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Fontana Builders, Inc. v. Assurance Co. of America

Supreme Court of Wisconsin

June 29, 2016

Fontana Builders, Inc., Plaintiff-Appellant-Petitioner,
Assurance Company of America, Defendant-Respondent. Anchorbank, FSB, Intervening Plaintiff-Co-Appellant-Petitioner,

          SUBMITTED ON BRIEFS: ORAL ARGUMENT: December 15, 2015

         REVIEW of a decision of the Court of Appeals. (L.C. No. 2008CV562)

          For 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.

          For 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.

          For 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.

          There was an amicus curiae brief by John E. Knight, Kirsten E. Spira and Boardman & Clark LLP, Madison, on behalf of the Wisconsin Bankers Association.

          DAVID T. PROSSER, J.

         ¶1 This is a review of an unpublished decision of the court of appeals[1] affirming judgments entered in favor of Assurance Company of America[2] (Assurance) against its insured, Fontana Builders, Inc.[3] (Fontana), and Fontana's lender, AnchorBank, FSB (AnchorBank).

         ¶2 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.

         ¶3 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.

         ¶4 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?

         ¶5 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.[4]


         A. Fontana's Construction Business

         ¶6 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.

         ¶7 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.

         ¶8 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.

         ¶9 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 and mortgages.

         B. Fontana's Builder's Risk Coverage from Assurance

         ¶10 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.

         ¶11 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.[5] The policy listed "Fontana Builders, Inc." as the named insured.

         ¶12 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.

         ¶13 A separate section of the policy specified additional conditions for coverage:


         We will 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 others[;]
. . . .
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.)

         C. The Accolas' Homeowner's Policy from Chubb

         ¶14 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.

         ¶15 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 contents.

         ¶16 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.

         D. The Fire and Its Aftermath

         ¶17 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.[6]

         ¶18 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.

         ¶19 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.[7] 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 contents.

         ¶20 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.

         ¶21 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[8] all participated in the mediation, which did not result in a comprehensive settlement.

         ¶22 Following the mediation, Chubb entered into a settlement agreement with the Accolas.[9] 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 Claim."

         ¶23 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.

         ¶24 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.


         ¶25 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.

         ¶26 Assurance moved for summary judgment, but the Walworth County Circuit Court[10] 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.

         ¶27 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.

         ¶28 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.

         ¶29 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., ¶1.

         ¶30 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, 2012.

         ¶31 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."

         ¶32 The circuit court[11] 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 evidence.

         ¶33 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 ...

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