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State of Wisconsin Local Government Property Insurance Fund v. Lexington Insurance Co.

United States District Court, E.D. Wisconsin

October 31, 2017



          J. P. Stadtmueller, U.S. District Judge

         1. INTRODUCTION

         This lawsuit arises from a fire at the Milwaukee County courthouse (the "Courthouse") on July 6, 2013. The parties, various insurance companies, are litigating to determine which of them must ultimately foot the bill for the damage it caused. Plaintiff State of Wisconsin Local Government Property Insurance Fund (the "Fund") was the primary insurer and has already paid the insured, Milwaukee County (the "County"). The Fund contracted with Defendant Lexington Insurance Company ("Lexington") for additional insurance should a loss exceed what the Fund could pay. The County also obtained insurance directly from Defendant The Cincinnati Insurance Company ("Cincinnati") for supplemental coverage for the Courthouse. The Fund's Complaint asserts the following causes of action divided into three counts:

1) A request for declaratory judgment that Lexington and Cincinnati must reimburse the Fund, pursuant to their respective insurance policies, for the amounts paid to the County;
2) Breach of contract against Lexington for failing to pay the Fund's claim on its policy; and
3) Bad faith against Lexington for its failure to pay the claim.

See (Docket #1-2 at 20-24).

         On May 11, 2017, the Fund filed a motion for summary judgment against Lexington (but not Cincinnati) as to Counts One and Two. (Docket #82). After seeking leave to conduct additional discovery, Lexington filed its response without opposition from the Fund on September 8, 2017. (Docket #145). The Fund replied on September 22, 2017. (Docket #152). On June 15, 2017, Lexington filed its own motion for summary judgment as to Count Three. (Docket #102). The Fund responded on July 17, 2017. (Docket #126). Lexington replied on August 4, 2017. (Docket #138). Upon consideration of the parties' filings, the Court must grant summary judgment to the Fund and largely deny it to Lexington.


         Federal Rule of Civil Procedure 56 provides that the "court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a); see Boss v. Castro, 816 F.3d 910, 916 (7th Cir. 2016). A "genuine" dispute of material fact is created when "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The Court construes all facts and reasonable inferences in a light most favorable to the non-movant. Bridge v. New Holland Logansport, Inc., 815 F.3d 356, 360 (7th Cir. 2016). In assessing the parties' proposed facts, the Court must not weigh the evidence or determine witness credibility; the Seventh Circuit instructs that "we leave those tasks to factfinders." Berry v. Chicago Transit Auth., 618 F.3d 688, 691 (7th Cir. 2010). Internal inconsistencies in a witness's testimony "'create an issue of credibility as to which part of the testimony should be given the greatest weight if credited at all.'" Bank of III. v. Allied Signal Safety Restraint Sys., 75 F.3d 1162, 1170 (7th Cir. 1996) (quoting Tippens v. Celotex Corp., 805 F.2d 949, 953 (11th Cir. 1986)). The non-movant "need not match the movant witness for witness, nor persuade the court that [its] case is convincing, [it] need only come forward with appropriate evidence demonstrating that there is a pending dispute of material fact." Waldridge v. Am. Hoechst Corp., 24 F.3d 918, 921 (7th Cir. 1994).

         3. RELEVANT FACTS

         The following facts are material to the parties' motions. They are drawn from the parties' factual briefing unless otherwise noted. See (Docket #127, #139, #146, and #151). For brevity's sake, the Court will present all of the pertinent facts here and note any disputes thereof. The appropriate standard of review will be applied in the Court's separate analysis of each party's motion. See infra Parts 4.1 and 4.2.

         3.1 The Insurance Policies

         There are two policies which together form the basis of this lawsuit. The first is the policy purchased by the County from the Fund (the "Fund Policy"). The Fund Policy lists the Courthouse as covered property and the County as the insured. The Fund Policy opens with, inter alia, the following passage:

In consideration of the provisions of this policy, the payment of premium, receipt of a statement of values, property in the open schedule and/or contractors equipment detail, and in accordance with the provisions of Ch. 605, Wisconsin Statutes, the "Fund" insures those named on the Declarations page for the coverages indicated by amount of coverage and premium.

(Docket #85-1 at 157). The Fund Policy goes on to state that it affords coverage for "all sudden and accidental direct physical loss or damage except as limited or excluded in the following sections." Id. The Fund agreed to pay the replacement cost of any covered property, even when that would be greater than its stated value. Id.; see Id. at 20 (Courthouse listing on the Statement of Values).

         Like most insurance contracts, the Fund Policy contains a number of exclusions. (Docket #85-1 at 162-64). Section VI catalogs the exclusions in two subsections, A and B. Subsection A is prefaced with the statement that "[t]he 'Fund' will not pay for loss or damage caused directly or indirectly by... any of the following[.]" Id. at 162. Subsection A goes on to list various specific exclusions under this heading:

Wear and tear[;] . . . deterioration; rust or corrosion; . . . inherent vice, inherent or latent defect; contamination; . . . error, omission, or deficiency in design, specifications, workmanship or materials; . . . unless loss by a peril not excluded in this policy results, and then the "Fund" will be liable for only such resulting loss.

Id. Subsection B opens with the same language as Subsection A, but also includes the following sentence: "Such loss or damage is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss or damage." Id. at 163. This is known as an "anti- concurrent cause" provision. See Am. Fam. Mut. Ins. Co. v. Schmitz, 793 N.W.2d 111, 113-14 (Wis. Ct. App. 2010).

         The second relevant policy is that between Lexington and the Fund (the "Lexington Policy"). Lexington issued its policy to the Fund in March 2013. It describes the covered perils as "all risks of direct physical loss or damage . . . except excluding equipment breakdown and as further described in the approved policy form." (Docket #76-1 at 5) (capitalization altered). The overall liability limit was $100 million and had a $1.8 million deductible. Id. at 4-5. The Lexington Policy also has a section on "sublimits" on coverage, which states that "equipment breakdown" is not covered. Id. at 14-15. The term "equipment breakdown" is not defined in the Lexington Policy. Various other exclusions, including those for internet malfunctions, data corruption, terrorism, boilers and machinery, and mold are all present in the Lexington Policy, and each includes an anti-concurrent cause provision. The Lexington Policy expressly incorporates and follows the form of the Fund Policy, meaning that the same coverages and exclusions are present in both contracts. Id. at 3, 22-34. This is referred to in the industry as a "follow form" provision.

         3.2 The Loss Event

         On July 6, 2013, the Courthouse-an enormous eleven-story building and the hub of many County governmental offices beyond the judiciary-was damaged. The County made a claim on the Fund Policy the very next day. Brynn Bruijn-Hansen ("Bruijn-Hansen"), the manager of the Fund, toured the Courthouse soon after. She observed what appeared to be fire-related damage in the basement and smoke damage in the upper floors of the building. During her tour, Bruijn-Hansen saw smoke on the third floor and smelled it as high as the eighth.

         The Fund concluded that coverage was available for the damage because it was due to a sudden and accidental direct physical loss, resulting at least arguably from a covered peril. This determination included potential coverage under the "resulting loss" language of the Subsection VI.A exclusions. The Fund determined that the level of coverage for this loss was replacement cost. The County provided a sworn statement of loss indicating the replacement cost for the damaged property was more than $19 million. Because the claim was arguably covered, Bruijn-Hansen followed the procedures dictated by the applicable statute (discussed further below) and certified the loss to the Wisconsin Department of Administration for payment. To date, the Fund has paid a total of more than $18 million to the County.

         Lexington denies that the claim was even arguably covered because of an additional exclusion in Section VI.A, which excludes loss from "[e]lectrical or mechanical breakdown including rupture or bursting caused by centrifugal force." (Docket #85-1 at 163). Lexington further maintains that the Fund's investigation was cursory and that Bruijn-Hansen was not qualified to determine the cause of the loss. It questions how Bruijn-Hansen could have made a determination for coverage and amount without waiting for the opinions of the Fund's retained experts.

         While approving the County's claim, the Fund simultaneously made a claim on the Lexington Policy. The Fund gave Lexington notice of its claim on July 8, 2013. In connection therewith, the Fund provided Lexington with a sworn proof of loss statement. Upon receipt of the claim, Lexington retained a number of consultants to commence its investigation. The investigation, described in greater detail below, resulted in a determination that Lexington would not cover the Fund's loss.

         3.3 The Parties' Positions on Cause and Origin

         Prior to addressing the specifics of the denial, it is helpful to know what the parties' positions are with respect to the underlying merits of the Fund's claim. Both the Fund and Lexington engaged numerous experts to evaluate the source of, and damage caused by, the events of July 6, 2013. The Fund's investigation placed blame on a fire, which then caused smoke damage throughout the Courthouse. According to the Fund's experts, an electrical capacitor in the basement failed and ruptured. The capacitor failed because its insulation degraded, having been in place for three years beyond its twenty-year expected lifespan. The combustible oil inside, Wemcol, ignited, generating heat and smoke. The fire, and the overvoltage resulting from the loss of the first capacitor, caused adjacent capacitors to also fail. This burned their Wemcol, as well as various other nearby combustibles like cable insulation. The fire also created electrical arcing between metal components of the capacitors. The fire theory is consistent with the observations of first responders to the event, who smelled smoke and saw it coming from air ducts. It is also supported by the Fund's expert testimony on smoke spread, which states that the observed smoke damage fits a Wemcol fire much more closely than an electrical arcing event. The smoke particulate generated by a Wemcol fire could have covered millions of square feet within the building.

         Lexington agrees that the capacitor failed and ruptured, but its experts have differing opinions on the precise cause and resulting damage. They believe the capacitor rupture was caused by an electrical failure, which raised the internal pressure of the capacitor beyond what it could withstand. The resultant explosion caused mechanical damage to other electrical components nearby. This in turn created an electrical arc which ignited plasma at approximately 5, 000 degrees Fahrenheit. The arc propagated around the electrical components, melting and vaporizing some of them. This also released some particulate matter around the area. The electrical arcing event was sustained for approximately eighteen minutes. Lexington attributes the length of the event to a failure in the electrical failsafe systems within the Courthouse. Only when the electrical utility's protective measures activated did the arcing event end. Thus, Lexington's experts attributed the entire event to two electrical equipment failures, one in the capacitors, and the other in the failsafe mechanism. As to the resulting damage, Lexington's smoke dispersion expert says that very ...

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