Miller v. Safeco Insurance Co. of America, 2012 U.S. App. LEXIS 12940

Millers obtained Safeco homeowner policy (effective July 1, 2005) covering accidental direct physical loss during the policy period.
Millers discovered severe water leaks and mold after beginning renovation; mold and water damage affected multiple exterior walls and interior finishes.
Pre-purchase inspection and seller disclosures indicated prior defects but not mold or latent water issues known to the Millers.
Safeco denied the claim after investigation, with internal review and an attorney’s opinion suggesting potential non-coverage under known-loss and exclusions.
District court held the loss was covered, found bad faith, awarded damages (plus prejudgment interest), and the Millers appealed; the Seventh Circuit affirmed.
Wisconsin law governs coverage and follows a three-step approach: initial grant of coverage, exclusions, and any reinstating exceptions.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the loss qualifies as covered under the policy	Millers: loss is accidental and within policy scope; neither cause nor harm was anticipated	Safeco: loss caused by inherent construction defects not fortuitous and thus not covered	Yes, covered as accidental direct physical loss
Whether continuous trigger applies to determine the injury date	Loss manifested during the policy period; continuous exposure until manifestation	Wisconsin should apply continuous trigger only if supported by caselaw; disputes broad applicability	Continuous trigger applied; outcome unchanged regardless of approach
Whether exclusions can be used since insurer failed to inform about exclusions before loss	Exclusions cannot bar coverage because insurer failed to inform insured of terms prior to discovery	Exclusions valid if known; failure to inform precludes enforcement through estoppel or other doctrine	Exclusions not enforceable here; coverage affirmed due to failure to inform prior to discovery
Whether Safeco acted in bad faith in denying the claim	Insurer lacked reasonable basis and acted with reckless disregard; delay and misleading conduct supported bad faith	Denial supported by policy terms and factual disputes; not necessarily bad faith	Bad faith established; insurer lacked a reasonable basis to deny and acted with reckless disregard

Am. Girl, Inc. v. American Family Mut. Ins. Co., 673 N.W.2d 65 (Wis. 2004) (undefined term 'accident' interpreted to require lack of intended harm; covered where neither cause nor harm was anticipated)
Glassner v. Detroit Fire & Marine Ins. Co., 127 N.W.2d 761 (Wis. 1964) (all-risk promise requires fortuitous, extraneous cause; inherent defects not covered)
Kraemer Bros., Inc. v. U.S. Fire Ins. Co., 278 N.W.2d 857 (Wis. 1979) (inherent defects not ‘external’ causes; not within policy)
Lucterhand v. Granite Microsystems, Inc., 564 F.3d 809 (7th Cir. 2009) (fortuity principle; when cause is unobserved, loss may still be fortuitous)
Shannon v. Shannon, 442 N.W.2d 25 (Wis. 1989) (insurer cannot preclude coverage through litigation conduct; exclusions not known to insured cannot bar recovery)
Gross v. Lloyds of London Ins. Co., 358 N.W.2d 266 (Wis. 1984) (failure to inform insured of exclusionaries before accident bars reliance on exclusions)
Roeske v. Diefenbach, 249 N.W.2d 555 (Wis. 1977) (contract terms limited to what is expressly expressed and agreed)
Mowry v. Badger State Mut. Cas. Co., 385 N.W.2d 171 (Wis. 1986) (bad faith standard requires showing absence of reasonable basis and knowledge or reckless disregard)
Osterneck v. Ernst & Whinney, 489 U.S. 169 (1989) (Rule 59(e) standards for correcting judgments in the discretion of the district court)