In Phillips v. Parmelee, No. 2011AP2608, 2013 WL 6818145 (Wis. Dec. 27, 2013) (applying Wisconsin law), the Wisconsin Supreme Court held that an asbestos exclusion in a liability policy barred a duty to defend and indemnify a building seller for claims that the seller failed to disclose that the building contained asbestos.
Prior to purchasing an apartment building, the policyholder received a building inspection report indicating that the heating supply ducts likely contained asbestos. The policyholder purchased the building and a "Business Owners" insurance policy for the building. Id. at *1. The policyholder then sold the building but failed to disclose the prior inspection report that indicated the possible presence of asbestos. After the building was sold, the buyers' contractor cut through the heating ducts, unknowingly dispersing asbestos throughout the building.
The buyers sued the policyholder, claiming breach of warranty, violation of various state statutes, and negligence in failing to disclose the presence of asbestos. The buyers claimed that the dispersal of the asbestos rendered the building uninhabitable, forcing the tenants to relocate, and causing the buyer to lose the building in foreclosure.
The insurer intervened in the buyers' suit and sought summary judgment against the policyholder and buyers, arguing that an asbestos exclusion precluded coverage for the buyers' suit against the policyholder. The exclusion provides, in part, "[t]his insurance does not apply to . . . property damage . . . with respect to any loss arising out of, resulting from, caused by, or contributed to in whole or in part by asbestos, exposure to asbestos, or the use of asbestos." Id. at *2. The trial court agreed with the insurer and granted summary judgment. The intermediate court of appeals affirmed.
The buyers appealed to the Wisconsin Supreme Court. The buyers attacked the asbestos exclusion on several grounds. First, they argued that the exclusion was ambiguous because asbestos has many forms and types, and the term "asbestos" was not defined in the policy. Id. at *3. The court disagreed, explaining that in the absence of any other language in the policy, a reasonable insured would read the exclusion as applying to asbestos in any form. Id.
Next, the buyers argued that the "arising out of" language in the exclusion is broad, invited multiple reasonable interpretations, and thus should be narrowly construed against the insurer. Id. The buyers also argued that "arising out of" required that there be a "causal nexus" between the loss and the asbestos. Id. Although the court agreed that the words "arising out of" are "very broad," the court stated that "they do have meaning and there are limits." Id. The court explained that the words "arising out of" are "commonly understood to mean originating from, growing out of, or flowing from, and require that there be some causal relationship between the injury and the risk for which coverage is provided." Id. The court reasoned that a causal nexus did exist between the buyers' loss and the dispersal of asbestos throughout the building. Id.
The court also rejected the buyers' argument that the exclusion only applied to "exposure to" or "use of" asbestos, and not to the "dispersal" or "presence" of asbestos. Id. The court explained that the exclusion "is written in broad comprehensive language" that included a wide range of asbestos-related losses. Id. at *4.
The buyers also argued that they never would have bought the building but for the policyholder's negligent failure to disclose the possibility of asbestos. Id. They argued that the exclusion did not apply to a negligent failure to disclose, and there is no causal nexus between the tort and their loss. Id. The court disagreed, explaining that "the scope of the asbestos exclusion does not depend on the type of tort from which the loss arose; the exclusion's language concerns the loss itself arising out of asbestos." Id. The court stated that "[o]ur analysis focuses on whether the loss suffered by the [buyers] is within the text of the asbestos exclusion and thus reasonably contemplated by the parties." Id. Concluding that a reasonable insured would interpret the applicable asbestos exclusion to preclude the alleged loss, the court affirmed the decision of the court of appeals.
This decision is significant because three courts, including Wisconsin's highest court, squarely rejected attempts to narrow a broad, clearly-worded asbestos exclusion. Further, it confirms that such an asbestos exclusion will apply to all causes of action, including an alleged failure to disclose the presence of asbestos.
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