Lawyers generally enjoy prognosticating future developments in the law. Under the Erie doctrine, federal judges have a legitimate need to engage in this pastime. Recently, in Philadelphia Indemnity Ins. Co. v. Chicago Title Ins. Co., No. 12-2525 (7th Cir. Nov. 13, 2014), the Seventh Circuit predicted how the Illinois Supreme Court would address a question of first impression regarding title insurance. The court’s decision might be reasonably taken as a prediction as to what the Wisconsin Supreme Court would do with the same facts. But a recent unpublished decision by the Wisconsin Court of Appeals suggests some caution in setting the odds.
Philadelphia Indemnity centered around a failed commercial development on Chicago’s South Side. After the lender initiated foreclosure proceedings, the developer responded with a separate lawsuit, alleging a flurry of contract, tort, and statutory claims. Because the developer’s complaint included a quiet-title cause of action, the lender tendered the defense to its title insurance company. The title insurer agreed to pay costs associated with the title claims, but refused to subsidize the tangentially related contract and tort-claim defense. Ultimately, the lender’s commercial general liability (“CGL”) insurer sought a declaratory judgment against the title insurer to sort out their respective coverage obligations and rights.
The “complete-defense” rule requires an insurer with a duty to defend one count in a complaint also to defend against all the others. Wisconsin, like Illinois, has adopted this rule for CGL insurance policies. See School Dist. of Shorewood v. Wausau Ins. Co., 170 Wis. 2d 347, 366 (1992); Pekin Ins. Co. v. Wilson, 930 N.E.2d 1011, 1015 n.2 (Ill. 2010). In Philadelphia Indemnity, the CGL insurer argued that the complete-defense rule governed, while the title insurer relied on express coverage limitations in the policy.
Judge Sykes, joined by Judges Flaum and Rovner, aptly summarized the holding in one sentence: “Title insurance is different.” Slip Op. 3. Relying on a recent opinion by the Supreme Judicial Court of Massachusetts, GMAC Mortgage LLC v. First American Title Insurance Co., 985 N.E.2d 823 (Mass. 2013), the Seventh Circuit noted that title insurance is “fundamentally different” from CGL insurance. Emphasizing the contractual nature of insurance coverage, the court distinguished the narrow coverage language used in title insurance policies from the typically broad terminology used by CGL policies, which often promise to defend and indemnify the insured against any “suit.” Slip Op. 13-14, 15. In the absence of contrary authority from other state high courts, the Seventh Circuit concluded that the Illinois Supreme Court is likely to follow the lead of Massachusetts.
While one might suspect that the Seventh Circuit would make the same prediction about the Wisconsin Supreme Court if the case had originated in Milwaukee as opposed to Chicago, that conclusion is far from certain. Earlier this year, an unpublished, non-precedential Wisconsin Court of Appeals decision applied the complete-defense rule to a title insurance dispute. See Bye v. Sire, 354 Wis. 2d 624 (Ct. App. May 20, 2014). In Bye, the court ruled that it need not determine whether a title insurer was contractually required to defend a claim for adverse possession that specifically was excluded by the policy because the court already had determined that the insurer had a duty to defend a separate, deed-based claim. Id. at ¶14. Citing Wisconsin Supreme Court precedent from the CGL insurance context, the Bye court held that “[w]hen an insurance policy provides coverage for even one claim made in a lawsuit, the insurer is obligated to defend the entire suit.” Id. at ¶14 (citing Fireman’s Fund Ins. Co. of Wis. v. Bradley Corp., 261 Wis. 2d 4 (2003)).
As noted, the Bye decision is non-precedential, but it suggests that Wisconsin courts might hold the complete-defense rule applicable to title insurance if they are ever presented the question directly, especially given the Wisconsin Supreme Court’s statement that title insurance policies are subject to the same rules of construction generally applicable to insurance contracts. See Laabs v. Chicago Title Ins. Co., 72 Wis. 2d 503, 510 (1976). On the other hand, Philadelphia Indemnity and Bye could be distinguished on the ground that Philadelphia Indemnity involved contract and tort claims wholly unrelated to property title, while Bye dealt only with property-related claims.
Regardless, lawyers can enjoy speculating how the Seventh Circuit’s “Erie Guess” might have been different had Wisconsin law applied.