2011 Wisconsin Insurance Law Year in Review
Insurance Coverage Litigation Update 01/31/12 Patrick J. Murphy, Brandon R. Gutschow
The insurance coverage team at Quarles & Brady continually reviews emerging trends and changes in insurance coverage litigation. Several of this year's noteworthy decisions in the Wisconsin courts addressed (1) the appropriate venue for insurance coverage cases, (2) direct actions against insurers, (3) contextual ambiguities, (4) bad faith insurance litigation, (5) faulty workmanship claims, and (6) environmental coverage litigation.
Winning the Race to the Courthouse: Northern States Power Co. v. Continental Insurance Co., 2011 WI App 136 (per curiam).
The "venue" of an insurance coverage case can greatly affect the case's outcome. Insurance law varies by state, and judges are more likely to apply the law of the state in which the court is "venued." This, in turn, can set off a "race to the courthouse" between policyholders and insurers, each of whom attempts to file suit in a state with favorable law before the other can file suit elsewhere. The Wisconsin Court of Appeals' decision in Northern States Power Co. v. Continental Insurance Co. illustrates the importance of winning the "race to the courthouse" for policyholders who wish to preserve their rights under Wisconsin law. When an insurer filed a coverage suit in Minnesota two weeks before the policyholder filed an identical suit in Wisconsin, the Wisconsin court ceased its proceedings out of deference to the first-filed Minnesota suit. The Minnesota court then applied Minnesota law to the detriment of the policyholder on a key issue on which Minnesota and Wisconsin law directly conflict - the allocation of claims between multiple insurers and policies. The Wisconsin court was then constitutionally obligated to honor the Minnesota court's decision, which significantly reduced the policyholder's insurance coverage by applying pro rata allocation.
Direct Actions Broadened: Casper v. American International South Insurance Co., 2011 WI 81.
In the context of third-party liability insurance, Wisconsin is one of a few states that allow injured parties to file a "direct action" against the responsible party's liability insurer. This is especially valuable when the responsible party cannot afford to pay for the damages. Until recently, direct actions were possible only when the insurance policy was delivered or issued for delivery in Wisconsin. However, the Wisconsin Supreme Court reversed this interpretation of the direct action statute in Casper v. American International South Insurance Co. and ruled that direct actions are available anytime the accident or injury occurs in Wisconsin.
Contextual Ambiguities May Lead to Coverage: Wadzinski v. Auto-Owners Insurance Co., 2011 WI App 47 (review granted).
The key to insurance coverage disputes is the language of the policy. Courts typically employ a three-step analysis: (1) Does the policy's "insuring agreement" provide an initial grant of coverage? (2) If so, do any exclusions eliminate coverage? (3) If so, do any exceptions to the exclusions reinstate coverage? All ambiguities are resolved against the insurer, as the drafter of the policy, and in favor of coverage. Wadzinski v. Auto-Owners Insurance Co. presented the rare case in which the court went beyond this typical analysis to find coverage. The policy's insuring agreement seemed to provide coverage only for third-party liability claims and not for first-party uninsured motorist claims, like the one at issue in the case. Rather than ending its analysis there, however, the Wisconsin Court of Appeals determined that one of the policy's endorsements, which was labeled as an exclusion, could be reasonably read to provide uninsured motorist coverage. Despite the clear language of the insuring agreement, the Court of Appeals held that the endorsement created a "contextual ambiguity" that must be resolved in favor of coverage. The Wisconsin Supreme Court, which has previously recognized contextual ambiguities, has accepted review of the decision. If the decision is affirmed, policyholders will have an additional avenue for arguing coverage through endorsements that may at first appear only to exclude coverage.
Bad Faith Stands Alone: Brethorst v. Allstate Property and Casualty Insurance Co., 2011 WI 41, and Park Terrace, LLC v. Transportation Insurance Co., 2011 WL 5984717 (Wis. Ct. App. Dec. 1, 2011).
In Brethorst v. Allstate Property and Casualty Insurance Co., the Wisconsin Supreme Court recognized for the first time that policyholders can sue insurers for bad faith without filing a separate breach of contract action. Nevertheless, the policyholder must (1) plead a breach of contract in its bad faith claim and (2) satisfy the court that a breach occurred. This case involved a first-party bad faith claim, which involves an insurer's unreasonable withholding of payments from its own insured under a first-party insurance policy. By contrast, third-party bad faith claims involve an insurer's unreasonable handling of its policyholder's defense against claims brought by a third-party claimant. There is no reason to believe that the rules announced in Brethorst would apply differently to third-party bad faith claims.
In another bad faith case, Park Terrace, LLC v. Transportation Insurance Co., the Wisconsin Court of Appeals issued key rulings on the timing of requests for bifurcation of bad faith claims and the requisite proof of bad faith damages. Insurers often seek to bifurcate bad faith claims from the other claims in a coverage suit to keep policyholders from learning about (and, ultimately, juries from being influenced by) the insurer's claim-handling practices until after a coverage trial. The Wisconsin Court of Appeals recognized that while bifurcation is appropriate in most cases, it must be timely requested. In this case, the insurers waited until after the close of discovery to request bifurcation, and the court denied it, noting that the insurer had already produced the claim file. This case also highlights the need to prove damages specific to the bad faith claim. The jury had awarded $3 million in bad faith damages, $1 million in attorney's fees spent on litigating the bad faith claim, and $4 million in punitive damages. The Court of Appeals reversed all of these damages awards, finding that the policyholder had failed to present evidence of how the insurer's bad faith conduct itself had caused damages. Rather, the policyholder had presented - as evidence of bad faith damages - the amount of money that the insurer should have paid for covered losses but had withheld in bad faith ($3 million). However, the Court of Appeals found that bad faith damages are not measured by the amount inappropriately withheld; instead, they are independent damages caused by the insurer's refusal to pay. Because the policyholder had failed to prove that it suffered additional losses as a result of the insurer's refusal to pay, the policyholder could not receive attorney's fees, which were on a contingency fee arrangement, or punitive damages.
Properly Presenting the Facts In Faulty Workmanship Cases: Acuity v. VPP Group, LLC, 2012 WL 15376 (Wis. Ct. App. Jan. 5, 2012); Yeager v. Polyurethane Foam Insulation, LLC, 2011 WL 6033041 (Wis. Ct. App. Dec. 6, 2011) (per curiam).
Most liability insurance policies do not provide coverage for a policyholder's faulty workmanship because such workmanship is not considered an accident or an "occurrence" under the policy. However, faulty workmanship may cause a covered "occurrence." For example, improperly installing a window is faulty workmanship, so the cost of reinstalling the window is not a covered occurrence. However, water leaking through the improperly-installed window may be an unintended consequence of the faulty workmanship, and the cost of repairing the water damage may be a covered occurrence. Two recent Wisconsin Court of Appeals decisions illustrate the importance of persuasively characterizing damages as directly or indirectly flowing from any alleged faulty workmanship.
In Acuity v. VPP Group, LLC, the policyholder was excavating dirt in order to remove a wall of a processing facility and accidentally caused nearby soil to erode, which in turn caused a partial collapse of the facility's engine room. The Court of Appeals held that although the policyholder's excavation was faulty workmanship, the soil erosion itself was a separate, unintended event that constituted an "occurrence" under the policy. The policyholder received coverage for all liability incurred as a result of the soil erosion.
In Yeager v. Polyurethane Foam Insulation, LLC, the policyholder improperly installed spray foam insulation. Among other issues, the insulation caused a buildup of condensation that resulted in water damage to the home. Although the condensation was a separate, unintended event resulting from the policyholder's faulty workmanship, the Court of Appeals found no coverage for the condensation or resulting water damage. The court focused not on the intervening event that caused the water damage - condensation - but on the policyholder's act that ultimately caused the water damage - improperly installing the insulation. That act, the court said, was faulty workmanship and therefore not an occurrence.
These two cases demonstrate that faulty workmanship cases are very fact-specific and courts applying the same law often reach opposite conclusions when faced with seemingly similar fact patterns. It is critical for policyholders to be thinking of causation issues from the outset, beginning with their fact investigation prior to submitting a claim.
CERCLA Limits Contribution Rights: Appleton Papers, Inc. v. George A. Whiting Paper Co., 776 F. Supp. 2d 857 (E.D. Wis. Mar. 1, 2011).
Generally, in a dispute between a policyholder and a third party who has caused the policyholder to suffer a loss, the fact that the policyholder can recover from its insurer generally does not limit or otherwise affect the third party's obligation to pay the policyholder for the loss. An insurer who has paid for the loss may be entitled to a recovery from the third party, but the third party cannot avoid paying damages, even if the policyholder has already been compensated for the loss. In Appleton Papers, Inc. v. George A. Whiting Paper Co., the Eastern District of Wisconsin held that this general rule is subject to an important exception in the context of CERCLA contribution claims for environmental damage: Any proceeds that a potentially responsible party ("PRP") recovers from its insurer to pay remediation costs will reduce the amount owed to the party by other PRPs. This decision may affect how policyholders settle claims for CERCLA liability with insurers. To maximize the policyholder's recovery from other PRPs, any amounts recovered from the insurer must be characterized as something other than indemnification for CERCLA losses.
For more details or if you have any questions, please contact Patrick Murphy at (414) 277-5459 / [email protected], Brandon Gutschow at (414) 277-5745 / [email protected] or your Quarles & Brady attorney.