Expert Commentary

Insurer Uses Contractual Liability Exclusion To Deny Coverage

In American Family Mutual Insurance v Pleasant Company, the court's reasoning completely misconstrues the purpose of the contractual liability exclusion. If followed, insurance companies in Wisconsin would not have to pay any claims so long as the claim arises out of work performed pursuant to a contract. If that is indeed the result of this decision, it is a rather unfortunate holding since it would penalize contractors for entering into written contracts, something encouraged by insurers.


Design Liability
June 2003

In American Family Mutual Insurance Co. v Pleasant Company, 652 NW2d 123 (Wis App 2002), an insurance company was held to have no duty to defend a design-builder for costs incurred when a building settled. It was held by the court that the plaintiff's pleadings failed to allege a covered event and that there was, therefore, no duty to defend the complaint by the insurance company.

The dispute involved a contract between The Pleasant Company ("Pleasant") and the Renschler Company ("Renschler") whereby Renschler was to design and construct a building. Renschler subcontracted with Lawson, a soils engineer, to analyze the soil conditions. Lawson recommended surcharging the site to compress the soil and worked with Renschler's superintendent to accomplish this. After substantial completion, the building settled, causing extensive damages.

Pleasant initiated arbitration proceedings against Renschler, alleging that negligence on the part of Lawson, Renschler's subcontractor, caused the building settlement, and that Renschler was contractually responsible to Pleasant for the damages.

Pleasant also alleged that Renschler had a non-delegable common law duty of care to Pleasant making it responsible for the negligence of Lawson. As a result of the arbitration demand, Renschler's insurer, American Family, sought a court order granting declaratory judgment for the insurance company. Its argument was that exclusions in the commercial general liability (CGL) insurance policy excluded coverage for the claims alleged by the plaintiff and that the insurance company, therefore, had no duty to defend Renschler.

The appellate court held that pursuant to the contractual liability exclusion of the CGL policy, there was no coverage for Renschler for this claim. The exclusion provided:


"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:

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

In the trial court case, the court concluded that the exclusion did not prevent coverage since the court interpreted this language as applying only to indemnification clauses. On appeal, in reversing the trial court, the appellate court held that the exclusion applied whenever an insured entered into a contract to perform services and is sued for both breach of contract and negligence. Consequently, the court held that the CGL would not provide coverage for any damages for which Renschler may be obligated to Pleasant unless Renschler would have been liable to the plaintiff for its subcontractor's negligence, even in the absence of the design-build contract.

Both the plaintiff and Renschler (the defendant) argued to the court that Renschler could be liable for its negligence at common law, even in the absence of any specific contract language contained in the contract, and that the claim therefore fit within the exception to the contractual liability exclusion. The court disagreed, and stated:

In order to proceed in a tort action when the party's relationship is defined by a contract, there must be a duty in common law independent from any duty created by the contract. In applying this test, the existence of a contract is ignored when determining whether the alleged misconduct is actionable in tort.

The court concluded that absent the contract, the general contractor (Renschler) would not have any duty of care to Pleasant with regard to the work performed by its subcontractor. Consequently, the court held that the contractual liability exclusion of the policy precluded for the damages arising out of the services provided by Renschler's subcontractor.

Risk Management Note

The issue of what is meant by "contractual liability" that is excluded from coverage pursuant to the contractual liability exclusion of an insurance policy such as that described in this case is one that has led to numerous arguments and probably an unfortunate amount of litigation. In the contract guides and risk management workshops presented by a number of insurance carriers, it is sometimes explained that this exclusion is not intended to bar all claims merely because they arose under work that would not have been performed in the absence of a written contract. This crux of the issue is whether the liability would be imposed on the contractor by application of common law principles in effect in the particular state or legal jurisdiction even in the absence of any particular contract language.

In American Family, it appears that the court is saying that the design-builder would have had no duty to its client but for the fact that it performed professional services and construction work pursuant to a contract. Stated another way, if the design-builder had not entered into a contract it would not have performed work and it would, therefore, have had no duty to the project owner to conduct its services and work with due care.

Since the work was performed under a contract, the court appears to be saying that the contractual liability exclusion of the CGL policy automatically applies. Applying this reasoning to its logical extreme, it would seem that insurance companies in Wisconsin would not have to pay any claims so long as the claim arises out of work performed pursuant to a contract. If that is indeed the result of this decision, it is a rather unfortunate holding since it would penalize contractors for entering into written contracts—something that insurance companies consistently encourage (and sometimes demand) their insureds to do.

The court's reasoning completely misconstrues the purpose of the contractual liability exclusion. As the language of the exclusion itself plainly states, it is not intended to exclude coverage for all claims arising out of work performed under a contract, but rather it is intended to exclude only those claims that are specifically created by contract language that imposes liability on the contractor for such things as defense costs and certain indemnity obligations that the contractor would not have under common law in the absence of that specific contract language. In other words, the issue is not whether or not the work was performed under a contract but rather whether the liability that results comes about solely because of peculiar contract language that imposes liability beyond what would be imposed by common law in the absence of that language.


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