Wis. Supreme Court Holds Insurers May Postpone Duty to Defend by Moving to Stay Merits
On February 13, 2020, the Wisconsin Supreme Court issued its decision in Choinsky v. Germantown School District Board of Education, 2020 WI 13. By a 5-to-1 ruling, the Court held that two insurers did not breach their duties to defend their insureds, notwithstanding that the insurers unilaterally—and, as it would turn out, wrongly—denied any defense obligation and refused for approximately five months to pay their insureds’ defense costs. According to the Court, the insurers were excused from honoring their defense obligation during the five-month period because they had promptly filed a motion to bifurcate coverage proceedings and stay litigation regarding the merits of the claims against the insureds. And because the insurers later reimbursed the insured for defense costs incurred during the five-month period, the insurers “retroactively” honored their defense obligation.
Justice Daniel Kelly dissented, channeling concerns with the majority’s analysis that policyholders across the state are likely to share. To appreciate these concerns, it is worth considering the Court’s recent jurisprudence regarding the duty to defend, and in particular, the Court’s instructions to insurers that wish to avoid breaching their defense obligation while reserving the right to challenge coverage.
Under well-established Wisconsin law, an insurer that unilaterally refuses to defend its insured “does so at its peril.” Water Well Solutions Services Group, Inc. v. Consolidated Insurance Co., 2016 WI 54, ¶ 28. This is because an insurer who is later found to have breached its duty to defend is liable for all damages naturally flowing from the breach. Such damages, which may exceed the insurer’s policy limits, include: (1) the amount of the judgment or settlement against the insured, plus interest; (2) costs and attorney fees incurred by the insured in defending the suit; and (3) any additional costs that the insured can show naturally resulted from the breach (e.g., costs and fees incurred in pursuing coverage). Id. The insurer also subjects itself to liability for bad faith, an intentional tort that carries with it the potential for punitive damages. Id., ¶ 29.
To avoid these risks, the Court has advised insurers to follow one of a few specific “judicially-preferred alternatives” to unilaterally refusing to defend. The Court summarized these alternatives four years ago in Water Well. Included among such preferred alternatives is the filing of a motion to bifurcate coverage and stay merits litigation pending a decision regarding the insurers’ duty to indemnify the insured. Id., ¶ 27.
The Water Well Court did not expressly hold that an insurer must defend its insured until its motion to stay is granted. But the Court did contrast the filing of a motion to bifurcate and stay with the non-preferred, perilous 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.” Water Well, 2016 WI 54, ¶ 27. So insureds across the state understood the Court to require insurers following the judicially-preferred alternatives to avoid unilateral denials and honor their defense obligations while pursuing a determination of no coverage.
Choinsky requires that insureds revisit their understanding of Water Well and adjust their expectations. According to the Choinsky majority, Water Well apparently does not stand for the proposition that an insurer must avoid a unilateral denial if it wishes to follow the permitted alternative of moving to bifurcate coverage proceedings and stay merits litigation. The insurer instead may do both. It may unilaterally deny its duty to defend as long as (1) the insurer immediately files a motion to bifurcate and stay merits litigation and (2) the insurer “retroactively” honors its defense obligation by reimbursing the insured for its defense costs if the trial court denies any part of the insurer’s motion to bifurcate and stay.
The facts in Choinsky are as follows: Former teachers sued the District in July 2013, alleging negligence and other causes of action relating to the District’s decision to discontinue a group long-term care insurance policy. The District tendered the suit to Wausau. Wausau denied any coverage obligation, intervened in the suit, and moved to bifurcate the action and stay any litigation relating to the teachers’ claims pending a decision regarding coverage. The trial court did not rule on Wausau’s motion for five months, during which period Wausau refused to pay for the District’s defense. Ultimately, the trial court granted Wausau’s motion to intervene and bifurcate merits and coverage proceedings. But the trial court denied Wausau’s motion to stay litigation on the merits of the teachers’ claims. Shortly thereafter, Wausau began to pay for the District’s defense costs under a reservation of rights. And Wausau reimbursed the District for the defense costs it previously had incurred, excluding $50,000 in fees to which Wausau objected as violating its standard billing guidelines (to which counsel for the District apparently had agreed in unrelated lawsuits).
Wausau continued to pay the defense costs incurred by the District through trial on the coverage dispute, which the District won, and through a trial on the merits, in which the District again prevailed. Nevertheless, the District argued Wausau had breached its defense obligation by unilaterally denying any duty to defend at the outset, failing to assume the defense of the District during the five-month period while Wausau’s motion to stay remained pending, and later failing to reimburse the District in full for all defense costs incurred during the same period.
In a 5-1 ruling, the Supreme Court rejected the District’s argument. Writing for the majority, Justice Rebecca Grassl Bradley explained Wausau did not breach its duty to defend by unilaterally—and wrongly—denying any duty to defend the District because Wausau timely filed a motion to bifurcate the coverage dispute and stay litigation regarding the merits of the teachers’ claims against the District and Wausau later reimbursed the District for fees the District paid to defend itself while the motion remained pending. That the District was left to simultaneously litigate coverage with Wausau and defend the teachers’ claims on the merits for five months did not trouble the majority, apparently because the majority believed relatively little had occurred in the merits proceedings during that period (though not so little that Wausau was willing to reimburse in full the fees the District paid to defend itself), which the majority assumes always will be the case (notwithstanding that the facts of Choinsky suggest the opposite).
In short, the majority was persuaded that the five-month period from Wausau’s denial to its assumption of the defense was not so much a “breach” as a mere “delay,” and not one caused by Wausau, but instead a delay caused by the trial court’s failure to more promptly rule on the motion to stay. According to the Majority, “[t]he insurer cannot be deemed in breach of its duty to its insured given that it acted to prevent its insured from paying for both liability and coverage, but the circuit court’s actions thwarted its attempt.”
The majority also rejected the District’s argument that Wausau breached its duty to defend by failing to reimburse the District in full for all fees incurred by the District in defense of the teachers’ claims during the period while Wausau’s motion to say remained pending. But, here, the majority did so on grounds relating to the record, not as a matter of law. The majority held that the record was “woefully inadequate” for a complete review of the dispute relating to the extent of Wausau’s reimbursement obligation, and in particular, lacked sufficient information for a determination that the fees the District had paid were reasonable.
Justice Daniel Kelly dissented. Like the majority, he began his analysis with a summary of the Court’s jurisprudence regarding the duty to defend, noting in particular that the Court consistently has held the duty 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. Relying on the Court’s prior holdings, Justice Kelly concluded Wausau breached its duty to defend the District by failing and refusing to assume the defense while awaiting a decision on its motion to bifurcate and 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 went on to criticize the majority’s characterization of the Court’s prior rulings on the subject, explaining that the majority misconstrued the precedents to allow Wausau “to buy its way out of its failed gamble”—refusing to defend the District—by “retroactively” paying the defense fees Wausau owed in the first instance. Justice Kelly argued Wausau instead should face the consequences of its wrongful refusal to defend the District, as any alternative ruling ensured Wausau “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. The reassurance of “retroactive” reimbursement by the insurer—which, like Wausau, may opportunistically attempt to dispute the reasonableness of defense fees the insured incurs in the interim—does little to mitigate these concerns. The same is true of the majority’s assumptions that busy trial courts will immediately rule on an insurer’s motion to bifurcate and stay and that most insureds will be able to immediately, completely, and indefinitely suspend all efforts to defend the merits (including, e.g., the collection and preservation of what may prove to be critical evidence) upon the insurer’s filing of such a motion. But we will have to await further decisions clarifying the ultimate impact of Choinsky to determine the extent to which any such concerns ultimately are warranted.
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