Insurance – Duty to Defend

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Case Name: Roger Choinsky, et al. v. Employers Insurance Company of Wausau and Wausau Business, et al.

Case No.: 2020 WI 13

Focus: Insurance – Duty to Defend

The Germantown School District Board of Education and Germantown School District (collectively, the “School District”) seek review of a court of appeals decision affirming the circuit court’s order and judgment, which denied the School District’s motion for attorney fees. The School District argues that its insurers, Employers Insurance Company of Wausau and Wausau Business Insurance Company (collectively, the “Insurer”), breached the duty to defend the School District in a lawsuit brought by retired employees; therefore, the School District claims its Insurer should pay, as a remedy for the breach, all the attorney fees incurred by the School District.

This case presents an insurance coverage duty-to-defend issue of first impression: does an insurer breach its duty to defend its insured when it denies a tendered claim and then follows the judicially preferred procedure of filing a motion to intervene and stay the underlying lawsuit pending a coverage determination, which is ultimately resolved in the insured’s favor? Additionally, we consider the insurer’s obligations in order to avoid breaching its duty to defend when the circuit court denies the motion to stay.

We conclude that when an insurer initially denies a tendered claim but promptly proceeds with one of our judicially preferred methods for determining coverage, it does not breach its duty to defend. If a circuit court denies any part of an insurer’s motion to bifurcate the coverage issue from the underlying liability lawsuit and stay the latter, causing an insured to simultaneously defend the liability suit and litigate coverage against the insurer, an insurer must defend its insured in the liability lawsuit, retroactive to the date of tender, under a reservation of rights, until a court decides the coverage issue. Because the School District’s Insurer followed this procedure, the Insurer did not breach its duty to defend and the Insurer is not responsible for any of the attorney fees the School District paid for the coverage dispute. See Newhouse v. Citizens Sec. Mut. Ins. Co., 176 Wis. 2d 824, 832-39, 501 N.W.2d 1 (1993) (when an insurer follows a judicially preferred method, the insurer “runs no risk of breaching its duty to defend”); see also Carney v. Village of Darien, 60 F.3d 1273, 1277 (7th Cir. 1995) (“[A]n insurer who properly follows the procedure recommended by the Wisconsin Supreme Court of first seeking a determination on coverage prior to the liability issue, has not breached its duty to defend.”); Reid v. Benz, 2001 WI 106, ¶¶26-28, 32-35, 245 Wis. 2d 658, 629 N.W.2d 262 (explaining an award of coverage attorney fees is limited to cases in which insurer breaches duty to defend and equity demands a fee-shifting).

In reaching this decision, we reject the School District’s claims that: (1) its Insurer’s initial outright denial of coverage followed by a delayed decision to defend under a reservation of rights constituted a breach of its duty to defend; (2) its Insurer’s delay in paying liability fees and its failure to reimburse the School District for the entire amount it paid to its liability lawyer constitutes a breach of its duty to defend; and (3) the circuit court’s assessment of whether the Insurer breached its duty to defend is subject to the four-corners rule.

We hold: (1) the Insurer’s initial denial of coverage did not breach its duty to defend because the Insurer promptly followed a judicially-approved method to resolve the coverage dispute; further, it defended the School District upon denial of the stay motion, agreeing to reimburse the School District for liability attorney fees retroactive to the date of the tender; (2) a delay in payment of liability attorney fees alone does not mean an insurer breached its duty to defend and an insurer is obligated to pay only reasonable attorney fees; and (3) the four-corners rule applies in determining whether a duty to defend exists but does not preclude a court’s consideration of whether the insurer unilaterally denied coverage or whether it chose a judicially preferred method of resolving a coverage dispute, in assessing whether an insurer breached its duty to defend. We affirm the decision of the court of appeals.

Affirmed

Concur:

Dissent: KELLY, J., filed a dissenting opinion.

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Derek A Hawkins is trademark corporate counsel for Harley-Davidson. Hawkins oversees the prosecution and maintenance of the Harley-Davidson’s international trademark portfolio in emerging markets.