SUBMITTED ON BRIEFS: ORAL ARGUMENT: December 15, 2015
of a decision of the Court of Appeals. (L.C. No. 2008CV562)
the plaintiff-appellant-petitioner, there were briefs by
Chris J. Trebatoski and Law Offices of Chris J. Trebatoski,
LLC, Milwaukee and oral argument by Chris J. Trebatoski.
the intervening plaintiff-co-appellant-petitioner, there were
briefs by Norman D. Farnam, John J. Laubmeier and Stroud,
Willink & Howard, LLC, Madison and oral argument by
Norman D. Farnum.
the defendant-respondent, there was a brief by William W.
Ehrke, and Crivello Carlson, S.C., Milwaukee and John J.
McInerney, and Leahy, Eisenberg & Fraenkel, Chicago. Oral
argument by William W. Ehrke.
was an amicus curiae brief by John E. Knight, Kirsten E.
Spira and Boardman & Clark LLP, Madison, on behalf of the
Wisconsin Bankers Association.
T. PROSSER, J.
This is a review of an unpublished decision of the court of
appeals affirming judgments entered in favor of
Assurance Company of America (Assurance) against its insured,
Fontana Builders, Inc. (Fontana), and Fontana's lender,
AnchorBank, FSB (AnchorBank).
The case involves a complicated insurance coverage dispute
arising out of a 2007 fire that destroyed portions of a
high-end custom home that was still under construction in
Lake Geneva. The fire caused major damage not only to the
home but also to the personal property of the home's
occupants, who were the presumptive purchasers of the home
upon its completion.
Both the construction contractor, Fontana, and the
occupants/presumptive purchasers, James and Suzy Accola (the
Accolas), had separate insurance policies. After the fire,
the Accolas settled with Chubb Insurance Co. (Chubb), the
insurer that provided their homeowner's policy, and
received a substantial payment. Assurance then denied all
coverage to Fontana for the fire, relying on the
"permanent property insurance" condition in its
builder's risk policy as grounds for the denial.
Assurance's denial of coverage upset not only Fontana but
also Fontana's mortgagee, AnchorBank, and James Accola,
Fontana's president and sole shareholder who had
personally guaranteed AnchorBank's loan.
In this factually complicated case, there have been two jury
trials and two appeals, although this is the first appeal to
reach this court. The parties have raised numerous issues.
Upon reflection, however, we see two fundamental questions
presented to the court. First, is the interpretation of the
"permanent property insurance" condition in the
builder's risk policy a question of fact for a jury or a
question of law for the court? Second, if the interpretation
of the "permanent property insurance" condition is
a question of law, did that condition terminate Fontana's
coverage under the builder's risk policy?
We conclude that the court of appeals incorrectly determined
that interpretation of Assurance's builder's risk
policy was a question of fact for a jury in this case, and we
reaffirm the general principle that interpretation of
insurance contracts presents a question of law for the court.
We further conclude that the homeowner's policy in this
case did not "apply" so as to terminate
Fontana's builder's risk policy because Fontana and
the Accolas insured different interests in the property.
Fontana had a reasonable expectation that coverage would
persist under the builder's risk policy while
construction continued and Fontana remained the owner of the
property. Accordingly, we reverse the decision of the court
of appeals and remand to the circuit court for the
determination of damages.
Fontana's Construction Business
Fontana designed and built "spec" homes,
speculative custom houses for which Fontana obtained
financing and began construction before securing a buyer for
the finished structure. When constructing a spec home,
Fontana owned the house and was responsible for any mortgage
until closing a sale to an eventual buyer. In the years
preceding the fire, Fontana had built and sold 16 or 17
custom homes. At any given time, Fontana would normally have
between one and three homes under construction.
James Accola was the president and sole shareholder of
Fontana Builders, Inc. On three or four occasions, he and his
wife, Suzy Accola, had purchased a completed home from
Fontana and moved in with their three children. Before the
fire damaged the Lake Geneva home, the Accolas intended to
purchase the home after Fontana finished construction.
The home at issue, located at 1527 Muirfield Court,
represented a substantial investment for Fontana. Nearly all
of Fontana's assets were invested in the house, which the
company planned to use to generate new opportunities for
itself in the high-end housing market. The home was larger
and included more detailed interior work than any previous
Fontana-built home. Accola testified at the second trial that
he intended to use the home to "showcase" Fontana
as "one of the premier builders in the Lake Geneva
area." As the home's owner, Accola would have
unfettered access to an example of Fontana's finished
work when he courted prospective buyers. He had even arranged
for a photo spread featuring the house in Trends, a
nationally distributed magazine.
Fontana financed the project's construction through two
mortgages with AnchorBank. The first mortgage, dated November
29, 2005, secured a $1.076 million loan. A subsequent
mortgage, dated April 23, 2007, secured a $200, 000 loan.
Accola provided a personal guarantee on Fontana's loans
Fontana's Builder's Risk Coverage from Assurance
As a standard condition of making the loans, AnchorBank
required Fontana to obtain builder's risk insurance
covering the home during construction. Fontana purchased two
policies from Assurance Company of America, which had
provided builder's risk coverage for previous Fontana
projects. Initially, Fontana purchased a new policy providing
up to $800, 000 in coverage for the Lake Geneva property.
Effective for one year from October 19, 2005, the policy
corresponded to the November 2005 loan from AnchorBank.
Fontana acquired the Assurance policy at issue in this case
when it sought the second AnchorBank loan to cover increased
project costs during construction. Because the previous
policy had lapsed in October 2006, Assurance issued a new
builder's risk policy providing $1.495 million in
coverage, effective for one year from April 19,
2007. The policy listed "Fontana Builders,
Inc." as the named insured.
Under the builder's risk policy, Assurance agreed to
"pay for direct physical loss to Covered Property from
any Covered Cause of Loss described in [the] Coverage
Form." Covered Property included "[p]roperty which
has been installed, or is to be installed in any commercial
structure and/or any single family dwelling, private garage,
or other structures that will be used to service the single
family dwelling." However, Covered Property did not
include existing inventory, which the policy defined as
"buildings or structures where construction was started
or completed prior to the inception date of [the]
policy." The policy defined "loss" as
"accidental loss and accidental damage, " and
"Covered Cause of Loss [meant] risk of direct physical
loss to Covered Property, except those causes of loss listed
in the Exclusions." The exclusions did not preclude
coverage for fire damage.
A separate section of the policy specified additional
conditions for coverage:
COVERAGE BEGINS AND ENDS
cover risk of loss from the time when you are legally
responsible for the Covered Property on or after the
effective date of the policy if all other conditions are met.
Coverage will end at the earliest of the following:
a. Once your interest in the Covered Property ceases;
b. Ninety days after initial occupancy of the Covered
Property . . . [;]
. . . .
c. When the Covered Property is leased to or rented to
. . . .
d. When you abandon the reported location with no intention
to complete it;
e. At the end of 12 months from the month when you first
reported the location to us unless you report the location
again and pay an additional premium. . . .;
f. When permanent property insurance applies;
g. Once the Covered Property is accepted by the owner or
buyer. (Emphasis added.)
Accolas' Homeowner's Policy from Chubb
James Accola obtained a 30-day temporary occupancy permit
dated May 30, 2007, and, shortly thereafter, the Accolas
moved most of their personal property into the home. Although
the Accolas began residing in the home, Fontana continued
interior work preparing the home for permanent occupancy.
Fontana remained the home's owner and had not yet closed
a sale or transferred title to the Accolas.
In anticipation of purchasing the home, the Accolas acquired
a homeowner's policy from Chubb Insurance Co. The policy
listed "Jim Accola" and "Susy [sic]
Accola" as the named insureds, and it listed
"Anchor Bank" as the mortgagee. Effective for one
year from June 21, 2007, the coverage summary explained:
"Your policy provides coverage against physical loss if
your home or its contents are damaged, destroyed, or
lost." It provided $2 million of deluxe coverage for the
dwelling and $1 million of deluxe coverage for the home's
Additionally, the policy provided coverage for extra living
expenses under certain circumstances:
If your house cannot be lived in because of a covered loss,
we cover any increase in your living expenses that is
necessary to maintain your household's normal standard of
living. We cover these expenses for the reasonable amount of
time it should take to repair or rebuild your house, or for
your household to relocate, even if the policy period ends
during that time.
Fire and Its Aftermath
The fire occurred late on the night of June 28, 2007. A
Fontana employee working on the property during the day left
rags used for wood staining in the garage, and those rags
spontaneously combusted. Awakened by smoke alarms shortly
after falling asleep, Accola immediately smelled smoke in the
house. With thick smoke filling the home's interior,
Accola retrieved his two youngest children from an upstairs
bedroom and exited the house.
In addition to destroying the garage and a Suburban sitting
in the driveway, the fire damaged portions of the residence
adjacent to the garage. Salvageable portions of the property
suffered extensive damage from smoke, heat, water, and
chemical fire suppressants. The Accolas lost virtually all
their personal property in the fire; many items not yet moved
into the house itself were stored temporarily in a bonus room
above the garage.
After the fire, the Accolas submitted a claim to Chubb for
damages to their property. They signed a Non-Waiver Agreement
allowing Chubb to investigate the claim without acknowledging
that the homeowner's policy provided coverage for the
Accolas. Without admitting that the policy provided
coverage to the Accolas for the fire loss, Chubb began
adjusting the claim after determining that the policy was in
force on the night of the fire and that the policy provided
coverage for fire damage generally. As part of the adjustment
process, Chubb procured damage estimates from two restoration
companies. One company estimated fire damages of $1, 324,
000.35, and the other estimated damages of $1, 391, 116.54.
While Chubb adjusted the claim, it made various payments to
the Accolas totaling $113, 686.81, but Chubb made the
payments on the condition that it could recover the money in
the event it determined that the policy did not cover the
loss. Ultimately, the Accolas filed two proofs of loss, one
claiming $2, 010, 683.67 for damages to the structure and the
other claiming $509, 740 for damages to the home's
Separate from the Accolas' claim with Chubb, Fontana made
a claim with Assurance under the builder's risk policy.
Assurance began investigating Fontana's claim after James
Accola signed a Non-Waiver Agreement on Fontana's behalf.
In January 2008, the insurance companies with policies
implicated by the fire engaged in mediation in an effort to
resolve the various claims made by the Accolas and Fontana.
Assurance, Chubb, and Westfield Insurance all participated
in the mediation, which did not result in a comprehensive
Following the mediation, Chubb entered into a settlement
agreement with the Accolas. Chubb agreed to pay the Accolas
$1.5 million to dispose of their claim. The agreement
allocated $519, 000 of the settlement proceeds toward
"replacement costs of the [Accolas'] personal
property" and $330, 000 toward their "additional
living expenses, " with the remainder allocated toward
"[a]ny other interest the [Accolas] may have in the
premises." The settlement total included the $113,
686.81 that Chubb had already paid to the Accolas, as well as
outstanding invoices totaling $53, 275.54 that Chubb agreed
to pay to a restoration company. Chubb agreed to issue two
checks to satisfy the balance of the settlement total: one
check for $537, 323.19 payable to "Jim Accola and Suzy
Accola and Anchor Bank, " and one check for $795, 714.46
payable to "Jim Accola and Suzy Accola."
Additionally, the agreement specifically provided that the
settlement "[was] not an admission by [Chubb] that
coverage is provided under the Policy for the Fire
After the Accolas agreed to the settlement with Chubb,
Fontana sent a letter to Assurance demanding payment under
the builder's risk policy. Drawing on one of the
restoration estimates obtained by Chubb, the letter requested
a $1, 391, 116.52 payment.
Assurance denied coverage after concluding that the policy
did not cover the fire loss for three reasons. First,
Assurance claimed that Fontana's coverage ended under the
builder's risk policy when the Accolas'
homeowner's policy with Chubb became effective on June
21, 2007. The builder's risk policy provided that
coverage would end "[w]hen permanent property insurance
applies, " and Assurance concluded that the
homeowner's insurance constituted permanent property
insurance that applied, thus terminating the Assurance
policy. Second, Assurance asserted that the policy's
"other insurance" clause rendered it excess to the
Chubb policy and inapplicable because the $1, 391, 116.52
demanded did not exceed the Chubb policy's $2 million
limit. Finally, Assurance asserted that the policy provided
no coverage for the portion of the structure that existed
prior to the policy's April 2007 effective date.
Fontana responded to Assurance's denial of coverage by
commencing this action on May 6, 2008. The complaint alleged
causes of action for breach of the insurance contract and for
bad faith failure to pay under the policy.
Assurance moved for summary judgment, but the Walworth County
Circuit Court concluded that the Assurance policy
provided coverage for the fire damage. The circuit court
reasoned that the builder's risk policy "was still
in force because the builder had not completed the work. It
had not been turned over unconditionally to the owner and was
not in the owner's name on the title." Furthermore,
Fontana's interest in the property "had not ceased .
. . yet." Additionally, the court added that it thought
the Accolas' settlement with Chubb was irrelevant to its
interpretation of the Assurance policy.
The case proceeded to a bifurcated trial on Fontana's
breach of contract and bad faith claims. Because the court
had decided that the Assurance policy provided coverage, the
first phase focused on the amount of money owed to Fontana
for fire damage to the property. Accordingly, the jury
received a special verdict question at the end of the first
phase: "What sum of money will fairly and reasonably
compensate the Plaintiff, Fontana Builders, Inc. for the
losses it sustained due to the fire at the Muirfield Court
property on June 28, 2007?" A unanimous jury answered
$1, 391, 116.54.
During the second phase, the jury heard evidence on
Fontana's claim that Assurance denied coverage in bad
faith. The jury received a two-part special verdict question.
First, the special verdict form asked, "Did Defendant,
Assurance Company of America, exercise bad faith in denying
the claim of the Plaintiff, Fontana Builders, Inc.?" If
the jury answered "yes, " the form then asked,
"What sum of money will fairly and reasonably compensate
Plaintiff, Fontana Builders Inc., for Defendant, Assurance
Company of America's bad faith in denying the claim of
Fontana Builders?" Ten of twelve jurors answered
"yes" to the first question and awarded $1, 218,
118 under the second.
Assurance appealed, and the court of appeals reversed in an
unpublished decision. Fontana Builders, Inc. v. Assurance
Co. of Am. (Fontana I), No. 2010AP2074, unpublished slip
op. (Wis. Ct. App. Dec. 7, 2011). The court of appeals
concluded that "the circuit court erred when it found as
a matter of law that the builder's risk policy provided
coverage." Id., ¶1. Citing its own
decision in Central Auto Co. v. Reichert, 87 Wis.2d
9, 273 N.W.2d 360 (Ct. App. 1978), the court of appeals
relied on the proposition that "when the words or terms
in [a] contract must be construed using extrinsic evidence,
the question is one for the trier of fact."
Id., ¶8. Applying that legal principle, the
court of appeals determined that "the question of
whether coverage existed" on the day of the fire
presented a question of fact for the jury. Id.,
The court of appeals provided instructions for the second
round of circuit court proceedings: "[T]he jury will
have to determine whether permanent property insurance
applied at the time of the fire. The circuit court may not
preclude the jury from considering the Chubb policy or any
other extrinsic evidence that is relevant to Section E.3 of
the policy." Id., ¶11 (footnote omitted).
In addition, the court of appeals noted that any
determination as to the applicability of the "other
insurance" clause in the Assurance policy "must
await the jury's decision as to whether coverage under
the builder's risk policy was still in effect at the time
of the fire." Id., ¶13. Fontana filed a
petition for review, which this court denied on April 23,
After the case returned to the Walworth County Circuit Court,
AnchorBank filed a motion to intervene under Wis.Stat. §
803.09(1). AnchorBank asserted an interest in any insurance
proceeds due from Assurance in light of a foreclosure default
judgment for $1, 135, 332.90, plus interest, that AnchorBank
had recently obtained against Fontana. The circuit court
granted the motion to intervene and later granted partial
summary judgment to AnchorBank, concluding that "[i]f,
and only if, Assurance Company of America pays or is required
to pay insurance proceeds in connection with this lawsuit,
then, in that event, the insurance proceeds shall be used to
restore or repair the property at issue in this lawsuit or
paid to AnchorBank."
The circuit court conducted a new trial to determine
whether the Accolas' Chubb policy terminated
Fontana's builder's risk policy from Assurance
because permanent property insurance applied to the Lake
Geneva home. Over Fontana's objection, the circuit court
allowed the admission of evidence related to the Accolas'
negotiated settlement with Chubb. Fontana argued that
Wis.Stat. § 904.08 barred evidence pertaining to the
Chubb settlement. The circuit court, however, determined that
the directive from the court of appeals--that "[t]he
circuit court may not preclude the jury from considering the
Chubb policy or any other extrinsic evidence that is relevant
to Section E.3 of the policy, " Fontana I, unpublished
slip op., ¶11--contemplated admission of the settlement
At trial, the special verdict form presented two questions to
the jury: (1) "Was the policy of insurance issued by
Chubb/Pacific Indemnity to James Accola and Suzy Accola
permanent property insurance?"; and (2) "Did the
policy of insurance issued by Chubb/Pacific Indemnity to
James Accola and Suzy Accola apply to the fire loss?"
Before deliberations, the court instructed the jury as to the
meaning of various terms necessary to interpret the policy:
For the purposes of determining your answers to Questions 1
and 2, you are instructed that "permanent" means
"continuing or enduring without marked change in status
or condition or place."
You are further instructed that the term "applies"
means "to be pertinent, suitable, or ...