Authors: Attorney John C. Mitby & Attorney Elizabeth L. Spencer

Phone: 608-575-4077 or 608-257-0945

Email: jmitby@hbslawfirm.com, espencer@hbslawfirm.com

When property damage occurs to a condominium the owners will turn to their association for recourse. This will often implicate either an association’s insurance policy or that of its contractors. However, even if the policy initially appears to cover damages there are often numerous exclusions that will eliminate coverage. In Kaitlin Woods Condo. Ass’n v. Kaitlin Woods, LLC, 2015AP423, 2017 (Wis. Ct. App. 2017) a Wisconsin appeals panel affirmed that the stucco exclusion in a general contractor’s commercial general liability insurance policy precluded coverage in a dispute between a condominium association and the insurer regarding water damage caused by subcontractors’ work.

Kaitlin Woods, LLC developed condominium buildings owned by members of the Kaitlin Woods Condominium Association. The LLC only oversaw construction of the condominiums owned while the actual construction was performed by subcontractors. After construction, the Association’s buildings had numerous problems including a faulty moisture barrier related to the synthetic stucco used on the exterior resulted in water leakage and ultimately damage to physical property. The LLC held a CGL policy by Nautilus Insurance Company during the time of construction. The policy included an endorsement excluding coverage for claims of defective work on any part of the exterior of a building on which synthetic stucco was applied.

The circuit court dismissed the Association’s claims against Nautilus after Nautilus moved to stay and bifurcate the action in order to determine if the policy actually covered the Association’s damage claims. Nautilus argued that the policy was unambiguous and it had no duty to defend or indemnify the LLC. The Association appealed.

The Court of Appeals reviewed the policy to determine the scope of Nautilus’ duty to defend and indemnify the LLC. The duty to defend is triggered by the allegations contained within the four corners of the complaint. Thus, the duty is determined by comparing the allegations to the terms of the policy. The Court followed the usual three-step process of determining if the policy made an initial grant of coverage, whether there was an applicable exclusion, and whether there was an exception to the exclusion. None of the parties disputed that the policy initially covered the LLC for the alleged damages and the Association did not argue that any exception to the exclusion applied. Thus, the Court focused on whether the stucco exclusion barred coverage for the claims.

After construing the policy and determining that the allegations in the complaint were subject to the exclusion the court turned its focus to the threshold issue of whether the exclusion should be given a narrow construction. The Association argued that the exclusion must be strictly construed as case law states that if the effect of the policy exclusion is uncertain it will construed narrowly against the insurer. The Court rejected this argument as they determined the exclusion was unambiguous.

The Association also made numerous arguments that would make the exclusion inapplicable. These arguments included that the exclusion does not bar coverage for supervisory work, that the exclusion does not apply because the leaks occurred with interior features, that structure meant building, coverage is barred only for damages caused by the stucco, the definition of “your work”, contextual ambiguity as to whether the stucco exclusion applies, and that the policy was illusory. However the court failed to be swayed by any of these arguments and would not address the allegation that there was an exception to the exclusions as it was not raised previously.

Why should condominium owners and associations care about this case?

Condominium owners and associations should be aware of this case because many disputes between owners, associations and third parties are based in the insurance coverage. Examining the applicable exclusions prior to any work occurring can help owners and associations anticipate potential problems or areas of contention. Consulting with an insurance agent or an attorney may help in determining if any preventative actions should be taken.

Further, as seen in this case the duty to defend is based on the four corners of the complaint. This means if the claims in the complaint filed by the condominium association do not contain language triggering the insurance policy the insurer may be able to have the case dismissed. As seen by the numerous arguments put forth by the plaintiffs in Kaitlin Woods using the correct terms and understanding how a policy defines them matters. The insurance policy should be carefully reviewed to ensure that the complaint will survive the four corners test.