On balance, and with one notable exception, 2010 was a good year for policyholders in Wisconsin. The Wisconsin state and federal courts issued several pro-insured decisions, establishing and extending precedents that support policyholders in coverage disputes with their carriers. Sorted by topic, described below are the more noteworthy decisions from this past year.
I. Excess Coverage, Exhaustion and Johnson Controls, Inc. v. London Market, 2010 WI 52, and Westport Insurance Corp. v. Appleton Papers, Inc., 2010 WI App 86.
Perhaps the most significant developments of 2010 related to excess coverage, and specifically, under what circumstances must primary coverage be exhausted for excess coverage to apply. In Westport Insurance Corp. v. Appleton Papers, Inc., the Court of Appeals found that Wisconsin is a “vertical exhaustion” state: Where multiple policies covering several years are triggered, the policyholder can choose which policy year must respond to a loss and then, depending on the excess policy language, go “up the tower” into excess layers without exhausting all primary coverage that might apply (i.e., coverage for other nonselected years). The decision represents a victory for policyholders in progressive injury cases in particular, where exposure reaches back decades and triggers policies in multiple years and some of the covered years include: insolvent insurers or large self-insured retentions, deductibles or reimbursement provisions. Last year, the Supreme Court decided — in Plastics Engineering Company v. Liberty Mutual Insurance Company, 2009 WI 13 — that solvent primary carriers had to cover a loss in full in some circumstances; Westport suggests that insureds can expect the same with excess carriers.
In Johnson Controls, the Supreme Court found that where an excess insurer issues a policy that contains a “follow form” provision, the excess policy incorporates and includes the duty to defend provided in the primary policy unless the excess policy expressly disclaims the duty. The Court also found that the excess insurer's duty to defend may be triggered if the primary insurer refuses to provide a defense, even though the underlying policy limits have not been exhausted.
II. Bad Faith and Roehl Transport Inc. v. Liberty Mutual Insurance Co., 2010 WI 49.
The run-of-the-mill bad faith case is one where the insurer refuses to settle a third-party claim, and the jury verdict exceeds policy limits. In Roehl Transport Inc. v. Liberty Mutual Insurance Co., the Supreme Court extended third-party bad faith actions to a less common but no less significant situation: where the verdict, although within policy limits, exposes the policyholder to a higher deductible payment than the policyholder would have paid had the insurer settled the claim before trial. Roehl not only confirms that policyholders have a remedy to cure an insurer’s bad faith, it provides policyholders with significant deductibles additional leverage in negotiating settlements with insurance carriers, even when the claims fall within policy limits. It also continues Wisconsin’s trend of permitting bad faith actions in a variety of contexts.
III. Volitional Acts and Doe v. Archdiocese of Milwaukee, 2010 Wisc. App. LEXIS 954, Mantz Automation, Inc. v. Navigators Insurance Co., 2010 WI App 84, and Burkhardt v. City of Stevens Point, 2010 U.S. Dist. LEXIS 98674 (W.D. Wis. Sept. 20, 2010).
Comprehensive General Liability Insurance (“CGL”) policies generally provide coverage for an “occurrence,” which the policies regularly define as an “accident.” However, the policies do not, in turn, define “accident.” A few years ago, the Supreme Court decided that the term “accident” means “an unintended and unforeseen injurious occurrence . . . that does not occur in the usual course of events or that could not be reasonably anticipated.” Purporting to apply this definition, the Court went on to analyze the insured’s conduct to determine if there existed “a degree of volition inconsistent with the term accident.” Since then, the Wisconsin courts have struggled with the sometimes metaphysical question: What acts are sufficiently volitional so as to be inconsistent with the term “accident” — acts that are committed with the intent to cause injury or, more broadly, acts that are merely “volitional,” i.e., all but involuntary, unconscious acts?
In Doe v. Archdiocese of Milwaukee the Court of Appeals adopted a broad interpretation, finding that even if the insured did not intend to cause any harm, the insured’s negligent failure to provide information was “volitional” and therefore, not a covered occurrence. According to the court, the insured’s conduct “may have been prompted by negligence, but it is nevertheless devoid of any suggestion of accident.”
The federal courts have also begun applying the volitional acts doctrine to bar coverage in cases applying Wisconsin law. In Burkhardt v. City of Stevens Point, the Court found that the insured’s mistake in seizing and destroying “abandoned” railcars that were, in fact, owned by a third party, was volitional and therefore, not a covered occurrence.
Finally, the Court of Appeals applied a similar analysis to a standard negligence claim in Mantz Automation, Inc. v. Navigators Insurance Co. There, the Court found that faulty workmanship is, as a matter of law, not an “occurrence,” apparently finding that faulty workmanship can never be accidental. Curiously, the Court cited a number of cases that found the opposite — that the alleged negligent workmanship at issue constituted an “occurrence,” but coverage was otherwise excluded as barred by the Your Work and Your Products exclusions. Having found that there was no occurrence, the Court never reached the business risk exclusions, which, like the intentional acts exclusion, are superfluous if the Court’s analysis is correct.
It will be interesting to see where these decisions lead in 2011. Most (if not all) acts of negligence involve some sort of “volitional act.” Taken to their logical conclusion, the recent decisions on the “volitional acts” doctrine has the potential to eliminate coverage for a number of acts that most reasonable insureds would believe are covered.
IV. “Additional Insured” coverage and Mathy Const. Co. v. West Bend Ins. Co., 2010 WI App 46.
That a CGL policy provides coverage for an "additional insured” does not always mean that the policy covers the additional insured’s own conduct. The “additional insured” coverage may be limited to liability arising out of the named insured’s conduct or the additional insured’s supervision of the named insured’s conduct.
That is the lesson of Mathy Const. Co. v. West Bend Ins. Company. There, a general contractor overseeing a road resurfacing project required its subcontractor to purchase liability insurance listing the general contractor as an “additional insured.” During the project, the road was reduced to a one-lane bottleneck, controlled by the general contractor’s flag people and driver, who led traffic in alternating directions through the bottleneck. The general contractor’s employees negligently allowed a bicyclist to ride through the bottleneck while traffic was being led in the opposite direction, and the bicyclist fell in front of a truck and was killed. The Court of Appeals found that the subcontractor’s insurance policy did not cover the general contractor because the general contractor’s liability arose not out of the subcontractor’s negligent acts, but out of the general contractor’s own negligence.
V. “Arising Out Of,” Auto Exclusions and Zarnstroff v. Neenah Creek, 2010 WI App 147.
The courts have fashioned a complicated way of analyzing the phrase “arising out of.” For the most part, it is broadly interpreted to mean “originating from, growing out of, or flowing from” identified conduct. However, there is a narrow exception: When an accident is caused jointly by an excluded risk (e.g., operating a truck) and an insured risk (e.g., negligence in affixing a scaffolding to the truck), the phrase “arising out of” in the exclusion is interpreted narrowly and will not bar coverage granted elsewhere in the policy.
In Zarnstroff v. Neenah Creek, the Court of Appeals confirmed just how narrow this exception is. There, an employee ran across a highway to a position where he could determine whether a semi would fit under an overpass. While crossing lanes, the employee caused an accident. The insured’s CGL policy contained an auto exclusion that barred coverage for conduct “arising out of” the use of an automobile. The Court interpreted the exclusion to bar coverage, reasoning that the employee’s conduct “arose out of the use of an automobile” because by crossing the lanes, he sought to facilitate the semi’s use of the highway. The Court refused to apply a narrower interpretation (e.g., limiting “arising out of” to simply driving an automobile), because the employee did not engage in independent conduct that jointly caused the accident to occur. Although the employee negligently walked across several lanes of traffic in front of speeding cars, his negligence was intended to facilitate the use of an automobile.
VI. Pollution Exclusions and Hirschhorn v. Auto-Owners Insurance Co., 2010 WI App 154.
Pollution exclusions typically define “pollutant” via a list of amorphous terms, such as “contaminant,” “irritant,” or “waste.” When a foreign substance invades property and causes damage, insurers reflexively invoke pollution exclusions, relying on one or more of the vague definitional terms to reach the substance at issue. Not surprisingly, courts both in Wisconsin and across the country have struggled with the semantic difficulties of classifying foreign substances for purposes of coverage.
In Hirschhorn v. Auto-Owners Insurance Co., the Court of Appeals quite wittily rejected the insurer’s claim that bat guano qualified as a “pollutant” under the policy’s pollution exclusion. According to the Court, “when a person reading the definition [of ‘pollutant’] arrives at the term ‘waste,’ poop does not pop into one’s mind.” Resolving ambiguities in favor of coverage, the Court rejected the insurer’s post hoc attempt to fit unexpected real-world circumstances into ill-defined policy exclusions. Cases such as Hirschhorn promote a “sniff test” of sorts; if an insurer’s denial of coverage smells funny, it is probably rotten or, as the case may be, batty.