News

Wisconsin commercial general liability insurance (“CGL”) policy holders may face a rise in insurance premiums and more exceptions to coverage following the recent ruling from District II Wisconsin Court of Appeals in McLaughlin v. Gaslight Pointe Condominium Association, LTD, 2024 Wis. App. 321 (“McLaughlin”). McLaughlin effectively results in an expansion of coverage under standard CGL policies and illustrates that coverage may be available when a party’s inaction or limited action contributes to an unforeseen accident and causes property damage.

Generally,  an insurance provider is required to provide coverage to a CGL policy holder where an “occurrence” causes property damage.[1] An “occurrence” takes place when (1) an insured’s conduct (2) leads to an accident that (3) causes property damage.[2] An accident is when property damage occurs by chance, or the property damage arises from unknown or unforeseeable causes.[3] The analysis Wisconsin courts utilize to determine whether a loss is covered under a standard CGL policy is generally, and in part, based on the court’s determination on whether property damage is foreseeable relative and prior to the insured’s conduct.[4] Put another way, generally, if an insured’s conduct leads to an event that causes damage, then the event is an accident so long as the damage was not foreseeable. Consequently, if a court determines that the property damage was not foreseeable, the property damage can be characterized as an occurrence, generally enabling a policy holder to recover under its CGL policy.

In McLaughlin, condominium owners sued the condominium association for property damage to the units caused, in part, by the association’s decision to delay making repairs to the property. The unit damage consisted of leaky and rotting windows, significant water damage to the garage, widespread mold in the units, and water staining and discoloration of carpets within the units. The CGL policy in place required subrogation such that the insurance company would step into the place of the condominium association in the suit as part of the unit owners’ attempted recovery under the association’s CGL policy. The unit owners argued that the association’s delay, or failure to act, constituted (1) conduct leading to (2) neglected structural damage to the buildings (i.e., the accident, or event arising from unknown or unforeseeable causes), which (3) resulted in damage to the units that the unit owners needed to repair. Conversely, the insurance company argued that the condominium association’s decision to delay, or its minimal action in making repairs, could not constitute an occurrence or accident. The court ruled in favor of the unit owners, determining that the association’s decision to not fix the condominium building could lead to an unforeseen accident, and that such inaction could constitute an occurrence within the meaning of the applicable CGL policy.

With McLaughlin now in effect, careful considerations must be made on how action, or inaction, may impact coverage under a CGL policy. The change in coverage analysis spurred by McLaughlin alters the scope of coverage under standard CGL policies, which may cause insurance providers to respond with expanded exceptions to coverage and/or increases in the cost of such policies (i.e., increased annual premiums or deductibles) for all different types of CGL policy holders. Accordingly, project developers, contractors, and other business entities with CGL policies should ensure that their contractual indemnities and warranties are drafted in a manner that can provide a reliable backstop to potential gaps in CGL coverage. Contact Michael Best & Friedrich for more information in evaluating your risk exposure relative to construction and renovation projects, as well as ordinary business operations.