Court of Appeals Provides Clarity on an Insurer’s Continuing Duty to Defend When All Covered Claims are Dismissed
Most of us have been there before: You are asked to intervene and represent your insurance client on the basis that there is no insurance coverage for at least some of the claims asserted in the complaint. Merits counsel is able to get the only claims for which there potentially was coverage dismissed on summary judgment. You then file your motion for summary judgment and/or declaratory judgment claiming that there is no coverage for the remaining claims, and it is granted by the court. You obtain a final order on this coverage ruling for the purposes of appeal. Your client is now officially off the hook and no longer must provide a defense for its insured, right? Unfortunately, while this may have been a common strategy for many coverage attorneys over the years, the Wisconsin Court of Appeals recently rendered a decision that obligates the insurer to continue defending its insured even beyond a successful summary judgment motion on the merits where the only remaining claims for trial are ones for which the insurer has no duty to indemnify.
II.Anderson v. Kayser Ford, Inc.
In Anderson v. Kayser Ford, Inc.,plaintiff, Jody Ann Anderson, filed a lawsuit against Kayser Ford, Inc. based on certain allegations arising from her purchase of a used car from the dealership.While the Court of Appeals does not go into detail regarding the specific allegations, it did differentiate the four claims asserted in Anderson’s complaint that was filed with the Circuit Court of Dane County, specifically:
- Count One: Fraudulent representations, in violation of Wis. Stat. § 100.18;
- Count Two: Statutory and code violations based on various provisions in Wis. Stat. § 218.0116 (governing the denial, suspension, and/or revocation of licenses);
- Count Three: Violations of the Magnuson-Moss Warranty Act, 15 U.S.C. § 2301, and Wis. Stat. §§ 402.314, 402.315 (governing implied warranties); and
- Count Four: Willful violation of a purchase contract and disclosure requirements under Wis. Stat. § 218.0116 and provisions of the state administrative code.
Kayser Ford was insured by Regent Insurance Company.Its policy included “an express contractual right and duty of Regent to defend Kayser in any suit for identified ‘damages.’”Kayser Ford tendered its defense to Regent, who defended its insured under a reservation of rights.Regent moved the court to intervene to seek an order declaring that it had no obligation to indemnify Kayser Ford on any of the claims, and that therefore, there was no duty to defend its insured.The lawsuit was bifurcated, and discovery on the merits was stayed.The court first considered whether Regent had an obligation to indemnify Kayser Ford.
The circuit court first determined that, assuming Ms. Anderson was successful on the merits, Regent would have an obligation to indemnify Kayser Ford only as to Count One for fraudulent representations;Regent would not be so obligated as to Counts Two, Three, and Four.It is important to note that this decision did not result in a final judgment that could be appealed as of right, and none of the parties petitioned for leave to appeal.
Once the coverage issues were decided and the stay on merits discovery was lifted, the court then addressed defense’s motion for summary judgment pertaining to the merits of Ms. Anderson’s claims.
In this regard, the circuit court granted summary judgment dismissing Counts One, Two, and Three, and held that trial was needed only as to Count Four.Similar to the decision rendered pertaining to Regent’s duty to indemnify, the merits decision also did not result in a final judgment that could be appealed as of right, and none of the parties petitioned for leave to appeal.The rulings made it such that the only claim that was to be tried was one on which the circuit court had already ruled Regent had no duty to indemnify (Count Four).
Regent filed a motion to dismiss, as the circuit court’s prior decision on coverage established that Regent had no duty to indemnify Kayser Ford for Count Four.While Kayser Ford agreed that Regent would have no duty to indemnify if Ms. Anderson was successful on Count Four at trial, it believed that Regent still had a duty to defend the entire suit, which it argued would continue “until the final termination of the litigation, including the appellate process.”Kayser Ford argued that this was especially so as the circuit court’s dismissal of Count One was not a final appealable judgment, and Regent had not otherwise settled the claim set forth in Count One.The circuit court granted Regent’s motion and dismissed the insurer with prejudice, finding that since there was no coverage for the claim asserted in Count Four, Regent had no duty to indemnify and no ongoing duty to defend Count Four.It was from this final order that Kayser Ford appealed.
The Court of Appeals analyzed the policy at issue under the “four-corners test”and the “entire-suit rule.”Regent relied on Baumann v. Elliottand argued that once the circuit court entered its last order, the entire suit consisted only of Count Four, and as Regent had no financial interest in the outcome of Count Four, there was no duty to defend its insured at trial.Regent focused on the Baumannrule that where all arguable indemnification issues are resolved in the insurer’s favor, the duty to defend ends as “coverage is no longer open to debate.”The Andersoncourt agreed, but pointed out that the issue regarding Regent’s duty to indemnify Kayser for Count One was very much still open to debate.Thus, Regent’s continuing duty to defend would not be inconsistent with Baumannas Regent would still have a financial interest in the final resolution of the issue of whether it had a duty to indemnify Kayser should Ms. Anderson prevail on Count One if it were to be revived on appeal.Regent admitted that it would resume the defense of Kayser Ford in an appeal, but argued that it otherwise had no duty to defend until such a situation arose.
Kayser Ford argued that the entire suit included Count One, as that “arguably covered, but dismissed-on-the-merits” claim had not been dismissed by settlement or litigation to finality (i.e., Ms. Anderson could still revive the merits of Count One on appeal).The Court of Appeals agreed, and relied on Newhouse v. Citizens Sec. Mut. Ins. Co.(Newhouse III)and persuasive authority out of Hawaiiin coming to its decision.
In Newhouse III, the Wisconsin Supreme Court held that “[i]n cases where a coverage decision is not final before the trial on liability and damages occurs, the insurance company must provide a defense to its insured.”The Court of Appeals in Andersondetermined that when the Newhouse IIIcourt referred to a coverage decision that was “not final,” it meant that the issue had not yet been fully resolved on appeal.
In Commerce & Industry Ins. Co. v. Bank of Hawaii,the Supreme Court of Hawaii agreed with Judge Learned Hand’s rule that “if the plaintiff’s complaint against the insured alleged facts which would have supported a recovery covered by the policy, it was the duty of the defendant to undertake the defence [sic], until it could confine the claim to a recovery that the policy did not cover.”In Anderson, the Court of Appeals determined that Regent had not yet “confined” its case entirely to Count Four, as Count One could still be revived on appeal.
The Andersoncourt acknowledged that while it may seem counterintuitive to obligate an insurer to provide a (typically costly) defense for a claim on which it faces no liability, in this case, Regent had assumed the duty, in exchange for Kasyer Ford’s payment of its premium, to defend the entire suit brought against Kayser Ford based on the single claim for which there was an arguable duty to indemnify (Count One).The Court of Appeals therefore agreed with Kayser Ford and reversed the Circuit Court of Dane County.
Given the holding of the Andersoncourt, an insurance company must exercise caution before pulling the merits defense when the coverage ruling is based on a non-final judgment or order from the court. If the plaintiff or insured still has an opportunity to appeal a merits claim that, if successful, would arguably create a duty to indemnify the insured, the insurer must continue to defend its insured until the time for appeals has passed or the appellate process is exhausted. The importance of litigating an issue “to finality” cannot be emphasized enough.
The Andersondecision defines and clarifies what it means to litigate a case “to finality.” First, settlement could be reached on all covered claims, and those claims could be dismissed with prejudice. Second, the time within which an appeal may be brought could expire. Lastly, the appeal process could be exhausted, and the claims could be resolved in their entirety. If one of these is not satisfied, the duty to defend continues, and an insurer runs the risk of a breach of that duty if it withdraws the merits defense of its insured prematurely.
The days of relying on a merits decision that dismisses the only arguably covered claim(s) are gone as long as there is a later opportunity for the plaintiff or the insured to appeal the decision post-trial. Unfortunately, this means that the insurance company may be forced to pay for litigation efforts and a trial for which the insurer has no interest.
Brittany L. Van Roo is an attorney with Simpson & Deardorff, S.C. She primarily practices in the defense of bodily injury and other damage claims on behalf of insurance companies and their insureds. She received her B.A. in 2007 from Marquette University and her J.D. in 2010 from Marquette University Law School. She is licensed in both Illinois and Wisconsin and has been admitted to the United States District Court of Northern Illinois and the Eastern District of Wisconsin as well as the 7thCircuit Court of Appeals.
2019 WI App 9, 386 Wis. 2d 210, 925 N.W.2d 547.
Id. ¶ 2.
Id. ¶ 3.
See id. ¶ 4.
The Regent policy stated that it would “pay all sums you [Kayser] legally must pay as ‘damages’ caused by an ‘Insured’ solely because of an error or omission in complying or failing to comply with any federal, state or local statute, code or ordinance pertaining to disclosure of prior damage to ‘autos’ you sold.” Id.¶ 15.
Id. ¶ 5.
Id.A decision that does not explicitly dismiss the entire matter in litigation as to one or more parties is not considered a final order. SeeWambolt v. West Bend Mut. Ins. Co., 2007 WI 35, 299 Wis. 2d 723, 728 N.W.2d 670.
See Anderson, 386 Wis. 2d 210 ¶ 6.
Id.;see alsoWis. Stat. § 808.03.
Anderson, 386 Wis. 2d 210 ¶ 7.
“When a complaint alleges facts that, if proven, would constitute a covered claim, the insurer must appoint defense counsel for its insured without looking beyond the complaint's four corners.” Estate of Sustache v. Am. Fam. Mut. Ins. Co., 2008 WI 87, ¶ 27, 311 Wis. 2d 548, 751 N.W.2d 845.
“Wisconsin courts require insurers to defend insureds against allclaims alleged in the entirelawsuit, so long as the insurer has an arguable duty to indemnify the insured on even one claim in the suit.” Anderson, 386 Wis. 2d 210, ¶ 23 (citing Marks v. Houston Cas. Co., 2016 WI 53, ¶ 42, 369 Wis. 2d 547, 884 N.W.2d 309).
Baumann v. Elliott, 2005 WI App 186, 286 Wis. 2d 667, 704 N.W.2d 361.
Anderson, 386 Wis. 2d 210, ¶ 24.
 Id. ¶ 49 (citing Baumann, 286 Wis. 2d 667, ¶¶ 9-10).
Id. ¶ 25.
Newhouse v. Citizens Sec. Mut. Ins. Co.(Newhouse III), 176 Wis. 2d 824, 501 N.W.2d 1 (1993).
In its brief, Kayser Ford cited Commerce & Indus. Ins. Co. v. Bank of Hawaii, 73 Haw. 322, 832 P.2d 733 (Haw. 1992).
Anderson, 386 Wis. 2d 210, ¶ 36 (quoting Newhouse III, 176 Wis. 2d at 836-37).
Id. ¶ 38.
Bank of Hawaii, 73 Haw. 322.
Id.at 326 (quoting Lee v. Aetna Casualty & Sur. Co., 178 F.2d 750, 753 (2d Cir. 1949)).
Anderson, 386 Wis. 2d 210, ¶ 43.