PUBLISHED OPINION
Case No.: 94-1837
†Petition for
Review Filed
Complete
Title
of
Case:RICHLAND VALLEY
PRODUCTS, INC.,
a Wisconsin corporation,
Plaintiff-Respondent-Cross
Appellant,†
v.
ST. PAUL FIRE & CASUALTY
COMPANY,
a Wisconsin insurance corporation,
Defendant-Appellant-Cross
Respondent.
Oral
Argument: June 21, 1995
COURT COURT OF
APPEALS OF WISCONSIN
Opinion
Released: March 28, 1996
Opinion
Filed: March
28, 1996
Source
of APPEAL Appeal and
Cross-Appeal from
judgments
Full
Name JUDGE COURT: Circuit
Lower
Court. COUNTY: Richland
(If
"Special" JUDGE: Kent
C. Houck
so
indicate)
JUDGES: Gartzke,
P.J., Dykman and Sundby, JJ.
Concurred:
Dissented:
Appellant
ATTORNEYSFor the defendant-appellant-cross
respondent the cause was submitted on the brief of Daniel W. Hildebrand
and Joseph A. Ranney of Ross & Stevens, S.C. of Madison, and Douglas
G. Houser and Stuart D. Jones of Bullivant, Houser, Bailey,
Pendergrass & Hoffman of Portland, OR.
Orally argued by Daniel W. Hildebrand.
Respondent
ATTORNEYSFor the plaintiff-respondent-cross
appellant the cause was submitted on the brief of Ralph A. Weber, Paul
F. Heaton and Clay C. Greene of Kravit, Gass & Weber, S.C.
of Milwaukee. Orally argued by Paul
F. Heaton.
Brief of Amicus Curiae, Civil Trial Counsel of Wisconsin, was
filed by Timothy J. Muldowney and Noreen J. Parrett of La
Follette & Sinykin of Madison.
COURT OF
APPEALS DECISION DATED AND
RELEASED March
28, 1996 |
NOTICE |
A party may file with the Supreme Court a petition to review an
adverse decision by the Court of Appeals.
See § 808.10 and Rule
809.62, Stats. |
This opinion is subject to further editing. If published, the official version will appear in the bound
volume of the Official Reports. |
No. 94-1837
STATE OF WISCONSIN IN
COURT OF APPEALS
RICHLAND
VALLEY PRODUCTS, INC.,
A
Wisconsin corporation,
Plaintiff-Respondent-Cross Appellant,
v.
ST.
PAUL FIRE & CASUALTY COMPANY,
a
Wisconsin insurance corporation,
Defendant-Appellant-Cross
Respondent.
APPEAL
and CROSS-APPEAL from judgments of the circuit court for Richland County: KENT C. HOUCK, Judge. Reversed and cause remanded with
directions.
Before
Gartzke, P.J., Dykman and Sundby, JJ.
GARTZKE,
P.J. St. Paul Fire & Casualty
Company appeals from a judgment for $9,098,545.65 in favor of Richland Valley
Products for breach of contract and for bad faith denial of Richland's
insurance claim, and from a judgment in favor of Richland Valley Products
awarding taxable costs in the amount of $31,178.39. We conclude that the dispositive issue is whether, as a matter of
law, St. Paul's policy covered Richland's loss. Because we conclude the loss is not covered, we reverse without
reaching the other issues presented in the appeal and Richland's cross-appeal.
Both
parties moved for summary judgment. St.
Paul sought dismissal of the complaint on grounds of policy exclusions, and
Richland sought summary judgment on grounds that coverage exists. The trial court denied St. Paul's motion and
granted Richland's.
Because
both parties moved for summary judgment, we may assume that the pertinent facts
regarding coverage are undisputed. Powalka
v. State Mut. Life Assurance Co., 53 Wis.2d 513, 518, 192 N.W.2d 852,
854 (1972). Moreover, Richland does not
dispute St. Paul's statement of the pertinent facts. The facts being undisputed, whether coverage exists is a question
of law. Thompson v. Threshermen's
Mut. Ins. Co., 172 Wis.2d 275, 280, 493 N.W.2d 734, 736 (Ct. App.
1992). We decide the coverage issue
independently of the trial court's opinion.
Id.
Richland
has manufactured ice cream bars and other ice cream and frozen water novelties
since early 1992. Its plant contains
various machines to manufacture and package novelties, including a
twenty-year-old used molding machine called the "Gram II" machine.
Some
of Richland's manufacturing machines, including the Gram II, must be kept at
temperatures well below freezing in order to make novelties of good
quality. To that end, the Gram II has a
helical coil composed of a number of coil pipes. The coil is submerged in a large vat filled with a brine solution
of water and calcium chloride. The coil
is connected to the plant's refrigeration system and filled with ninety-nine
percent pure liquid ammonia. The
ammonia is kept at a temperature of about minus eighty-five Fahrenheit, well
below the temperature of the brine. The
coil keeps the brine at a temperature low enough to cool the molds to a proper
temperature. Because heat moves from
the brine to the coil, ammonia is circulated through the coil system so that it
can be recooled at the point of origin.
The
Gram II is connected to the plant's central refrigeration system. The system pumps liquid ammonia refrigerant
through a network of piping to other production machinery and the cold storage
inventory area.
On
August 10, 1992, Richland began experiencing difficulty in maintaining low
temperatures in the Gram II and other machines. It investigated the problem and notified St. Paul and another of
its insurers of a loss. Those companies
and Richland hired engineers to determine the cause of the problem. The engineers determined that the problem
happened in the following manner:
When
the Gram II machine was originally built, a cooling coil was welded to support
struts in the machine. When the welder
attached the coil to its support struts, the welder allowed the strut or
welding material to penetrate the walls of the coil, leaving holes in the
coil. After welding, the coil was
galvanized and the holes were coated with a thin skin of metal. The coating eventually deteriorated,
exposing the holes.
When
the holes appeared, brine entered the coil.
The brine and ammonia in the coil mixed, and calcium chloride and
ammonium chloride salts crystallized and precipitated out of the solution. The salts clogged the piping system and
spread to other parts of the refrigeration system. The clogging reduced the system's efficiency, forcing Richland to
shut down its entire manufacturing operation in order to eliminate the
clogging.
St.
Paul's Output Protection Policy (MOP Policy) contains the following coverage
provisions:
What This Agreement Covers. We'll protect insured property against risks of direct physical
loss or damage except as excluded in the Exclusions-Losses We Won't Cover
Section of this agreement.
The
policy contains the following "Failure/Faulty Work Exclusion" clause:
Mechanical
Breakdown. We won't cover loss to covered property
caused or made worse by:
mechanical
breakdown;
failure;
derangement
of mechanical parts;
rupture
caused by centrifugal force; or defects due to faulty work, design, materials
or manufacture.
But if a loss not otherwise excluded results, we'll pay
for the loss that results directly from the covered cause.
The
MOP policy also contains the following "Contamination Exclusion"
clause:
Corrosion - inherent
nature - animals. We won't cover loss or damage caused or made
worse by:
mold,
wet or dry rot, rust, corrosion, or contamination including fungal or bacterial
contamination;
....
If a loss that would otherwise be covered results from
one of these causes, we'll pay for the direct loss that results.
We
begin with a statement of the principles we must employ when deciding if
coverage exists. Whether coverage
exists requires judicial construction of the policy. That requires an examination of the language of the policy.
In Wisconsin, the construction of contracts of insurance
should be made with an aim toward effecting the true intent of the parties and
the extent of policy coverage. Limpert
v. Smith, 56 Wis.2d 632, 203 N.W.2d 29 (1973); Schuhknecht v.
Robers, 192 Wis. 275, 212 N.W. 657 (1927). The test "is not what the insurer intended the words to mean
but what a reasonable person in the position of the insured would have
understood them to mean." Ehlers
v. Colonial Penn Ins. Co., 81 Wis.2d 64, 74-75, 259 N.W.2d 718 (1977)
(citation omitted). When a policy is
clear and unambiguous on its face, the terms of that policy should not be
rewritten by construction to bind an insurer to a risk it never contemplated or
was willing to cover, and for which it was never paid. Limpert, 56 Wis.2d at
640. However, when the terms of the
policy are ambiguous or obscure, the policy must be strictly construed against
the drafter of the policy, the insurance company. Wisconsin Builders, Inc. v. General Ins. Co., 65
Wis.2d 91, 103, 221 N.W.2d 832 (1974).
Words or phrases in a contract are ambiguous when they are
"reasonably or fairly susceptible to more than one
construction." Stanhope,
90 Wis.2d at 849.
Gonzalez v. City of Franklin, 137 Wis.2d 109, 122, 403 N.W.2d 747, 752 (1987).
With
these principles in mind, we continue with our analysis of the policy before us
in light of the uncontroverted facts on which coverage exists or falls.
CONTAMINATION
Richland's
serious losses have been traced to the welder's error when Gram II was
manufactured. The welder's error caused
the defect in the coil which led to the brine's entering the coil and mixing
with the ammonia. Because the defect
was due to faulty workmanship and manufacture, the resulting loss is excluded
under the "Failure/Faulty Work Exclusion," unless "a loss not
otherwise excluded result[ed]." We
therefore examine the "contamination exclusion." The question is, as St. Paul contends,
whether loss or damage was caused or made worse by "contamination."
The
trial court concluded that because each side in this litigation reads the term
"contamination" differently, it is ambiguous and must be construed
against the insurer, St. Paul. That is
not the test for ambiguity. A policy
term is ambiguous only if it is reasonably susceptible to more than one
construction. Garriguenc v. Love,
67 Wis.2d 130, 135, 226 N.W.2d 414, 417 (1975). A policy term is not ambiguous merely because the parties
disagree as to its meaning. U.S.
Fire Ins. Co. v. Ace Baking Co., 164 Wis.2d 499, 503-04, 476 N.W.2d
280, 282 (Ct. App. 1992); Bartel v. Carey, 127 Wis.2d 310, 314,
379 N.W.2d 864, 866 (Ct. App. 1985).[1]
The
term "contamination" as used in St. Paul's policy is
unambiguous. Other jurisdictions have
almost uniformly construed the term in insurance policies in light of modern
dictionary definitions and concluded that it is unambiguous. As said in American Casualty Co. of
Reading, P.A. v. Myrick, 304 F.2d 179, 183 (5th Cir. 1962), contamination
"connotes a condition of impurity resulting from mixture or contact with a
foreign substance," and that it means "to make inferior or impure by
mixture; an impairment of impurity; loss of purity resulting from mixture or
contact," a definition the court found consistent with common
understanding and Webster's New
International Dictionary. Even
if exclusions from all-risk policies are construed narrowly and in favor of the
insured, the term "contamination" is plain. Auten v. Employer's Nat. Ins. Co., 722 S.W.2d 468,
470 (Tx. Ct. App. 1986).
"Contamination occurs when a condition of impairment or impurity
results from mixture or contact with a foreign substance." Id. at 469, citing American
Casualty Co. of Reading, P.A., 304 F.2d at 183. The Ohio Court of Appeals said regarding a
contamination exclusion, "Giving the word `contaminate' its usual and
ordinary meaning, it means `to render unfit for use by the introduction of
unwholesome or undesirable elements.'"
Hartory v. State Auto Mut. Ins. Co., 552 N.E.2d 223, 225
(Ohio Ct. App. 1988), citing Webster's
Third New International Dictionary 491 (1981). See also Raybestos-Manhattan
v. Indus. Risk Insurers, 433 A.2d 906, 907 (Pa. Super. Ct. 1981)
(citing dictionary definition).
"Contamination"
may describe damage to food, as in American Casualty Co. of Reading, P.A.,
304 F.2d at 181-83, where ammonia rendered refrigerated food stuffs unfit for
human consumption, but "contamination" is by no means limited to food
spoilage. In Hi-G, Inc. v. St.
Paul Fire & Marine Ins. Co., 283 F.Supp. 211 (D.C. Mass. 1967), aff'd
391 F.2d 924 (1st Cir. 1968), plaintiffs manufactured small switching devices
or relays. During their manufacture,
the relays were placed in an industrial oven.
Oil vapor was accidently drawn into the oven and covered the relays in
it. The Hi-G court said
that contamination cannot be restricted to food spoilage occurring as the
result of bacteria. Rather,
"`contamination' connotes a condition of impurity resulting from mixture
or a contact with a foreign substance."
Id. at 212. It
means "to make unfit for use by introduction of unwholesome or undesirable
elements," id. at 212-13, citing Webster's Third International Dictionary, and implies
"intrusion of or contact with an outside source as its cause." Id. at 213. The court said,
What happened in this instance is clearly a case of
contamination. An undesirable element,
oil vapor, was introduced into the relays from an outside source, and it was
precisely the intrusion of this outside element and its presence within or in
contact with the relays that rendered them unfit for the use for which they
were intended.[2]
Id.
The
Hi-G court's holding that contamination is not limited to food
spoilage is consistent with rulings by other courts. In Auten, 722 S.W.2d at 469-71, the court held that
fogging the plaintiff's home with an above-normal level of an oil-based
pesticide "contaminated" the home, within the meaning of a
contamination exclusion. In Hartory,
522 N.E.2d at 225, a contamination exclusion applied when methane gas seeped
from a landfill into plaintiffs' home and rendered it and a well unfit for
use. And in J&S Enterprises
v. Continental Cas. Co., 825 P.2d 1020, 1024 (Col. Ct. App. 1991),
asbestos fibers released during a store renovation were held to come within an
"unambiguous" contamination exclusion. See also Falcon Products, Inc. v. Ins. Co. of P.A.,
615 F.Supp. 37, 39 (D.C. Mo. 1985), aff'd 782 F.2d 779 (8th Cir. 1986),
where plaintiff conceded that radioactive scrap metal plaintiff purchased and
used in its products was "contaminated."
Here
the trial court also reasoned that contamination had not occurred because after
the galvanizing broke loose, in "a very short process, a few hours from
possibly as much as a day or two," the refrigeration system
malfunctioned. The court looked to the
conditions listed in the contamination exclusion clause, "mold, wet or dry
rot, rust, corrosion or contamination," said that all are slow processes
that occur over time, and concluded that the exclusion did not apply to
Richland's loss.
We
have located only one decision holding "contamination" must be a slow
process. In Largent v. State Farm
Fire & Cas. Co., 842 P.2d 445 (Or. Ct. App. 1992), the plaintiff's
tenants operated an illegal laboratory, creating airborne vapor and
particulates which permeated porous materials in the apartment such as drapes,
carpets and woodwork. Plaintiff argued,
and the Oregon court agreed, that the "contamination exclusion"
applies only when contamination happens over time. Id. at 446.
We reject the Largent court's reasoning. It is contrary to the several cases we have
cited from other jurisdictions in which contamination occurred during a short
period. Moreover, time lapse has
specifically been held irrelevant to application of another condition,
"corrosion," listed in St. Paul's contamination exclusion
clause. See Arkwright-Boston
Mfrs. v. Wausau Paper Mills Co., 818 F.2d 591, 595 (7th Cir. 1987)
(concluding speed at which corrosion took place "not relevant to whether
it falls under the corrosion exclusion").
Finally,
the trial court concluded from the wording "contamination including fungal
or bacterial contamination" in St. Paul's policy that the exclusion is
restricted to fungal or bacterial contamination. The court relied on the application of the doctrine of ejusdem
generis in Wisconsin Builders Inc. v. General Insurance Company,
65 Wis.2d 91, 221 N.W.2d 832 (1974). We
conclude that the doctrine does not apply to St. Paul's contamination
exclusion.
The
Wisconsin Builders court construed a builder's risk policy which
provided coverage for risks of direct physical loss to an apartment building
while under construction. Id.
at 93, 221 N.W.2d at 833. Part of the
building collapsed. The policy covered
the collapse unless an "earth movement" exclusion applied. That exclusion described "earth
movement, including but not limited to earthquake, volcanic eruption,
landslide, mud flow, earth sinking, earth rising or shifting." Id. at 94, 221 N.W.2d at
834. The Wisconsin Builders
court said that most courts had found the exclusion ambiguous and had applied ejusdem
generis to limit the definition of "earth movement." 65 Wis.2d at 101-02, 221 N.W.2d at 837. After noting that on other occasions it had
"recognized the applicability of the ejusdem generis rule in
construing overly broad and ambiguous terms in insurance contracts," the
supreme court applied the ejusdem generis rule to limit the earth
movement exclusion. Id.
at 103, 221 N.W.2d at 838.
Wisconsin
Builders is not in
point. The "contamination
exclusion" in St. Paul's policy is neither overly broad nor
ambiguous. For that reason, the ejusdem
generis rule is inapplicable.
The
case law satisfies us that St. Paul's contamination clause is unambiguous and
applies to the undisputed facts. The
question is then whether coverage nevertheless exists by virtue of the
"ensuing loss" clause following St. Paul's contamination clause, and
we turn to that issue.
"ENSUING
LOSS"
St.
Paul appears to take the position that because contamination occurred and loss
or damage caused by contamination is excluded, further analysis is unnecessary. St. Paul's reasoning is based on the
"ensuing loss" clause[3]
immediately following the mechanical breakdown exclusion, since loss resulting
from contamination is a loss "otherwise excluded." However, the policy contains two
"ensuing loss" clauses. The
contamination exclusion has its own "ensuing loss" clause. The question is whether the loss resulting
from contamination is covered by virtue of the latter "ensuing loss"
clause, the clause providing at the end of the contamination exclusion,
"If a loss that would otherwise be covered results from one of these
causes, we'll pay for the direct loss that results."
We
first pinpoint the nature of the "contamination" and the loss it
caused in the case before us.
Contamination occurred when brine entered the coil and mixed with the
ammonia in it. The two substances
mixed, and they were not supposed to.
The brine was foreign to the ammonia, and their mixing resulted in a
loss of purity. That is contamination
within the dictionary definitions and the case law from other jurisdictions
construing and applying the term. The
loss from the contamination is the impure ammonia.
St.
Paul would extend the initial contamination beyond the mixing of ammonia and
brine and the loss of pure ammonia to the crystallization and precipitation of
salts that the mixing caused, and then to the salts' spreading to and clogging
the other parts of the system. We
disagree with that extension. When the
brine mixed with the ammonia, that was contamination. The crystallization and precipitation of salts out of the
solution and circulation through the system resulted from the mixing. The question is whether the loss resulting
from the crystallization and precipitation and the salt's spreading throughout
and clogging the system is covered by virtue of the "ensuing loss"
clause that accompanies the contamination exclusion. We conclude the resulting loss is not covered.
The
clogging was a direct physical loss, but it was a loss which would not be
otherwise covered because it was caused by the circulation of salt. The direct physical loss was caused by additional
contamination, and loss caused by contamination is an excluded loss. To demonstrate that contamination resulted,
we need only refer to the case law of other jurisdictions we have reviewed
which held that particular losses described were excluded by virtue of a
contamination clause. The contamination
here is comparable to the contamination from the oil that covered relays in Hi-G
Inc., 283 F.Supp. at 213, to the pesticide that fogged a home in Auten,
722 S.W.2d at 469-70, to the methane gas which seeped into a home in Hartory,
552 N.E.2d at 225, and to the asbestos fibers released during a store
renovation in J&S Enterprises, 825 P.2d at 1022.
The
difference between those cases and the case before us is that the salt that
circulated throughout and clogged Richland's system resulted from the initial
contamination itself, the mixing of brine and ammonia, but it is as much an
additional contamination as if somebody had injected salt from an outside
source into the piping which was used to circulate refrigerant.[4] Had the initial contamination resulted in
fire, for example, that loss would have been covered under the ensuing loss
clause. Loss by fire is a loss not otherwise
excluded. But here the result was loss
resulting from contamination, and loss caused by contamination is excluded from
coverage.
From
Richland's point of view, its loss is largely the lost earnings and other
expenses it has had. However, those
losses are not "due to a covered cause of loss" under the Blanket
Earnings and Expense Coverage endorsement to St. Paul's policy. That endorsement provides,
We'll pay your actual loss of earnings as well as extra
expenses that result from the necessary suspension of your operations during
the period of restoration caused by direct physical loss or damage to
property at an insured location. The
loss or damage must occur while this endorsement is in effect and must be
due to a covered cause of loss.
(Emphasis added.)
While physical loss or damage occurred to Richland's
system, it was not due to a covered cause of loss. It is an excluded loss.
CONCLUSION
Because
the undisputed facts establish that Richland's loss is not a covered loss, the
trial court should have dismissed Richland's complaint. Since coverage does not exist, there is no
basis for Richland's claims for breach of contract and bad faith damages. Our disposition moots the various other
issues raised in Richland's cross-appeal, all of which are predicated on the
assumption that St. Paul's policy covers Richland's losses.
By
the Court.—Judgments reversed
and remanded with directions to dismiss the complaint.
[1] The same principle applies to statutory construction. Ambiguity arises in a statute when its
language "may be reasonably construed in two different ways." K.L. v. Hinickle, 144 Wis.2d
102, 109, 423 N.W.2d 528, 531 (1988).
For that reason, "ambiguity does not arise just because persons
unreasonably reach different conclusions." Girouard v. Jackson Cir. Ct., 155 Wis.2d 148, 155,
454 N.W.2d 792, 795 (1990). As the Girouard
court said, "The litigants cannot [by disagreeing] limit the legal
responsibility of the court to make that determination." Id. See also Harnischfeger Corp. v. LIRC, 196
Wis.2d 650, 662, 539 N.W.2d 98, 103 (1995) (that two parties interpret statute
differently does not in itself create an ambiguity).
Were the
principle otherwise in insurance law, merely by asserting an alternative
reading for otherwise plain words, a party to an insurance contract could
create an ambiguity where none exists.
Such a principle would invariably lead to policy disputes being resolved
in favor of the insured. See Wisconsin
Builders, Inc. v. General Ins. Co., 65 Wis.2d 91, 103, 221 N.W.2d 832,
838 (1974) (ambiguous term insurance policy is normally construed in favor of
the insured and against the insurer).
[2] A contaminate need not effect an actual
physical change in the form or substance of the product itself. Hi-G, Inc., 283 F.Supp. at
212. The First Circuit agreed, Hi-G,
391 F.2d at 925.
[3] The parties use "ensuing loss" as a
short-hand reference to the clause. The
policy itself does not use the term.
[4] Thus, we do not use the analysis St. Paul
proposes on the basis of Acme Galvanizing Co. v. Fireman's Life Ins. Co.,
270 Cal. Rptr. 405 (Cal. Ct. App. 1990), and Chadwick v. Fire Ins.
Exchange, 21 Cal. Rptr. 2d 871 (Cal. Ct. App. 1993), but the result
would be the same. The Acme
court held that the ensuing loss provision in that case applied when
"there is a `peril,' i.e., a hazard or occurrence which causes a loss or
injury, separate and independent but resulting from the original excluded
peril, and this new peril is not an excluded one, from which loss
ensues." Acme, 270
Cal. Rptr. at 411. St. Paul's ensuing
loss provision makes no reference to a peril, it is unambiguous and does not
require construction. The Chadwick
court imposed the "additional peril" requirement in a case which
appears not to have involved ensuing loss clause.