In Otto v. Physicians Ins. Co. of Wisconsin Inc., 751 N.W.2d 805 (Wisc. 2008), a sharply divided Wisconsin Supreme Court affirmed a default judgment entered against an insurer for damages allegedly caused by its co-defendant insureds’ negligence, even though no finding had been made as to the insureds’ liability for the damages at issue.

In Otto, the plaintiffs sued the insureds for medical malpractice, designating the defendants’ as-yet-unknown insurer as a “fictitious” co-defendant in the initial complaint. The plaintiffs subsequently amended their complaint to specifically name the defendants’ insurer as a co-defendant. The insureds timely answered the amended complaint, denying that they were negligent or that their conduct caused plaintiffs’ damages. The insurer, however, failed to answer. Eight months later, the insureds’ counsel filed an amended answer on behalf of the insureds and the insurer. Plaintiffs moved to strike the insurer’s answer and for default judgment against the insurer. The court denied the insurer’s subsequent motion for enlargement of time to answer, finding that the insurer’s failure to timely answer was not the result of “excusable neglect.” Accordingly, the court granted plaintiffs’ motion to strike, entered default judgment against the insurer, and dismissed the insureds from the action without determining whether the insureds had been negligent. After a hearing on damages, the court awarded the plaintiffs nearly $1 million in compensatory damages, fees, costs and interest.

On appeal, the insurer conceded that it was in default. The issue, therefore, was whether a defaulted insurer could be held liable for its co-defendant insureds’ conduct when the insured’s liability had not been determined and the insureds had affirmatively denied liability in their timely answer to the complaint.

In its 4-3 decision in favor of the plaintiffs, the Wisconsin Supreme Court reasoned that an insurer’s liability under Wisconsin’s “direct action” statute, Wisc. Stat. § 632.24, depends on the insured’s conduct, rather than liability, and that liability can therefore be imposed on an insurer irrespective of whether final judgment has been entered against the insured.

Accordingly, the court held that the co-defendant insureds’ timely answer denying liability did not, as a matter of law, preclude default judgment against the insurer.

The three dissenting justices argued that Wisconsin’s direct action statute subjects an insurer to conditional liability; thus, an insurer should be liable only to those entitled to recover against the insured for the insured’s negligence.

A copy of the Wisconsin Supreme Court’s opinion is available here.