There are a variety of situations where construction litigation may be necessary to address issues such as shoddy workmanship, defective materials, or other problems that lead to property damage. One factor that played a role in Wisconsin construction litigation cases was known as the “integrated systems rule.” This rule stated that insurance coverage for property damage would only apply if damage occurred to “other property.” However, a recent ruling by the Wisconsin Supreme Court has rejected this rule. This ruling may affect other types of construction litigation cases and ensure that contractors, suppliers, or those responsible for property damage are held liable.

5 Walworth, LLC v. Engerman Contracting, Inc.

In the case of 5 Walworth, LLC v. Engerman Contracting, Inc., a property owner in Lake Geneva hired a contractor to construct an in-ground swimming pool complex. This contractor, Engerman Contracting, Inc., hired a subcontractor, Downes Swimming Pool Co., Inc., to perform the construction. Downes hired a supplier, Otto Jacobs Company, to supply shotcrete, a ready-mixed concrete used in the construction of the pool. However, after the pool construction was finished, leaks were found. Over the course of several years, attempts were made to repair the leaks. Eventually, it was determined that the leaks would continue to develop and get worse over time. As a result, the property owner was forced to demolish and rebuild the pool.

The property owner sought damages against Engerman and Downes for deficient construction, requesting compensation for the demolition of the old pool and construction of the new pool. Downes also brought a third-party claim against Otto Jacobs, claiming that the shotcrete provided for the project was inferior. The insurers for Engerman, Downes, and Jacobs sought a summary judgment to declare that their commercial general liability (CGL) policies did not provide coverage for these damages. The insurers’ claims were based on the integrated systems rule. Since the pool itself was damaged by improper construction methods and defective materials, as opposed to other property, the insurers argued that they were not required to pay for the demolition and new construction.

When reviewing the case, the Wisconsin Supreme Court determined that previous decisions about property damage and integrated systems were made in error. Specifically, the decision in Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of California, Inc. departed from established laws and contradicted prior cases. Therefore, the Court overruled these prior decisions made in error and found that property damage does not have to be limited to “other property” to be covered by an insurance policy.

In reviewing the 5 Walworth case, the Supreme Court determined that the cracks in the pool and the subsequent water leakage constituted an “occurrence,” and the damage to the pool and the surrounding soil could be considered “property damage” that was covered by the insurance policies in question. Based on these findings, the case was sent back to a lower court to determine whether the property owner can recover compensation for property damage.

This decision may play a significant role in litigation related to construction defects, and it may provide homeowners or other parties with the opportunity to recover compensation for property damaged by negligent contractors or suppliers.