2021 Wisconsin Insurance Case Law Year in Review
Insurance Coverage Litigation 01/20/22 Alexandra Shortridge, Joseph Poehlmann, Patrick Proctor-Brown, Patrick Murphy
Every year, Quarles & Brady’s Insurance Recovery Team compiles a list of important decisions by Wisconsin state and federal courts addressing insurance issues. We then summarize the cases to keep you informed of developments and help you anticipate what the future may bring. This is our list of 2021 decisions. For additional information, please reach out to any member of Quarles & Brady’s Insurance Recovery Team.
Colectivo v. Society, 2021AP463
We start with an exception to our rule—Colectivo is not yet a decision, but rather a pending appeal. It is the first COVID-19 business interruption case to reach the Wisconsin Supreme Court. Because the appeal remains pending—with no decision so far from either the Wisconsin Court of Appeals or Supreme Court—we note Colectivo here more as a case to watch, and one with important implications for many Wisconsin businesses.
The Colectivo appeal arises out of a class action brought by Wisconsin bar and restaurant owners that purchased property insurance from Society Insurance. The insureds filed suit seeking a determination that they and the class are entitled to coverage for losses they suffered as a result of the presence of COVID-19 in their bars and restaurants and government orders requiring that they cease in-person dining and service operations. Society filed a motion to dismiss the insureds’ complaint, arguing the insureds failed to allege facts sufficient to trigger coverage under Society’s policy, which requires “direct physical loss of or damage to” covered property. Society argued this language means the insureds must allege facts establishing (1) physical damage in the form of tangible injury to covered property, or (2) physical loss in the form of actual destruction or dispossession of covered property.
The trial court denied Society’s motion, finding that the insureds had adequately alleged having suffered a “direct physical loss of” covered property because they were physically unable to use their property in its intended manner (e.g., for in-person dining) as a result of COVID-19. The court also concluded the insureds had adequately alleged a dangerous condition on or around the insureds’ covered property because COVID-19 was “widespread” and likely present on covered property, which, in turn, caused a governmental entity to “prohibit” access to covered property, triggering civil authority coverage.
Society filed a petition for leave to appeal, which the Court of Appeals granted. Society then filed a petition to bypass the Court of Appeals and proceed directly to the Wisconsin Supreme Court. The Supreme Court granted the petition and now will review the trial court’s undisputedly nonfinal decision denying a motion to dismiss—a highly irregular procedural posture for a case in any state’s highest court.
On appeal, Society repeats the same arguments it asserted in the trial court. Society insists that “a mere loss of use without a corresponding physical alteration or displacement . . . does not constitute a ‘direct physical loss of or damage to’ covered property.” It likewise insists that the government orders at issue did not trigger coverage because they limited, but did not eliminate, the insureds’ use of the covered property, which Society argues was not “tangibly damaged or destroyed,” notwithstanding the insureds’ contrary allegations in their complaint.
The insureds respond that Society’s policy does not require any “physical alternation” or complete destruction—had Society intended such requirements, it should have expressly written them into the policy. As drafted, the policy instead requires “physical loss,” which the insureds allege having suffered as a result of the presence of COVID-19 and government orders. The insureds note that Society’s policy expressly uses the disjunctive “or” between “direct physical loss of or damage to” covered property. Under standard rules of interpretation, “loss” therefore must mean something other than and different from “damage,” which the insureds also allege having suffered. It thus would be inappropriate to construe “loss” to require physical alternation of the sort “damage” denotes. The insureds further point out that standard dictionaries define “loss” to include “loss of use.” And the insureds explain that Society chose not to include any virus exclusion in its policies, which is a telling omission that also renders the non-Wisconsin cases on which Society relies interpreting such exclusions clearly distinguishable.
The appeal already has attracted the sort of interest one would expect on such important issues to Wisconsin businesses, nearly all of which have been impacted in some way by COVID-19 and routinely look to their policies for coverage in circumstances involving less than the complete destruction of their property. Several amicus briefs have been filed, including one by our firm on behalf of United Policyholders. The Supreme Court has not yet set a date for argument.
Kemper Independence Ins. Co. v. Islami, 2021 WI 53, 397 Wis.2d 394, 959 N.W.2d 912
We noted Islami in our 2020 Year in Review and discussed the Wisconsin Court of Appeals decision, which held that an estranged spouse’s bad actions forfeited coverage otherwise available to an innocent co-insured. This year, the Wisconsin Supreme Court affirmed that holding in a 4-3 split decision.
The facts supposedly were undisputed. Ismet Islami legally separated from her husband in 1998 but did not obtain a divorce. She took sole title to their marital home, but she and Mr. Islami continued living there together. While Ms. Islami was on vacation in 2013, Mr. Islami intentionally burned down the home. He then lied under oath about the cause of the fire. When these misdeeds eventually came to light, Ms. Islami’s homeowner’s insurer, Kemper, sued her, seeking a judicial declaration of no coverage.
The majority of the Supreme Court held that although Ms. Islami was, by all accounts, an innocent victim of Mr. Islami’s arson, the particular language in Ms. Islami’s homeowner’s 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 Kemper would provide coverage to “no insureds” if “an insured”concealed or misrepresented material facts to the insurer, as Mr. Islami had done. Finally, the majority rejected Ms. Islami’s attempt to invoke Wis. Stat. § 631.95, which preserves insurance coverage for victims of domestic violence. The majority held that the statute did not apply because the majority found no evidence in the record to suggest Mr. Islami started the fire as an act of domestic violence, to harm Ms. Islami.
The dissent took issue with the final step in the majority’s analysis, and in particular, the majority’s review of the record and legal interpretation of acts constituting “domestic violence.” According to the dissent, there was sufficient evidence in the record to establish a genuine issue of material fact as to whether the arson by Mr. Islami, a convicted sex offender with a criminal record, caused Ms. Islami “reasonably to fear imminent engagement of” bodily harm, which would constitute “domestic violence” by law. The dissent therefore rejected the majority’s conclusion that Wis. Stat. § 631.95 did not apply.
Ms. Islami has petitioned the United States Supreme Court for review arguing the majority decision violated her right to due process and freedom of religion. So there may be further developments in the future.
5 Walworth v. Engerman Contracting, 2021 WI App 51, 399 Wis.2d 240, 963 N.W.2d 779
5 Walworth confirms that coverage exists for “property damage” caused by an “occurrence” that is the result of defective workmanship. No part of that sentence should be controversial, and the decision in 5 Walworth should not be noteworthy because it simply applies long-standing precedents repeatedly affirmed by the Wisconsin Supreme Court. But insurers routinely misconstrue those same precedents and argue they should be ignored or overturned. As a result, 5 Walworth is worth reviewing closely.
The facts are relatively straightforward: 5 Walworth hired Engerman as its general contractor for a residential construction project consisting of building a swimming pool complex—two pools, a patio, and surrounding retaining walls. Engerman subcontracted the work to a subcontractor who completed the project using shotcrete purchased from a supplier. After the subcontractor finished the work, 5 Walworth discovered that the pools included in the complex were leaking. An engineer investigated the cause of the leaks and concluded that the subcontractor had incorrectly installed the shotcrete and certain steel reinforcing bars, which caused cracks to form in the pool walls, as a result of which water escaped the pool and destabilized the surrounding soil, causing the cracks to widen and resulting in additional and further leaks.
5 Walworth decided to remove and replace the complex. It then sued Engerman, the subcontractor, and the insurers of each to recover the costs it incurred in doing so. The subcontractor sued the supplier of the shotcrete and its insurer in a separate action, later consolidated with 5 Walworth’s suit, alleging that the shotcrete mix was defective.
Engerman’s insurers agreed to defend Engerman under a reservation of rights and then filed motions for summary judgment arguing that their policies provided no coverage. They contended that the complaint against Engerman alleged defective workmanship only, which they argued cannot give rise to a covered “occurrence.” They also argued that their policies provided no coverage because the complaint purportedly failed to allege “property damage” and instead alleged damage to Engerman’s product—the pool complex—only. The supplier’s insurer also filed an early motion for summary judgment arguing that its policy provided no coverage because the supplier’s shotcrete must be considered a component part of an indivisible integrated system—the entire pool complex—damage to which amounts to damage only to the supplier’s own product.
The trial court granted the insurers’ motions, agreeing with the insurers that the claims “come down to faulty workmanship” and therefore “cannot constitute an occurrence” and that the pool complex constitutes an “integrated system”—a single product, damage to any part of which is not damage to “other” property, regardless of the cause or nature of the damage.
The Court of Appeals reversed. It held that while defective workmanship is not, in and of itself, an “occurrence,” “defective workmanship may cause an occurrence (i.e., an accident), resulting in property damage.” The Court of Appeals further held the record suggests that may in fact be what happened—the incorrect installation of shotcrete and steel reinforcing bars (not an “occurrence”) caused the pool walls to crack (an “occurrence”), resulting in leaks that destabilized surrounding soil and caused the cracks to widen (also an “occurrence”). The Court of Appeals further held that the occurrence appears to have caused “property damage” in that the defective shotcrete caused the pool walls to crack, as a result of which water escaped and destabilized the surrounding soil, which destabilization caused additional damage in that the cracks widened. In light of such property damage, the Court of Appeals rejected the insurers’ claim that any “integrated system” analysis was appropriate—that analysis applies only where a product causes no damage to any property.
Notwithstanding that the Court of Appeals analysis is based on long-standing Wisconsin Supreme Court precedents, the insurers have petitioned the Supreme Court to hear a further appeal. The Supreme Court has accepted the petition, perhaps to confirm once and for all that it has meant what it has said all along—defective workmanship can cause a covered “occurrence.”
Bee Forest Products, Inc. v. Western National Mutual Ins. Co., 2021 WL 2634733 (W.D. Wis.)
Bee Forest also involved the question of what circumstances constitute an “occurrence.” But unlike the insured in 5 Walworth, Bee Forest undisputedly intended to do exactly what it did—there was no allegation of any defective workmanship. Bee Forest instead made a mistake about its authority to perform the work in question and its liability hinged on that mistake.
Bee Forest entered a contract with LeRoy Bechly to cut timber on a property in Lincoln, Wisconsin. The contract and online property records identified Bechly as the owner of the property. But both were mistaken—Bechly’s daughters in fact owned the property. And they objected to Bee Forest cutting timber on it and demanded damages from Bee Forest after it began cutting.
Bee Forest tendered the daughters’ claims to its liability insurer, Western National. Western National denied coverage. Bee Forest then settled with the daughters and sued Western National. Western National moved for summary judgment, arguing that its liability policy covers only property damage caused by an “occurrence,” which the policy defines as an “accident,” and Bee Forest’s act of cutting down trees the daughters owned was not “accidental”—Bee Forest instead cut the trees it intended to cut located on the property in question.
Bee Forest filed no opposition to Western National’s motion. So the district court was left only with Western National’s arguments on which to base its decision. And the Bechly daughters never filed suit. As a result, there was no complaint against Bee Forest alleging a series of negligent acts, including, for example, negligent failure to confirm ownership of the property before commencing timber cutting operations. It therefore is not particularly surprising that the district court agreed with Western National that the alleged damages the daughters suffered were not caused by an “occurrence.” After all, Bee Forest cut only the trees it was hired to cut and that it intended to cut.
Eaton Corp. v. Westport Ins. Co., 2021 WL 4810538 (E.D. Wis.)
Eaton addresses the appropriate timing for coverage litigation with excess insurers in suits involving long-tail claims (e.g., asbestos or environmental liabilities) and specifically, when such litigation might be “ripe” for judicial determination.
Eaton has been in litigation for years with its historical liability insurers. The litigation arises out of disputes relating to coverage for tens of thousands of underlying asbestos claims. Under Wisconsin law, the asbestos claims trigger coverage under policies issued over multiple decades, in each year of which there exist multiple layers of primary and excess liability policies.
Eaton has settled with most of the insurers. But a few holdouts remain, each of which issued high-layer excess policies in the 1970s and 1980s. These excess insurers moved to dismiss Eaton’s remaining claims against them, arguing that Eaton needs to first exhaust all of the underlying coverage before Eaton’s claims against the high-layer excess insurers will ripen and present a sufficiently imminent controversy for the court to resolve. Eaton countered that the claims are ripe because (1) Eaton already has incurred sufficient asbestos liabilities to exhaust all of the coverage underlying some of the high-layer excess policies at issue, and (2) even if that were not the case, it is likely that Eaton’s asbestos liabilities eventually will exhaust all underlying coverage.
The district court agreed with the insurers and dismissed Eaton’s claims against them without prejudice, leaving the door open for Eaton to pursue the claims in the future. The court acknowledged Eaton’s right under Wisconsin law to allocate its asbestos liabilities to specific years of coverage, allowing Eaton to tap into high-layer excess policies in given years without exhausting lower layers of coverage in other years. But the court noted that Eaton had not yet actually selected the year(s) it wanted to target. And while Eaton might have sufficient liabilities to reach some of the high-layer excess policies by targeting specific years, its liabilities were not sufficient to trigger all of the policies at issue. Additionally, the court noted that settled insurers that issued policies in different years already appeared to have paid many of Eaton’s asbestos liabilities. As a result, the court questioned Eaton’s ability to allocate those same paid liabilities to years covered by the holdout excess insurers. Finally, the court disagreed with Eaton that its asbestos liabilities soon would exhaust the coverage underlying all of the applicable high-layer excess policies. The court estimated that it could take several decades for that to happen, meaning any dispute about the high-layer excess policies remains too remote to warrant judicial attention now.
The court’s decision confirms that in some instances, policyholders may be forced to litigate long-tail coverage disputes in multiple phases over time with different sets of insurers that issued coverage in different years or at different excess layers. However, policyholders may avoid this outcome by investing additional time and resources to allocate their past liabilities and project their future liabilities to prove the ripeness of their claims.
Hayes v. Wisconsin & Southern Railroad, LLC, 514 F.Supp.3d 1055 (E.D. Wis.)
Hayes held that, under Wisconsin law, an insurer may not pursue a claim for unjust enrichment against its insured to recover costs paid in the insured’s defense where there never was any coverage under the insurer’s policy in the first instance.
The facts were as follows: a railroad worker was electrocuted while working for Wisconsin & Southern Railroad. The worker sued the railroad and its insurer, Zurich. The railroad tendered the defense to Zurich, which initially defended the suit under a reservation of rights. Zurich later withdrew its defense after the district court agreed with Zurich that there was no coverage for the worker’s claims.
Zurich then amended its pleadings to assert a counterclaim for unjust enrichment seeking reimbursement of the costs it incurred in defense of the railroad. Zurich’s policy did not include any right to reimbursement. But Zurich nevertheless purported to reserve such a right in its reservation of rights letter.
No Wisconsin case had previously addressed the question of whether an insurer may recover defense costs it paid under a purported reservation of right to reimbursement. But the district court predicted that the Wisconsin Supreme Court would not allow Zurich’s purported reservation of rights to unilaterally create a right to reimbursement that Zurich had not included in its policy. The court followed the Wisconsin principle that unjust enrichment is not available where the parties have entered a contract (including an insurance policy). The court further observed that unjust enrichment requires that the defendant received a benefit under circumstances making it inequitable to allow the defendant to retain the benefit. And as the court aptly observed, those circumstances are present when an insurer such as Zurich defends its insured to protect the insurer’s own best interest in avoiding a claim for breach of the policy.
Hayes offers some comfort to insureds who otherwise must monitor reservation of rights letters and reject purported rights to reimbursement that do not exist in most policies and therefore cannot be “reserved” at all.
Badger Mining Corp. v. First American Title Ins. Co., 534 F.Supp.3d 1011 (W.D. Wis.)
Badger Mining addresses the scope of a title insurer’s duty to defend under policy language stating that the insurer will defend “only those stated causes of action alleging matters insured against by this policy” and that the insurer “will not pay any fees, costs, or expenses incurred . . . in the defense of those causes of action that allege matters not insured by the policy.” The district court enforced such language as written, holding that the title insurer’s duty was limited to covered claims only and did not extend to any and all claims in the underlying suit, even where there existed at least one covered claim.
The coverage dispute arose out of Badger’s purchase of a frac sand mine. Badger purchased the mine from Northern Frac Proppants II, LLC (“NFP II”). As part of the transaction, Badger also purchased a title insurance policy from First American. Years later, multiple parties sued Badger and NFP II, asserting seventeen causes of action, several of which challenged Badger’s title to the mine. Plaintiffs in the suit asserted that the transaction by which NFP II had acquired the mine prior to the sale to Badger involved a fraudulent transfer, that NFP II therefore did not in fact own the mine it purported to sell to Badger, and that Badger knew NFP II did not own the mine at the time Badger purchased it from NFP II.
Badger tendered the suit to First American, which refused to defend Badger, arguing that its policy excluded the claims because the complaint purportedly alleged Badger was a “knowing, active and willing participant” in the fraudulent transfer scheme. Badger defended itself, later settled the underlying suit, and then sued First American for breach of its duty to defend.
Badger and First American filed cross motions for summary judgment regarding First American’s alleged breach. The district court granted the motions in part and denied them in part. It held that First American was obligated to defend at least some of the claims in the underlying suit—those alleging fraud by NFP II based on events that predated Badger’s purchase of the mine. Although those claims were not asserted against Badger, they nevertheless implicated Badger’s title to the mine and asserted claims “adverse to” Badger’s interest. They therefore triggered First American’s duty to defend under the title policy, which promised a defense “in litigation in which any third party asserts a claim covered by this policy adverse to the insured.” But the district court held that First American had no obligation to defend all claims in the underlying suit, as its policy required that First American defend “only those stated causes of action alleging matters insured against by this policy.”
This limited duty to defend is narrower than the duty to defend under general liability policies, as to which the duty to defend the entire “suit” exists if coverage arguably exists for at least one claim. But because First American refused to defend any claims, the district court found it breached its duty and set further proceedings to assess damages.
Cincinnati Ins. Co. v. Ropicky, 2021 WI App 25, 397 Wis. 2d 196, 959 N.W.2d 356
In Ropicky, the Wisconsin Court of Appeals held that the statutory immunity granted to “safety investigators” under Wis. Stat. § 895.475 does not extend to investigators retained by insurers to conduct post-loss investigations in the course of the insurer’s review of a policyholder’s claim for coverage.
Cincinnati hired Infratek Engineering to conduct a post-loss claim investigation of property damage to an insured’s residence and determine the causes of such damage so that Cincinnati could make a coverage decision. Based on Infratek’s subsequent report, Cincinnati denied the homeowners’ claim and filed suit, seeking a declaration of no coverage. The homeowners joined Infratek in the suit, asserting a third-party claim for negligence. In support, they alleged Infratek failed to discover the full extent of the damage at issue and gave bad advice to the homeowners, their contractor, and Cincinnati.
Infratek moved for summary judgment, arguing that the homeowners’ negligence claim was barred under Wis. Stat. § 895.475, which states that “safety inspection or advisory services intended to reduce the likelihood of injury, death or loss shall not subject . . . an . . . insurer’s agent . . . to liability for damages from injury, death or loss occurring as a result of any act or omission in the course of the safety inspection or advisory services.” The trial court granted Infratek’s motion, finding that Infratek acted as Cincinnati’s agent and provided “advisory services to reduce the likelihood of loss” to Cincinnati in the claim evaluation process.
On the homeowners appeal, the Court of Appeals reversed. It noted that the “advisory services” contemplated by the statute must be “intended to reduce the likelihood of . . . loss” before such loss occurs and that is not at all what Infratek was engaged to do by Cincinnati. Infratek instead was retained to investigate the extent and cause of the loss after the fact, and to do so in connection not with any “safety inspection,” but instead in furtherance of Cincinnati’s attempts to reduce and avoid its contractual obligation to pay property damage under its policy.
While not strictly speaking a coverage case, Ropicky confirms that neither an insurer nor its claims investigation agent are immune from liability under Wis. Stat. § 895.475.
For more information, contact your Quarles & Brady attorney or a member of our Insurance Recovery Team: