The Breaching Defender? - Navigating Wisconsin’s Breach of Duty to Defend Jurisprudence When an Insurer Provides a Defense
Wisconsin law is rife with cases where an insurer has breached its duty to defend by refusing to provide a defense to an insured when required under the four-corners rule. In those cases, if a court finds that the underlying complaint triggered the insurer’s duty to defend, the breach analysis is rather simple: the insurer breached its duty to defend because it failed to provide any defense in the face of a complaint that triggered its duty to do so.
On the other hand, Wisconsin law has only sparsely addressed the situation where an insurer may be liable for breaching its duty to defend when it provides some form of a defense. In these instances, an insured contends that the insurer shirked in its defense obligation by failing to provide an immediate and complete defense. Such cases typically involve disputes over (1) the length of time it takes an insurer to respond to an insured’s tender of defense, (2) the selection and payment of counsel for the insured, (3) the insurer’s foisting of certain conditions on the defense, and (4) an insurer’s obligation to provide the sole defense, as opposed to a shared defense with other insurers. Given today’s complex multi-party litigation landscape, including lawsuits involving several claims that may trigger multiple liability policies, these disputes will surely continue.
This article details Wisconsin’s duty to defend where the insurer provides a defense, but the insured nonetheless alleges the insurer breached its duty to defend. It further examines implications for insurers and insureds arising out of these cases.
II. The Case Law
A. General Principles
Under Wisconsin law, an insurer’s initial duty to defend obligation is determined by comparing the allegations in the complaint to the terms of the insurance policy, referred to as the “four-corners rule.” When an insurance policy provides coverage for even one claim, the insurer is obligated to defend the entire lawsuit. If an insurer’s initial duty to defend is triggered under the four-corners rule, it can utilize one of the four judicially-recognized procedures to preserve coverage defenses and submit extrinsic evidence to the court to show that there is no duty to indemnify, and consequently, no continuing duty to defend. The four “judicially-preferred” procedures include: (1) afford a defense under a reservation of rights; (2) seek a declaratory judgment; (3) enter into an agreement with the insured to defend while retaining the right to challenge coverage; or (4) seek a bifurcated trial in which the court decides the coverage issue in a separate action from the action on the merits of the complaint. That said, an insurer who has received its insured’s tender of defense, “may always make the strategic choice to reject its insured’s tender,” but does so at its own risk.
B. Lakeside Foods, Inc. v. Liberty Mutual Fire Insurance Co.
The leading Wisconsin state court case addressing breach of duty to defend allegations in the context of an insurer that provides a defense is the Wisconsin Court of Appeals unpublished, but citable, opinion in Lakeside Foods, Inc. v. Liberty Mutual Fire Insurance Co. There, the insured, Lakeside Foods, Inc. (“Lakeside Foods”), was sued in California regarding a packing agreement for self-heating containers. Within days, Lakeside Foods tendered defense of the lawsuit to its liability insurer, Liberty Mutual Fire Insurance Company (“Liberty Mutual”). Two and a half months later, Liberty Mutual acknowledged its duty to defend under a reservation of rights. In the following months, Lakeside Foods and Liberty Mutual debated selection and payment of counsel issues. Eventually, Liberty Mutual believed that the parties had reached an oral agreement whereby Lakeside Foods would continue to be represented by its selected counsel, but Liberty Mutual would only pay a portion of counsel’s bills. However, no written agreement existed, and Lakeside Foods disputed that an agreement had been reached. The underlying action settled with Liberty Mutual contributing $160,000 of the $1,070,000 in attorneys’ fees incurred by Lakeside Foods.
Lakeside Foods then brought suit against Liberty Mutual in Manitowoc County, alleging that Liberty Mutual breached its duty to defend by (1) paying only a small portion of the total defense costs and (2) responding in a slow and incomplete manner following Lakeside Foods’ tender. Following a summary judgment motion, the circuit court dismissed the breach of duty to defend claim, finding that the parties reached an agreement that required Liberty Mutual to only pay a portion of the costs and that the length of time Liberty Mutual took in response to the tender did not support a claim.
On appeal, the court of appeals first addressed whether the parties had reached an agreement related to the defense-cost issues. It determined that there were disputed facts as to whether the parties actually reached any agreement, and if so, what the scope and terms of that agreement were. Accordingly, the court revived and remanded the breach of duty to defend claim so that the fact finder could make this determination. It noted that the breach of duty to defend claim would be moot if the fact finder found that an agreement existed and established the apportionment of attorneys’ fees.
However, the claim would survive if there was no agreement or established rate schedule.
The court also addressed the timeliness of Liberty Mutual’s response to Lakeside Foods’ tender. Lakeside Foods contended that Liberty Mutual was required to provide an immediate response to its tender and that its almost three-month delay in responding to a multi-million-dollar lawsuit was not quick enough. The court rejected these arguments, stating: “While Lakeside understandably may have preferred a more prompt response from Liberty, Lakeside has not identified any prejudice or damages suffered as a result of the delay. Indeed, it was well represented by its counsel of choice.” In doing so, the court did not establish a specific time period by which an insurer must respond to its insured’s tender, but instead, relied on a lack of showing of prejudice or damage from the delay. As such, it found that Lakeside Foods had not established a breach of duty to defend based on the timeliness of Liberty Mutual’s response because Lakeside Foods sustained no prejudice or damage due to the same.
C. Cases Following Lakeside Foods
Following Lakeside Foods, two Wisconsin federal district courts have addressed breach of duty to defend claims in the context of an insurer that provided a defense. Not surprisingly, both relied on Lakeside Foods. First, in American Design & Build, Inc. v. Houston Casualty Co.,the insurer delayed its decision regarding defense of the insured for several months while it investigated coverage, but nonetheless reimbursed the insured for defense costs back to the date of tender and provided a defense under a reservation of rights. The court dismissed the breach of duty to defend claim, citing Lakeside Foods for the principle that “an insurer may investigate a claim before accepting the defense, so long as it reimburses the insured for defense retroactive to the date of the claim.” Because the insurer had reimbursed the insured retroactive to the date it received notice, the court explained that it was “perplexed by the plaintiff’s insistence that the defendant had breached its duty to defend.
Additionally, in Haley v. Kolbe & Kolbe Millwork Co.,the insured alleged a breach of duty to defend based on the insurer’s delay in making decisions regarding counsel and its attempt to impose its own choice of counsel on the insured. However, the insured proceeded with its selected counsel and the insurer paid for its share of defense costs retroactive to the date of tender. Given these facts, the court dismissed the breach of duty to defend claim, relying on Lakeside Foods. It stated: “A delay in deciding whether to defend an insured does not qualify as a breach of duty to defend . . . when the reason for the delay is the insurer’s investigation of coverage, the insured has counsel while the insurer is conducting its investigation and the insurer pays the cost of counsel even for the time period that the investigation was pending.” The court explained that “under these circumstances, the defense is not harmed in any way,” and in doing so suggested that there could be no prejudice or damage to the insured in this situation.
III. Implications for Insurers and Insureds
There are several considerations for both insurers and insureds arising out of the cases above. Insureds will want to quickly assess all relevant options for insurance coverage after being sued and notify and tender to all possible liability carriers in short order. After receiving a tender, insurers will want to complete a timely investigation and ensure that the entire investigative process is documented. While insurers investigate, they will want to be cognizant of whether the insured has counsel. If the insured has counsel representing it in the underlying action, this will likely allow the insurer to demonstrate that the insurer sustained no prejudice under the Lakeside Foods analysis should timeliness of response become an issue. If the insured has not retained counsel, the insurer may want to streamline its investigation to ensure that the insured is not prejudiced by any delay and/or quickly assign counsel for the insured under a reservation of rights. Additionally, once the insurer completes its initial coverage investigation, if it determines that the complaint arguably triggered its duty to defend, it will want to retroactively pay any defense costs back to the date of tender. This will serve to defuse any prejudice arguments from the insured and put the insurer in a position similar to the insurers in American Design & Build and Haley. Moreover, insurers will want to assess whether the insured has any other carriers that may have provided coverage that could have been triggered by the underlying lawsuit and request that those insurers be put on notice of the suit. Beyond all, communication between the insurer and insured will be critical. Insurers will want to consider issuing a reservation of rights letter to the insured, especially if the insurer wants to preserve forfeiture clause defenses under Maxwell v. Hartford Union High School District.
Further, insurers may want to avail themselves to the other “judicially-preferred” procedures noted above, including filing a separate declaratory judgment action or motion to intervene and bifurcate in the underlying action for coverage issues. However, prior to doing so, insurers may want to communicate their plan with insureds. Insureds contend that they have an interest in not dealing with collateral coverage proceedings at the same time as the underlying litigation. While this position likely does not support a claim for breach of duty to defend should the insurer proceed with a coverage action or motion, such preemptive communication could best protect the business relationship between the insurer and insured (assuming the policyholder is still a current insured of the insurer) and thwart any future breach of duty to defend allegations, however unsupported they may be.
If a coverage action or motion by the insurer is not immediately pursued, but delayed until the conclusion of the underlying litigation, insurers should seek a defense agreement. Insurers will want to preserve a right of reimbursement of defense costs that postdate the agreement should it be determined that the insurer had no indemnity obligation. Likewise, insurers will want to consider breach of duty to defend and bad faith waivers as part of any agreement. Finally, to avoid the Lakeside Foods predicament, an agreement between the insurer and insured should be in writing.
Dieter J. Juedes is an associate at Meissner Tierney Fisher & Nichols, S.C. He graduated cum laude from Marquette University Law School in 2012. Dieter litigates commercial and insurance matters in both state and federal courts, including business disputes, complex insurance coverage issues, construction defect litigation, and professional liability. He has been recognized as a Super Lawyers Rising Star on multiple occasions. Feel free to contact him at email@example.com.
1 See, e.g., Radke v. Fireman’s Fund Ins. Co., 217 Wis. 2d 39, 577 N.W.2d 366 (Ct. App. 1998); Grube v. Daun, 173 Wis. 2d 30, 496 N.W.2d 106 (Ct. App. 1992).
2 Sustache v. Am. Family Mut. Ins. Co., 2008 WI 87, ¶¶ 20 & 28, 311 Wis. 2d 548, 751 N.W.2d 845. In a fairly recent case, the Wisconsin Supreme Court made clear that there is “no exception to the four-corners rule in duty to defend cases in Wisconsin” and it declined to consider the extrinsic evidence submitted by the insured that presumably would have triggered the insurer’s initial duty to defend. Water Well Sols. Serv. Grp., Inc. v. Consol. Ins. Co., 2016 WI 54, ¶ 27, 369 Wis. 2d 607, 881 N.W.2d 285.
3 Fireman’s Fund Ins. Co. v. Bradley Corp., 2003 WI 33, ¶ 21, 261 Wis. 2d 4, 660 N.W.2d 666.
4 Once a court resolves the duty to indemnify in the insurer’s favor, the duty to defend is also resolved. Sustache, 2008 WI 87, ¶ 22 n.7 & ¶ 29 (“The insurer’s duty to continue to defend is contingent upon the court’s determination that the insured has coverage if the plaintiff proves his case.”). However, an insurer’s defense obligation continues until the coverage determination becomes final through appeal. Newhouse by Skow v. Citizens Sec. Mut. Ins. Co., 176 Wis. 2d 824, 836, 501 N.W.2d 1, 6 (1993).
5 Sustache, 2008 WI 87, ¶ 25 n.8; see also Water Well, 2016 WI 54, ¶ 27.
6 Kraft v. Thompson, 2013 WI App 41, ¶ 23, 346 Wis. 2d 733, 828 N.W.2d 594 (unpub).
7 2010 WL 2836401, 2010 WI App 120, 329 Wis. 2d 270, 789 N.W.2d 754 (unpub).
8 Id. ¶ 2.
9 Id. ¶ 5.
10 Id. ¶ 6.
11 Id. ¶¶ 7–10.
12 Id. ¶¶ 11–13.
13 Id. ¶ 13.
14 Id. ¶ 15.
15 Id. ¶ 16.
16 Id. ¶ 18.
17 Id. ¶ 38.
18 Id. ¶ 38.
19 Id. ¶ 39.
20 See id. Once its duty to defend is triggered, an insurer must pay for the insured’s reasonable defense costs at the market standard for that particular type of litigation in that particular geographical area. Id.
21 Id. ¶ 42.
22 Id. ¶ 43.
23 2012 WL 719061 (E.D. Wis. Mar. 5, 2012).
24 Id. at ** 9–11.
25 Id. at *11 citing Lakeside Foods, 2010 WI App 120.
26 Id. at *10.
27 2015 WL 6669395, at *3 (W.D. Wis. Nov. 2, 2015).
28 Id. at *1.
30 Id. at *3.
31 See id.
32 2012 WI 58, 341 Wis. 2d 238, 814 N.W.2d 484.
33 An insurer’s right to equitable recoupment of attorneys’ fees from an insured is not clear under Wisconsin law. Krueger Int’l, Inc. v. Fed. Ins. Co., 647 F. Supp. 2d 1024, 1039 (E.D. Wis. 2009).