In an unanimous decision of the Wisconsin Supreme Court, an asbestos exclusion included in a business owner’s policy was found to preclude coverage. See Phillips v. Parmelee, 2013 WI 105. A review of the Phillips decision reveals that the Wisconsin Supreme Court is willing to uphold insurance policy exclusions if they are written in a clear and unambiguous manner. This decision stresses why all insurance carriers should strive to draft clear and easy to understand insurance policy exclusions.
In Phillips, the defendants purchased a twenty (20) unit apartment building in New London, Wisconsin. Prior to that purchase, the defendants hired a building inspector who determined that the building “likely contained asbestos”. The defendants, nevertheless, purchased the building and subsequently insured it through a business owner’s policy from American Family Mutual Insurance Company. Promptly thereafter, the defendants listed the property for sale. In the course of negotiating the sale of the property with the plaintiffs, the defendants signed a Real Estate Condition Report which contained a statement that the defendants were “not aware of the presence of asbestos or asbestos containing materials on the premises”.
After the plaintiffs purchased the building, a contractor retained by the plaintiffs cut through asbestos wrapped ducts in an attempt to have them removed which resulted in asbestos being dispersed throughout the building. This contamination resulted in the tenants being forced to vacate the building which resulted in the plaintiffs being unable to finance the building and, finally, a loss of the property in foreclosure. The plaintiffs filed suit in Circuit Court claiming damages due to breach of contract/warranty, misrepresentation and negligence. The defendants tendered defense of plaintiffs’ lawsuit to American Family. After intervening as a defendant, American Family filed a motion for declaratory/summary judgment on the issue of insurance coverage seeking an order of no coverage based upon an asbestos exclusion which provided, in part, as follows:
This insurance does not apply to … “property damage” … with respect to:
a. Any loss arising out of, resulting from, caused by, or contributed to in whole or in part by asbestos, exposure to asbestos, or the use of asbestos … (Phillips at paragraph 18).
The Circuit Court judge determined that this asbestos exclusion applied and, therefore, granted judgment in favor of American Family. Thereafter, the Circuit Court concluded that American Family had no duty to defend or indemnify their insured for the allegations in the plaintiff’s Complaint. In a published decision, the Court of Appeals affirmed.
On appeal, the plaintiffs and defendants both asserted that the asbestos exclusion was ambiguous because, they allege, “asbestos” was undefined in the policy. In an opinion written by Chief Justice Shirley Abrahamson, the Wisconsin Supreme Court first noted the following benchmarks of insurance policy construction:
A reasonable insured is presumed to understand that an exclusion in a policy limits coverage. If the effect of an exclusion is uncertain, it will be construed in favor of coverage. Day v. Allstate Indemnity Co., 2011 WI 24, ¶29, 332 Wis.2d 571, 798 N.W.2d 199. Language in an insurance policy is narrowly construed against the insurer “if it is susceptible to more than one reasonable interpretation.” Folkman v. Quamme, 2003 WI 116, ¶13, 264 Wis.2d 617, 665 N.W.2d 857. The rule of narrow construction of an exclusion against the insurer, however, “is not applicable if the policy is unambiguous.” Whirlpool Corp. v. Ziebert, 197 Wis.2d 144, 152, 539 N.W.2d 883 (1995).
In affirming the Circuit Court’s decision in favor of American Family, the Supreme Court next held as follows:
In the absence of other language in the policy, and there is none, a reasonable person in the position of the insured would not interpret the word “asbestos” to limit the clause to certain types of asbestos. A reasonable insured reading this policy, asbestos in any form is “asbestos”. (See paragraph 21.)
The Supreme Court also rejected the argument that the defendants’ failure to disclose the presence of asbestos somehow affected the exclusion. In so holding, the Supreme Court held as follows:
The scope of the asbestos exclusion does not depend on the type of tort from which the loss arose; the exclusion’s language concerns the loss itself arising out of asbestos. Our analysis focuses on whether the loss suffered by the plaintiff-buyers is within the text of the asbestos exclusion and thus reasonably contemplated by the parties. (See paragraph 33.)
In conclusion, the Supreme Court held that “… we are persuaded that a reasonable insured would interpret the asbestos exclusion in American Family’s policy to preclude the loss alleged by the plaintiff-buyers.”
A review of the Supreme Court’s decision in Phillips shows that the Courts are willing to exclude from coverage certain types of damages assuming the insurance policy exclusion is written in a clear and unambiguous manner. Drafters of insurance policies must, therefore, make certain that any such exclusion is well-written and not susceptible to more than one reasonable interpretation. If you have any questions regarding this article or insurance coverage in general, please contact Doug Lehrer at email@example.com.