Wisconsin Supreme Court Rules Integrated Systems Analysis Does Not Apply to Evaluating Insurance Coverage Under a CGL Policy
In 5 Walworth, LLC v. Engerman Contracting, Inc., 2023 WI 51, the Wisconsin Supreme Court addressed insurance coverage under a commercial general liability policy for damages allegedly caused by the deficient construction of an inground swimming pool. The pool cracked, causing water to leak into and destabilize the surrounding soil. Attempts were made to fix the cracks, but ultimately the entire pool structure had to be demolished and replaced. The homeowner then sued the general contractor who constructed the defective pool and its two insurers. The general contractor in turn sued the supplier of the concrete mix used to construct the pool and its insurer. All three insurance companies sought summary judgment declaring that their policies do not provide coverage to their respective insureds. The circuit court granted all three motions for summary judgment and dismissed the three insurers from the case. The court of appeals reversed, and petitions for review were filed and granted.
The insurers argued, inter alia, that there was no “property damage” caused by an “occurrence” under the CGL policies issued to the general contractor and concrete supplier. Specifically, the insurers for the general contractor argued that there was no coverage for what amounted only to faulty workmanship. The insurer for the concrete supplier took the argument one step further and claimed that the allegedly defective concrete was part of an integrated system—i.e., the pool complex—and therefore no coverage was afforded under the integrated systems analysis in Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of California, Inc., 2016 WI 14, 367 Wis. 2d 221, 876 N.W.2d 72. In Pharmacal, the Court applied the integrated systems analysis, derived from tort law, to determine whether the specific product alleged to be defective and to have caused the plaintiff’s damage is part of an integrated whole, such that any damage can be ascribed only to the product itself rather than to other property. If it applied, the integrated systems theory would preclude insurance coverage not only for any injury to the product itself (i.e. the pool), but also to any integrated system, which the insurer maintained included the entire pool complex.
The Court in 5 Walworth rejected the insurers’ arguments. First, the Court reaffirmed the basic principle that, while faulty workmanship is not an “occurrence,” faulty workmanship may cause an “occurrence.” Id., ¶35. The Court determined that faulty work caused the pool to crack and leak, and these cracks and the damage to the surrounding soil could constitute “property damage” caused by an “occurrence.” Id.
Second, the Court concluded that the integrated systems analysis does not apply to insurance coverage disputes, thereby overruling its prior decision in Pharmacal. The Court reasoned that the integrated systems analysis improperly resorted to tort liability principles rather than policy language. Id., ¶¶26-29. The Court also overruled Pharmacal’s incorporation of an “other property” analysis into the initial determination of whether an “occurrence” has caused “property damage” under an insurance policy. Id., ¶31. The Court confirmed that “other property” is not relevant to the initial determination of whether there is “property damage” caused by an “occurrence,” but noted it may be relevant to the policy’s business exclusions. Id., ¶23.
5 Walworth represents both change and consistency in Wisconsin’s insurance law. The Court rejected the integrated systems analysis in the context of determining insurance coverage. However, the Court reaffirmed that faulty workmanship can (and often does) cause an “occurrence.” Expect 5 Walworth to feature prominently in cases involving insurance coverage for construction defects in the future.
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