Recent Developments in Wisconsin Construction Law

Recent Developments in Wisconsin Construction Law

March 1, 1999

Wisconsin. One just can’t help but think of cheese, beer, and the Green Bay Packers (well, two out of three isn’t bad). Construction law probably does not immediately spring to mind. As competition within the industry continues to increase, however, larger contractors and other construction professionals often find themselves looking beyond traditional territories for challenging and profitable projects. In order to stay competitive, industry professionals must acquaint themselves with the evolving construction laws in these new markets.

The construction industry in Wisconsin, similar to nearly all Midwestern states, continues to enjoy the recent boom brought about by low interest rates and general economic stability. More construction usually is accompanied by more construction laws. The following Briefing Paper will address a number of recent developments in Wisconsin construction law as generated by both the Wisconsin Appellate Courts and the State Legislature.

I.   New Bond Requirements for Construction Projects

Effective June 17, 1998, Wisconsin’s requirements for bonding on public contracts were revised as part of a state budget bill [1997 Act 237, §§ 609-27]. In Wisconsin, bonding requirements are determined by: (1) the type of governmental entity contracting the work; and (2) size of the project. Wis. Stat. § 779.14. The requirements can be summarized as follows:

State Projects:

1.   Small ($10,000 – $100,000)

-Direct payments to subs or by joint payee draft to prime and subs (not required for contracts with municipalities relating to transportation facilities, parking lots, bridges)

-Contracts must comply with written standards of Department of Administration which include criteria to determine need for payment or performance assurances

2.   Medium ($100,000 – $250,000)

-Direct payments to subs or by joint payee draft to prime and subs (not required for contracts with municipalities relating to transportation facilities, parking lots, bridges)

-Contracts must comply with written standards of Department of Administration which include criteria to determine need for payment or performance bond or other types of assurances

3.   Large (over $250,000)

-Payment or performance bond required

Local Projects:

The same requirements as for State Projects with the exception of reduced dollar contract thresholds (Small $10,000 – $50,000, Medium $50,000 – $100,000, and Large $100,000+). All public contract thresholds are to be indexed through biennial adjustments made by the Wisconsin Department of Workforce Development based on changes in construction costs since June 17, 1998. No adjustment will be made if a change would be less than 5%.

II.   Theft by Contractor – Constructive Trust – Payment of Funds to Subcontractor

Theft by contractor, as generally defined, is a contractor’s intentional diversion of an owner’s funds to sources unrelated to the project’s labor and material expenses. At least three (3) Wisconsin Statutes address the issue of contractor theft. As one might expect, contractors have been successfully prosecuted under the state criminal theft statute. Wis. Stat. § 943.20. Chapter 779 (Liens) of Wisconsin Statutes, in separate provisions, discusses the civil liability aspects of contractor theft. Wis. Stat. §§ 779.02(5) and 779.16. Recently, the Wisconsin Court of Appeals considered whether a general contractor may be held personally liable to a subcontractor under Wis. Stat. § 779.02(5).

In Capital City Sheet Metal, Inc. v. Voytovich, the plaintiff-subcontractor contracted with the defendant-general contractor to install a roof on a $148,000 residential home. After installation of the roof, the homeowner canceled her contract with the general contractor. The general contractor had received $125,771 from the owner prior to cancellation, while having disbursed $125,777 to various project subcontractors. Although it had received some payment from the general contractor, the plaintiff-subcontractor sued under Wis. Stat. § 779.02(5) for the subcontract balance. The subcontractor sought to hold the general contractor’s president personally liable for the outstanding $3,831.86.

In analyzing the subcontractor’s claim, the Wisconsin Court of Appeals acknowledged that: (1) Wis. Stat. § 779.02(5) imposes a trust in favor of due (or soon to become due) claims of subcontractors and suppliers on all funds paid by the owner to the general contractor; and (2) imposes personal liability on a general contractor for a breach of that trust. In reversing the “personal liability” portion of the trial court’s judgment, the appellate court determined that the general contractor’s president had not violated the statute. Despite acknowledging that the subcontractor had not received full payment, the Capital City court held that Wis. Stat. § 779.02(5) imposes no such requirement. As all of the homeowner’s funds were disbursed to persons furnishing labor and materials to the project, no impropriety had occurred. Although not a concern in Capital City, the Wisconsin Court of Appeals further noted that the general contractor would not have run afoul of the theft by contractor statute even if some of the homeowner’s funds were used to pay its own project expenses.

In summary, as long as a contractor performing work in Wisconsin applies payments received for project work toward labor and materials expenses for that project, neither criminal nor civil theft by contractor statutes pose any concern.

III.   Insurance Coverage – Business Risk Exclusion – Economic Losses

Although construction disputes involve many types of insurance policies, the cornerstone of a contractor’s insurance portfolio is the Commercial General Liability policy (“CGL policy”). The CGL policy is geared to protect the insured (contractor) from the consequences of third party claims. Despite decades of insurance litigation, in most instances, the determination of whether coverage exists under a contractor’s CGL policy remains clouded. The struggles inherent in the evolution of insurance coverage and interpretation, in the context of construction litigation, are reflected in a January 1999 decision of the Wisconsin Court of Appeals.

In Jacob v. Russo Builders, the Wisconsin appellate court interpreted a business risk exclusion in a CGL policy issued to a subcontractor who performed defective masonry work on a residence. Insufficient mortar between bricks caused significant flooding throughout the home’s ceiling and walls. The business risk exclusion at issue in Jacob precluded coverage for damage to the subcontractor’s work or product. Accordingly, the affected homeowners and the subcontractor agreed that the $102,470 required to repair or replace the defective work was not covered by the CGL policy. Rather, at issue were other “categories” of property damaged by the subcontractor’s defective masonry. Specifically, the homeowners sought to recover approximately $85,000 under the subcontractor’s CGL policy for: interior damage, driveway repair, expert fees, relocation expenses, temporary repairs, landscaping, refinancing, and loss of use and enjoyment of the residence. The $85,000 figure had previously been determined by a jury in the homeowners’ liability action against the general contractor and subcontractor.

On appeal, the subcontractor’s CGL carrier argued that a finding of insurance coverage for the “attendant business risks involved with replacing and repairing the damages associated with the defective product or work” would functionally convert the policy into a performance bond. Conversely, the homeowners asserted that coverage exists under the CGL policy because the $85,000 award reflects collateral damages related to “other” property (tort-based economic losses).

The Jacob court’s ruling epitomizes the somewhat complex and arbitrary decision-making process often accompanying insurance coverage disputes. First, the Wisconsin Court of Appeals denied coverage for driveway repair and landscaping as such were “similarly related” to the subcontractor’s defective work. Second, relocation costs, temporary repairs, loss of use and enjoyment of the residence, and interior damage were determined by the court to be something other than a “direct consequence” of repairing or replacing the defective work. Finally, in remanding the case back to the trial court, the appellate court ruled that the expert fees and refinancing costs issues fell into a “gray area” which required additional testimony and review. In short, the Jacob court answered “no,” “yes,” and “maybe” in addressing whether the homeowners’ damage claims were covered. In arriving at its decision, however, the Wisconsin Court of Appeals specifically rejected the CGL carrier’s argument that the residence itself was a single “product” (as to completely disallow the homeowners’ “other property” tort claims).

IV.   Conclusion

The decision to procure and perform work in new territories brings with it both excitement and challenge. For every professional employed in the construction industry, each jurisdiction offers both familiar and unique hurdles. If considering work in Wisconsin, or in any other unfamiliar jurisdiction, it is in your interest to gain at least a rudimentary understanding of its laws and their application. In Wisconsin, and all other jurisdictions, an ounce of prevention is still worth a pound of cure.

This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T

Fabyanske Westra Hart & Thomson