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Wisconsin Insurance Law Year in Review

Insurance Coverage Litigation Law Update Jeffrey O. Davis, Patrick S. Nolan, Keith A. Bruett, Patrick J. Murphy, Brandon R. Gutschow

The insurance coverage team at Quarles & Brady continually reviews emerging trends and changes in insurance coverage litigation. In 2012, Wisconsin courts were especially active in the insurance coverage arena. Several of the year's noteworthy decisions addressed (1) claims-handling practices, (2) environmental claims, (3) advertising injuries, (4) construction defects, (5) volitional acts analysis, (6) procedural matters and (7) various other topics. Below is a summary of the key decisions. 

Communication Is Key - Claims-Handling Decisions: Maxwell v. Hartford Union High School District, 2012 WI 48; Society Insurance v. Bodart, 2012 WI App 75; and American Design & Build, Inc. v. Houston Casualty Co., 2012 WL 719061 (E.D. Wis.)

Several recent decisions highlight the need for communication between policyholders and insurers early in the claims-handling process. Clear communication can prevent future disputes and unexpected costs, and it can identify conflicts of interest.

In Maxwell v. Hartford Union High School District, the Wisconsin Supreme Court held - subject to a vigorous dissent - that an insurer which assumes the defense of its insured without reserving its rights to contest coverage can nonetheless later seek to foist the costs of an adverse judgment on the policyholder. The Court based this holding on a "general rule" that neither waiver nor estoppel can expand coverage beyond that provided in the policy but narrowed the holding in two respects. First, an insurer that intends to deny coverage based on the policyholder's breach of a forfeiture clause (e.g., a notice or cooperation clause), as opposed to a coverage clause, must timely reserve its rights or risk waiving the forfeiture defense. Second, the Court was careful to distinguish and preserve a separate, but related, line of authority holding that insurers which breach their duty to defend or act in bad faith are liable for all damages naturally flowing from such conduct, including damages not covered under the policy and/or in excess of policy limits.

In Society Insurance v. Bodart, the Wisconsin Court of Appeals addressed the situation in which an insurer defends its policyholder against both covered and uncovered claims but settles all potentially covered claims, leaving only uncovered claims for further litigation. The Court held that insurers can abandon the defense of the remaining uncovered claims, provided that (1) the settlement of the covered claims was in good faith and (2) the insurer's withdrawal will not prejudice the policyholder's continued defense of uncovered claims.

In American Design & Build, Inc. v. Houston Casualty Co., the Eastern District of Wisconsin denied a policyholder's motion seeking summary judgment that its professional liability insurer breached its duty to defend. After receiving the insurer's reservation of rights letter denying coverage, the policyholder undertook its own defense. The Court denied the policyholder's motion because the reservation of rights letter did not specifically deny a duty to defend and, prior to the filing of summary judgment, the insurer reimbursed the policyholder's defense costs.

Cleaning Up - Environmental Coverage Decisions: NCR Corp. v. Transport Insurance Co., 2012 WI App 108; Ansul Inc. v. Employers Ins. Co. of Wausau, 2012 WI App 135; Miller v. Safeco Ins. Co. of Am., 683 F.3d 805 (7th Cir.); WRR Environ. Servs. Inc. v. Admiral Ins. Co., 2012 WL 3904364 (E.D. Wis.); Hirschhorn v. Auto-Owners Ins. Co., 2012 WI 20; and Phillips v. Parmelee, 2012 WL 6115985 (Wis. Ct. App.)

Wisconsin courts were especially active during 2012 in deciding coverage cases involving environmental claims. While not entirely groundbreaking, these decisions reinforced important principles that courts use to analyze coverage for these claims that often involve high exposure and complex claims.

In NCR Corp. v. Transport Insurance Co., the Wisconsin Court of Appeals clarified two key aspects of the expected or intended defense to coverage, a limitation on coverage that comes from a general liability policy's definition of a covered "occurrence" as "an accident . . . which results, during the policy period, in personal injury or property damage neither expected nor intended from the standpoint of the insured." According to the Court of Appeals, the proper analysis requires (1) consideration of the insured's expectations at the time the conduct causing damage occurs, not at all times up through and including later policy inception, as insurers frequently argue (conflating the expected/intended limitation with the "known loss" defense); and (2) consideration of the insured's actual, subjective expectations and intentions, not the expectations or intentions of an objective, reasonable person in the insured's position (which, if it were the law, would mean merely negligent conduct might not trigger a covered occurrence - an absurd result, given that general liability policies are specifically purchased to cover negligent conduct).

In Ansul Inc. v. Employers Insurance Co. of Wausau, the Wisconsin Court of Appeals affirmed the trial court's judgment that the insured forfeited coverage by failing to notify its insurer of government-ordered remediation for more than a decade, and only then, by filing suit against its insurer, seeking a declaration of coverage. The Court of Appeals was unmoved by the insured's claim that it withheld notice from Certain Underwriters at Lloyd's & London Market Insurance Companies (Lloyd's) while providing notice to other carriers, on the advice of its broker, believing that Lloyd's would deny the claim and increase the insured's premiums. The trial court and Court of Appeals agreed that the insured was at least 11 years late in giving notice, had failed to carry its burden of proving Lloyd's was not prejudiced by the delay, and breached its duty to cooperate by providing notice in the form of a lawsuit "immediately set[ting] itself at odds with Lloyd's" and "adopting an adversarial position."

In Miller v. Safeco Insurance Co. of America, the Seventh Circuit, applying Wisconsin law, rejected the insurer's argument that the continuous trigger theory applies only to third-party claims, holding instead that under Wisconsin law, continuous and repeated damage or injury occurring progressively over several policy periods triggers each of the policies at issue even in the context of first-party property claims. The court also confirmed that Wisconsin's prohibition against creating coverage through estoppel does not conflict with the well-established rule that an insurer is barred from relying on an exclusion about which it fails to inform the insured until after the loss occurs (as sometimes happens when the insurer does not immediately deliver a copy of the policy containing the exclusion to the insured). Prohibiting the insurer from relying on an undisclosed exclusion has nothing to do with estoppel; undisclosed terms are simply not part of the parties' agreement in the first place.

Several decisions focused on specific exclusions that can eliminate coverage for environmental claims. First, in WRR Environmental Services Inc. v. Admiral Insurance Co., a federal district court applying Wisconsin law reformed a general liability policy to eliminate the absolute pollution exclusion, finding the exclusion had been included by mutual mistake. The insured had purchased the policy to cover the hazardous waste facility it operated. A month after the policy's effective date, the insurer sent the insured a series of declarations and endorsements, including an absolute pollution exclusion. However, the insurer's agent also executed and delivered a hazardous waste facility certificate of liability insurance - essentially a promise by the insurer to the insured and the EPA that the policy would cover sudden and accidental occurrences arising from the operation of the hazardous waste facility. The insured continued to pay premiums and sent the certificate to the EPA, who accepted the certificate as evidence of financial responsibility. Approximately 15 years later, the insurer first notified the insured of its position that the certificate was invalid. Under these facts, the court found that the only reasonable explanation for the certificate is that the insured asked for coverage for sudden and accidental occurrences, and the insurer agreed to provide such coverage. Issuing the exclusion was a mistake that contradicts the intent of the contracting parties, requiring reformation.

Second, in Hirschhorn v. Auto-Owners Insurance Co., the Wisconsin Supreme Court construed the pollution exclusion in a homeowner's insurance policy to bar coverage for damage caused by an accumulation of bat guano. Reversing the Court of Appeals, the Supreme Court broadly construed "pollutants" to unambiguously include guano - an "irritant" and "contaminant," according to the Court. Further, the Supreme Court held that the homeowner's loss resulted from "discharge, release, escape, seepage, migration or dispersal" of guano, because it "deposited and once contained between the home's siding and walls, emitted a foul odor that spread throughout the inside of the home, infesting it to the point of destruction." While the facts of Hirschhorn are unique, the Supreme Court's broad construction of the pollution exclusion is notable and may be of concern to policyholders tendering environmental claims to their insurers.

Finally, in Phillips v. Parmelee, the Wisconsin Court of Appeals upheld and applied a broad asbestos exclusion to deny coverage. The exclusion provided that the policy did not apply to "property damage" with respect to "any loss arising out of, resulting from, caused by, or contributed to in whole or in part by asbestos, exposure to asbestos, or the use of asbestos." Of perhaps greater significance than this ultimate ruling, however, the Court of Appeals found that the allegations of the underlying complaint (fraud and negligent failure to disclose defective conditions) triggered an initial grant of coverage. The Court held that the alleged accidental exposure to and dispersal of asbestos caused by cutting pipes that were, 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."

The New Frontier - Coverage for Advertising Injury: Acuity v. Ross Glove Co., 2012 WI App 70; and Sawyer v. West Bend Mutual Insurance Co., 2012 WI App 92

When competitors sue each other, they often turn to the "personal and advertising injury" section of their commercial liability policies to seek defense and/or coverage. Success in that quest will generally depend on whether the complaint alleges that the insured committed one or more of a series of "enumerated offenses" set forth in the policy and, depending on the offense, whether the insured engaged in "advertising" that caused the alleged harm. Though case law construing this type of coverage has been relatively sparse to date, it is an evolving and increasingly important area.

Wisconsin courts clarified the scope of this coverage in several ways in 2012. In Acuity v. Ross Glove Co., Ross Glove, a manufacturer of winter protective gear, was sued for trade dress infringement by a rival manufacturer. Ross Glove sought defense and coverage from its insurer. Trade dress was (and is typically) one of the "enumerated offenses" covered by the policy; the concern for Ross Glove was that any advertising was done by a third party. (Ross Glove's products were sold through Cabela's, who had also been sued.) The Wisconsin Court of Appeals essentially said, "No problem": the product packaging, which Ross Glove did create, was a form of "notice" and "publication" that satisfied the requirement that there be an "advertisement." The court further ruled that the advertising need only be a "contributing factor" to the harm in order to trigger coverage. Since the packaging and design of the product allegedly caused confusion and thus contributed to the alleged harm (along with Cabela's marketing activities), the causal nexus requirement was met.

The Wisconsin Court of Appeals delivered more good news to policyholders in Sawyer v. West Bend Mutual Insurance Co., where the policyholder had been hit with a class action suit under the Telephone Consumer Protection Act (TCPA). The policyholder had sent "junk faxes" in order to advertise its products. The policy at issue included as an enumerated offense "oral or written publication . . . that violates a person's right of privacy." Whether this language encompassed "junk fax" suits is an issue that has divided courts around the country; indeed the Seventh Circuit, among others, had previously found that such suits were not covered. The Sawyer court sided with those courts finding coverage, ruling that the right of privacy included a "right of seclusion" that was sufficiently implicated by the sending of an unwanted fax.

Property Damage - Whether It Exists and When It Occurs is Key in Construction Defect Coverage Cases: W.D. Hoard & Sons Co. v. The Scharine Group, Inc., 2012 WL 1726800 (Wis. Ct. App.); and Pamperin Rentals II, LLC v. R.G. Hendricks & Sons Construction, Inc., 2012 WI App 125

Insurance coverage in the area of construction disputes has been frequent fodder for appellate litigation over the past several years. That trend continued in 2012.

In Pamperin Rentals v. Hendricks, the Wisconsin Court of Appeals considered whether a contractor had coverage for a lawsuit alleging that the concrete it had installed was defective. Though the complaint broadly alleged future consequential and other broad forms of damage, facts revealed in discovery showed that the only "harm" was for replacement of defective concrete. Because the insurer had defended, the court reasoned that the actual facts learned in discovery were what mattered, not what was alleged in the complaint. As a result, the Pamperin court found that there was no third-party property damage. In addition, coverage was barred by the "business risk" exclusions - namely, the standard "your work" exclusion - which bars coverage for claims based solely on damage to the insured's completed work.

In W. D. Hoard & Sons v. Scharine Group, Inc., the plaintiff was the owner of a farm that had contracted for the construction of a manure basin that had been built over an artesian water source. Due to an alleged defect in the concrete, the basin leaked manure into the groundwater. The plaintiff sued the insurers of both the contractor who built the basin and the engineer who designed it. Unfortunately for the plaintiff, the policies issued to the contractor, though in force at the time of the construction, had expired at the point manure began leaking. Because the policies required that property damage occur during the policy period, the court had little trouble concluding there was no coverage for the claim against the contractor. With respect to the claim against the engineer, the engineer's policy contained a "professional services" exclusion. (The opinion does not say whether the engineer had a separate errors and omissions policy to cover professional services.) The plaintiff argued that the engineer, by supervising the project, was acting as a general contractor, not a "professional." Once again, the court had little trouble rejecting this coverage argument in light of deposition testimony that the engineer was hired as an engineer and that the policy expressly made reference to "supervisory" services as part of the professional services exclusion.

Neither of these cases is particularly groundbreaking. They do, however, serve as reminders of certain coverage basics: (1) it is the damage, not the accident, that triggers coverage under a standard CGL policy, and there may be instances where the two occur at different times; (2) coverage generally does not exist for faulty workmanship unless there is damage to surrounding property; and (3) once an insurer defends, coverage may be determined by the underlying facts, not the allegations of the complaint. It also bears noting that in 2012 the Wisconsin Supreme Court accepted review of Acuity v. Society Insurance, 2012 WI App 13, 339 Wis.2d 217, 810 N.W.2d 812, a case we discussed in our 2011 "Year in Review." The case settled just before argument, meaning that the Court of Appeals' decision remains the law. To recap, that decision further establishes that coverage exists for faulty workmanship where there is damage to other property. Indeed, the so-called "business risk" exclusions will only apply where the damage is to "that particular part" of the property on which work is being performed, a phrase the court construed narrowly to mean only the wall where work was being performed would be subject to the exclusion. Therefore, when the wall collapsed, damage to the surrounding property was covered.

Examining Intent - A New Chapter In the Volitional Acts Analysis: Schinner v. Gundrum, 2012 WI App 31

Under Wisconsin law, an act that evidences "a degree of volition inconsistent with the term accident" does not trigger a covered "occurrence." In recent years, Wisconsin courts have struggled to determine which acts are sufficiently volitional to preclude coverage under this standard. For example, is negligent failure to provide information "volitional" and, therefore, not a covered occurrence?[1] Or, is seizing and destroying railcars thought to be abandoned sufficiently "volitional" that it does not trigger a covered occurrence?[2]

The Wisconsin Court of Appeals clarified an important step in the volitional acts analysis in Schinner v. Gundrum, where the insured homeowner hosted a party and a fight broke out between guests, leading to plaintiff's injury. The issue was whether the assailant's volitional act precluded coverage for the insured homeowner. The Court of Appeals held that a court analyzing alleged volitional acts must view the events from the perspective of either the insured or the injured party (the court did not decide which) and not from the perspective of the third-party actor who caused the injury or damage. So, coverage exists for bodily injury caused by an assault as long as neither the insured nor the injured party committed the assault.

Equally important, the Court of Appeals clarified that the dispositive question is not whether the insured committed some non-accidental, volitional act somewhere in the course of events that ultimately led to the act that caused bodily injury or property damage (in this case, hosting a party attended by the assailant, or providing alcohol to the assailant) - the key question is whether the act that caused injury or damage itself was unintended from the perspective of the insured. Under the facts at issue in Schinner, as long as the insured did not himself assault the victim, the insured's liability for the victim's injuries must be covered by the insurer. The Wisconsin Supreme Court has accepted review of the Court of Appeals' decision, making this a case to watch in 2013.

Dotting I's and Crossing T's - Procedural Decisions: Olson v. Farrar, 2012 WI 3; Ullerich v. Sentry Insurance, 2012 WI App 127; and ; and Fiserv Solutions, Inc. v. Westchester Fire Ins. Co., 2012 WL 2120513 (E.D. Wis.)

Wisconsin courts issued several decisions in 2012 bearing on procedural matters. Although sometimes overlooked as seemingly insignificant, procedural issues can have a big impact on the strategy and outcome of insurance coverage cases.

The four-corners rule limits inquiry into an insurer's duty to defend solely to the four corners of the underlying complaint against the policyholder - if the complaint contains allegations that, if true, would trigger coverage, then the insurer must provide a defense, even if extrinsic evidence might show the allegations to be false. In Olson v. Farrar, the Wisconsin Supreme Court addressed the scope of the four-corners rule in situations where insurers provide a defense but then stay the underlying case while litigating the issue of insurance coverage. Relying on the four-corners rule, the insurer in Olson sought to prevent its policyholder from introducing extrinsic evidence bearing on the issue of coverage. The Court sided with the policyholder, finding that the four-corners rule applies only to the analysis of an insurer's duty to defend - once the insurer agrees to defend and seeks a determination of coverage, then the four-corners rule has served its purpose.

Two recent cases addressed procedural rules involving bad faith claims. First, in Ullerich v. Sentry Insurance, the Wisconsin Court of Appeals held that complaints alleging insurer bad faith must, in order to avoid dismissal, allege facts showing that the insurer denied a claim that was not fairly debatable. Second, in Fiserv Solutions, Inc. v. Westchester Fire Insurance Co., the Eastern District of Wisconsin denied an insurer's motion to bifurcate its policyholder's bad faith claim from its other claims and to stay the bad faith proceedings. This latter decision highlights the importance of venue in determining litigation strategy. While Wisconsin state courts endorse the process of bifurcating and staying bad faith claims, such procedural rules are not controlling on federal courts.

Other Noteworthy Decisions: Estate of Kriefall v. Sizzler USA Franchise, Inc., 2012 WI 70; Admiral Insurance Co. v. Paper Converting Machine Co., 2012 WI 30

In Estate of Kriefall v. Sizzler USA Franchise, Inc., the Wisconsin Supreme Court, in a case involving complex indemnification and subrogation principles, held that an at-fault franchisee had no contractual right to be indemnified for a $1 million payment made by an insurer on its behalf. This case stemmed from an E. coli outbreak at two Sizzler restaurants that caused 150 people to become ill and resulted in the death of a three-year-old girl. The franchisee sought to exercise the insurer's subrogation right to indemnification under a hold harmless agreement, in which the at-fault meat supplier agreed to indemnify the franchisee. The Court, noting that both indemnification and subrogation require the person seeking recovery to have made a payment, held that because the franchisee did not make the $1 million payment, it could not recover on behalf of the insurer that had made the payment. The Court also noted that the insurer had not assigned its subrogated right to the franchisee.

In Admiral Insurance Co. v. Paper Converting Machine Co., the Wisconsin Supreme Court blocked an insurer's attempt to duck its responsibilities under an oral settlement funding agreement. The insurer orally agreed to contribute its policy limits toward settlement of the policyholder's claim. However, before signing a written agreement or paying money toward the settlement, the insurer changed its mind, claiming that a policy exclusion barred coverage for the policyholder's claim. The Court held the initial oral agreement was binding and that the insurer could not avoid paying its policyholder under theories of unjust enrichment or mutual mistake.

[1] Doe v. Archdiocese of Milwaukee, 2010 Wisc. App. LEXIS 954 (finding no covered occurrence).

[2] Burkhardt v. City of Stevens Point, 2010 U.S. Dist. LEXIS 98674 (W.D. Wis. Sept. 20, 2010) (finding no covered occurrence).