The association appealed, arguing that the synthetic stucco exclusion did not bar coverage for the contractor against the association's damage claims.

The Nautilus Policy

The Nautilus policy provided:

EXCLUSION — EXTERIOR INSULATION AND FINISH SYSTEM (EIFS)

This endorsement modifies coverage provided under the following:

COMMERCIAL GENERAL LIABILITY COVERAGE PART PRODUCTS/COMPLETED OPERATIONS COVERAGE PART

SCHEDULE

Description of your work and/or your product:

1. The design, manufacture, construction, fabrication, preparation, installation, application, maintenance or repair, including remodeling, service, correction or replacement of an “exterior insulation and finish system'' (commonly referred to as synthetic stucco) or any part thereof, or any substantially similar system or any part thereof including the application or use of conditioners, primers, accessories, flashing, coatings, caulking or sealants in connection with such a system.

2. Any work or operations with respect to any exterior component, fixture or feature of any structure if an “exterior insulation and finish system” or similar type of product or installation is used on any part of that structure.

This exclusion applies to “your work” and/or “your product” described in Paragraph 1. or Paragraph 2. above performed by you or on your behalf.

….

This Insurance does not apply to “bodily injury” or “property damage” included in the “products/completed operations hazard'' and arising out of “your work” and/or “your product” shown in the Schedule. 

The appellate court affirmed, holding that, under a plain language interpretation, the synthetic stucco exclusion barred coverage for the association's claims against the contractor.

In its decision, the appellate court observed that the association alleged that the contractor had breached the implied warranty of good workmanship, fitness, and habitability due to defective work performed by the contractor and subcontractors that the contractor had hired and supervised to perform the exterior work on all of the condominium buildings, and also alleged that synthetic stucco had been applied to all of the buildings when the contractor had constructed them. Moreover, the appellate court pointed out, the association also alleged that the defective work performed on the exterior of all of the buildings had been caused by negligence of the contractor and subcontractors the contractor had hired and supervised.

The appellate court then concluded that the association's allegations, “liberally construed,” were subject to the synthetic stucco exclusion and, for that reason, Nautilus had no duty to indemnify and defend the contractor against the association's allegations. It reasoned that the association's alleged damages arose “from work performed on the exterior of the condominium buildings, all of the condominium buildings contain[ed] synthetic stucco, and the alleged defective work was performed by the [contractor] or on behalf of the [contractor] by the subcontractors it hired and supervised.”

The appellate court rejected the association's argument that applying the exclusion would render the promise of coverage under the policy to be a “dead letter,” allowing Nautilus to be free from its responsibility to provide coverage, in conflict with the intent of the contractor. It declared that the synthetic stucco exclusion was “unambiguous” and, therefore, that it had to apply the synthetic stucco exclusion “according to its literal terms.”

The appellate court also ruled that:

- Damages stemming from design, project management, and supervision were barred from coverage by the “unambiguous” synthetic stucco exclusion because “a reasonable insured would understand that the phrase '[a]ny work or operations' in Paragraph 2.” meant that the exclusion applied to all work that was performed by the contractor with respect to any “exterior component, fixture or feature,” including design, project management, and supervisory services. “Any other reading would be unreasonable,” according to the appellate court;

- The association was wrong when it argued that the synthetic stucco exclusion only applied to property damage caused by synthetic stucco, given that the exclusion “unambiguously” stated that coverage did “not apply to … 'property damage' … arising out of 'your work'”;

- Defective work allegedly completed by the contractor's subcontractors was not excepted from the synthetic stucco exclusion;

- Based on the plain language of the synthetic stucco exclusion, a reasonable insured would understand that the exclusion “plainly” modified the general liability coverage part of the policy; and

- Interpreting the synthetic stucco exclusion to exclude all the damages claimed in this case did not make coverage illusory, given that, for example, coverage would be triggered for claims for defective work, including masonry work, performed on structures that the contractor designed and built that did not include synthetic stucco and that the synthetic stucco exclusion also would not apply to work or operations with respect to defects involving work on internal components, fixtures, or features, including in structures on which synthetic stucco was applied to the exterior part of the structure.

Accordingly, the appellate court concluded that coverage for the contractor was precluded for the claims brought by the association relating to the construction and maintenance of the buildings owned by members of the association, and Nautilus had no duty to defend or indemnify the contractor.

The case is Kaitlin Woods Condo. Ass'n, Inc. v. Kaitlin Woods, LLC, No. 2015AP423 (Wisc. Ct.App. July 31, 2017).