Background
On May 11, 2018, a storm drove rainwater through the walls of James Ropicky’s Wisconsin home, causing what appeared at first to be localized water damage. Cincinnati Insurance Company’s retained engineer, Donald Krizan, concluded that the water had entered through a one-inch gap constituting a construction defect present since the house was built in 2005, and that water had been infiltrating with nearly every storm for years. Krizan further determined that sustained moisture had activated latent fungal spores, causing widespread rot to the home’s oriented strand board sheathing. Relying on a Construction Defect Exclusion and a Fungi Exclusion in the homeowner’s policy, Cincinnati paid Ropicky only $12,138.53—$2,138.53 for visible water damage and $10,000 under a capped Fungi Additional Coverage provision—against claimed damages of $1,030,300.
After Cincinnati filed a declaratory judgment action and Ropicky counterclaimed for breach of contract and bad faith, the Waukesha County Circuit Court granted summary judgment to Cincinnati. It found that Ropicky’s experts failed to directly refute Cincinnati’s experts and that the Ensuing Loss Exception did not cover the claimed damages. The court of appeals reversed, finding genuine disputes of material fact and adopting a broad reading of the ensuing loss clause. The Wisconsin Supreme Court accepted review to resolve two questions of policy interpretation.
Ropicky’s experts disputed both the existence of the one-inch construction defect and the extent of fungal damage, noting that Cincinnati’s engineer conducted no standard diagnostic testing, took no samples at the time of initial inspection, and that materials later sampled had been stored in warm conditions for months in a way that could have promoted post-collection mold growth. The competing expert testimony created sharply disputed factual records on causation, the existence of defects, and the source and scope of the damage.
The Court’s Holding
The Wisconsin Supreme Court, in a 4-3 decision authored by Justice Hagedorn, held first that rainwater constitutes an “ensuing loss” within the meaning of the policy’s Ensuing Loss Exception to the Construction Defect Exclusion. Even if a construction defect set the stage for water intrusion, the resulting physical damage caused by the rainwater itself is a covered ensuing loss. The court rejected Cincinnati’s argument that an ensuing loss requires a break in the causal chain or that a separately covered peril must be the proximate cause of the loss, affirming the broader Wisconsin approach consistent with prior court of appeals precedent in Arnold v. Cincinnati Ins. Co., 2004 WI App 195.
On the Fungi Exclusion, the court disagreed with the court of appeals and agreed with a concurring judge below: the Fungi Additional Coverage provision is an exception to the Fungi Exclusion, not an independent grant of coverage that renders the exclusion inoperative. The practical consequence is that fungi-related losses remain subject to the $10,000 cap in the Additional Coverage provision rather than being fully covered as though the exclusion did not exist. The court construed the policy’s “this exclusion does not apply” language as reinstating limited coverage through the Additional Coverage, not eliminating the exclusion altogether.
Finally, applying these interpretive holdings, the court concluded that genuine disputes of material fact preclude summary judgment. Disputed issues remain as to whether a construction defect actually existed, how much of the ensuing water damage is attributable to that defect, whether fungi were present at the time of loss, and to what extent fungi caused or increased the physical damage. The circuit court’s grant of summary judgment was reversed and the case remanded.
Key Takeaways
- Under Wisconsin law, physical loss caused by rainwater that enters through a construction defect qualifies as a covered “ensuing loss”—insurers cannot use a construction defect exclusion to deny all downstream water damage.
- A Fungi Additional Coverage provision that states the Fungi Exclusion “does not apply” operates as an exception to the exclusion, not as a displacement of it; fungal damage coverage remains capped at the Additional Coverage limit ($10,000 here).
- An insurer’s engineer who conducts no standard diagnostic testing, takes no contemporaneous samples, and later stores samples in conditions that promote mold growth may not be enough to establish an undisputed factual record sufficient for summary judgment.
- Wisconsin courts apply a three-step burden framework: the insured bears the burden to show initial coverage and exceptions to exclusions; the insurer bears the burden to prove the exclusion applies.
Why It Matters
This decision provides significant clarity on how Wisconsin courts will interpret ensuing loss exceptions in property insurance policies, particularly for homeowners facing multi-cause damage scenarios involving construction defects and water intrusion. By adopting a broad reading—rainwater damage following a defective condition is covered even without a causal break—the court limits insurers’ ability to invoke construction defect exclusions to deny coverage for storm water losses that a reasonable insured would expect to be covered. The 4-3 split signals this remains a contested area, and the dissent’s proximate-cause approach may influence future policy drafting.
The decision also has practical importance for how claims are investigated. The court’s reversal rests heavily on the adequacy—or inadequacy—of the insurer’s engineering investigation: no diagnostic instruments, no contemporaneous sampling, and compromised post-collection storage of evidence all contributed to a factual record that could not support summary judgment. Insurers handling complex water and mold claims in Wisconsin should expect courts to scrutinize investigative methodology closely when coverage disputes reach the summary judgment stage.