New Wisconsin Court of Appeals Decision Highlights the Importance of Policy Language in Determining When Umbrella and Excess Insurers Have a Duty to Defend a Claim Against an Insured
Comprehensive general liability policies (CGL) typically provide protection against both claims for monetary damages (the “duty to indemnify”) and the cost of retaining legal counsel to provide a defense to claims (the “duty to defend”). The insurer has a duty to defend a claim that is arguably covered by the policy and, as such, the duty to defend is generally broader than the duty to indemnify. In most cases, whether a claim is covered is clear and the insurer will either select legal counsel to represent the insured in the defense of the claim or notify the insured that the claim is not covered by the policy.
When an insurer believes that a claim is not covered but the issue of coverage is not entirely clear, Wisconsin courts have indicated that the proper course of action is for the insurer to assume the defense and seek a judicial declaration that the claim is not covered. The consequences for wrongfully denying coverage and breaching the insurer’s duty to defend are severe. The insurer is liable to the insured for the damages caused by the breach and in egregious cases, may be liable for bad faith damages which can include punitive damages and attorneys’ fees.
In Johnson Controls, Inc., v National Insurance Company of Omaha, Appeal No. 2014AP2050, released on April 25, 2018, the Wisconsin Court of Appeals, District I, was asked to apply these general principles to an excess insurance policy and, in doing so, emphasized the central importance of policy language in determining when an excess carrier has a duty to defend when the underlying insurer(s) refuses to do so.
The case has a long history spanning almost three decades. In the mid-1980’s Johnson Controls received what are commonly referred to as PRP letters indicating that it may be a potentially responsible party under the federal Comprehensive Environmental Response and Compensation Liability Act (“CERCLA”) for remediation costs at sites where Johnson Controls had delivered lead acid batteries. Johnson Controls tendered the PRP letters to its primary, umbrella and excess CGL insurers, including Central National, requesting defense and indemnity coverage. All of the insurers concluded that their policies did not cover claims by the government under CERCLA and declined to provide defense or indemnity coverage. In 1989, Johnson Controls filed suit against all of the insurers.
While the original case was pending, the Wisconsin Supreme Court issued its City of Edgerton decision in 1994, which held that costs for environmental cleanup were not covered damages and that PRP letters from the government were not the same as a “suit’ and did not trigger the insurer’s duty to defend. The Johnson Controls case was then dismissed, appealed, dismissed again, appealed again and ultimately led to the Wisconsin Supreme Courts’ decision in 2003 reversing Edgerton.
In 2005, Johnson Controls began reviving its claims against the insurers, including Central National. Central National issued five umbrella CGL policies to Johnson Controls during the 1954-1985 time frame. Each policy was excess to primary CGL policies issued by Wausau Insurance and primary umbrella policies issued by other insurers. It was undisputed that the Central National excess policies and the underlying policies provided the same scope of coverage for the environmental liabilities claimed in the case.
Johnson Controls claimed that Central National breached the duty to defend in its policies when it failed to step in and provide a defense when Wausau Insurance and the primary umbrella carriers failed to do so. Johnson Controls, which had previously settled with the other insurers, sought to recover all of its costs from Central National based upon its alleged breach of the duty to defend arguing that when the other underlying insurers refused to provide a defense, the proper course of action for Central National was to step in and provide a defense while seeking a judicial declaration that it did not have a duty to defend. The trial court ruled in favor of Johnson Controls and Central National appealed.
On appeal, the Court of Appeals reversed, finding the duty to defend language in Central National’s policies to be dispositive. The duty to defend language in the policies provided that Central National would provide a defense for “occurrences covered under this policy, but not covered under the underlying insurance as set out in the attached schedule…” (emphasis added)
Because it was undisputed that the scope of coverage for the environmental claims brought by Johnson Controls was the same in the Wausau policies as in Central National’s, there was no scenario where Central National would have a duty to defend. If the claims were covered by the Wausau policies, Central National had no duty to defend because the policy language required the claim to not be covered by the underlying insurance before Central National would provide a defense. On the other hand, if the claim was not covered by the Wausau policy, it was also not covered by the Central National policy because they had similar coverage.
The Court’s decision highlights the central importance of policy language in determining if, and under what circumstances, umbrella, and excess insurers have a duty to defend a claim asserted against an insured. The refusal by the primary CGL insurer to provide a defense does not necessarily mean that a company’s umbrella or excess carrier will step in and do so. Accordingly, it may be advisable for companies to review their umbrellas and excess policies to determine if there is a potential gap in defense coverage if their primary carrier declines to retain counsel to defend against a claim.