Wisconsin “property damage,” and “impaired property” and “sistership” exclusions.

In Tweet/Garot-August Winter, LLC v. Liberty Mut. Fire Ins. Co., No. 06-C-800 (E.D. Wis. Feb. 7, 2007), the insured was hired to install pipes and valves in the HVAC system for the Lambeau Field stadium renovation and expansion project.  The insured hired subcontractors to purchase and install the valves.  After installation, leaks in some of the valves resulted in property damage to other parts of the stadium.  The insured replaced the leaking valves.  After testing determined that the valves were defective, upon the demand of the owner and general contractor, the insured replaced all of the valves, even those that had not leaked.  The replacement required tear out and repair of other portions of the stadium.    After completing the work, the insured sought reimbursement under the OCIP CGL policy for all costs associated with the replacement of the valves.  Significantly, the insured did not seek to recover the costs to repair property damage caused by the valves that actually leaked.   The insurer denied coverage and the insured filed suit.  The federal trial court entered summary judgment for the insurer.  The court held that the costs to replace the defective valves did not constitute damages because of “property damage,” rejecting the insured’s defective product incorporation argument.  The court further held that, even assuming “property damage,” the impaired property exclusion–ISO CGL exclusion m.—applied, stating:

Exclusion (m) addresses situations where a defective product, after being incorporated into the property of another, must be removed or replaced at great expense, thereby causing loss of use of the property.  …  The exception for “sudden and accidental physical injury” does not apply, for the destruction of walls and other Lambeau Field property in other to replace the faulty valves was deliberate.

The court next held that the exclusion for recall or withdrawal of the insured’s defective work—ISO CGL exclusion n.–applied to the costs to replace the valves that, although defective, had not leaked, relying on Paper Machinery Corp. v. Nelson Foundry Co., Inc., 323 N.W.2d 160 (Wis. Ct. App. 1982).    The court rejected the insured’s argument that the withdrawal must be market wide.  The court next rejected the insured’s “loss mitigation” argument because, even assuming the exclusions did not apply, there was not a loss in progress:

The leaking that had occurred when the first 13 valves failed had been stopped, and there was no continuation of an insured loss when the replacement costs were incurred.