurrence" for purposes of CGL coverage. In Wausau Tile, we concluded that certain tort claims between Wausau Tile and its cement supplier, Medusa Cement, were barred by the economic loss doctrine. Wausau Tile, 226 Wis. 2d at 247-254. Having disposed of the tort claims in the case, we briefly addressed Medusa's insurer's duty to defend the remaining contract/warranty claims, noting only that the issue of whether the alleged breach of contract or warranty was a covered "occurrence" under the insurer's policy was "undisputed." Id. at 268-69. Here, unlike in Wausau Tile, the issue is disputed.

¶47 If, as American Family contends, losses actionable in contract are never CGL "occurrences" for purposes of the initial coverage grant, then the business risk exclusions are entirely unnecessary. The business risk exclusions eliminate coverage for liability for property damage to the insured's own work or product——liability that is typically actionable between the parties pursuant to the terms of their contract, not in tort. If the insuring agreement never confers coverage for this type of liability as an original definitional matter, then there is no need to specifically exclude it. Why would the insurance industry exclude damage to the insured's own work or product if the damage could never be considered to have arisen from a covered "occurrence" in the first place?

¶48 The court of appeals has previously recognized that the faulty workmanship of a subcontractor can give rise to property damage caused by an "occurrence" within the meaning of a CGL policy. In Kalchthaler v. Keller Construction Co., 224 Wis. 2d 387, 395, 591 N.W.2d 169 (Ct. App. 1999), a general contractor subcontracted out all the work on a construction project; the completed building subsequently leaked, causing over $500,000 in water damage. The court of appeals noted that the CGL defined "occurrence" as "an accident," and further noted that "[a]n accident is an 'event or change occurring without intention or volition through carelessness, unawareness, ignorance, or a combination of causes and producing an unfortunate result.'" Id. at 397 (quoting Webster's Third New International Dictionary 11 (1993)). The court of appeals concluded that the leakage was an accident and therefore an occurrence for purposes of the CGL's coverage grant. Id.

¶49 The same is true here. We conclude that the property damage to the 94DC was the result of an "occurrence" within the meaning of the insuring agreement.[7] This brings us to the policy exclusions. American Family invokes several.

C. The "expected or intended" exclusion

¶50 Exclusion (a) eliminates coverage for "'property damage' expected or intended from the standpoint of the insured.'" American Family argues that given the poor soil conditions at the site, and Renschler's recognition that special measures were required to prepare the soil to carry the weight of the 94DC, Renschler expected that some settlement would occur, and therefore this exclusion applies. We disagree.

¶51 American Family does not argue that "property damage" was expected or intended by the insured (which is what the exclusion requires), only that some degree of settlement must have been expected under the circumstances. This is insufficient to trigger the exclusion. American Family cites two cases, Pachucki v. Republic Insurance Co., 89 Wis. 2d 703, 278 N.W.2d 898 (1979), and Raby v. Moe, 153 Wis. 2d 101, 450 N.W.2d 452 (1990). Both of these involved intentional infliction of bodily injury and are therefore inapplicable here.

D. The "contractually-assumed liability" exclusion

¶52 The court of appeals held that exclusion (b), for contractually-assumed liabilities, applied to preclude coverage under all the policies at issue in this case. Exclusion (b) states:

This insurance does not apply to:

. . . .

b. "Bodily injury" or "property damage" for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages:

(1) Assumed in a contract or agreement that is an "insured contract," provided the "bodily injury" or "property damage" occurs subsequent to the execution of the contract or agreement; or

(2) That the insured would have in the absence of the contract or agreement.

¶53 The court of appeals held that Renschler's construction contract for the 94DC constituted a contractually-assumed liability within the meaning of the exclusion, citing Nelson, 158 Wis. 2d 647. In Nelson, the insured, an auction company, was sued by the owner of an automobile who had placed the automobile with the company to auction for a specified reserve price. Id. at 650. Due to an employee's negligence, the auction company sold the automobile for far less than the agreed-upon reserve price, and the owner refused to deliver the automobile to the purchaser. When the purchaser sued the owner for specific performance, the owner impleaded the auction company and its CGL insurance carrier.

¶54 The CGL policy in Nelson included an exclusion for contractually-assumed liabilities identical to the one at issue in this case. After quoting the relevant exclusion language, the Nelson court concluded summarily that the policy "clearly excludes coverage for incidents involving purely contractual liabilities." Id. The court offered no authority for this broad proposition, nor did it discuss the exclusion language or any other language from the policy in its opinion.

¶55 In applying Nelson to this case, the court of appeals noted that it "arguably conflicts" with a subsequent court of appeals' decision, Meyer v. United States Fire Insurance Co., 218 Wis. 2d 499, 582 N.W.2d 40 (Ct. App. 1998). In Meyer, the court considered whether an employer's commercial umbrella policy provided coverage for an employee's injury caused by a co-employee.[8] The policy excluded coverage for bodily injury to an employee arising out of employment with the insured, but also provided: "We will pay on behalf of the 'Insured' those sums in excess of the 'Retained Limit' which the 'Insured' by reason of liability imposed by law, or assumed by the 'Insured' under contract prior to the 'Occurrence,' shall become legally obligated to pay as damages for [bodily injury]." Id. at 504-05 (emphasis in original). The employer had a motor vehicle liability policy with another insurer that contained an endorsement deleting the standard exclusion for co-employee liability. If the exclusion had not been deleted, the remedy against the employer would have been circumscribed by the terms of the worker's compensation statute.

¶56 The precise issue in Meyer was whether by deleting the co-employee exclusion, the employer had "assumed . . . under contract" liability for its employee's injury. To resolve this issue, the Meyer court adopted the reasoning of Dreis & Krump Manufacturing Co. v. Phoenix Insurance Co., 548 F.2d 681 (7th Cir. 1977), which held that "'liability assumed [by the insured] under any written contract' means 'a specific written agreement between the insured and a third party whereby the insured agrees to 'indemnify' the third party." Meyer, 218 Wis. 2d at 505 (quoting Dreis & Krump, 548 F.2d at 684). The Meyer court found no coverage under the employer's umbrella policy because the deletion of the co-employee liability exclusion did not constitute an indemnification agreement with a third party. Id.

¶57 The Meyer/Dreis interpretation of "contractually-assumed liability" is more consistent with the actual CGL policy language than the broader Nelson interpretation, and appears to be generally accepted by commentators and courts around the country. "The key to understanding this exclusion . . . is the concept of liability assumed." 2 Rowland H. Long, The Law of Liability Insurance § 10.05[2], 10-56, 10-57 (2002). As one important commentator has noted,

Although, arguably, a person or entity assumes liability (that is, a duty of performance, the breach of which will give rise to liability) whenever one enters into a binding contract, in the CGL policy and other liability policies an "assumed" liability is generally understood and interpreted by the courts to mean the liability of a third party, which liability one "assumes" in the sense that one agrees to indemnify or hold the other person harmless.

21 Holmes, supra, § 132.3, 36-37.

¶58 The term "assumption" must be interpreted to add something to the phrase "assumption of liability in a contract or agreement." Reading the phrase to apply to all liabilities sounding in contract renders the term "assumption" superfluous. We conclude that the contractually-assumed liability exclusion applies where the insured has contractually assumed the liability of a third party, as in an indemnification or hold harmless agreement; it does not operate to exclude coverage for any and all liabilities to which the insured is exposed under the terms of the contracts it makes generally.

¶59 This reading is consistent with the general purposes of liability insurance because it enables insurers to enforce the fortuity concept by excluding from coverage any policyholder agreements to become liable after the insurance is in force and the liability is a certainty. See 2 Stempel, supra, § 14.14, 14-141. Limiting the exclusion to indemnification and hold-harmless agreements furthers the goal of protecting the insurer from exposure to risks whose scope and nature it cannot control or even reasonably foresee. The relevant distinction "is between incurring liability as a result of a breach of contract and specifically contracting to assume liability for another's negligence." Olympic, Inc. v. Providence Washington Ins. Co., 648 P.2d 1008, 1011 (Ala. 1982).

¶60 Courts in other jurisdictions have held that the contractually-assumed liability exclusion "refers to a specific contractual assumption of liability by the insured as exemplified by an indemnity agreement." 21 Holmes, supra, § 132.3, 40. See also Musgrove v. Southland Corp., 898 F.2d 1041, 1044 (5th Cir. 1990); Action Auto Stores v. United Capitol Ins. Co., 845 F.Supp. 428, 442 (W.D. Mich. 1993); Gibbs M. Smith, Inc. v. United States Fidelity & Guar. Co., 949 P.2d 337, 341 (Utah 1997); Marlin v. Wetzel Co. Bd. Of Educ., 569 S.E.2d 462, 469 (W.Va. 2002).

¶61 This interpretation of exclusion (b) is consistent with the evolution of the CGL policy over time. Prior to the 1986 revision, the exclusion for contractually-assumed liabilities was achieved through language in the insuring agreement that granted coverage for "contractual liabilities." Coverage was extended to certain types of contractual obligations but not others. With the 1986 revision, however, this language was moved into the exclusions section, and the basic coverage for certain contractual obligations was retained by inserting an exception to the exclusion for "insured contracts."


Case No.:		01-1871
Complete Title:
		American Family Mutual Insurance Company, Plaintiff-Appellant-Cross- Respondent, v. American Girl, Inc., f/k/a Pleasant Company, Inc. Defendant-Respondent-Cross- Appellant-Petitioner, The Renschler Company, Inc., Defendant-Third-Party Plaintiff- Respondent-Cross-Appellant- Petitioner, v. West American Insurance Company, The Ohio Casualty Insurance Company, Regent Insurance Company and General Casualty Company of Wisconsin, Third-Party Defendants- Respondents-Cross-Respondents.

		REVIEW OF A DECISION OF THE COURT OF APPEALS 2002 WI App 229 Reported at: 257 Wis 2d. 771, 652 N.W.2d 123 (Ct. App. 2002-Published)

Opinion Filed:		January 9, 2004
Submitted on Briefs:
Oral Argument:		September 9, 2003

Source of Appeal:
	Court:	Circuit
	County:	Dane
	Judge:	John C. Albert

Justices:
	Concurred:
	Dissented:	CROOKS, J., dissents (opinion filed). ROGGENSACK, J., joins dissent. ROGGENSACK, J., dissents (opinion filed). CROOKS, J., joins dissent.
	Not Participating:	ABRAHAMSON, C.J., and WILCOX, J., did not participate.

Attorneys:

(L.C. No.	00 CV 0788)
STATE OF WISCONSIN :		IN SUPREME COURT

American Family Mutual Insurance Company, Plaintiff-Appellant-Cross- Respondent, v. American Girl, Inc., f/k/a Pleasant Company, Inc., Defendant-Respondent-Cross- Appellant-Petitioner, The Renschler Company, Inc., Defendant-Third-Party Plaintiff- Respondent-Cross-Appellant- Petitioner, v. West American Insurance Company, The Ohio Casualty Insurance Company, Regent Insurance Company and General Casualty Company of Wisconsin, Third-Party Defendants- Respondents-Cross-Respondents.			FILED JAN 9, 2004 Cornelia G. Clark Clerk of Supreme Court