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High court clarifies duty to defend

A recent Wisconsin Supreme Court decision has settled a debate concerning the common-law responsibilities insurance companies have to defend their policyholders.

In the case of Marks v. Houston Casualty, the court specifically looked at the so-called four-corners test, which compares allegations listed in a complaint with an insurance policy’s language. If the allegations fall within the realm of what the policy is meant to cover — or, in some cases, even possibly do — the insurance company is bound by common law to defend the policyholder.

Some contracts, though, contain provisions specifically preventing coverage for certain activities. The validity of those provisions has been questioned in rulings handed down in three court of appeals cases: Grube v. Daun, Kenefick v. Hitchcock, and Radke v. Fireman’s Fund Insurance Co.

In a seeming contradiction of the four-corners rule, the judges in these cases decided that policy exclusions cannot be introduced in court when holders are denied coverage and sue their insurers. Although apparently at odds with common law, Grube v. Daun, Kenefick v. Hitchcock, and Radke v. Fireman’s Fund Insurance Co. have never been overturned and have been cited in more than 50 other published cases.

A Supreme Court ruling handed down on June 30 in the Marks case should put an end to that. In their decision, the justices upheld the exclusions in an insurance contract between David Marks, a lawyer, and Houston Casualty Co.

The case of Marks v. Houston Casualty arose from Marks’ purchase, in 2002, of professional liability insurance to provide protection for his work as trustee of two investment trusts.

About seven years later, Marks, then a Milwaukee resident, asked Houston Casualty to defend him in six federal civil lawsuits filed in five different states. The lawsuits alleged in part that Marks had committed fraud in his capacity as chairman of the board for Global Holdings Inc., a company that had received investments from some of the trusts Marks had worked for.

Houston Casualty responded in November 2009 with a refusal, prompting Marks to bring his own suit. Filing in Milwaukee County Circuit Court, Marks alleged, among other things, that Houston Casualty was breaching its duties as a liability insurer.

Defending itself, Houston Casualty cited a policy provision allowing it to refuse to cover liability arising from roles Mark had at companies not named in the declarations. Company representatives noted that Marks was being sued specifically over his actions at Global Holdings, not at the two trusts for which he had obtained insurance from Houston Casualty.

The Supreme Court’s decision to side with Houston Casualty would seem to give Jon Fredrickson, Marks’ lawyer, little cause for celebration. But he was grateful at least for the Supreme Court’s willingness to provide some clarity.

“The appellate court decisions were all over the map,” Frederickson said.

Fredrickson had used the appellate decisions that seemingly contradicted the four-corners rule to back up his argument that Marks should be covered under a policy that would have otherwise excluded him. Specifically, Marks’ contract with Houston Casualty called for coverage to stop short of claims arising from outside Marks’ duties as trustee to the two trusts.

Aidan McCormack, a lawyer representing Houston Casualty, had argued that the court had properly taken Marks’ entire policy — exclusions and all — into consideration.

“The exclusion is part of the contract,” McCormack said. “You never don’t consider it.”

He also said the Supreme Court’s decision in the Marks case puts Wisconsin in line with many other jurisdictions within the U.S. and the rest of the world.

The decision obviously benefits insurance companies. Had the justices sided with Marks, said McCormack, insurers would have dropped out of the market because they could no longer rely on the exclusions in their policies.

Those that remained would have to reissue their polices just for Wisconsin, making them uncommon and therefore more expensive.

“If one steps back and looks at the broader picture, it also helps policyholders and their attorneys,” McCormack said. “At rock bottom, they don’t want to see their premiums go up. And if there’s a dispute, they want them resolved efficiently.”

About Erika Strebel, [email protected]

Erika Strebel is the law beat reporter for the Wisconsin Law Journal and a law school student at UW-Madison. She can be reached at 414-225-1825.

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