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State Farm Fire & Casualty Co. v. Acuity3/15/2005
aratory judgment action, the question is whether Acuity has a duty to defend or indemnify Krause for damages allegedly caused by his negligent draining and removal of the fuel oil tanks. To determine whether there is a duty to defend, we compare the allegations in the complaint to the relevant portions of the insurance policy. School Dist. of Shorewood v. Wausau Ins. Cos., 170 Wis. 2d 347, 364-65, 488 N.W.2d 82 (1992). The insurer has a duty to defend whenever the allegations in the complaint would, if proven, create a "possibility of recovery that falls under the terms and conditions of the insurance policy." Id. at 364. If there is any doubt as to the existence of a duty to defend, we resolve that doubt in favor of the insured. Peace v. Northwestern Nat'l Ins. Co., 228 Wis. 2d 106, 153, 596 N.W.2d 429 (1999) (citing Wausau Tile, Inc. v. County Concrete Corp., 226 Wis. 2d 235, 266, 593 N.W.2d 445 (1999)).
. A complaint may contain many theories of liability not covered by an insurance policy. See Shorewood, 170 Wis. 2d at 366. But if just one theory appears to fall within the policy's coverage, the insurer is obligated to defend the entire action. See id. To determine whether coverage exists under a particular policy, we first examine the facts of the insured's claim to ascertain whether the insuring agreement makes an initial grant of coverage. See American Fam. Mut. Ins. Co. v. American Girl, Inc., 2004 WI 2, , 268 Wis. 2d 16, 673 N.W.2d 65. If an initial grant is triggered, we look to see if any exclusions apply. See Smith v. Atlantic Mut. Ins. Co., 155 Wis. 2d 808, 811, 456 N.W.2d 597 (1990). Exclusions are narrowly or strictly construed against the insurer and any ambiguities are resolved in favor of coverage. See id.
Acuity's Basic Liability Agreement
. Krause's business liability policy, section 1a, begins with the basic liability agreement: "We will pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury, property damage, personal injury or advertising injury to which this insurance applies." The policy later defines "property damage" as either "physical injury to tangible property" or "loss of use of tangible property that is not physically injured." Based on that agreement and the second definition of property damage, Krause claims Acuity has a duty to defend because State Farm's amended complaint alleges loss of use of tangible property-the family home-which was not physically injured. Although we agree that the language Krause cites triggers an initial grant of coverage, that initial grant does not create a duty to defend unless coverage survives application of the policy exclusions. See, e.g., Smith, 155 Wis. 2d at 811.
The Pollution Exclusion
. Krause contends coverage survives because Acuity's pollution exclusion does not unambiguously exclude smells or odors as pollutants. Alternatively, he argues the exclusion does not negate the initial grant of coverage because some of the property damage the Kagens alleged was caused by a non-toxic quality of spilled fuel oil, its smell. We disagree that coverage survives application of the pollution exclusion, but do not reach the merits of the first argument because the pollution exclusion operates to deny coverage more directly.
. Under 1.f.(1)(a), (1)(d) and (1)(d)(ii) of the Exclusions section of the Acuity business liability policy, neither bodily injury nor property damage are covered if they "arise out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants" at any premises on which the insured is "working directly" when the operation involved is testing, monitoring, cleaning
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