Horizon West Condominium Homes Association, Inc. v. Travelers Indemnity Company of Connecticut

United States Court of Appeals
For the Seventh Circuit
Chicago, Illinois 60604
Argued October 3, 2023
Decided November 17, 2023
Before
MICHAEL B. BRENNAN, Circuit Judge
MICHAEL Y. SCUDDER, Circuit Judge
AMY J. ST. EVE, Circuit Judge
No. 22-3191
HORIZON WEST CONDOMINIUM
HOMES ASSOCIATION, INC., et al.,
Plaintiffs-Appellants,
v.
TRAVELERS INDEMNITY COMPANY
OF CONNECTICUT,
Defendant-Appellee.
Appeal from the United States District
Court for the Eastern District of Wisconsin.
No. 22-cv-00597-LA
Lynn Adelman,
Judge.
O R D E R
In December 2021, the City of Waukesha ordered the residents of a high-rise
condominium building to evacuate upon determining that the building was at risk of
imminent collapse. A month later, the City directed Horizon West Condominium Homes
Association, Inc., to tear down the building at the Association’s expense. Seeking
compensation, the Association filed a claim with its insurer, The Travelers Indemnity
Company of Connecticut, under a one-year commercial property policy that protected
against many—though not all—risks to the building.
NONPRECEDENTIAL DISPOSITION
To be cited only in accordance with FED. R. A PP. P. 32.1

-- 1 of 7 --

No. 23-3191 Page 2
When Travelers failed to supply coverage on the claim, the Association sued
Travelers. On Travelers’ motion, the district court dismissed the suit, concluding that all
losses occurred outside of the policy period or fell within one of the policy’s many
exclusions. We agree and affirm. Though mindful of the emotional and financial
hardships this litigation and the events underlying it have caused the Association’s
members, we must give effect to the policy’s plain terms, which, as the district court
correctly held, do not supply coverage for the claimed losses.
I
A
Sometime before June 5, 2020, residents of Horizon West Condominiums, a 48-unit
high-rise building in Waukesha, Wisconsin, noticed that the balconies were unstable.
After removing some of the balconies, engineers discovered that structural steel had
rusted not only in the balconies themselves, but also in the beams and crossbeams
supporting the building. The engineers determined that water had, at some unknown
point in time, entered the building and caused substantial rusting.
The City inspected the property in 2020, later determining that the compromised
steel structure placed the building at risk of imminent collapse. To protect Horizon West’s
residents, the City issued an order on December 2, 2021, requiring the building’s
immediate evacuation. All residents promptly left their homes. In January 2022, the City
deemed the building uninhabitable and issued a final demolition order pursuant to Wis.
Stat. § 66.0413(1)(b). The order describes structural problems including “significant
degradation” of support columns and beams “due to heavy rusting, delamination and
deterioration.” To date the building remains vacant but standing.
In March 2021, after the City’s inspection but before the issuance of the evacuation
and demolition orders, Travelers issued a commercial property policy to Horizon West
Condominium Homes. The policy provides that Travelers will pay for loss of or damage
to the building “caused by or resulting from a Covered Cause of Loss”—defined as any
“risk[] of direct physical loss” materializing within the policy period, so long as that risk
is not specifically excluded. The policy provided coverage for the one-year period May
11, 2021, to May 11, 2022.
The policy contains several exclusions. Most relevant are the express exclusions
for losses caused by: (1) “[t]he enforcement of or compliance with any ordinance or law”
that regulates the use or repair of a property or requires “the tearing down of any
property,” “even if the property has not been damaged”; (2) rust, decay, deterioration, or

-- 2 of 7 --

No. 23-3191 Page 3
“any quality in property that causes it to damage or destroy itself”; (3) faulty
workmanship; or (4) collapse. Under the latter exclusion, losses caused by an abrupt
collapse of the building or a “loss of structural integrity” short of collapse are not covered,
although the policy supplies coverage for “an abrupt falling down or caving in of a
building” under limited circumstances.
In March 2022, the Association and individual unit owners submitted a claim to
Travelers seeking $17,023,172 under the policy—the building’s estimated replacement
cost. After some delay in processing the claim, the Association, joined by 34 unit owners,
sued the insurer in Wisconsin state court for breach of contract and bad faith. Travelers
responded by invoking 28 U.S.C. § 1332 and removing the case to federal court. In its
complaint, the Association alleged that Travelers unreasonably failed to make a coverage
decision. They contended that structural defects rendered the building uninhabitable,
prompting an evacuation and causing residents to lose their housing, equity, and
personal property. The plaintiffs pointed to both the building’s structural faults and “the
subsequent raze order” as the cause of their losses—losses they saw as covered under the
Travelers policy.
B
Travelers moved to dismiss the complaint. As to the individual unit owners,
Travelers argued that because they were not parties to the policy at issue, they were not
proper plaintiffs, a position the district court agreed with and is not challenged on appeal.
From there Travelers contended that the policy did not extend coverage to, or at least
excluded, the claimed losses. In the terms of the policy, Travelers argued that there was
no direct physical loss or damage from a covered cause of loss that arose during the policy
period.
The district court agreed with Travelers and dismissed the complaint. The district
court first determined that the only potentially covered events during the policy period
were the City’s declaration that the building was uninhabitable and the evacuation and
demolition orders issued in December 2021 and January 2022. Having limited its review
to those alleged causes of loss, the district court then concluded that any of three
exclusions applied: (1) for losses caused by the enforcement of any ordinance or law; (2)
for damage caused by rust and corrosion; and (3) for damages caused by a loss of
structural integrity. And because bad-faith claims can succeed only if a policy provides
coverage, the district court dismissed that claim too.
Along the way the district court also considered and rejected the Association’s
argument that it could obtain coverage under an exception to the ordinance-or-law

-- 3 of 7 --

No. 23-3191 Page 4
exclusion found in an optional add-on to the policy—the Legal Liability Coverage
Form—because the parties had not made that particular coverage a part of the policy. The
district court further disagreed with the Association’s contention that the policy violated
Wisconsin public policy. Contrary to the Association’s view, the policy did not encourage
unit owners to “create” coverage by continuing to live in the building until it actually
collapsed, because the portion of the policy supplying coverage for sudden collapse does
not apply to collapses caused by “known” decay.
The Association now appeals.
II
A
This coverage dispute requires us to determine how the Travelers policy applies
to the facts alleged in the complaint, which we accept as true at the pleading stage. See
Stant USA Corp. v. Factory Mut. Ins. Co., 61 F.4th 524, 525 (7th Cir. 2023). Contrary to the
Association’s arguments on appeal, the motion to dismiss did not require conversion into
a motion for summary judgment, see FED. R. C IV. P. 12(d), as the district court did not rely
on “matters outside the pleadings” in reaching its decision. See FED. R. C IV. P. 10(c)
(deeming a “copy of a written instrument that is an exhibit to a pleading … part of the
pleading for all purposes”); see also Bible v. United Student Aid Funds, Inc., 799 F.3d 633,
639–40 (7th Cir. 2015) (“In deciding a Rule 12(b)(6) motion, the court may consider
documents attached to a complaint, such as contract documents, without converting the
motion into one for summary judgment.”).
Wisconsin law governs our independent review of the district court’s Rule 12(b)(6)
dismissal. See Stant USA Corp., 61 F.4th at 525–26; State Farm Mut. Auto. Ins. Co. v. Pate,
275 F.3d 666, 669 (7th Cir. 2001). Under Wisconsin law, “contract language is construed
according to its plain or ordinary meaning.” Ash Park, LLC v. Alexander & Bishop, Ltd., 866
N.W.2d 679, 685 (Wis. 2015). We ask “‘what a reasonable person would understand the
words [of the policy] to mean under the circumstances.’” Id. (quoting Seitzinger v. Cmty.
Health Network, 676 N.W.2d 426, 433 (Wis. 2004)).
B
The district court was right to conclude that both the language of the policy’s
exclusions and its temporal limits foreclose coverage here. As to timing, the policy does
not cover events that preceded its effective date, and the complaint makes clear that the
structural damage to the building existed before the policy took effect. The complaint
alleges not only that the residents first noticed unstable balconies before June 5, 2020—

-- 4 of 7 --

No. 23-3191 Page 5
nearly a year before the policy went into effect in May 2021—but also that when engineers
removed the balconies, they realized that past water seepage had caused beams and
crossbeams to rust. Even if the losses occurred within the policy period, the policy
contains several exclusions, including one for losses caused by rust, the ordinance-or-law
exclusion, and the collapse exclusion, that independently preclude the Association’s
claim for coverage.
The Rust Exclusion. As to this exclusion, the Association attempts to recharacterize
defects like rust as “end products,” not causes, of the losses suffered. This position is
inconsistent with the complaint, which in no uncertain terms states that rust
compromised the building’s steel structure and the balconies, causing instability. The
Association cannot change its factual allegations or press arguments for the first time on
appeal. See Wagner v. Teva Pharms. USA, Inc., 840 F.3d 355, 359 (7th Cir. 2016); Johnson v.
Prentice, 29 F.4th 895, 903 (7th Cir. 2022). The Association asserted below that rust caused
the instability and, by extension, the loss, and so it must contend with the fact that the
policy expressly identifies “rust” as an excluded cause of loss.
The Association attempts to do so by challenging the rust exclusion as
impermissibly vague. Under Wisconsin law, if an insurer writes a coverage exclusion in
a way that is susceptible to multiple reasonable interpretations, the language is to be
narrowly construed against the insurer. See Phillips v. Parmelee, 840 N.W.2d 713, 716 (Wis.
2013). But this is not so when the policy is unambiguous. Id. Recall that the rust exclusion
states that Travelers will not pay for losses caused by “[r]ust, other corrosion, fungus,
decay, deterioration, hidden or latent defect or any quality in property that causes it to
damage or destroy itself.” The Association sees the phrase “that causes it to damage or
destroy itself” as unclear, rendering the entire provision vague. But the disjunctive list
means that this phrase does not modify “rust,” which is an excluded event. See Day v.
Allstate Indem. Co., 798 N.W.2d 199, 206 (Wis. 2011) (“A court will enforce exclusions that
are clear from the face of the policy.”).
In the alternative, the Association insists that the rust exclusion does not apply
because rust is the result of water intrusion, which the policy covers to some degree. The
Association sees a potential conflict in the policy—that the type of water intrusion that
caused rusting could be covered under the policy, while damage caused by the rust is
excluded. It therefore invites us to resolve the contradiction in favor of coverage. We
cannot do so. Wisconsin law dictates that “if the covered risk is not actionable without
the occurrence of an excluded risk, then the covered risk is not sufficiently independent
to trigger coverage under the policy.” Siebert v. Wis. Am. Mut. Ins. Co., 797 N.W.2d 484,
492 (Wis. 2011). Any water intrusion here did not directly damage the property (such as
by flooding) and so its collateral effects, like rust, do not trigger the water-intrusion

-- 5 of 7 --

No. 23-3191 Page 6
coverage. In the end, we see no conflict to resolve in the insured’s favor. Remember, too,
that any water intrusion occurred outside the policy period.
The Ordinance-or-Law Exclusion. This exclusion likewise defeats the Association’s
claim for coverage. By its terms, the exclusion states that Travelers will not pay for a loss
caused by, or resulting from, “[t]he enforcement of or compliance with any ordinance or
law” that, like Wis. Stat. § 66.0413(1)(b), requires “the tearing down of any property.”
Resisting the application of this exclusion, the Association contends both that “the
evacuation itself is an insured event that caused damages” and that the evacuation and
raze orders were “the result of the loss, not the cause of a loss.” But the complaint alleged
that the residents’ compliance with the City’s orders caused them to leave and lose their
homes.
Regardless, the Association urges that the Legal Liability Coverage Form does
away with the ordinance-or-law exclusion. Here, too, we cannot agree. The policy, which
the Association incorporated into its complaint, see FED. R. C IV. P. 10(c), says that the
Legal Liability Coverage Form “may be attached to your policy,” and that if it is “part of
this policy,” the ordinance-or-law exclusion does not apply. Here, however, the policy’s
“Listing of Forms” does not include the Legal Liability Coverage Form, and the form is
not attached to the policy in the record—one that, according to the Association, “is a true
and correct copy of the insurance policy in question.” At no point has the Association
argued that the policy it attached to its complaint is incomplete. The district court was
therefore correct to conclude that the provisions of the Legal Liability Coverage Form are
not part of the parties’ contract, meaning that the ordinance-or-law exclusion was in
effect.
The Collapse Exclusion. Finally, even if neither the ordinance-or-law exclusion nor the
rust exclusion applies, the policy’s collapse exclusion bars coverage for losses caused by
“loss of structural integrity.” The complaint alleged that the City deemed the building to
be in danger of collapsing because of structural deficiencies—not that the building
abruptly fell, which the policy would cover.
As a last resort, the Association posits that the insurance policy and its exclusions
in particular run afoul of Wisconsin public policy. In the Association’s view, because the
policy excludes losses caused by compliance with ordinances or laws, the policy
encourages policyholders not to comply and to remain in an unsafe building to obtain
coverage. But even if residents could remain in the building despite the evacuation
order—or even if the ordinance-or-law exclusion were eliminated—the collapse
exclusion would bar coverage. Prior notice that the building was in danger of collapsing
would mean that any collapse would not be covered. And although the Association

-- 6 of 7 --

No. 23-3191 Page 7
argues that the policy provides only “illusory” protection, its plain language says
otherwise. The Association correctly points out that “[i]llusory policy language defines
coverage in a manner that coverage will never actually be triggered.” Cont’l W. Ins. Co. v.
Paul Reid, LLP, GPS, Inc., 715 N.W.2d 689, 691 (Wis. Ct. App. 2006). Here, the fact that the
policy covers, at a minimum, loss and damage resulting from a sudden collapse means
that it is not illusory.
III
In no way are the unfortunate circumstances giving rise to this case lost on us. The
residents of Horizon West Condominiums had little choice but to flee their homes at a
moment’s notice, and we have no doubt they have experienced many hardships, financial
and otherwise. Our role, however, is limited to interpreting the terms and conditions of
the policy between the Association and Travelers. In these circumstances, the policy’s
plain and unambiguous terms and conditions leave us no choice but to AFFIRM.

-- 7 of 7 --