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The Only Potentially-Covered Claim Was Dismissed, Can the Insurer Withdraw the Defense?

Consider the situation

A policyholder is sued by a plaintiff alleging four distinct theories. The policyholder’s liability carrier does the right thing to resolve its coverage obligations by defending its insured, intervening in the suit, moving to bifurcate proceedings and securing a declaratory ruling that its policy provides potential coverage for only one of the four claims. Because there is potential coverage for that remaining claim, the carrier continues to defend.

Later in the case the policyholder defendant seeks summary judgment dismissing all claims against it. The court grants the motion dismissing three of the four claims, including the only potentially-covered claim.

Since there is no remaining theory under which the carrier could become obligated to indemnify the policyholder, can the carrier withdraw from the defense and seek dismissal from the suit?

So what happens?

In a thoughtful decision, the Wisconsin Court of Appeals held that the answer is “no.”

In reaching this conclusion, the court noted that even reasonable policyholders may not fully understand how the policy would apply in these circumstances and that a decision requiring the carrier to continue to defend in this situation is counterintuitive and potentially unfair.

Nonetheless, the court reviewed prior precedent and noted that the Wisconsin Supreme Court has held that the duty to defend continues until the potentially covered claim has been dismissed based on a settlement or litigated to the point of finality. Here, the potentially-covered claim had not been settled (it has been dismissed, after all) and it had not been litigated to conclusion, as the plaintiff could still appeal the dismissal ruling, making it a non-final order.

How the court made its decision

The court made clear that its decision was based on its view of prior Wisconsin Supreme Court precedent, which broadly stated the principle that an insurer cannot rely on a circuit court determination of no coverage until that order became final through exhaustion of the appellate process.

In this case, because the carrier could not rule out that the order dismissing the one potentially-covered claim would be reversed on appeal and that the plaintiff could subsequently prevail against the policyholder on that claim, the carrier was obligated to continue to defend. The court rejected the carrier’s position that it could take up the defense of its insured after the potentially-covered claim was reinstated on appeal without breaching its duties to its insured.

The court of appeals’ decision in this matter notes that its holding is dependent on its view of binding Wisconsin Supreme Court precedent, stating that if it were “writing on a blank slate” its decision might be different.

In the author’s view, this invitation to the parties to seek Wisconsin Supreme Court review will likely be followed, potentially giving more clarity to Wisconsin law regarding a defending carrier’s duties in similar situations.

Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume IX, Number 91


About this Author

Todd Smith Insurance Attorney Godfrey Kahn Law Firm

Since joining the firm, Todd has helped clients resolve their most difficult commercial disputes, including those involving employee benefits and insurance coverage. Todd has represented parties in complex commercial litigation throughout the state and is a past president of the Western District of Wisconsin Bar Association, an association of lawyers practicing in the fast-moving federal district court in Madison. Todd is the leader of the firm's ERISA Litigation Team.

In addition, Todd's practice has emphasized representing clients in ERISA litigation and other...