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New Wisconsin Supreme Court Decision Scales Back the Consequences of One Insurer’s Breach of the Duty to Defend Where Multiple Carriers Provide Overlapping Coverage

Steadfast Insurance Company v. Greenwich Insurance Company, 2019 WI 9, decided by the Wisconsin Supreme Court on January 25, 2019, adds fire to the ongoing debate among insurance coverage counsel about the consequences of an insurer’s breach of the duty to defend.  Does the decision suggest that a majority of the Court have now adopted the view expressed by Justice Prosser in Maxwell v. Hartford Union High School District, 2012 WI 58, that an insurer can assert policy defenses after breaching the duty to defend?  While this question awaits a future decision by the Court, the Steadfast decision does change rules in matters involving a claim potentially covered by more than one insurer.

The Steadfast case arose out of the historic rains that occurred in Milwaukee in June, 2008.  Raw sewage backed up into more than 8,000 homes and lawsuits were brought by homeowners against the Milwaukee Metropolitan Sewerage District (“MMSD”), United Water Services, LLC (“United Water”) and Veolia Water Milwaukee, LLC (“Veolia”).  United Water and Veolia operated and maintained MMSD’s system by contract during different time periods.  United Water was insured by Greenwich and Veolia was insured by Steadfast.  Both policies named MMSD as an additional insured.

MMSD tendered the claims to both Greenwich and Steadfast.  Steadfast participated in MMSD’s defense by reimbursing MMSD for $1.55 million in defense costs.  Greenwich refused MMSD’s tender.  MMSD’s renewed tender to Greenwich a year later was also rejected. The lawsuits against MMSD were eventually settled without MMSD paying any damages.

After the settlements, Steadfast brought a subrogation action against Greenwich to recover the $1.55 million in defense costs it had paid to MMSD.  The circuit court granted summary judgment to Steadfast for the full $1.55 million, ruling that Greenwich waived its right to raise coverage defenses because it breached the duty to defend.  The circuit court also awarded Steadfast $325,000 in attorney fees incurred in the subrogation action.  The Court of Appeals affirmed but with a different rationale, holding that Greenwich was not equitably entitled to an allocation of a share of the $1.55 million defense cost because it had breached the duty to defend.

In a majority opinion by Justice Roggensack, the Wisconsin Supreme Court affirmed in part, and reversed in part.  First, with respect to the damages awarded for defense costs, the Court faulted the circuit court and Court of Appeals for ignoring the financial windfall to Steadfast of awarding damages for all of the defense costs when Steadfast had its own duty to defend MMSD.  The Court held that when two insurers have the duty to defend the same claim and one insurer provides a defense but the other does not, “the financial sanction of an insurer who fails in its duty to defend does not include judicial forgiveness of another insurer’s financial obligation for defense cost.”  Id. ¶ 41.

Accordingly, the Court next looked at how to allocate the defense costs between Steadfast and Greenwich and decided that the fairest method would be pro-rata, based upon the respective policy limits.  This resulted in the defense costs being allocated 60 percent to Steadfast and 40 percent to Greenwich.

On the issue of Steadfast’s attorney fees, the Court agreed with the circuit court and Court of Appeals that Steadfast was subrogated to the rights of MMSD and, therefore, had the same right as MMSD would have had to an award of attorney fees if MMSD had successfully sued Greenwich for breaching its duty to defend.  While noting that Wisconsin courts had not yet awarded attorney fees to a subrogated insurer for breach of the duty to defend, the Court found no persuasive reason to exclude “attorney fees from the bundle of rights that arise from a specific subrogation clause upon payment by the subrogee.”  Id. ¶ 51.

In a separate opinion concurring in part and dissenting in part, Justice Ann Walsh Bradley joined by Justice Dallet criticized the majority opinion as being inconsistent with the preferred framework of requesting a judicial determination on coverage rather than making a unilateral decision to refuse to defend its insured.  In Justice Bradley’s view, “[r]ather than encouraging insurers to live up to their contractual obligations, the majority opinion allows insurers to rest comfortably in their decision to deny a defense with the knowledge that if a breach is later found, no financial consequence will be forthcoming.”  Id. ¶ 72.

Justice Bradley also disagreed with the majority’s affirmance of the award of attorney fees.  She decried the failure to heed the warning that exceptions to the American Rule are to be limited and narrow and concluded that allowing a subrogated insurer to recover attorney fees in a subrogation action against another insurer was not justified.

So, in Justice Ann Walsh Bradley’s view, the breaching insurer should have to pay the non-breaching insurer 100% of the cost incurred defending the insured, but would not be liable for attorney fees incurred by the non-breaching insurer to pursue subrogation.

Justice Rebecca Grassl Bradley also filed a separate opinion concurring in part and dissenting in part.  While agreeing as a general matter that an insured’s defense costs should be allocated between insurers who have an overlapping duty to defend the insured, Justice Bradley would have reversed the judgment against Greenwich in its entirety based upon her interpretation of the Greenwich policy as being excess to the Steadfast policy.

Whether the Steadfast case represents a significant change in the law of the duty to defend will have to await future decisions.  There is a clear distinction between an insured who is left hanging by an insurer who breaches its duty to defend and a fight between insurers.  But the decision does change the considerations that can come into play when a claim is tendered to two insurers who have arguably overlapping coverage.  Now, at least, those insurers have clear direction on how defense costs should be shared and the risks of denying coverage.

© 2019 Davis|Kuelthau, s.c. All Rights Reserved

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About this Author

Todd Farris, Davis Kuelthau Law Firm, Milwaukee, Real Estate Litigation Law Attorney
Senior Attorney

Todd is both an experienced litigator and a practicing real estate and municipal law attorney.

Todd has litigated real estate and commercial disputes, insurance coverage, claims and bad faith denials of coverage, environmental matters including municipal cost recovery proceedings under Section 292.35, construction defects and warranty claims, land use and licensing disputes with municipalities, FINRA securities (suitability of investments) and AAA arbitrations, receivership law, Indian Gaming Regulatory Act matters, noncompetition agreements,...

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Ted Warpinski, Davis Kuelthau Law Firm, Green Bay, Environmental Litigation Law Attorney
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With over 30 years of experience, Ted has worked on a wide variety of environmental and litigation cases across Wisconsin. From the early years of Superfund litigation on sites like the Fadrowski Drum Disposal Site in Franklin, Wisconsin and the Moss-American Site in Milwaukee, Ted has been immersed in both the legal and technical aspects of environmental law.

Ted’s litigation practice has grown to include environmental nuisance claims and toxic tort litigation, contract and property disputes, construction defects, insurance coverage litigation and enforcement actions. From Kenosha to Minocqua and from Lafayette County to Florence County, Ted has crisscrossed Wisconsin representing both plaintiffs and defendants.

He represents individuals, community groups, local and tribal governments, small business, utilities and large corporations. This breadth of experience helps Ted prepare his clients for what they can reasonably expect in litigation by looking at the case from the other side’s point of view.

In addition to his litigation practice, Ted also works very closely with the firm’s real estate and development lawyers handling due diligence investigations and environmental permitting. His experience includes addressing real estate deals that involve brownfield issues, where the risk of liability for historical contamination is a major consideration. Ted’s experience allows him to assist the DK team with understanding and managing these risks.

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Christopher Meuler Insurance Attorney
Senior Attorney

Chris maintains a general litigation practice with emphasis in the areas of business litigation, eminent domain, insurance coverage, appellate work, contract disputes, and bid protests. As part of his practice, he regularly serves as local counsel for a number of national law firms when disputes arise in Wisconsin.

In addition, Chris pursues his interest in politics with a concentration in election law. He has worked on numerous election recounts and nomination paper challenges and has advised both sides of the aisle on campaign finance and other election-related issues.

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