Wisconsin Insurance Law Year in Review
Insurance Coverage Litigation Update 02/14/14
The insurance coverage team at Quarles & Brady continually reviews emerging trends and changes in insurance coverage litigation. In 2013, Wisconsin courts were again active in the insurance coverage arena. Several of the year’s noteworthy decisions addressed (1) policy exclusions; (2) volitional/criminal/intentional acts; (3) advertising injuries; (4) reservations of rights; (5) insurer insolvencies; (6) apportioning liability; and (7) mortgagees’ rights under property and casualty policies. Below is a summary of the key decisions.
Interpreting and Applying Policy
Many of this year’s noteworthy decisions addressed what is the crux of many coverage disputes: interpreting policy exclusions and applying them to the unique facts of individual claims.
1. Phillips v. Parmelee, 840 N.W.2d 713 (Wis. 2013)
In Phillips v. Parmelee, the Wisconsin Supreme Court came to the rather unremarkable conclusion that a broadly worded asbestos exclusion in a business owners policy barred coverage for damage caused by the release of asbestos in the policyholder’s building. The primary impact of the decision may be what the Supreme Court did not say. Namely, the Supreme Court did not engage in a volitional acts analysis (a source of much consternation for policyholders and much confusion for courts, as described in more detail below in the section entitled “Volitional, Criminal and Intentional Acts”), because the insurer did not present that issue for review. The Court of Appeals had performed such an analysis and found that the allegations of the underlying complaint (fraud and negligent failure to disclose defective conditions) triggered an initial grant of coverage. In particular, the alleged accidental exposure to and dispersal of asbestos caused by cutting ductwork that was, as it turned out, wrapped in asbestos constituted an “occurrence,” resulting in “property damage” under the policy’s broad definition of that term in the form of “loss of use of tangible property that is not physically injured.” Because this issue was not before the Supreme Court, the Court of Appeals’ discussion remains binding authority.
2. Wilson Mutual Insurance Co. v. Falk, No. 2013AP691, 2013 WL 6480760 (Wis. Ct. App. Dec. 11, 2013) (recommended for publication)
In Wilson Mutual Insurance Co. v. Falk, the Wisconsin Court of Appeals added another chapter to the growing pantheon of decisions examining whether losses caused by excrement fall within a policy’s pollution exclusion. In recent years, both the Court of Appeals and Supreme Court have grappled with whether bat guano qualifies as a “pollutant.” This time, the Court of Appeals faced the same question, but with respect to manure. The policyholders sought coverage under their farmowners policy after manure they had spread on their fields wound up contaminating a local aquifer and neighboring wells. Their insurer denied coverage, citing the policy’s pollution exclusion. The court emphasized that one must examine the meaning of “pollutant” from the standpoint of a reasonable person in the position of the insured. Because a reasonable farmer views manure not as a pollutant, but as “liquid gold” that fertilizes fields, the court held that the pollution exclusion did not bar coverage.
3. Barrows v. American Family Insurance Co., No. 2013AP720, 2013 WL 6418929 (Wis. Ct. App. Dec. 10, 2013) (recommended for publication)
In Barrows v. American Family Insurance Co., the Court of Appeals found that the intra-insured exclusion in a homeowners policy barred coverage even though the claimant was not insured under the policy. Tragically, an 11-year-old boy shot and killed himself with his stepfather’s gun. The boy’s father sued the mother, stepfather, and their homeowners insurer for wrongful death. The insurer denied coverage under its intra-insured exclusion, which barred coverage for “bodily injury to any insured.” The policy further defined “bodily injury” to include “resulting loss of services, required care and death.” The son was an insured under the relevant homeowners policy, but the father was not. The court adopted what it identified as “the majority rule that an intra-insured exclusion like the one in [the] policy bars coverage for a wrongful death claim arising out an insured’s death, even if the claimant is a non-insured.” Essentially, the father’s claims were all derivative of his son’s (an insured’s) bodily injury, thereby triggering the intra-insured exclusion for the father’s wrongful death claim. Like the Supreme Court in Phillips v. Parmelee, the court did not address the insurer’s alternative argument that there was no initial grant of coverage.
4. Heinecke v. Aurora Healthcare, Inc., 841 N.W.2d 52 (Wis. Ct. App. 2013)
In Heinecke v. Aurora Healthcare, Inc., the Court of Appeals examined not only a policy exclusion, but an exception to that exclusion. A hospital’s decorative water fountain allegedly emitted a bacteria that caused several people to contract pneumonia. The hospital sued the contractor that constructed the fountain, as well as the contractor’s liability insurers. The insurers denied coverage under the “fungi or bacteria” exclusion. On appeal, all parties agreed that the exclusion applied, but the contractor argued that an exception to the exclusion — the consumption exception — reinstated coverage. The consumption exception would resurrect coverage if the fungi or bacteria “are, are on, or are contained in, a good or product intended for consumption.” The policy did not define the term “consumption.” The contractor argued that the exception should apply because “consumption” can include the observation and enjoyment of art. The Court of Appeals acknowledged that such an alternative definition of consumption exists but found that applying that definition here would lead to absurd results and run afoul of the parties’ objectively reasonable expectations. Instead, the court applied a more common definition of consumption — “to eat, to drink, to use up, to consume” — and held that the exception did not apply to the decorative water fountain.
5. Konrad Marine, Inc. v. Marine Associates, Inc., No. 2012AP1260, 2013 WL 1580354 (Wis. Ct. App April 16, 2013) (unpublished)
In Konrad Marine, Inc. v. Marine Associates, Inc., the Court of Appeals examined a liability policy’s business-risk exclusions and found that some damages fell within the exclusions, and some damages did not. Marine Associates improperly cut teeth into gears that were then installed — and eventually caused failures — in Konrad Marine’s stern drives for boats. A jury awarded Konrad Marine several categories of damages. Marine Associates’ liability insurer conceded coverage for damage to Konrad Marine’s property (i.e., the stern drives). But the insurer denied coverage for several other categories of damages, including (1) costs associated with Marine Associates’ gears themselves (e.g., the costs of installed gear sets that failed, replacement gears, and testing to determine the cause of failures); (2) costs of replacing gear sets in stern drives that had not yet failed; and (3) Konrad Marine’s lost profits. The Court of Appeals agreed that the “your work” and “your product” business-risk exclusions barred coverage for the first two categories of damages. In so holding, the Court of Appeals rejected the policyholder’s arguments that (1) damage to the stern drives occurred as soon as faulty gears were installed in the drives, not after the drives failed; and (2) the business-risk exclusions apply to the policy’s coverage for property damage, but not to the products-completed operations coverage. However, the Court of Appeals also found in the policyholder’s favor with respect to lost profits, because Konrad Marine’s reputational injury and ensuing lost profits resulted, at least in part, from both a covered loss (physically damaged stern drives) and a non-covered loss (the policyholder’s own faulty gears). The court determined it was “not practicable under the facts of this case to parse the source of consequential lost profits between both noncovered and covered losses.”
Volitional, Criminal and Intentional Acts:
1. Schinner v. Gundrum, 833 N.W.2d 685 (Wis. 2013)
In Schinner, the insured, Gundrum, hosted an underage drinking party at his family’s business. One of the underage partygoers assaulted another attendee, Schinner, leaving him paralyzed. Schinner sued Gundrum and Gundrum’s homeowner’s insurer alleging Gundrum negligently created the conditions that led to the assault. Like most liability policies, Gundrum’s homeowner’s policy provided coverage for harm caused by an “occurrence,” defined as “an accident.”
In a deeply divided 4-3 decision, the Wisconsin Supreme Court found the policy did not cover Schinner’s injuries. The Supreme Court unanimously held courts should determine whether “an accident” caused bodily injury or property damage by analyzing the events from the insured’s standpoint, not from the perspective of the injured party. But, the Supreme Court split on what event mattered — the party or the assault — in assessing whether an accident had occurred.
A narrow majority of four justices found Gundrum’s conduct in hosting the party, inviting the aggressor and failing to intervene as the dispute escalated were sufficiently “volitional” that no accident could be said to have occurred from Gundrum’s perspective, and further that by this conduct, Gundrum proximately caused Schinner to suffer foreseeable injuries. Perhaps conceding that its holding was a stretch, the majority also relied heavily on the public policy against allowing those who host underage drinking parties to avoid responsibility for injuries their guests sustain.
The vigorous dissent filed by the remaining justices identified a different “policy” that should be central to the outcome — the insurance policy — and argued the assault, not the party, was the “occurrence” and further, that the assault was clearly an accident from Gundrum’s perspective. The dissent also faulted the majority for improperly (1) inserting a foreseeability test into the analysis; and (2) “undermin[ing] the well-established premise that intentional acts constitute an ‘occurrence’ if the injury is unexpected or unintended.”
The substantial disagreement between the justices strongly suggests that the result in Schinner is the product of unique facts, and that Schinner does not represent the final word on the subject of coverage for harm or injury caused by negligent, though “volitional” acts.
2. Estate of Dobry v. Wilson Mutual Insurance
Co., No. 2013AP580, 2013 WL 6418930 (Wis. Ct. App. Dec. 10, 2013) (not
recommended for publication)
In Dobry, the insured inadvertently shot and killed his friend Dobry while playing with a gun during an underage drinking party at the insured’s home. A jury found the insured guilty of negligent homicide. Dobry’s estate sued the insured and his insurer. The insurer denied coverage and moved for summary judgment of no coverage. The Court of Appeals assumed without deciding that there had been an occurrence, but otherwise agreed with the insurer that the policy’s criminal acts exclusion applied, barring coverage for bodily injury “that is the result of a criminal act of an insured.” Dobry’s estate argued the criminal acts exclusion was ambiguous and should be construed to apply only to coverage for injuries caused by intentional criminal acts, not negligent homicide. The Court of Appeals disagreed, finding that nothing in the exclusion “requires that the criminal act be intentional.”
3. Fetherston v. Parks, No. 2012AP1920, 2013 WL 6500446 (Wis. Ct. App. December 12, 2013) (recommended for publication)
In rather stark contrast to Schinner and Dobry, the Fetherston decision establishes that under certain policies, coverage may exist for personal injuries caused by the insured’s intentional,andcriminal conduct, in this case driving recklessly to evade chasing police officers. The insured’s auto policy excluded coverage for “bodily injury or property damage caused intentionally by, or at the direction of, and substantially certain to follow from the act of an insured person.” (emphasis added). Construing this language, the Court of Appeals held the insurer must prove the insured subjectively and objectively intended to cause harm. Neither party disputed that the insured’s conduct in weaving through traffic at 90 miles per hour was substantially certain to result in injury, satisfying the objective prong. But, there was no evidence that the insured “had in mind” or “planned” to cause injury. Absent the missing evidence of subjective intent, the Court of Appeals held the exclusion did not apply to bar coverage.
In reaching its conclusion, the Court of Appeals noted that the auto policy’s intentional acts exclusion is distinct from the text typically included in CGL policies defining an “occurrence” as “an accident . . . neither expected nor intended by the insured” in so far as “intended” and “expected” are disjunctive elements of the occurrence definition, meaning that there is no coverage if either applies.
4. Laufman v. Safeco Ins. Co. of Am., No. 2012AP2116, 2013 WL 2157891 (Wis. Ct. App. May 21, 2013) (unpublished)
Plaintiffs, lakefront property owners, sued North Central Power Co. and its directors and officers, alleging that North Central’s “neglect” in operating a dam caused the lake on which plaintiffs lived to revert to a river. North Central sought coverage under its CGL policy, equating the allegation of “neglect” with negligent conduct covered by the policy. The Court of Appeals disagreed, noting that the property owners actually alleged “intentional neglect . . . intentionally calculated” to lead to the destruction of the lake, not negligence. According to the Court of Appeals, such intentional conduct is not an “accident,” a term that denotes an “unexpected,” “unforeseen,” or “unintentional” event.
1. Air Engineering, Inc. v. Industrial Air Power, LLC, 828 N.W.2d 565 (Wis. Ct. App. 2013)
Air Engineering sued Industrial asserting various causes of action based on Industrial’s alleged misappropriation and use of Air Engineering’s website source code, site content and an internet advertising system, which system “recognizes relevant terms in a potential customer’s online search and strategically directs select advertisements to that customer, including purchased domain name links to product information.”
Industrial tendered the defense to its insurer, who intervened in the lawsuit, seeking a declaratory judgment that it had no obligation to defend or indemnify. The trial court agreed with the insurer.
The Court of Appeals reversed, finding the allegations of the complaint triggered coverage under the “advertising injury” portion of the policy and specifically the enumerated offense of “the use of another’s advertising idea in your ‘advertisement.’” According to the Court of Appeals, the website content, source code and internet advertising system each represented “advertising ideas” in that each was “an idea for calling public attention to a product or business . . . so as to increase sales or patronage.” Equally importantly, the court rejected the insurer’s contention that coverage was barred under the “Knowing Violation of Rights of Another” exclusion, which essentially bars coverage for acts intended to cause advertising injury. In so doing, the court joined courts across the country that have held if intent is not an element of the asserted cause of action, the insurer owes a duty to defend even if, as was the case in Air Engineering, the complaint alleges “willful and malicious” conduct.
2. Lexington Insurance Co. v. Tudor Insurance Co., No. 11-C-809, 2013 WL 461279 (E.D. Wis. Feb. 6, 2013)
In the 1990’s, Trek Bicycle Corporation developed contractual relationships with the two best known cyclists in U.S. history — Lance Armstrong and Greg LeMond. Following the well-publicized feud that erupted between Armstrong and LeMond, LeMond’s company sued Trek for failing to protect the LeMond brand from disparaging comments made by Armstrong and his representatives. Trek tendered defense of the claim to its liability insurers. One of the insurers, Lexington, agreed to defend, but the other insurer, Tudor, disclaimed coverage and refused to defend. Lexington then sued Tudor to recoup some of the defense costs that Lexington paid.
The District Court agreed with Trek and Lexington that Tudor had a duty to defend. Tudor’s policy included personal and advertising injury coverage for injury arising out of slander, libel, or disparagement of an organization’s goods, products, or services. LeMond asserted only breach of contract claims against Trek. However, the personal and advertising injury coverage still applied because the factual allegations in LeMond’s complaint qualified as charges of defamation and disparagement. Tudor’s policy also required that the personal and advertising injury be caused by an offense arising out of the insured’s business. It did not matter that Armstrong — and not Trek — was the bad actor, because “Trek was undoubtedly in the Lance Armstrong (and Greg LeMond) business.” The District Court also rejected — in largely summary fashion — Tudor’s arguments that several exclusions eliminated coverage, and that Lexington could not bring claims for contribution and/or subrogation following Tudor’s settlement with Trek.
Reservation of Rights/Duty to Defend:
DeMarco v. Keefe Real Estate, Inc., No. 2012AP1933, 2013 WL 6818148 (Wis. Ct. App. Dec. 27, 2013) (not recommended for publication)
The DeMarco coverage dispute arose out of an underlying action in which the plaintiff alleged the insured failed to disclose substantial defects in the home he sold to the plaintiff. The insured sought coverage under his homeowner’s and umbrella policies. The insurer agreed to defend, subject to a reservation of rights, and paid defense costs for several months until the litigation settled with the insurer agreeing to contribute a modest portion of the settlement. The insurer then failed to pay the final outstanding defense bill and failed to contribute its share of the settlement.
The insured filed the coverage action seeking reimbursement of the amounts paid to defend and settle the underlying litigation. The trial court granted the insurer’s motion for summary judgment finding that the underlying complaint did not allege an “occurrence.” The Court of Appeals agreed that the insurer owed no duty to indemnify the insured because the misrepresentations and nondisclosures alleged in the complaint constituted “volitional” acts, not “accidents.” But, the court affirmed the trial court only with respect to the finding of no duty to indemnify the insured.
With respect to the duty to defend, the Court of Appeals reversed, finding that the insurer owed the insured a defense until the moment the court found no coverage, a moment that occurred several months after the underlying settlement. Because the insurer stopped paying defense costs before obtaining a declaration of no coverage, the insurer breached its duty to defend and was liable for “all damages that result from that breach of its duty,” including the fees and costs the insured incurred in suing the insurer but excluding any severable amounts incurred in seeking indemnification for the insured’s share of the settlement (which share the insured agreed to pay before the insurer breached its duty to defend).
In Re Ambac Assurance Corp., 351 Wis. 2d 539 (Wis. Ct. App. 2013)
When insurers become insolvent, it can present all kinds of problems for insureds. Insurance by definition is designed to provide security and protection for catastrophic risks, and to have that security and protection suddenly gone can have devastating consequences. The insurer insolvency scenario also presents special problems for the courts and regulators charged with sorting out the various competing interests for the insurer’s limited pool of assets. For that reason, Wisconsin, like most states, has a specific statutory scheme, in Wis. Stats. Ch. 645, to deal with insurer insolvency through rehabilitations and liquidations.
In Ambac, the Wisconsin Court of Appeals, in a case that has drawn nationwide attention in the financial press, grappled with numerous issues involving Wisconsin’s insurer insolvency scheme in the context of the largest insurer insolvency in Wisconsin history. While the facts of the case are inordinately complex, and have involved years of drawn out court proceedings, essentially Ambac was a Wisconsin-formed entity that rose to become one of the world’s largest insurers of financial instruments — a specialized type of insurer known as a “monoline.” Ambac was hard hit by the subprime mortgage crisis in 2008, and its claims skyrocketed to the tune of $150 million per month. The Wisconsin Insurance Commissioner intervened, and under the advice of special counsel approved a “segregated account” of troubled policies, which would receive less favored treatment than claims made under other policies. The trial court approved the plan of rehabilitation for the segregated account, and the Court of Appeals affirmed. In doing so, the court relied heavily on the legal presumption giving deference to the Commissioner’s discretion. The implications of this decision, portions of which may yet be reviewed by the Supreme Court, could be significant. Disparate treatment of policyholders based on claims history is an extraordinary measure. It may well be that the decision will be limited to its peculiar and unique facts, but a broad reading of the case could have serious implications for insurance coverage and future insurer insolvencies.
Apportioning Liability Among Jointly and Severally Liable Policies:
Cleaver Brooks, Inc. v. AIU Insurance Co., 839 N.W.2d 882 (Wis. Ct. App. 2013)
In Cleaver Brooks v. AIU Insurance Co., the Wisconsin Court of Appeals held that the insured, not the insurer, has the right to control the manner and order in which multiple triggered policies respond to a claim. In that case, Cleaver Brooks sought insurance coverage for hundreds of thousands of asbestos suits, most of which included allegations that claimants were exposed to asbestos during periods when Cleaver Brooks had $35 million of unexhausted excess liability coverage. In each of the years of coverage, three excess policies formed part of a quota share, meaning that each of the insurers was responsible for a percentage of the policy limits. Two of the three policies had duties to defend; the third only included a duty to indemnify. Given that structure, the insured wanted the policies with defense obligations to remain on the risk as long as possible by having all three policies pay any settlements and judgments. The insurers sought to have the policies respond sequentially.
The court ruled that because the insurers were jointly and severally liable, the insured could choose how its policies would respond to maximize its overall coverage. Although the specific facts of the case arose in the context of a quota share, there are numerous circumstances in which the order policies respond will impact the amount of available coverage. For example, on a claim that triggers coverage in multiple years, an insured may self-insure some portion of the coverage through retentions or fronting policies. Or, an insured may want to allocate losses in earlier years of coverage to preserve the limits of later issued policies. Thus, the broader principle decided in Cleaver Brooks — that the insured can decide the order in which its insurance coverage applies — is a significant win for Wisconsin insureds.
Mortgagees’ Rights Under Property and Casualty Policies
Waterstone Bank, SSB v. American Family Mutual Insurance Co., 832 N.W.2d 152 (Wis. Ct. App. 2013)
In Waterstone Bank, a business owners policy contained vacancy provisions that precluded coverage for damage caused water, vandalism, or theft if the property is vacant for more than 60 days. The subject properties sustained damage from water, vandalism, and theft during a time they were vacant. However, the bank that held mortgages on the properties sought coverage under the policy’s “mortgageholders” clause, which preserved coverage for mortgagees (mortgage holders) on claims that would otherwise get denied because the mortgagor (borrower) failed to comply with the terms of the policy. The Wisconsin Court of Appeals agreed with the insurer that the mortgageholders clause did not apply in these circumstances because the vacancy provisions were not conditions to be obeyed. Instead, the vacancy provisions addressed risks that the insurer never assumed. “The particular loss [water damage, vandalism, or theft during periods of vacancy] was not covered in the first place, and the mortgageholder clause does not create coverage for a risk never assumed.”