A Wisconsin woman inherited a property from her father in early2002. Her father had insured the property for $150,000, and thewoman and her husband later procured a policy for the same amountthrough an insurance agent. The agent confirmed the property's$150,000 value by inspecting the premises and using a valuationformula.

Three months later, the couple met with the agent to discussvarious insurance policies. At that time, the woman's husband saidhe believed the policy limits on the inherited property should beraised to at least $250,000 and asked the agent to do so. The agentresponded that the property was not worth that much and that a$100,000 increase on a $150,000 property would look suspicious.

The couple agreed to get an assessment to support the desiredincreased value. The couple subsequently obtained a verbalassessment from a contractor but did not communicate it to theagent. Nor did the parties further discuss the notion of increasingcoverage on the property.

A fire later destroyed the property, and the replacement costexceeded $250,000. The couple sued the agent, alleging that henegligently failed to increase their coverage.

In a motion for summary judgment before a circuit court, thedefendant contended that an agreement between the parties wasnecessary for an agent to have a duty to procure coverage. Thecourt, however, said Wisconsin law required an agent to procure anycoverage a customer requested–not just coverage an agent agreed toprocure. The agent appealed.

In the appeal, the plaintiffs cited Appleton Chinese FoodService Inc. v. Murken Insurance Inc., [185 Wis. 2d 791, 519 N.W.2d674 (Ct. App. 1994)]. In that case a Chinese restaurant askedan agent to procure a policy with replacement cost andbusiness-income coverage. The agent prepared applications that,because of a clerical error, did not include a request forbusiness-income insurance. The policy subsequently issued did notinclude the coverage, a fact the insured did not realize untilafter a fire destroyed the restaurant.

The insured couple argued that this case supported their claim:The restaurant requested coverage, the agent failed to procure it,and the restaurant was permitted to recover its subsequent lossfrom the agent.

The appeals court, however, viewed the cited case differently.It said a mere request for coverage does not impose a duty on anagent to obtain it. It noted that the court in Appleton Chinesestated that an insurance agent has “an independent duty to act withreasonable care, skill and diligence in procuring the agreed uponcoverage” (emphasis added). Further, the court in that case statedthat “the negligent failure of an insurance agent to issue apolicy, pursuant to an agreement relied upon by the applicant,renders the agent liable in tort for loss resulting therefrom”(emphasis added). Thus, the appeals court said there was “somethingmore” in Appleton Chinese than in the case at hand: There was arequest for coverage and an agreement concerning that coverage.After the restaurant requested coverage, the agent prepared sevenapplications and ultimately procured a policy, the court noted. Itsaid those actions certainly were evidence of an agreement, and therestaurant evidently relied on it.

In contrast, the appeals court said, the plaintiffs in the caseat hand did not enter into an agreement with the agent to procureadditional coverage. “All we can discern from the record is thatthe parties contracted for (the agent) to obtain a $150,000policy,” the court said. “It is undisputed that he did so. Anyincrease in coverage would not have been 'pursuant to' thatagreement. Thus, we cannot conclude that the (plaintiffs') initialagreement gave rise to a duty to procure the requested increase incoverage.”

The plaintiffs cited two other Wisconsin cases, but the appealscourt found them inapplicable for similar reasons. In contrast, itcited case law from other jurisdictions maintaining that aninsurance agent must agree to procure a coverage increase before heor she has a duty to do so. In one of these cases (Baldwin v.Lititz Mutual Insurance Co., 393 S.E.2d 306, 307-08 (N.C. App.1990)], a state appellate court delineated an insuranceagent's responsibilities to a customer:

“As a general rule, when an insurance agent undertakes toprocure insurance for a customer … the law imposes upon the agentthe duty to exercise reasonable care in performing thatundertaking, and the agent will be liable for loss attributable tothe negligent performance or default of that duty. … But it isequally well established that an insurance agent is not obligatedto assume the duty of procuring a policy of insurance for acustomer. In determining whether an agent has undertaken to procureinsurance for a customer, the court must consider the conduct ofthe parties and the communications between them tending to showthat the agent accepted an obligation to provide insurance.”

That case, the appeals court said, demonstrates that theinsurance agent, not the customer, gets to decide whether the agentwill assume the duty to procure coverage. If the law were torecognize a duty based on a customer's mere request, it wouldeffectively give customers a veto over an agent's decision, thecourt noted.

In the case at hand, the appeals court said the agent agreedonly to procure a $150,000 fire insurance policy, which he did.Incurring additional coverage was a new task, and the insuredscould not unilaterally impose it on the agent, the court said. Itreversed the circuit court's denial of the agent's motion forsummary judgment.

Avery v. Diedrich, No. 2005AP1730 (Wis.App. 06/07/2006)2006.WI. 0000538) (www.versuslaw.com).

Damage arising from faulty materials and workmanshipruled an 'occurrence'

A general contractor constructed a house for a client, pursuantto a written contract. The work was performed by subcontractors.The house was completed in 1991, but water leaks developed aroundthe windows. As a result, the house's stucco exterior cracked andleaked. The contractor tried to determine the cause of the leakswith the help of the window manufacturer. Eventually, thecontractor concluded that the windows were defective, but the exactdefect was not pinpointed.

In 1996, after repeated attempts to fix the problem failed, thehomeowner threatened a lawsuit, and the contractor so informed hisinsurer. The carrier sent the contractor a letter disclaimingliability coverage “for any alleged liability arising out of asituation concerning improper installation and/or defective windowswhich were installed by (the contractor) or one of itssubcontractors.” The letter also stated, “It is our opinion thatthe situation giving rise to this claim does not meet thedefinition of … (an) 'occurrence' as defined by the policy.” Theinsurer also denied coverage based on several exclusions in thepolicy.

The contractor joined the window manufacturer, the windowretailer and the stucco installer in negotiating a settlement ofthe homeowner's claim. The contractor subsequently sued his insurerto recover the full amount he paid to settle the claim, $12,956.92.The parties filed competing motions for summary judgment. Adistrict court denied both motions, but implied that the damage wascaused by an “occurrence,” thus triggering coverage under thecontractor's CGL policy.

Before a scheduled jury trial was held, the insurer concededthat the amount the contractor spent to resolve the homeowner'scomplaint was fair and reasonable, and was paid in good faith.After argument, the district court determined that no materialissues of fact remained and granted the contractor's motion forsummary judgment, based on the court's previous determination thatthe damage resulted from an occurrence. The court entered judgmentin the amount of $12,956.92, plus prejudgment interest and costs,and also awarded the contractor $77,101.15 in attorney fees andexpenses. The insurer appealed.

The Kansas Court of Appeals affirmed the district court on allissues regarding the contractor's coverage under the CGL policy.The insurer then appealed the case to the Kansas Supreme Court.There were several issues to resolve, but the main one was whetherthe two lower courts erred in finding that the cause of damage tothe house–moisture leakage over time caused by defective materialsor workmanship–constituted an “occurrence” under the CGLpolicy.

The contractor's CGL policy had the standard coverage grant,which in part covered property damage caused by an “occurrence,” aterm defined as “an accident, including continuous or repeatedexposure to substantially the same general harmful conditions.” Asis the case with the standard CGL policy, the term “accident” wasnot defined.

The question of whether the circumstances in this caseconstituted an “occurrence” under a CGL policy was one of firstimpression in Kansas. In answering it, the supreme court said itwould be guided by Kansas case law as well as well as by Fidelity& Deposit of Maryland v. Hartford Cas., a case decided in 2002by the U.S. District Court for the District of Kansas. That courtsaid that “under Kansas law, the key to determining whether thereis an 'occurrence' appears to be whether the resulting damage, notthe act performed that led to the damage, was intentionally causedby the insured.” Going further the district court concluded that“the Kansas Supreme Court would find that the damage that occurs asa result of faulty or negligent workmanship constitutes anoccurrence as long as the insured did not intend for the damage tooccur.”

In the case at hand, the state sup- reme court also agreed withthe court of appeals that the exclusion in the CGL policy forproperty damage to “your work” (i.e., an insured contractor's work)and the exception to that exclusion if “the damaged work or thework out of which the damage applies was performed on your behalfby a subcontractor” supported the conclusion that faultyworkmanship can constitute an occurrence. “If there can be nooccurrence (created by faulty workmanship),” the court said, “theexclusion–and its exception–appear to be superfluous.” The courtalso rejected the argument that losses actionable in contract, asopposed to tort, can never be “occurrences.” If that were the case,then the CGL's business-risk exclusion would be entirelyunnecessary, the court said.

The court concluded that “the damage in the present case is anoccurrence … because faulty materials and workmanship provided by(the contractor's) subcontractors caused continuous exposure of the… home to moisture. The moisture in turn caused damage that wasboth unforeseen and unintended.” Since the insurer only hadpetitioned the court for a review of the occurrence issue, thesupreme court said further inquiry regarding the applicability ofexclusions and their exceptions was unnecessary.

Lee Builders, Inc. v. Farm Bureau Mutual Ins. Co.,2006.KS.0000156 (www.versuslaw.com.)

Don Renau is a retired agent and practicing attorney inLouisville, Ky. As an attorney, he consults on a variety of issues,including business formation and estate planning, for agencies andbusinesses in Kentucky. He can be reached at [email protected] or, by fax, at(502) 805-0702.