2020 Wisconsin Insurance Case Law Year in Review
Insurance Coverage Litigation 02/11/21 Patrick Murphy, Alexandra Shortridge, Joseph Poehlmann, Patrick Proctor-Brown, Brandon R. Gutschow
Quarles & Brady’s Insurance Recovery Team keeps its finger on the pulse of insurance law and wants to help keep you informed. This article compiles important decisions issued in Wisconsin in 2020 that may impact your business or practice. It will get you up to speed on the current state of the law and help you anticipate what’s to come in 2021. For additional information, please reach out to any member of Quarles & Brady’s Insurance Recovery Team.
Covid-19 was certainly a significant development in 2020. And it produced a ton of coverage litigation—according to the University of Pennsylvania Carey Law School’s Covid Coverage Litigation tracker, there were 1,454 lawsuits filed last year arising out of policyholders’ claims for insurance coverage for Covid-related losses. Some of those suits were filed in Wisconsin. But none has yet resulted in a decision by the Court of Appeals, and we are reluctant to draw conclusions from the filings alone. So, we will defer discussion of this important issue and focus instead on coverage decisions unrelated to Covid-19 losses.
Choinsky v. Germantown School District Board of Education, 2020 WI 13
In Choinsky, the Wisconsin Supreme Court held that two insurers did not breach their duties to defend their insured, notwithstanding that the insurers unilaterally and wrongly denied any defense obligation and refused to pay for their insureds’ defense for five months. According to the Court, the insurers were excused from honoring their defense obligation during the five-month period because they promptly had filed a motion to stay the litigation against the insured pending a decision regarding coverage. And because the insurers began paying the insured’s defense costs when the circuit court denied the motion to stay, the insurers “retroactively” honored their defense obligation.
At first glance, Choinsky conflicts with the Court’s recent jurisprudence regarding the duty to defend—in particular, the Court’s instructions to insurers that wish to avoid breaching their defense obligation while reserving the right to challenge coverage. Just four years ago, the Court advised insurers not to unilaterally refuse to defend their insureds—to instead, follow one of a few specific “judicially-preferred alternatives.” Water Well Solutions Services Group, Inc. v. Consolidated Insurance Co., 2016 WI 54, ¶ 27-28. Included on the “preferred” list was the alternative of filing a motion to bifurcate coverage proceedings and stay merits litigation pending a decision regarding the insurers’ duty to indemnify the insured. But the Court contrasted the filing of such a motion with the non-preferred alternative of an insurer unilaterally deciding that no duty to defend exists: “We continue to strongly encourage insurers to follow one of the judicially-preferred approaches rather than make a unilateral determination to refuse to defend an insured.”Id. ¶ 27 (emphasis added). So insureds across the state understood the Court to require insurers following the “preferred” alternative to honor their defense obligations while pursuing a determination of no coverage.
Insureds were not alone in this. Justice Daniel Kelly reached the same conclusion. As a result, he dissented in Choinsky, noting that the Court consistently has held the duty to defend commences upon the insured’s tender of the complaint to the insurer and continues “unabated” until resolution of the matter or a finding of no coverage. Because the duty continues “unabated,” Justice Kelly concluded the insurers breached their duty to defend in Choinsky by failing and refusing to assume the defense while awaiting a decision on their motion to stay merits proceedings: “I don’t know how to describe the unexcused failure to perform an unabated contractual obligation as anything but a breach of contract.” Justice Kelly further criticized the majority’s decision as allowing an insurer “to buy its way out of its failed gamble” by “retroactively” paying defense fees the insurer owed in the first instance. The decision therefore ensures the insurer “risks nothing” in breaching its duty to defend, converting the duty to defend to a “heads I win; tails you lose” proposition of the sort the Court’s prior jurisprudence consistently has rejected.
Justice Kelly’s dissent channels the substantial concerns of Wisconsin’s insured businesses, any of which may soon face an insurer refusing to defend a potentially covered claim, and the prospect of contemporaneous litigation regarding coverage and the merits of the claims against them, at least for as long as a busy trial court takes to decide an insurer’s motion to stay. The reassurance of “retroactive” reimbursement by the insurer does little to mitigate these concerns.
Emer’s Camper Corral, LLC v. Alderman, 2020 WI 46
In Camper Corral, the Wisconsin Supreme Court held that a policyholder hoping to establish a negligence claim against its broker for failure to procure specified coverage must do more than prove the coverage in question was commercially available—the policyholder must prove the coverage would have been available to the policyholder specifically.
Camper Corral, a used camper dealership, sued its insurance agent, alleging that the agent negligently obtained a policy covering hail damage with a $5,000 per-camper deductible when the agent should have obtained a policy with a $1,000 per-camper deductible and a $5,000 aggregate deductible. The case proceeded to trial, during which Camper Corral presented evidence of the general commercial availability of a policy with the deductibles Camper Corral sought. But after the trial, the circuit court entered a directed verdict in favor of the agent because Camper Corral had failed to present any evidence that Camper Corral in particular would have been able to secure the lower deductible coverage it alleged the agent negligently failed to procure.
The Supreme Court affirmed, holding that Camper Corral’s evidence of the commercial availability of the preferred coverage did not suffice to establish causation, a required element of Camper Corral’s claim. Camper Corral instead was obligated to present evidence proving that an insurer likely would have issued a policy with such deductibles to Camper Corral, notwithstanding its loss experience. The Court reasoned that “just because an insurance company would write a specific policy for one company does not mean it would insure all companies under the same terms....It does not answer whether such a policy was available to Camper Corral.”
Dhein v. Frankenmuth Mutual Ins. Co., 2020 WI App 62
The Court of Appeals decision in Dhein reminds us that an additional insureds' rights are defined by the terms of the insurance policy at issue, not the contract between the additional insured and named insured pursuant to which the named insured agreed to carry a policy providing additional insured coverage.
In Dhein, a commercial tenant’s employee sued the tenant’s landlord for injuries the employee suffered in the course of work for the tenant but on property owned by the landlord, located adjacent to the premises leased to the tenant. The landlord sought coverage for the employee’s suit from the tenant’s general liability insurer, ACE. ACE’s policy included an additional insured endorsement under which the landlord qualified as an additional insured “but only with respect to liability for ‘bodily injury’ . . . caused, in whole or in part, by [the tenant’s] acts or omissions or the acts or omissions of those acting on [the tenant’s] behalf: (1) in the performance of [the tenant’s] ongoing operations; or (2) in connection with [the tenant’s] premises owned by or rented to [the tenant].”
ACE argued the landlord was not entitled to coverage for the employee’s suit because there was no evidence that the tenant’s negligence caused the employee’s injuries. The circuit court agreed with ACE and granted its motion for summary judgment. The Court of Appeals reversed, finding that the additional insured endorsement did not require evidence that the tenant’s negligence caused the employee’s injuries. Such evidence might be required to trigger the tenant’s duty to indemnify the landlord under the lease. But the language of the insurance policy, not the lease, determined the landlord’s rights as an additional insured. And the policy’s additional insured endorsement required only that the employee’s injuries (a) were caused in whole or in part by acts or omissions of the tenant or those acting on the tenant’s behalf and (b) such acts or omissions occurred in the course of the tenant’s ongoing operations or in connection with premises owned or rented by the tenant.
With respect to the first element, the Court of Appeals had no trouble concluding that the employee’s injuries were caused by acts or omissions of the employee, even if he was not liable for his injuries or otherwise at fault. As to the second element, the Court of Appeals found the employee’s acts or omissions occurred in the performance of the tenant’s “ongoing operations” as the employee was engaged in regular work activities for the tenant at the time of his injuries. The Court of Appeals also found that the acts or omissions occurred “in connection with” the premises rented by the tenant as the employee was traveling from one leased building to another when his injuries occurred.
Dhein reinforces the importance of reviewing the scope of additional insured endorsements to ensure that they provide the protections for which contracting parties bargained.
Kemper Independence Ins. Co. v. Islami, 2020 WI App 38
In Islami, the Wisconsin Court of Appeals held that an estranged spouse's bad actions forfeited coverage otherwise available to an innocent co-insured.
Ismet Islami legally separated from her husband in 1998. She took sole title to their marital home, but she and her husband continued living there together. While Ms. Islami was on vacation in 2013, Mr. Islami intentionally burned down the home (for unknown reasons). He then lied under oath about the cause of the fire. When these misdeeds eventually came to light, Ms. Islami's homeowners insurer sued her to confirm that the insurer owed no coverage.
The Court of Appeals held that even though Ms. Islami was, by all accounts, an innocent victim of Mr. Islami's arson, the particular language in Ms. Islami's homeowners policy precluded coverage. First, the policy specified that a spouse who resides in the same home qualifies as an insured. And even though the Islamis were legally separated, they still technically remained spouses. Second, the policy's “concealment or fraud” condition specified that the insurer would provide coverage to “no insureds” if “an insured” concealed or misrepresented material facts to the insurer.
While the Court of Appeals acknowledged that under prior case law a small grammatical change from “an insured” to “the insured” might have salvaged coverage for Ms. Islami, the Court of Appeals was compelled to apply the language as written, absent a contrary public policy mandate from the Wisconsin Supreme Court or legislature. The Court of Appeals also rejected Ms. Islami's attempt to invoke Wis. Stat. 631.95, which is intended to preserve insurance coverage for victim's of domestic violence, because there was no evidence in the record of Mr. Islami abusing Ms. Islami.
Perhaps the public policy mandate referenced in the Court of Appeals’ decision will come in 2021, as the Wisconsin Supreme Court has accepted Ms. Islami's Petition for Review.
Thompson v. State Farm, 2020 WI App 31 (unpublished)
Thompson is a reminder that when evaluating which of several consecutive policies might provide coverage for an event, the year in which the event occurred may not be the proper focus if the injury occurred later.
In 2007, a homeowner installed an outdoor deck and railing. The homeowner subsequently sold the home. In 2013, a guest fell off the deck due to a broken railing and suffered bodily injury. The guest then sued a number of parties, including the former homeowner, alleging that the homeowner negligently installed the railing in 2007.
The homeowner had purchased occurrence-based liability policies from Wilson Mutual during the period in which the homeowner owned the home. Under the policies, Wilson Mutual agreed to pay “all sums for which an insured is liable by law because of bodily injury . . . caused by an occurrence to which this coverage applies.” The policies defined “occurrence” to mean “an accident, including repeated exposures to similar conditions, that results in ‘bodily injury’ . . . during the policy period.”
Wilson Mutual argued none of the policies applied because there had been no “occurrence” as no injury occurred “during the policy period.” The homeowner responded that under a prior Wisconsin Supreme Court decision involving similar language, the Court had held a reasonable insured “would understand that the phrase, ‘during the policy period,’ modifies when the occurrence (event or accident) must take place in order that coverage under the policy be invoked.” Kremers-Urban Co. v. American Employers Insurance Co., 119 Wis. 2d 722, 739-40 (1984). So the accident that causes the injury must happen during the policy period, but the injury itself may occur later.
The Court of Appeals agreed with the homeowner’s reading of Kremers-Urban, but found the decision to be distinguishable. The Wilson Mutual policies included an additional provision elsewhere confirming that: “This policy only covers losses, ‘bodily injury’, and ‘property damage’ that occur during the policy period.” According to the Court of Appeals, “[a]fter reading the ‘Policy Period’ condition, no reasonable insured could conclude that the Wilson Mutual policies would cover bodily injury that occurred outside the policy period.”
Church Mut. Ins. Co. v. Travelers Cas. & Surety Co., 2020 WL 113908 (W.D. Wis.)
Church Mutual highlights that forum sometimes matters. Here, a federal court denied an insurer’s motion to bifurcate pre-trial discovery in a case involving both breach of contract and bad faith claims against the insurer. The court noted that a Wisconsin state court might be more inclined to grant the insurer’s motion under Wisconsin law. But Wisconsin law regarding bifurcation—a procedural device—does not apply in federal court. So the federal court was free to reject the insurer’s motion, which the court found would result in a “piecemeal approach to discovery” and delays affecting the trial schedule.
Insurers hoping to avoid contemporaneous discovery regarding breach and bad faith claims are sure to take note and carefully consider forum options in the future. Policyholders should too.
Market Street Bancshares, Inc. v. Federal Ins. Co., 962 F.3d 947 (7th Cir.)
In Market Street, the Seventh Circuit rejected a policyholder’s claim that a plaintiff’s new damages theory, first asserted years into a lawsuit, constitutes a “claim” triggering coverage under the claims-made policy in place at the time the plaintiff asserted the theory. The Court applied Illinois law, not Wisconsin law. But the decision turns more on policy language than governing law, and therefore may matter to Wisconsin policyholders, particularly those litigating a coverage dispute in federal court.
The underlying lawsuit against the insured, a bank, arose out of the failed sale of various Taco John’s restaurant franchises. Sellers of the franchises sued the bank alleging it had breached an agreement to retain certain letter-of-credit proceeds to assure rent payments. The lawsuit lasted many years. In year eleven of the suit, the bank purchased a three-year, claims-made, professional liability insurance policy from Federal. In year thirteen of the suit, the sellers asserted a new theory against the bank—they claimed the bank had failed to provide timely notification of the buyer’s default, which the bank allegedly was obligated to do under a pledge agreement, thereby causing the sellers to suffer certain damages.
The bank asked Federal to provide coverage for the new theory, contending that it constituted a “claim” first made during the policy period of the professional liability policy. Federal disagreed and argued that the damages argument was not a “claim,” and even if it was, it was first made at the start of the lawsuit. The policy defined “claim” to include “a written demand for monetary relief” or “a civil proceeding commenced by the service of a complaint or similar pleading.”
In the resulting coverage lawsuit, the Seventh Circuit rejected the bank’s contention that the seller’s new theory, alone, constituted a “claim.” The Court reasoned that the theory arose within “a civil proceeding” and the policy did not allow for “claims incepted within a claim” because such a reading would render the second part of the definition superfluous—a demand for monetary relief that is made during and as part of a civil proceeding is not a claim separate from the civil proceeding itself.
Turubchuk v. Southern Illinois Asphalt Co., Inc., 958 F.3d 541 (7th Cir. 2020)
Turubchuk teaches policyholders to be careful in making representations regarding their coverage to adverse parties in the course of settlement negotiations. Here too, the Seventh Circuit applied Illinois law. But Wisconsin policyholders may find the lesson useful.
The Seventh Circuit’s decision summarizes the case in these two sentences:
A fatal car crash in southern Illinois led to a personal injury lawsuit against the companies repaving the highway where the wreck occurred. That case settled, but plaintiffs later sued again, alleging the companies misrepresented their insurance coverage.
It turns out that the paving companies had been paving the highway as part of a joint venture. The joint venture carried a liability policy with a $1 million limit. Counsel for the companies had mentioned the joint venture and this policy in both a phone call with plaintiffs’ counsel and in Rule 26 initial disclosures. Counsel did not disclose the existence of policies purchased by the companies themselves, independent of their joint venture. Plaintiffs agreed to settle for the $1 million policy limits. They later discovered the existence of separate policies purchased by the companies—not the joint venture—and sued a second time, alleging the companies negligently misrepresented the coverage available in the first suit. Following trial, a jury awarded the plaintiffs $8 million and the district court entered judgment.
The Seventh Circuit reversed and remanded the case for new proceedings. It held that the content of the companies’ Rule 26 initial disclosures cannot be the basis for a negligent misrepresentation claim. But the Seventh Circuit found that the phone call in which counsel for the companies mentioned only the joint venture’s coverage could be the basis for such a claim.
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