In Steadfast Insurance Company v. Greenwich Insurance Company, 2019 WL 323702 (Wis. January 25, 2019), the Wisconsin Supreme Court apportioned defense costs between two insurers using the pro-rata by the limits approach, even though one of the insurers had breached its duty to defend.

In Steadfast, the Milwaukee Metropolitan Sewerage District contracted with United Water Services Milwaukee, LLC to inspect, maintain, repair, and operate Milwaukee’s sewerage system from 1998 to February 2008. As part of the agreement, United Services had to include the District on its insurance policies with Greenwich Insurance Company as an additional insured.

In March 2008, the District switched providers and entered into an agreement with Veolia Water Milwaukee to provide services for the Milwaukee sewerage system. Veolia added the District as an additional insured to its insurance policy with Steadfast Insurance Company.

In June 2008, heavy rains overwhelmed the Milwaukee sewer system and resulted in raw sewage backing up into more than 8,000 homes. Homeowners filed lawsuits against United Water, Veolia, and the District alleging negligence in the operation, maintenance, and repair of the sewer system before and during the rains.

The Greenwich policy obligated the insurer to provide a defense and indemnification of insured claims up to its $20 million policy limits. The Steadfast policy also provided for defense and indemnification of covered claims up to its $30 million policy limits. The District tendered its defense to both Greenwich and Steadfast, but ultimately defended itself, incurring $1.55 million in costs. Steadfast participated in the District’s defense by reimbursing the District for its defense costs. Greenwich, on the other hand, denied coverage claiming: (1) that it failed to see how United Water was liable for a backup four months after its services terminated; and (2) the Greenwich policy’s “other insurance” clause made coverage excess to Steadfast’s policy.

Steadfast sued Greenwich to recover the defense costs it paid to the District. The circuit court granted summary judgment for Steadfast awarding it the full $1.55 million of defense costs and $325,000 in attorney fees it incurred in bringing suit. The court of appeals affirmed. The Wisconsin Supreme Court held that Greenwich breached its duties under its policy, but that the damages awarded to Steadfast were incorrect. The Court noted that Steadfast had a duty to defend the District as well as Greenwich, so despite the fact that Greenwich breached its duty, it should not bear the full amount of defense costs. The Court apportioned the defense costs on a pro rata basis based on the insurer’s policy limits. Greenwich was ordered to pay two-fifths of the defense costs, or $620,000 plus interest. The Court also awarded attorney fees to Steadfast for the litigation, including the ability to request costs for litigating the appeals.

Greenwich took a big risk by refusing to defend the insured in this case. It is well-accepted that “other insurance” clauses only apply to concurrent insurers. Further, as the dissent pointed out, insurers who deny their duty to defend do so at their own peril and there should be consequences. Under the Court’s ruling, Greenwich only had to pay the defense costs that it otherwise would have paid had it honored its obligations; but the Court was split and Greenwich could have found itself liable for the full amount of defense.