Reversing an appellate court, the Wisconsin Supreme Court held that an insurer’s failure to issue a reservation of rights letter does not waive or estop a defense arising from a coverage clause in an insurance contract. Maxwell v. Hartford Union High School Dist., 814 N.W.2d 484 (Wis. 2012).  

A school district turned to its liability insurer for defense against a lawsuit brought by a former employee. The insurer furnished a defense without issuing a reservation of rights letter. After judgment had been issued against the district, but before damages had been awarded, counsel appointed by the insurer notified the district that although it would continue to provide a defense in the underlying action, it would not provide indemnification for any damages imposed against the district in light of a breach of contract exclusion. After the court imposed damages against the district, the district filed a third-party complaint against the insurer. The complaint sought a declaration of coverage, as well as attorneys’ fees and punitive damages. The district argued that because the insurer had provided a defense without issuing a reservation of rights, it was estopped from denying coverage. The trial court granted summary judgment in favor of the insurer as to coverage for the underlying breach of contract claims. The court reasoned that the policy exclusion precluded coverage for the damages against the district and that the insurer’s conduct could not create such coverage. The appellate court reversed, finding that the doctrines of waiver and estoppel prevented the insurer from asserting noncoverage after providing a defense without a reservation. The Wisconsin Supreme Court reversed the appellate court decision.  

The Wisconsin Supreme Court held that furnishing a defense does not waive or estop reliance on a coverage clause. The court stated:  

Waiver and estoppel cannot be used to supply coverage from the insurer to protect the insured against risks not included in the policy or expressly excluded therefrom, for that would force the insurer to pay a loss for which it has not charged a premium. Moreover, if courts entertained the prospect that insureds could gain unpurchased coverage on account of collateral action by the insurer, unprotected insureds would have obvious incentive to pursue litigation.  

Although Maxwell represents a victory for insurance companies, insurers are still advised to timely and clearly communicate all defenses to policyholders in order to avoid the risk of waiving otherwise valid policy defenses. As the court noted, although waiver and estoppel cannot prevent an insurer from invoking a defense based on a coverage provision, “providing and assuming full control of a defense may be grounds for establishing waiver or estoppel of a forfeiture clause [e.g., notice] when the insurer fails to issue a reservation of rights.”