2014 Wisconsin Insurance Law Year in Review
Insurance Coverage Litigation Law Alert 02/17/15 Jeff Davis, Keith Bruett, Pat Nolan, Patrick Murphy, Brandon Gutschow, Alex Shortridge
The insurance coverage team at Quarles & Brady continually reviews emerging trends and changes in insurance coverage litigation. In 2014, Wisconsin courts were again active in the insurance coverage arena. Noteworthy decisions this year addressed (1) pollution exclusions; (2) late notice requirements; (3) the trigger of coverage for property insurance; (4) concurrent coverage issues; (5) volitional acts; (6) "loss of use" claims; (7) the rights of excess insurers; (8) coverage for faulty workmanship and construction defects; and (9) statutory interest. Below is a summary of the key decisions.
Further Developments on the Pollution Exclusion
Wilson Mutual Insurance Co. v. Falk, 2014 WI 136, ___ Wis. 2d ___, 857 N.W.2d 156
Preisler v. General Casualty Co., 2014 WI 135, ___ Wis. 2d ___, 857 N.W.2d 136
Questions involving the "pollution exclusion" have bedeviled parties and courts ever since the exclusion was introduced in the standard CGL policy in 1973. While initially most litigation concerned the "sudden and accidental" exception to the exclusion, since the introduction of the "absolute" pollution exclusion in 1986 (which eliminated the exception), such claims now typically revolve around whether the damage for which coverage was sought was caused by a "pollutant" and Wisconsin courts have weighed in on this issue on a number of occasions. Of late, our courts have been tasked with reviewing this issue in the unseemly context of excrement, continuing a trend started last year in Hirschhorn v. Auto-Owners Ins. Co., 2012 WI 20, 338 Wis.2d 761, 809 N.W.2d 529, where the Wisconsin Supreme Court found that bat guano was a pollutant, barring coverage for a homeowner's loss.
The emphasis on biological waste as a pollutant continued in 2014. Unfortunately for policyholders, the Supreme Court, in two cases decided the same day, also continued the trend set in Hirschhorn of ruling against policyholders in such cases. In Wilson Mutual v. Falk, the issue was whether there was coverage for damages attributable to groundwater contamination caused by the spreading of manure as a fertilizer. In Preisler v. General Casualty, the insured was a business involved in the selling and application, also for fertilization purposes, of septage from septic tanks and the insured was sued by one of its customers when the septage contaminated a well, causing serious harm and death to the customer's herd of cattle.
The Supreme Court in both cases ruled that the waste material was a pollutant, rejecting the Court of Appeals' determination in Wilson Mutual that the context in which the waste was being used—a context that led the Court of Appeals in Wilson Mutual to label manure as "liquid gold" rather than an undesirable substance—took the case outside the exclusion. The court reasoned that a substance would be considered a "pollutant" if it is "largely undesirable and not universally present in the context of the occurrence that the insured seeks coverage for" and "if a reasonable insured would consider the substance …a pollutant."
Both cases have serious implications for farmers and others in the business of putting waste products and other materials ordinarily considered "undesirable" to productive use. More broadly, both cases have troubling implications for any coverage case where the underlying claim is based on damage caused by contamination from an undesirable material, regardless of whether the circumstances go beyond "traditional" pollution liability. How far the court will go in applying these cases in other contamination scenarios remains to be seen. Whether, for example, situations such as the one in Wisconsin Pharmacal, infra,involving a contaminated product—a case where the pollution exclusion was not even raised or addressed—will be subjected to a pollution exclusion defense in future coverage litigation is anybody's guess. One thing seems clear: businesses engaged in activities involving the handling of any products ordinarily thought of as "largely undesirable" should be cognizant of the potential limitations on their standard coverage and prepared to purchase, either by endorsement or a separate policy, pollution or similar type insurance that expressly provides coverage for whatever harm may arise from those activities.
Other cases of note: Acuity v. Chartis Specialty Ins. Co., 2014 WI App 45 (explosion caused by ruptured gas line was not attributable to a "pollution condition" so as to trigger coverage under a Contractor's Pollution Liability policy) pet'n for rev. granted 2014 WI 122
Notice Requirements Under Claims-Made Policies
Anderson v. Aul, 2014 WI App 30, 353 Wis. 2d 238, 844 N.W.2d 636 (review pending).
Liability insurance policies nearly always contain a condition obligating the insured to provide an insurer with timely notice of a claim. Timely notice of a claim provides the insurer an opportunity to adequately investigate, defend and potentially settle the claim. In one liability policy form, the so-called "claims made" policy, the notice provision takes on potentially greater significance than in other policies, such that the insured's failure to give timely notice might be fatal to the insured's chances of obtaining insurance coverage. That is because "claims-made" policies typically use language that limits coverage to those claims first made and reported to the insurer within a defined time period—typically the policy's policy period and an extended reporting period.
In Wisconsin, however, late notice issues are often answered not as much by policy language or case law but by statute, Wis. Stat. §§ 631.81 and 632.26, each of which expressly state than an insured loses coverage only where the insurer is "prejudiced" by late notice.
In early 2014, the Wisconsin Court of Appeals decided Anderson v. Aul, which addressed whether the notice-prejudice statutes apply to a "claims-made" policy after an insured gives notice beyond expiration of a "claims-made" reporting period.
Anderson was an attorney malpractice case. The plaintiffs wrote the attorney policyholder in December 2009 claiming malpractice and demanding money. The policyholder's professional liability policy covered claims-made and reported to the insurer between April 2009 and April 2010, but the attorney policyholder did not provide notice until March 2011, eleven months after the policy expired. The plaintiffs filed suit in March 2012, and the attorney provided notice of the suit shortly thereafter. The insurer intervened in the lawsuit, seeking a declaration that it owed no coverage based, in part, on the attorney policyholder's failure to provide notice of the claim within the reporting period. The Circuit Court ruled in the insurer's favor despite acknowledging that the insurer likely suffered no prejudice.
The Court of Appeals reversed, deciding as a matter of law that the Wisconsin notice-prejudice statutes apply to claims-made polices and that the insurer suffered no prejudice from the delayed notice. The court found that the insurer had adequate time to investigate and defend the claim, reasoning that even though notice was late per the policy terms, it came well before formal discovery or any court-ordered deadlines. The court also rejected the insurer's argument that claims-made policies, by their very nature, (i.e., that they will not cover claims reported outside the reporting period) create automatic prejudice to the extent an insurer must cover claims after notice is given outside the policy period. In other words, the court rejected the notion that there is inherent prejudice to an insurer when it is unable to treat a claims made policy as closed and off its books after the reporting period ends.
Based upon Anderson court's holding that Wisconsin's notice-prejudice rule applies to both occurrence-based and claims-made liability policies, insureds may still have coverage for claims first reported to the insurer after a claims-made policy's reporting period. The final chapter has not yet been written on this issue because this case is now pending before the Wisconsin Supreme Court. A Wisconsin Supreme Court decision on the issue is expected in 2015.
The Trigger of Coverage for Property Insurance
Strauss v. Chubb Indemnity Insurance Company, 771 F.3d 1026 (7th Cir. 2014)
A key issue in any insurance claim is when and how coverage is "triggered." Trigger determines which policy—and oftentimes how many policies—can provide coverage. In third party liability claims, Wisconsin has for some time now accepted a "continuous trigger" theory which permits the insured to recover under any policy in place during the course of a loss, even if the loss is "on-going." Strauss considered whether such a theory applies to first-party property claims.
The policyholders in Strauss had water infiltration causing damage to their home that went undiscovered from the time construction was completed in 1994 until 2010. They made a claim for coverage under policies written by Chubb from 1994 through 2005. Chubb denied coverage, contending that the damage manifested in 2010, and that under the manifestation trigger Chubb was not obligated to cover the damage.
Focusing on the policy language, the court held that the definition of "occurrence" in the policies, which included "continuous and repeated exposure" contemplated a long-lasting occurrence that could give rise to a loss over an extended period of time. Thus, according to the plain language of the policy, coverage was triggered when an occurrence causing loss takes place during the policy, and once triggered the policy covers "all risk of physical loss" to the home. Although the court declined to adopt a universal trigger theory for first-party coverage cases, the common definition of "occurrence" found in property policies means that Wisconsin courts are likely to apply the continuous trigger theory in first-party coverage cases.
The other noteworthy issue in Strauss involved the statute of limitations. Wis. Stat. § 631.83(1)(a) requires that an action on a property policy "be commenced within 12 months after the inception of the loss." However, parties to an insurance contract are free to alter the length of the limitations period and the date when that period begins to run. The Chubb policy did alter the date when the limitations period began to run by allowing a claim to be filed "within one year after a loss occurs." The court found that language to be ambiguous, and that it could reasonably be interpreted to mean after the loss is complete. Therefore, the policyholder in Strauss could have brought a claim at any point until one year after the water infiltration manifested itself.
Concurrent Coverage Issues
Blasing v. Zurich American Ins. Co., 2014 WI 73, 356 Wis. 2d 63, 850 N.W.2d 138
Burgraff v. Menard, Inc., 2014 WI App 85, 356 Wis. 2d 282, 853 N.W.2d 574
In Blasing v. Zurich American Insurance Co., the Wisconsin Supreme Court held that the auto insurer for plaintiff insured had to defend and indemnify defendant for plaintiff's own personal injury claims while defendant's employee was loading lumber into her truck. Defendant argued it was entitled to coverage under plaintiff's personal automobile liability policy—issued by American Family—because defendant's employee qualified as a "permissive user" of plaintiff's vehicle. The Wisconsin Supreme Court agreed because (1) the policy defined "insured person" as "any person using your insured car" and (2) loading lumber into plaintiff's truck constituted "use" of plaintiff's vehicle. The court rejected American Family’s argument that requiring American Family to defend and indemnify a suit brought by—not against—its insured "would be absurd." The court noted that American Family drafted the policy and, therefore, could not avoid application of its express terms; it is not uncommon for a single insurer to have issued policies covering both plaintiff and defendant; and American Family was not really representing both parties to the lawsuit—plaintiff had not asserted any claim for coverage from American Family. The court was careful to clarify that its decision did not address how, if at all, the existence of coverage under American Family's policy might affect coverage available to defendant from defendant's own liability insurer, or the respective obligations of the two insurers in such circumstance. That is where Burgraff v. Menard, Inc. comes in—sort of.
In Burgraff, a case arising out of nearly identical facts to those at issue in Blasing, the Wisconsin Court of Appeals held that defendant's self-insured retention qualified as "other applicable liability insurance" under the "other insurance" clause in plaintiff's auto policy, such that plaintiff's insurer was only required to pay a pro rata portion of defendant's liability—defendant had to pay the rest. Again, defendant (also the defendant in Blasing) had tendered the defense of plaintiff's personal injury lawsuit to plaintiff's auto insurer, Millers First Ins. Co, arguing that the employee who caused plaintiff's injury was a "permissive user" of plaintiff's car. Defendant had its own liability insurance from CNA, but defendant preferred not to pursue coverage under the policy because coverage was subject to a $500,000 self-insured retention (SIR). Millers First agreed to defend under a reservation of rights, then moved for partial summary judgment, arguing that its share of any settlement or judgment would be limited to one-sixth of the total verdict or settlement under the "other insurance" clause in its policy, which stated that if "other applicable liability insurance" existed, covering a loss, Millers First's share of any liability would be limited to the proportion its policy limits ($100,000) bore to the total limits of liability under all applicable insurance ($100,000 plus $500,000 SIR = $600,000).
Defendant opposed the motion, arguing that its SIR is not "other applicable liability insurance" and, in any event, should be treated as excess coverage pursuant to the "other insurance" provision in the CNA policy defendant had purchased, which stated that the CNA policy is excess over "any other insurance …if the loss arises out of maintenance of use of … 'autos.'" The Court of Appeals rejected this argument. It held that under the Wisconsin Supreme Court's decision in Hillegass v. Landwehr, 176 Wis. 2d 76 (1993), an SIR constitutes "other applicable liability insurance." The Court of Appeals distinguished its own decision in Brown County v. OHIC Ins. Co., 2007 WI App 46, 300 Wis. 2d 547, as establishing an exception to this principle under which an insurer cannot invoke the "other insurance" provision in its policy to recover from its own policyholder (who happened to have purchased overlapping coverage—one policy subject to an SIR and one with first-dollar coverage). As to the "other insurance" clause in the CNA policy, the Court of Appeals held that defendant could not invoke the clause because it governs CNA's obligations when other insurance is available for a covered loss, not defendant's obligations for exposure within the self-insured layer of coverage.
Interestingly, and notwithstanding these favorable aspects of the decision, Millers First did not quite prevail in Blasing. It turns out that, after the trial court granted Millers First's motion for partial summary judgment, limiting Millers First's indemnity exposure to one-sixth of any verdict or settlement, Millers First settled with plaintiff for a sum certain in exchange for a release "fully discharg[ing] Millers First… and one-sixth of any liability that [defendant] may have to [plaintiff]." Millers First then withdrew from defending defendant. The Court of Appeals held that Millers First breached its duty to defend by doing so because the settlement did not exhaust the limits of liability under Millers First's policy; nor did the settlement exhaust defendant's exposure to liability. Under the terms of the policy, Millers First was obligated to defend defendant until Millers First had paid the policy "limits of liability," not Millers First's "maximum exposure," i.e., the pro rata share of any verdict or judgment.
A petition for review has been filed.
Volitional Acts – Acting With Intention in 2014
Leinweber v. Wirth, 2014AP552, 2014 WL 4920837 (Wis. Ct. App. Oct. 2, 2014) (unpublished)
Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of California, Inc., 2014 App 111, ___ Wis. 2d ___, 856 N.W.2d 505
General liability policies are intended to cover liability for accidents that result in harm. Unfortunately, courts have on occasion muddied the waters by excluding coverage for unintended harm upon finding "volition" somewhere in the causal chain, usually in the form of misrepresentation. See, e.g., Everson v. Lorenz, 2005 WI 51 (holding that real estate developer's misrepresentations regarding a flood plain were volitional and therefore not covered); Stuart v. Weisflog's Showroom Gallery, Inc., 2008 WI 86 (holding the same for contractors' misrepresentations regarding their familiarity with Brookfield's building codes). In 2014, the Court of Appeals addressed the issue in two very different contexts.
Leinweber v. Wirth was a wrongful death action by the estate of a tavern patron who was fatally shot at close range in a scuffle. State Farm intervened and moved for a declaratory judgment that the shooter had no coverage under a renter's insurance policy. The policy covered "occurrences," defined as "an accident  which results in bodily injury or property damage." The Wisconsin Court of Appeals determined that pointing and firing a semi-automatic handgun "evinces a degree of volition inconsistent with the term accident." Accordingly, the court held that there was no "occurrence" and therefore no insurance coverage.
By contrast, in Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of California the Wisconsin Court of Appeals held that, under an identical policy provision, supplying the wrong ingredient for incorporation into a dietary supplement was an accident (i.e., not a volitional act) and the insured supplier was entitled to coverage, even though the supplier allegedly made several misrepresentations to the buyer about the ingredient. The court distinguished Everson by focusing on the act of supplying the wrong ingredient rather than any accompanying false statements made to the buyer. A dissent was filed whichargued that "allegations of misrepresentations underlay all of the claims" and denied coverage because "a misrepresentation is not an accident." According to the dissent, Everson and Stuart mandate this result.
Wisconsin Pharmacal is also significant because of its interpretation of "property damage" and the "Your Product" exclusion. In important holdings for component part manufacturers, the court concluded that blending the wrong ingredient with a third-party's ingredients so as to make the other ingredients unusable constituted "property damage," and the damage was to the third-party's ingredients, not the insured's. A petition for review by the Wisconsin Supreme Court is currently pending.
"Loss of Use" Claims
Hip Hop Beverage Corp. v. Krier Foods, Inc., 13-CV-412, 2014 WL 280387 (E.D. Wis. Jan. 24, 2014).
The importance of always considering available insurance coverage—even for common commercial disputes—was underscored once more in the Hip Hop Beverage decision from the Federal District Court for the Eastern District of Wisconsin. A buyer of carbonated beverage drinks had sued the beverages' packager claiming the packager performed faulty work that led to leaking beverage containers, unusable or wasted product, and the need for significant repackaging—all claims typically excluded under a general liability insurance policy.
When the packager's insurer asked the district court to deny coverage for these claims, the district court seized upon the buyer's assertions that faulty packaging caused a loss of use of the buyer's warehouse property because it was needed for storing and repackaging the defective beverage containers. Given assertions of potential loss of use of tangible property—which is considered one form of property damage under a general liability policy— the district court concluded that the packager's insurer, at minimum, had a duty to defend all of the buyer's claims. The court applied the longstanding rule that if there exists one covered claim, the insurer must defend the entire action.
As a practical side note, the district court also relied upon a relatively newer exception to the traditional four corners rule in deciding the duty to defend question. Under the four corners rule, the insurer's obligation to defend is typically guided solely by the allegations contained in the four corners of the Complaint. However, because the insurer had already agreed to defend the action at the outset, the district court could look outside the complaint's four corners to extrinsic evidence to decide if a duty to defend existed, relying upon the Wisconsin Supreme Court's relatively recent holding on this issue in Olson v. Farrar, 2012 WI 3, 338 Wis. 2d 215, 809 N.W.2d 1.
The Rights of Excess Insurers
In re C.P. Hall Co. 750 F.3d 659 (7th Cir. 2014)
In Hall, the court addressed an excess insurer's right to intervene in a bankruptcy proceeding for the purposes of objecting to a settlement with a primary insurer. C.P. Hall Company was defendant in asbestos lawsuits involving tens of thousands of claims. When Hall filed bankruptcy in 2011, one of its assets was a $10 million insurance policy from Integrity Insurance Company, which was itself insolvent and in liquidation. Facing questions about whether Integrity's policy actually covered Hall's losses, Hall settled with Integrity for $4.125 million, which was approved by the bankruptcy judge.
The bankruptcy judge refused to consider an objection from one of Hall's excess insurers, Columbia Casualty Company, which claimed that the settlement increased the likelihood of triggering Columbia's coverage obligations. The court determined that Columbia's feared loss was only speculative, and not sufficient to make Columbia a "party in interest" eligible to challenge the settlement. The court did note that an excess insurer or reinsurer can still protect itself through carefully crafted policy language. The court suggested that the excess insurer could protect itself by writing its policy to not attach until the underlying limit had been reached, or alternatively dropping down in the event the underlying insurer became insolvent. Under the first option, the insurer would be unaffected by the reduced settlement, and under the latter the excess insurer would have a concrete stake in the bankruptcy proceeding, enabling it to intervene in the bankruptcy proceeding.
Construction Defect and Faulty Workmanship Claims — The Key to Preserving Coverage
Dahl v. Peninsula Builders, LLC, 2014AP270, 2014 WL 4411606 (Wis. Ct. App. Sept. 9, 2014) (unpublished, per curiam)
Insurance claims for construction defects and faulty workmanship are fact-intensive. The framing of those facts can preserve or eliminate coverage. To trigger coverage under a general liability insurance policy, there must be an "occurrence" (i.e., an accident) that causes property damage or bodily injury. Courts across the country have grappled with the question of whether faulty workmanship itself qualifies as an occurrence. In fact, the Wisconsin Court of Appeals asked the Wisconsin Supreme Court for guidance on that very issue in 2006. See Glendenning's Limestone & Ready-Mix Co. v. Reimer, 2006 WI App 161, 291 Wis. 2d 5556, 721 N.W.2d 704. After the Supreme Court declined to weigh in on the issue, the Court of Appeals developed a line of authority under which a contractor's faulty workmanship is not standing alone an occurrence, though it can cause a covered occurrence. For example, a contractor's faulty installation of windows would not be an occurrence, but subsequent leaking of those windows that causes water damage would be an occurrence. Although there are some serious questions about the soundness of that approach, particularly in light of recent trends around the country, it is currently the law in Wisconsin. Accordingly, the key to preserving coverage for faulty workmanship claims is to identify an "occurrence" other than the faulty workmanship itself (e.g., an intervening event like window leaks) that caused the bodily injury or property damage. This should be done early in the process by the contractor when presenting its insurance claim and also by the injured party (who likely wants to access the contractor's insurance coverage) when framing its damages claim against the contractor.
In that regard, Dahl v. Peninsula Builders serves as a cautionary tale of sorts. Homeowners sued their remodeling contractor for failing to complete the remodeling work, failing to perform in a workmanlike manner, and causing extensive damage to parts of the property that were not being remodeled. The contractor relied on the final allegation in seeking coverage from its liability insurer, focusing on the fact that the contractor's alleged faulty workmanship caused harm to property other than the contractor's own work product. However, the Wisconsin Court Appeals determined there was no insurance coverage because the contractor had failed to identify an intervening "occurrence" caused by the faulty workmanship that, in turn, caused the additional property damage. The takeaway: intervening occurrences may not always be easy to identify, but failing to do so could jeopardize insurance coverage.
Statutory Interest on Delayed Insurer Payments
Singler v. Zurich American Insurance Co., 2014 WI App 108, 357 Wis. 2d 604, 855 N.W.2d 707
In Singler v. Zurich American Insurance Co., an injured motorist sought interest after the other driver's insurer failed to pay a settlement within 30 days. Specifically, the motorist sought interest under Wis. Stat. § 628.46, which requires insurers to pay insurance claims within 30 days, after which interest is charged at 12%. The Wisconsin Court of Appeals determined that Wis. Stat. § 628.46 did not apply because it was a contractual settlement of an insurance claim that the insurer had failed to pay, not an insurance claim. In particular, the court observed that applying Wis. Stat. § 628.46 to settlements with insurers would deny parties the freedom to negotiate settlements with different payment terms, such as annuity payments or time limits of over 30 days. Nevertheless, the court required the insurer to pay interest under Wis. Stat. § 138.04, which applies a default interest rate of 5% to overdue contractual payments. The parties' settlement agreement did not impose a time limit for payment, but the insurer's payment was "overdue" because a reasonable limit of 30 days—as determined by the trial court—was implied.
This decision provides a couple of important reminders. First, Wis. Stat. § 628.46 is a powerful tool to combat insurers' delay tactics. Even though the court did not apply it in this case, the statute is something all parties should have in their toolbox when dealing with insurers. Second, parties that settle insurance claims have the freedom to set time limits for payment (e.g., 7 days) and penalties for overdue payments (e.g., 12% interest), but should explicitly do so in the settlement agreement.
For any questions, please contact Jeff Davis at (414) 277-5317 / [email protected], Keith Bruett at (414) 277-5411 / [email protected], Pat Nolan at (414) 277-5465 / [email protected], Patrick Murphy at (414) 277-5459 / [email protected], Brandon Gutschow at 414-277-5745 / [email protected], Alex Shortridge at (414) 277-5443 / [email protected], or your local Quarles & Brady attorney.