The insurance coverage team at Quarles & Brady continually reviews emerging trends and changes in insurance coverage litigation. In 2015, Wisconsin courts were again active in the insurance coverage arena. Noteworthy decisions this year addressed (1) notice requirements for claims-made insurance; (2) the duty to defend; (3) application of policy exclusions; (4) triggers of coverage relating to property damage; (5) bad faith claims; and (6) post-coverage recovery issues. Below is a summary of the key decisions.
Notice Requirements for Claims-Made Insurance
Anderson v. Aul, 2015 WI 19, 361 Wis. 2d 63, 862 N.W.2d 304
Liability insurance policies always require the insured to provide an insurer with timely notice of a claim. Such notice 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. That is because “claims-made” policies typically use language that limits coverage to those claims first made and reported to the insurer within a specifically defined time period—typically the policy’s policy period and an extended reporting period.
An age-old question in insurance cases is: What happens if notice is not timely given? Does the insured lose coverage or must the insurer demonstrate prejudice, i.e., an inability to investigate and defend the claim? With many liability policies courts hold that coverage is lost only if there is prejudice to the insurer from the late notice but with claims-made and reported policies the result has been different—most courts have found that coverage is barred without regard to prejudice. Until this year, the Wisconsin Supreme Court had never addressed the issue, and in Wisconsin the issue was made more complicated by a statute, Wis. Stat. § 632.26, which expressly states that in “any liability policy” an insured loses coverage only where the insurer is “prejudiced” by late notice.
Last year we reported that the Wisconsin Court of Appeals decidedAnderson v. Aul, which ruled that a plain reading of the statute required that it apply to “claims-made” policies. In 2015, the Supreme Court reversed the Court of Appeals.
In reversing, the Wisconsin Supreme Court’s opinion turned largely on issues of statutory construction, holding that the plain language of the notice-prejudice statutes, sections 631.81 and 632.26, Wis. Stats., did not apply to the reporting requirement in “claims-made-and-reported” policies. The decision drew a fine distinction between the insured “giving notice” of a claim and the insured’s act of “reporting” a claim to an insurer under a policy that “covers” only claims that are reported in a timely manner. In other words, because the reporting requirement was in the coverage grant the court reasoned that the statute did not apply as it would create new coverage where no coverage existed in the first place.
Though the court also left open the possibility that a late reported claim under a claims-made-and-reported policy may be covered if reporting were impossible, the decision is a tough one to swallow for the myriad of Wisconsin businesses that purchase these types of policies, which are ubiquitous in employment practices liability, errors and omissions, and directors and officers liability policies. It is equally tough on claimants—who often have no realistic way to ensure the giving of notice—harmed by such businesses, particularly where insurance provides the only means of recovery. Indeed, in Anderson, the claimants were the ones seeking coverage for that very reason. Three key points should be taken from this decision: (1) always read and understand whether you have a claims-made-and-reported liability policy; (2) be vigilant about what constitutes a “claim” under the policy—a claim can be broader than suit papers and as simple as a letter demanding some relief or payment (that was the "claim" in Anderson, which the insured failed to report), or even a government subpoena or investigation; and (3) when faced with an arguable claim or circumstances that could turn into a claim, err on the side of caution and report the claim or circumstances to the insurer.
The Duty to Defend When Breach Occurs/Choice of Counsel/Defense Handling/Four Corners Rule.
Haley v. Kolbe & Kolbe Millwork Co., Inc., No. 14-cv-99-bbc, 2015 WL 6669395 (W.D. Wis. Nov. 2, 2015)
Whether a policyholder can choose its own defense counsel after a carrier reserves rights continues to be a frequently litigated issue in Wisconsin and was the subject of another federal district court decision in 2015. In the Haley case, Judge Crabb in the Western District of Wisconsin addressed the issue of when an insured may be entitled to its own defense counsel as well as the separate question of when an insurer breaches its duty to defend. The insured in Haley, a window manufacturing company, was sued in a class action lawsuit seeking damages for selling allegedly defective windows. The insured sought its own defense counsel to be paid for by its insurers; the insurers wanted their own defense counsel defending the insured. Ultimately, after much back-and-forth, the insurers agreed to pay a portion of the rates charged by the insured’s chosen counsel.
Notwithstanding that the insurers agreed to pay a portion of the insured’s defense counsel fees, the insured sued them, arguing both carriers had breached their duty to defend and engaged in bad faith by not immediately agreeing to pay the defense costs and by attempting to appoint defense counsel that were not truly independent.
The Haley court noted, however, that the insured was continuously defended by its own counsel and the insurers had agreed to pay a portion of their fees from the point of tender. It further ruled that an insurer need not immediately agree to defend a lawsuit but may take some time to investigate whether it has a duty to defend. If, after the period of investigation, the insurer concludes that a duty to defend exists and if the insurer pays defense costs from the point of tender, theHaley court held there is no breach of the duty to defend or bad faith.
The Haley court also made a duty to defend ruling, reaffirming the four corners rule, which says that the insurer’s duty to defend is governed exclusively by the allegations within the complaint’s four corners. The insurers attempted to show they had no duty to defend based upon court filings in the underlying class action lawsuit filed after the complaint which suggested plaintiffs were not seeking damages associated with “other” property. The Haley court had originally held that the complaint’s allegations of damage to “other” property brought the claims within defense coverage. The Haley court denied consideration of these later filings, citing the four corners rule. While the Haley court acknowledged that the four corners rule may have been relaxed in at least one Wisconsin Supreme Court decision, Estate of Sustache v. American Family Mutual Ins. Co., 311 Wis.2d 548, 751 N.W.2d 845, 2008 WI 87, the court ruled that Sustache was not so broad to allow for consideration of extrinsic facts that contradict complaint allegations when determining the duty to defend.
Using Exclusions to Analyze the Duty to Defend.
David M. Marks v. Houston Casualty Co., 2015 WI App 44, 363 Wis.2d 505, 866 N.W.2d 393; Water Well Solutions Service Group Inc. v. Consolidated Insurance Company, 2015 WI App 78, 365 Wis.2d 223, 871 N.W.2d 276
Both the Marks and Water Well cases addressed the issue of whether exclusions should be used to analyze an insurer’s duty to defend, particularly after a carrier unilaterally denies coverage.
In Marks, the insurer refused to defend the insured in a matter where the insured was alleged to have breached his fiduciary duties as an officer and director. The insured later sued for coverage, citing language from certain past Wisconsin duty to defend cases—notablyGrube v. Daun, 173 Wis.2d 30, 496 N.W.2d 106 (Ct. App. 1992),Kenefick v. Hitchcock, 187 Wis.2d 218, 522 N.W.2d 261 (Ct. App. 1994), Radke v. Fireman’s Fund Ins. Co., 217 Wis.2d 218, 232, 522 N.W.2d 261 (Ct. App. 1994)—that suggested that the duty to defend should be determined solely by examining a policy’s coverage grant without resorting to exclusionary policy language. Under that view, theMarks insured argued that the complaint allegations triggered the coverage grant and required the insurer to defend him. The insurer argued that even if the policy’s coverage grant triggered coverage, the policy’s exclusions would exclude coverage. The Court of Appeals rejected the insured’s view that only the coverage grant should be consulted in determining the duty to defend and reiterated that exclusions should be part of the analysis as well. Given that the exclusions clearly absolved the insurer of a duty to defend, the Markscourt denied the duty to defend. This decision is now on review before the Wisconsin Supreme Court, which will have the final say on this question in 2016.
In Water Well, the insured was a plumbing contractor that negligently replaced a submersible pump in a municipal water system. The municipality’s insurer later sued the plumbing contractor who tendered the case to its general liability carrier for a defense. The contractor’s carrier denied coverage under both the “your work” and “your product” exclusions and refused to defend without seeking a declaration from any court on its duty to defend.
In arguing for coverage, the plumbing contractor made the same argument as in the Marks case—i.e., that once the insurer fails to defend, the duty to defend inquiry is confined to the policy’s coverage grant. Like the Marks court, the Court of Appeals held that when determining the duty to defend, no matter when in the course of coverage proceedings, the entire policy—both the coverage grant and exclusions—must be examined and applied.
The insured plumbing contractor in Water Well also asked the Court of Appeals to look outside the four corners of the complaint after submitting evidence that, if considered, would tend to support coverage under the policy. This evidence would have specifically nullified the “your work” and “your product” exclusions in the policy. The Court of Appeals denied the insured’s request to look outside the four corners of the complaint, holding such a position was contrary to well-established Wisconsin duty to defend case law. The Water Well case is also now before the Wisconsin Supreme Court on review.
Application of Policy Exclusions
State Farm Fire & Casualty Company v. Easy PC Solutions, LLC, No. 2014AP2657, 2015 WL 8215533 (Wis. Ct. App. Dec. 9, 2015) (slip copy) (recommended for publication)
Advanced Waste Services Inc. v. United Milwaukee Scrap, LLC, 2015 WI App 35, 361 Wis.2d 723, 863 N.W.2d 634
Acuity v. Chartis Specialty Ins. Co., 2015 WI 28, 361 Wis.2d 396, 861 N.W.2d 533
Connors v. Zurich American Ins. Co., 2015 WI App 89, 365 Wis.2d 528, 872 N.W.2d 109
Ramos v. Charter Oak Fire Ins. Co., 2015 WL 5972555, 2015 WI App 90, 365 Wis.2d 607, 871 N.W.2d 866 (Oct. 15, 2015)
Interpreting and applying policy exclusions is always a hot topic in insurance coverage litigation, and 2015 was no different, with notable decisions addressing exclusions for Telephone Consumer Protection Act (TCPA) liability and pollution.
A hotly contested issue in the past several years involves liability insurance coverage for so-called “blast fax” suits which seek, typically on a class action basis, to impose liability against the senders of mass faxes under the TCPA. Courts around the country are divided on whether such suits trigger coverage under the Personal and Advertising Injury section of the standard Commercial General Liability policy, which provides liability coverage for certain offenses, one of which is invasion of privacy. Two years ago, we wrote about the court of appeals decision in Sawyer v. West Bend Mut. Ins. Co., 2012 WI App 92, 343 Wis.2d 714, 821 N.W.2d 250, in which the court found such coverage on the grounds that the right of privacy included a right to be left alone, which is violated by a blast fax. That case may already be somewhat dated—and not just because blast faxes have largely given way to blast emails. Rather, the standard CGL policy now contains an exclusion designed to expressly bar coverage for TCPA liability and, with the passage of time, the exclusion has found its way into more and more policies. In State Farm Fire & Cas. Co. v. Easy PC Solutions, LLC, the Wisconsin Court of Appeals addressed the applicability of the exclusion in another blast fax case. The insured argued that the exclusion did not apply because the complaint alleged a conversion claim (unauthorized use of the recipients’ paper and toner) that did not rely on the TCPA. The insured also argued that the complaint could be construed as triggering coverage under earlier policies that did not contain the exclusion. The Court of Appeals rejected both arguments. Given the breadth of the exclusion, this result was not a surprise. The key takeaway from the case is simply this: for any business in which potential class action TCPA liability is a realistic concern, it is critical to understand whether one’s policy contains the exclusion. Most CGL policies written today do. Businesses, particularly those that engage in mass consumer marketing, should be aware of this and if TCPA coverage is desired, secure it through an appropriate endorsement.
Wisconsin courts have decided numerous insurance cases in recent years involving pollution exclusions, and 2015 saw another influx of such cases. In Advanced Waste Services, the Court of Appeals decided that a pollution exclusion can bar coverage even if the policyholder does not intentionally disperse pollutants. The policyholder was a metal scrapping business that sent its wastewater to a recycling company that would remove and resell oil from the water. The wastewater contained PCBs that contaminated the oil recycling facility. The metal scrapping business’ liability policy contained a standard pollution exclusion eliminating coverage for damage caused by the dispersal of pollutants. There was no dispute that the damage to the oil recycling facility was caused by the dispersal of pollutants, but the policyholder urged the court to adopt an additional requirement imposed by some states that a pollution exclusion can apply only if the policyholder intentionally discharges a known pollutant. The Court of Appeals, as an error-correcting court, had to decline the invitation and find no coverage, but this remains an issue that the Wisconsin Supreme Court could someday choose to address.
In Acuity v. Chartis, the Wisconsin Supreme Court addressed a dispute between a contractor’s general liability insurer and its pollution liability insurer. While excavating a road, the contractor’s employees damaged a natural gas pipe, causing a leak and eventually an explosion and fire that injured several people and damaged several buildings in the area. The contractor’s general liability insurer acknowledged coverage but the pollution liability insurer did not, arguing that pollution coverage cannot overlap with general liability coverage. The court disagreed, pointing out that while courts broadly interpret a policy’s grant of coverage, they narrowly interpret policy exclusions. Therefore, a broad reading of a pollution policy’s coverage grant combined with a narrow reading of a general liability policy’s pollution exclusion could lead to coverage under both policies for a pollution-related claim. More importantly, the general liability insurer never denied coverage, so the court only needed to examine whether the claim triggered coverage under the pollution policy. The pollution policy at issue provided coverage for bodily injury and property damage caused by “pollution conditions,” which were defined to include the release or escape of any solid, liquid, gaseous, or thermal irritant or contaminant. Interpreting this language broadly, the court agreed with the contractor that the natural gas was a contaminant that caused the bodily injury and property damage. Accordingly, the pollution insurer had to split the costs of the claim with the general liability insurer.
Connors and Ramos were related cases decided jointly by the Wisconsin Court of Appeals. Bacteria formed in the cooling towers of a foundry and allegedly caused Connors and Ramos to contract pneumonia. The foundry’s liability policy contained a pollution exclusion that, based on prior Wisconsin cases, would eliminate coverage for the Connors and Ramos claims. However, the policy also contained an endorsement that redefined “pollutants” and provided examples of such pollutants, all of which were industrial products or byproducts. The court found that the endorsement rendered the pollution exclusion ambiguous and potentially applicable only to claims involving a product or byproduct of the policyholder’s business. Because bacteria was not a product or byproduct of the foundry, the ambiguous pollution exclusion did not bar coverage for the Connors or Ramos claims.
Triggers of Coverage Relating to Property Damage
Advance Cable Co. LLC v. Cincinnati Ins. Co., 788 F.3d 743 (7th Cir. 2015)
Smith v. Anderson, 2015 WL 9283969 (Wis. Ct. App. Dec. 22, 2015)
In Advance Cable v. Cincinnati Ins. Co., the Seventh Circuit addressed whether the nature and extent of property damage matter for purposes of triggering a policy covering “direct physical ‘loss’ to Covered Property.” Advance Cable tendered a claim under the policy for cosmetic damage—dents—to the metal roof of its building following a hail storm. Advance Cable’s insurer, Cincinnati Insurance, denied the claim because the damage did not result in any material structural harm or impair the roof panels’ life expectancy. Advance Cable sued.
On cross motions for summary judgment, Cincinnati argued that the policy language “physical loss” means “material or structural harm”; therefore, the merely cosmetic damage at issue did not trigger coverage under the policy language. The district court disagreed, noting that any ambiguities must be construed against Cincinnati as drafter of the policy language, and granted summary judgment in favor of Advance Cable.
The Seventh Circuit affirmed, holding that “physical” means “affecting the physical (not intangible) characteristics” of the covered property. As to “loss,” which was defined in the policy as “loss or damage,” the Seventh Circuit held that the policy did not limit coverage to losses of function or diminution in value, but instead covered all forms of “damage,” including purely cosmetic injury.
In Smith v. Anderson, the Wisconsin Court of Appeals rejected a policyholder’s attempt to expand coverage under a CGL policy to reach misrepresentation claims that relate to property damage. It is reasonably well-settled that a misrepresentation as to the condition of property does not trigger coverage under a CGL policy that covers “property damage caused by an occurrence.” The misrepresentation—a mere false statement—does not cause the property damage at issue; the misrepresentation has no effect whatsoever on the condition of the property.
The question presented in Smith was whether the analysis changes if the insured is alleged to have been responsible for fixing the defective property. There, Smith sued Anderson alleging that Anderson had misrepresented the condition of a home Smith had purchased from him. Anderson, in turn, filed a third-party complaint seeking indemnification or contribution from R&B, a contractor he had hired to fix some of the defects at issue. R&B tendered the case to its insurer, West Bend Mutual, who sought a declaration of no coverage.
The trial court ruled in favor of the insurer, refusing to recognize a distinction between Smith’s claims against Anderson, and Anderson’s claims against R&B. The Court of Appeals affirmed, noting that “the third party complaint states no theory of liability against R&B. It simply states that if Anderson is found liable to Smith, R&B should share liability.” It was significant to the court that neither Smith’s complaint nor Anderson’s third-party complaint alleged negligence or faulty workmanship and that the complaint in fact alleged that the work was “performed in accord with the design drawings . . .” Had Anderson made the missing allegations of negligence or faulty workmanshipcausing property damage the result may have been different (though a business risk exclusion may have applied to bar coverage if the only allegation involved a failure to adequately perform the work for which R&B was hired). But without the missing allegations, the court found the misrepresentation claims at issue insufficient to trigger coverage under the CGL policy, notwithstanding the allegation that R&B had been hired to remedy the property damage.
Bad Faith Claims
Estate of Meistad v. Progressive Universal Ins. Co., 2015 WL 3403457, 2015 WI App 52, 364 Wis. 2d 408, 866 N.W.2d 405
It is well-settled in Wisconsin that bad faith is a separate tort cause of action, distinct from breach of contract. (Brethorst v. Allstate Prop. & Cas. Ins. Co., 2011 WI 41, ¶ 56). However, the two causes of action—bad faith and breach of contract—remain closely related in that an insured cannot assert a bad faith claim without alleging conduct by the insurer that would constitute a breach of contract—such conduct is an element of the bad faith cause of action even if plead as a stand-alone tort claim.Id.
What was perhaps less clear until the Court of Appeals’ decision inMeistad, is whether the insured can sue for bad faith if the insurer has adjusted the insured’s claim and paid the insured insurance proceeds. It turns out that the answer is yes, the insured can sue for bad faith if the insurer failed to conduct a reasonable investigation of the insured’s claim and instead, induced the insured to accept a quick payment of less money than he would otherwise be entitled to receive under the policy.
The insurance claim in Meistad arose out of an auto accident in which Meistad was injured by an uninsured driver. Meistad made a claim to his auto insurer, Progressive, which had issued a policy including uninsured motorist coverage. After some negotiation, Progressive settled Meistad’s claim, paying Meistad $19,950 and Meistad signed a release in favor of Progressive. A few months later, Meistad learned that his injuries were more severe than his initial treating physician had thought. He sought additional compensation from Progressive. But Progressive refused to make further payments arguing that the release Meistad had signed relieved Progressive of ongoing obligations with respect to Meistad’s claim.
Meistad sued Progressive, asserting only a claim for bad faith. Progresive moved for summary judgment, arguing that (1) Meistad had failed to plead conduct that would constitute a breach of contract, as Meistad conceded Progressive had promptly settled his claim; and (2) Progressive had a reasonable basis for denying Meistad’s claim to additional proceeds given that Meistad had executed a release in Progressive’s favor.
The trial court denied Progressive’s motion. After trial in which the jury found in Meistad’s favor, the Court of Appeals affirmed the trial court’s summary judgment decision, finding sufficient evidence in the record to support a finding that Progressive wrongfully denied Meistad the full extent of his contracted-for benefit of coverage—i.e., that Progressive’s bad faith in negotiating a settlement with Meistad also constituted a breach of contract sufficient to satisfy the Brethorst standard. The Court of Appeals went on to reject Progressive’s request to create a blanket rule that as long as an insurer obtains a release—regardless of how the insurer obtains it—the insurer has a reasonable basis for denying the insured’s claim and is immune from bad faith liability. Instead, the Court of Appeals held that if Progressive obtained the release through bad faith conduct—by failing to investigate the claim and misleading Meistad in critical ways during the claim negotiations (including discouraging Meistad from retaining a lawyer)—the mere existence of the release does not establish that Progressive had a reasonable basis for denying Meistad’s claim.
Post-Coverage Recovery Issues
Dilger v. Metropolitan Property and Casualty Ins. Co., 2015 WI App 54, 364 Wis.2d 410, 868 N.W.2d 117 (Wis. Ct. App. June 3, 2015)
Gronik v. Balthasar, Nos. 10-cv-0954, 11-cv-0697, 2015 WL 4647938 (E.D. Wis. Aug. 6, 2015)
Fleet and Farm of Green Bay, Inc. v. United Fire and Casualty Co., No. 13-C-1013, 2015 WL 5839056 (E.D. Wis. Oct. 7, 2015)
Even after coverage is found, there are numerous issues that can affect a policyholder's ultimate recovery. The Wisconsin Court of Appeals and the Federal District Court for the Eastern District of Wisconsin addressed three of these issues in 2015—interest, setoffs, and attorney’s fees—with mixed results.
Dilger marks a win for insurers regarding statutory interest. Wisconsin Statute § 628.46 requires insurers to pay claims within 30 days, or incur interest at 12 percent. The Court of Appeals determined that interest accrues “when there is clear liability, a sum certain owed, and written notice of both,” but not if the insurer has “reasonable proof” that it is not responsible. The claimant in Dilger was a Brookfield police officer struck by an insured driver who left the scene thinking she had hit a deer. The officer filed a claim which the driver’s auto insurer denied because at the time the driver disputed whether she hit the officer. The driver later pled guilty in the related criminal case to hit-and-run and was sentenced to jail four months after entering the plea. The Court of Appeals affirmed that interest did not accrue until sentencing. The court reasoned that even though the guilty plea evidenced that the driver was responsible, she could have withdrawn her guilty plea at any time up to sentencing, so the insurer had reasonable proof of nonresponsibility until that point. This result sets an extremely lenient standard for avoiding interest, but the prospect of 12 percent statutory interest should remain a powerful deterrent against insurer delays.
Gronik v. Balthasar, on the other hand, represents a win for policyholders by denying an insurer’s counterclaim for setoff. In Gronik, insured homeowners sought to recover damages under their homeowners’ policy after having already settled a claim for the same damages. Chubb counterclaimed that it was entitled to an offset for the settlement amount to avoid double recovery by the homeowners. The Eastern District denied the setoff for three reasons. First, a “setoff” is a reduction in a debt plaintiffs owe defendants and the plaintiff homeowners did not owe Chubb any pre-existing debt. Second, setoffs are equitable and equitable remedies are unavailable in contract actions. Third, a setoff for Chubb was against public policy: “Where an insured has paid a premium to an insurance company for the benefit of coverage, he should receive that benefit regardless of whether he is able to obtain payment for the same loss from another source.” Gronikpotentially puts an end to setoff claims by insurers in Wisconsin.
In another important victory for policyholders, the Eastern District found in Fleet and Farm that insurers who breach the duty to defend have only a “very limited ability to challenge attorney’s fees that were actually incurred.” There, United Fire and Casualty Company wrongfully denied coverage for an accident in a Fleet and Farm store and was therefore liable for Fleet and Farm’s defense costs. When Fleet and Farm provided redacted defense cost invoices, United Fire moved for unredacted copies, claiming it could not tell whether the fees were reasonably and necessarily incurred. In denying the motion, the Eastern District found that when the insurer abandoned its duty to defend, it also gave up its right to control the defense, including the right to control the reasonableness of costs or to “take a fine-toothed comb over its legal bills.” In other words, there will be no Monday-morning-quarterbacking by insurers that breach their duty to defend.