THE DUTY TO DEFEND

Heidi L. Vogt

Cook & Franke S.C.

660 East Mason Street

Milwaukee, WI 53202

(414) 271-5900

  1. THE DEFENSE OBLIGATION
  2. An Insurer’s Contractual Obligation to Defend
  3. Most comprehensive general liability policies provide the insurer has the “right and duty to defend the insured against any suit seeking damages.”
  4. In return for the premiums paid by the insured, the insurer assumes the contractual duties of defense and indemnification for claims that fall within the policy provisions. Elliott v. Donahue, 169 Wis. 2d 310, 320, 485 N.W.2d 403 (1992).
  5. When an insurer fulfills its defense obligation, it has the right to select counsel and control the defense. See Town of Mt. Pleasant v. Hartford Accident & Indem. Co., 2001 WI App. 38, ¶ 13, n.3, 241 Wis. 2d 327, 625 N.W.2d 317; Loosmore v. Parent, 2000 WI App. 117, ¶22, n.5, 237 Wis. 2d 679, 613 N.W.2d 923.
  6. Duty To Defend Standard
  7. The standard for determining an insurer’s defense obligation is whether there are “allegations in the complaint, which, if proved, would give rise to recovery under the terms and conditions of the insurance policy.” Elliott, 169 Wis. 2d at 321. Thus, the insurer’s duty to defend is determined by comparing the allegations of the complaint with the language of the policy. Newhouse v. Citizens Sec. Mut. Ins. Co., 176 Wis. 2d 824, 833-835, 501 N.W.2d 1 (1993); see also Last v. American Family Mut. Ins. Co., 2000 WI App. 169, ¶ 9, 238 Wis. 2d 140, 617 N.W.2d 215.
  8. Whether an insurer has a duty to defend is a question of law. Last, 2000 WI App. at ¶ 9.
  9. The duty to defend focuses on the nature of the claim, not the merits of the claim. Smith v. Katz, 226 Wis. 2d 798, 806, 595 N.W.2d 345 (1999). The duty to defend may exist regardless of whether the allegations of the complaint are “groundless, false or fraudulent.” Grieb v. Citizens Cas. Co., 33 Wis. 2d 552, 558, 148 N.W.2d 103 (1967).
  10. The duty to defend is broader than the duty to indemnify because the duty to defend is triggered by arguable, not actual, coverage. Fireman’s Fund Ins. Co. of Wis. v. Bradley Corp., 2003 WI 33, ¶ 20, 261 Wis. 2d 4, 660 N.W.2d 666. Note: some courts have used the “fairly debatable,” rather than “arguable,” standard. See Red Arrow Products Co. v. Employers Insurance, 2000 WI App. 36, 233 Wis. 2d 114, 607 N.W.2d 294.
  11. The choice of legal theories stated in the Underlying Complaint is not determinative of the duty to defend; the question is whether the allegations of the complaint fall within the policy provisions. Bradley Corp. v. Zurich Ins. Co., 984 F. Supp. 1193 (E.D. Wis. 1997).
  12. Any doubt as to the existence of a defense obligation must be resolved in the insured’s favor. Elliott, 169 Wis. 2d 321; Kenefick v. Hitchcock, 187 Wis. 2d 218, 231-32, 582 N.W.2d 261 (Ct. App. 1994).
  13. The duty to defend is based on allegations in the complaint and not on extrinsic evidence. Fireman’s Fund Ins. Co. of Wis., 2003 WI 33; Doyle v. Engelke, 219 Wis. 2d 277, 284, n.3, 580 N.W.2d 245 (1998); see also Green v. Heritage Mut. Ins. Co., 2002 WI App. 297, ¶ 11, 258 Wis. 2d 843, 655 N.W.2d 147 (noting that an insurer’s duty to defend is determined solely by the allegations contained in the complaint without consideration of extrinsic facts); Bruner v. Heritage Co., 225 Wis. 2d 728, 735, 593 N.W.2d 814 (Ct. App. 1999) (noting that whether an insurer has a duty to defend is determined by the complaint and not by extrinsic evidence); Atlantic Mut. Ins. Co. v. Badger Medical Supply, Inc., 191 Wis. 2d 229, 241, 528 N.W.2d 486 (Ct. App. 1995) (“in determining whether there is a duty to defend, we do not consider later depositions or other materials we look only at the allegations of the complaint.” Extrinsic evidence cannot be used to establish the defense obligation).
  14. The duty to defend is triggered by what is actually alleged in the complaint, not what could have been alleged in the complaint. Midway Motor Lodge of Brookfield v. Hartford Ins. Group, 226 Wis. 2d 23, 36, 593 N.W.2d 852 (Ct. App. 1999); see also Last, 2000 WI App. at ¶¶ 12-13.
  15. An insurer does not have a duty to defend against claims that cannot be brought against the insured as a matter of law. See Wausau Tile, Inc. v. County Concrete Corp., 226 Wis. 2d ,235, 268, 593 N.W.2d 445 (1999).
  16. When the policy is clear and unambiguous, the terms of the policy cannot be rewritten by construction to bind an insurer to a risk it never contemplated and for which it was not paid. American Family Mut. Ins. Co. v. American Girl, Inc., 2004 WI 2, ¶ 23, 268 Wis. 2d 16, 673 N.W.2d 65.
  17. Adequacy Of Tender Of Defense
  18. A tender of defense occurs once an insurer has been put on notice of a claim against the insured. Towne Realty, Inc. v. Zurich Ins. Co., 201 Wis. 2d 260, 548 N.W.2d 64 (1996). There are no technical requirements. Notice of a claim, without a specific request that the insurer assumed the defense, was sufficient to constitute a tender of defense in Towne Realty.
  19. If there is a question as to whether the insured is seeking a defense, it is the insured’s duty to seek clarification. However, if the insured is uncooperative or unresponsive, the insurer need not pursue the matter further. Id.
  20. The insured has a duty to notify the insurer of a claim in the first instance. Town of Mount Pleasant, 2001 WI App 38. Notice from one insured in a multi-party action is not sufficient notice for any other insureds. Id.
  21. Apportionment Of The Defense
  22. This problem arises when some claims in the complaint are covered and others are not.
  23. Example: Complaint alleges both negligence and intentional conduct as alternate grounds for liability.
  24. “Even though the … complaint in the underlying litigation may contain other theories of liability not covered by the insurance policies, the insurers are obligated to defend the entire action if just one theory of liability appears to fall within the coverage of the policies.” School District of Shorewood v. Wausau Ins.Co., 170 Wis. 2d 347, 366, 488 N.W.2d 82 (1992); see also United States Fire Ins. Co. v. Good Humor Corp., 173 Wis. 2d 804, 496 N.W.2d 730 (Ct. App. 1993); Curtis-Universal v. First Nat’l Ins. Co. of Am., F.3d 1119, 1122 (7th Cir. 1994)(policy did not cover antitrust injury, but because the complaint also alleged claims that could constitute “advertising injury,” which was covered by the policy, the insurer was required to defend the entire action).
  25. What if there is a reasonable means for prorating costs of defense between covered and excluded claims? Some courts allow the insurer to pro-rate the defense. SeeLockwood Int’l v. Volm Bag Co., 273 F.3d 741, 743-74 (7th Cir. 2001). (“if defense costs are readily apportionable between the covered and uncovered claims, the insurance company need pay only for the former”) (emphasis in original).
  26. What Constitutes A “Suit”
  27. Typically, courts refer to the complaint filed in a civil action to determine whether there is a defense obligation. Newhouse, 176 Wis. 2d at 835 (an insurer’s duty to defend is predicated on the “allegations contained within the four corners of the complaint”); see also Fireman’s Fund Ins. Co. of Wis., 2003 WI 33 (the duty to defend is based on the allegations of the complaint); Elliott, 169 Wis. 2d at 321; Nichols v. American Employers Ins. Co., 140 Wis. 2d 743, 749, 412 N.W.2d 547 (Ct. App. 1987) (the duty to defend is based on the allegations in the third party’s complaint).
  28. Exception: PRP letters in the CERCLA context. Johnson Controls v. Employers Ins. of Wausau, 2003 WI 108, 264 Wis. 2d 60, 665 N.W.2d 257, overruling City of Edgerton v. General Cas. Co. of Wis., 184 Wis. 2d 750, 517 N.W. 2d 463 (1994), rec. denied, (October 25, 1994), cert. denied, 115 S.Ct. 1360 (March 20, 1995), cert. denied, 115 S.Ct. 2615 (June 26, 1995).
  29. A “PRP letter is so adversarial that it constitutes the functional equivalent of a suit and triggers the insurer’s duty to defend.” Johnson Controls, 2003 WI at ¶90.
  30. Johnson Controls is limited to PRP letters in the CERCLA context. Id. at ¶87, n.37.
  31. Johnson Controls holding applies to EPA or equivalent state agency. Id. at ¶92.
  32. Does the policy define the term “suit?” In more recent policies, the term “suit” is defined as a “civil proceeding.”
  33. An insurer’s duty to defend is limited to “suits” against the insured “seeking damage.” The obligation does not extend to offensive actions taken by the insured such as cost incurred to prosecute counterclaims. Towne Realty, Inc., 201 Wis. 2d at 272-73.
  34. METHODS FOR DISPUTING COVERAGE
  35. Disputing Coverage Within The Context Of The Underlying Case -- Bifurcation Method
  36. One method used to dispute coverage is to bifurcate the coverage and liability issues and stay the liability proceedings. Reid v. Benz, 2001 WI 106, ¶ 3, 245 Wis. 2d 658, 629 N.W.2d 262; Elliott, 169 Wis. 2d 310; Fire Ins. Exch. v. Basten, 202 Wis. 2d 74, 90, 549 N.W.2d 690 (1996); Newhouse, 176 Wis. 2d at 838; Mowry v. Badger State Mut. Cas. Co., 129 Wis. 2d 496, 529 n.4, 385 N.W.2d 171 (1986); see also Wis. Stat. § 803.04(2)(b) (providing for bifurcation) and Wis. Stat. § 806.04 (declaratory judgment statute).
  37. This is the preferred method. SeeBasten, 202 Wis. 2d at 89-90 (stating this was the preferred method); Mowry v. Badger State Mut. Cas. Co., 129 Wis. 2d at 529, n.4 (“In many cases policy defenses are tried prior to the determination of the liability and damages issue. It would seem that, once an order to bifurcate has been made, a trial on the coverage issue should be a relatively simple matter. We, therefore, encourage a court which has ordered bifurcation to expedite the coverage issue by placing the trial on its calendar at an early date to assist in avoiding a needlessly protracted claim against the insured”)(citation omitted); Kenefick, 187 Wis. 2d at 234-35 (insurer did “precisely what was required of it. . . it sought and obtained a bifurcated trial, and the proceedings relating to liability were not held simultaneously to those relating to coverage”); Barber v. Nylund, 158 Wis. 2d 192, 197-98, 461 N.W.2d 809 (Ct. App. 1990) (when an insurer seeks the “supreme court recommended bifurcation procedure,” the insurer retains its right to contest coverage); Professional Office Bldgs. Inc. v. Royal Indem. Co., 145 Wis. 2d 573, 585, 427 N.W.2d 427 (Ct. App. 1988) (insurer may try the issue of coverage, generally to the court, and then if coverage is found to exist, the liability trial proceeds at a later date; “[w]here coverage is an issue, bifurcated trials are the norm”).
  38. Factors courts consider in granting a bifurcated trial:
  39. Potential prejudice to the parties.
  40. Complexity of the issues.
  41. Potential confusion to jury.
  42. Relative convenience, economy or delay that might result.

Zawistowski v. Kissinger, 160 Wis. 2d 292, 301, 466 N.W.2d 664 (Ct. App. 1991).

  1. Move to Stay Proceeding On Liability.
  2. In addition to seeking a bifurcated trial, the insurer should also seek to stay any proceeding on liability. Reid, 2001 WI at ¶18;; Newhouse, 176 Wis. 2d at 836; Elliott, 169 Wis. 2d at 318.
  3. Even where the trial court determines there is no coverage, if the coverage issue is timely appealed, the insurer should seek a stay of the trial on the issue of liability pending the outcome of appeal. Otherwise, the insurer runs the risk of breaching its duty to defend if the ruling is reversed on appeal. Newhouse, 176 Wis. 2d at 836.
  4. What if the insurer is not a party to the underlying litigation?
  5. Move to intervene under § 803.09, Stats.

(1)Section 803.09, Stats.; see also Basten, 202 Wis. 2d at 89-90.

(2)Persons seeking to intervene must demonstrate they have such an interest in the “property or in the subject matter of the controversy as requires them to be parties for their own protection.” Hoppmann v. Reid, 86 Wis. 2d 531, 534, 273 N.W.2d 298 (1979); see also Armada Broadcasting, Inc. v. Stirn, 183 Wis. 2d 463, 472, 516 N.W.2d 357 (1994).

(3)Decision to grant motion to intervene is within the discretion of the court and is not a matter of right. Hoppmann, 86 Wis. 2d at 534.

  1. Follow procedures under sec. 1-4 above.
  1. Insurer’s obligations pending coverage determination.
  2. When a stay is in place, the insurer has no duty to defend. Newhouse, 176 Wis. 2d at 836.
  3. Insurer’s duties to insured are not suspended pending the outcome of the coverage determination. Kenefick, 187 Wis. 2d at 235. During the stay, an insurer should consider any new facts which would affect a reasonable settlement decision or affect a coverage determination. Mowry, 129 Wis. 2d at 524.
  4. Insurer should keep the insured informed of any settlement offers from the claimant and the progress of any negotiations even though the insurer is disputing coverage. Mowry, 129 Wis. 2d at 524.
  5. Considerations:
  6. Insurer that successfully bifurcates the issues of coverage and liability and stays the liability proceeding generally does not need to provide defense counsel.
  7. Bifurcation procedure provides determination of coverage issues early on.
  8. Bifurcation procedure is a quick method for disputing coverage especially if the coverage issues can be handled by dispositive motions.
  9. Courts may be unwilling to grant either a bifurcation of the issues or a stay if the coverage issues involve issues of fact.
  1. Disputing Coverage In A Separate Action - Declaratory Judgment Actions.

While this may not be the “preferred” method, it is a proper method. Basten, 202 Wis. 2d at 89-90; see also Wis. Stat. § 806.04 (Wisconsin declaratory judgment statute).

  1. Justiciable controversy requirement.

Justiciable controversy means “a controversy in which a claim of right is asserted against one who has an interest in contesting it.” Rudolph v. Indian Hills Estates, Inc., 68 Wis. 2d 768, 770, 229 N.W.2d 671 (1975)(quoting Pension Mgmt. Inc. v. DuRose, 58 Wis. 2d 122, 127, 205 N.W.2d 553 (1973)).

  1. Declaratory relief is discretionary.

“DISCRETIONARY. The court may refuse to render or enter a declaratory judgment or decree where such judgment or decree, if rendered or entered, would not terminate the uncertainty or controversy giving rise to the proceeding.”

  1. Who must be joined?
  2. Section 806.04(11), Stats.

“Parties. When declaratory relief is sought, all persons shall be made parties who have or claim any interest which would be affected by the declaration, and no declaration may prejudice the right of persons not parties to the proceeding.”

  1. “[T]hose parties in the underlying action, who have made a claim against the insured, and whose actual recovery on a judgment may be affected by a separate coverage determination, are ‘interested persons’ under the statute and are required to be made parties to the declaratory judgment action, even though their right to recover from the insured is not at issue.” Basten, 202 Wis. 2d at 93.

(1)Plaintiffs and co-defendants in the underlying action?

(2)Primary carriers and excess carriers?

  1. Under what circumstances should a declaratory judgment action be used to dispute coverage?
  2. Where there has been no actual underlying action commenced.
  3. Where the underlying litigation does not address the coverage issue.
  4. Where the trial court presiding over the underlying action denies the insurer’s motion to intervene.
  5. Forum considerations.
  6. Concerns of having appeal delayed until underlying matter is litigated.
  7. If the separate declaratory judgment action would result in duplicate proceedings, the court may order consolidation of the underlying action and the declaratory judgment action. Basten, 202 Wis. 2d at 95.
  1. Other Available Options.
  2. Defend the insured under a reservation of rights.
  3. Reservation of rights letter which informs the insured of the insurer’s position enables the insurer to fulfill its duty to defend while preserving the insurer’s right to assert defenses to coverage at a later date.
  4. Although the reservation of rights letter should specifically set forth each policy defense (referring to the specific policy provisions) on which the insurer is reserving its rights, failure to list all policy defenses is not fatal. See Shannon v. Shannon, 150 Wis. 2d 434, 442 N.W.2d 25 (1989)(failure to forward reservation of rights letter specifically including the family member exclusion did not preclude insurer from later asserting the family member exclusion as a policy defense).
  5. Settle the Case.
  6. Early settlement may be more cost effective than retaining defense counsel on the liability issues and coverage counsel on the coverage issues.
  7. Can an insurer settle an arguably covered claim in a multi-count complaint and withdraw from the defense? See Lockwood, 273 F.3d 741.
  8. Deny the tender and take no further action.
  9. Although an insurer that “declines to defend does so at [its own] peril, it is not liable to its insured unless there is, in fact, coverage under the policy or coverage is determined to be “fairly debatable.” Production Stamping Corp. v. Maryland Cas. Co., 199 Wis. 2d 322, 327, 522 N.W.2d 584 (Ct. App. 1995) (citations omitted).
  10. If the insurer is correct that there is no coverage, there is no breach of the defense obligation. See Last, 2000 WI App 169; Production Stamping, 199 Wis. 2d at 331, n.4.
  11. An insurer need not move to bifurcate and stay if the complaint does not contain allegations which would arguably fall within the policy terms.
  12. If the insured wrongfully refused to defend and the underlying liability trial proceeded, the insurer will have breached its duty to defend. Midway Motor Lodge, 226 Wis. 2d at 37-38.
  1. BREACHING THE DEFENSE OBLIGATIONS
  2. What Constitutes A Breach Of The Defense Obligation.

A breach occurs when the liability trial precedes a coverage determination and the insurer does not provide defense counsel when obligated to do so. See Mowry, 129 Wis. 2d at 529,; see also Reid, 2001 WI at ¶ 22; Newhouse, 176 Wis. 2d at 836; Carney v. Village of Darien, 60 F.3d 1273, 1276 (7th Cir. 1995).

  1. Consequences of Breaching The Defense Obligation.
  2. When the insurer breaches its duty to defend, “the insurer is guilty of a breach of contract which renders it liable to the insured for all damages that naturally flow from the breach.” Newhouse, 176 Wis. 2d at 837. Types of damages that naturally flow from the breach include:
  3. The amount of the judgment or settlement plus interest.

(1)The insurer may be obligated to pay the entire judgment or settlement even if the amount exceeds the policy limit Newhouse, 176 Wis. 2d at 838.

(2)In Newhouse, an insurer won a declaratory judgment action of no coverage, allowed the liability trial against its insured to proceed despite the trial court’s offer to stay the underlying action pending resolution of coverage, then lost the coverage issue on appeal. Id. at 831-33. The court held under those circumstances, an insurer’s liability is not restricted by the policy limits. Id. at 838. The insurer was liable for “all damages that naturally flow from the breach.” Id. at 837.

  1. Attorney Fees

(1)Attorney fees incurred in the defense of the underlying action. Loosmore, 2000 WI App. at ¶ 23. An insurer may be required to pay all defense costs from the date of tender forward. Towne Realty Inc. v. Zurich Co., 193 Wis. 2d 544, 560, 534 N.W.2d 886 (Ct. App. 1995).

(2)Attorney fees incurred for pursuing coverage. Elliott v. Donahue, 169 Wis. 2d 310 324, 485 N.W.2d 403 (1992); Towne Realty, 193 Wis. 2d at 560; see also Reid, 2001 WI 106.

(3)Attorney fees to prosecute claims are not damages which naturally flow from the breach. Loosmore, 2000 WI App. at ¶24; see also Sauk County v. Employers Ins. of Wausau, 202 Wis. 2d 433, 446, 550 N.W.2d 439 (Ct. App. 1996).

  1. “Waiver” and “Estoppel”
  2. The Wisconsin Court of Appeals has adopted a rule that prevents an insurer from litigating coverage after the insurer has been held to have breached its duty to defend. See Good Humor Corp., 173 Wis. 2d at 831-32,; Grube v. Daun, 173 Wis. 2d 30, 496 N.W.2d 106 (Ct. App. 1992); Barber, 158 Wis. 2d at 197,; Professional Office Bldg., Inc., 145 Wis. 2d at 584-85.
  3. The bar against litigating coverage is sometimes called “waiver,” Good Humor, 173 Wis. 2d at 818, and sometimes called “estoppel,” Grube, 173 Wis. 2d at 74. Sometimes the terms are used interchangeably. Professional Office Bldg., 145 Wis. 2d at 584-85.
  4. There is a conflict concerning whether the court analyzes the exclusions when determining if the insured had a duty to defend. CompareLast, 2000 WI App. 169 (worker’s compensation exclusion); Bruner v. Heritage Companies, 225 Wis. 2d 728, 593 N.W.2d 814 (Ct. App. 1999) (intentional acts exclusion); Product Stamping Corp., 199 Wis. 2d 322, 544 N.W.2d 584 (Ct. App. 1996) (absolute pollution exclusion) with Radke v. Fireman’s Fund Ins. Co., 217 Wis. 2d 39, 44, 577 N.W.2d 366 (Ct. App. 1998) (ignored the exclusionary and limiting provisions of the policy).
  5. Relying on Good Humor and its predecessors, insureds have argued waiver or estoppel in a number of circumstances. See, e.g., Benjamin v. Dohm, 189 Wis. 2d 352, 365, 525 N.W.2d 371 (Ct. App. 1994); Kenefick, 187 Wis. 2d at 234, but in many instances, the argument has been rejected. Benjamin, 189 Wis. 2d at 366 (insurer did not waive right to contest coverage by withdrawing from the defense after a portion of the underlying action had been litigated and seeking a coverage determination); Kenefick, 187 Wis. 2d at 233-36 (insurer did not waive right to contest coverage by waiting six months after the complaint was filed before moving to bifurcate and stay); see also Barber, 158 Wis. 2d 197 (insurer not estopped from raising coverage issues after obtaining a bifurcation and stay).
  6. There are no Wisconsin Supreme Court cases adopting the waiver/estoppel rule.
  7. The court of appeals waiver/estoppel rule conflicts with Wisconsin Supreme Court decisions.

(1)Absent from these decisions is any discussion of the Wisconsin Supreme Court’s long-held rule that the doctrines of waiver and estoppel cannot be used to expand coverage in an insurance policy. See, e.g., Shannon, 150 Wis. 2d at 450-51; International Chiropractors Ins. v. Gonstead, 71 Wis. 2d 524, 528, 238 N.W.2d 725 (1976); Ahnapee & W. Ry. Co. v. Challoner, 34 Wis. 2d 134, 140-43, 148 N.W.2d 646 (1967); McCoy v. Northwestern Mutual Relief Ass’n, 92 Wis. 577, 584, 66 N.W. 697 (1896); see also Budget Rent-A-Car Systems, Inc. v. Shelby Ins. Group, 197 Wis. 2d 663, 671, 541 N.W.2d 178 (Ct. App. 1995).