When Do Timing Issues and Payment Discrepancies Constitute a Breach of the Duty to Defend?
Once an insurance policy is issued, both the insurer and the insured must meet certain conditions and owe certain duties pursuant to the policy. The insured must pay premiums and comply with any other requirements to acquire coverage. The insurer then agrees to indemnify the insured against damages or losses, and to defend the insured against any claims for damages. Of course, if the insurer refuses to defend the insured for claims covered by the policy, the insurer breaches its duty to defend. However, it is not always clear what other specific actions by an insurer may amount to a breach of the duty to defend. This article explores the circumstances under which timing issues and payment discrepancies constitute a breach of the duty to defend.
II. The Duty to Defend: The Basics
An insurer may contest coverage without violating its duty to defend if the issue is “fairly debatable” and the insurer provides coverage and a defense of coverage is established. An insurer has several options to contest coverage. Wisconsin courts prefer the insurer intervene in the suit, request a bifurcated trial of coverage and liability, and move to stay proceedings on liability until the coverage dispute is resolved. The Wisconsin Supreme Court first stated this preference in Mowry v. Badger State Mut. Casualty Co., and the preference has continually been reiterated in subsequent cases. The law is clear that if the insurer follows this procedure, it does not breach its duty to defend.
Although the bifurcation and stay approach is preferred, an insurer has other options to contest coverage: (1) entering a non-waiver agreement with the insured, in which the insurer agrees to defend but the insured acknowledges the insurer’s right to contest coverage; (2) defending under a reservation of rights, meaning the insurer reserves the right to not pay a judgment if a court finds the policy does not cover the underlying claim; and (3) refusing to defend. Refusing to defend is done at the insurer’s peril: if the insurer refuses to defend and coverage is established, the insurer breaches the duty to defend and is liable for all the damages that naturally flow from the breach. These damages may include the amount of the judgment, settlement against the insured plus interest, costs and attorney fees incurred by the insured, and excess judgment if a proximate cause of the breach.
If the insurer opts for a bifurcation and stay of the proceedings, it is well-established the insurer may have to provide a defense if the coverage trial does not precede the liability trial. In this way, the insurer may have to furnish a defense before coverage is established, but it will at least be notified of having to do so by a court order specifying the sequence in which the trials will occur. The insurer bears this duty until the coverage issue is resolved.
Notably, the insurer is only responsible for the fees and costs the insured incurs with respect to liability. Otherwise, Wisconsin courts adhere to the American Rule, which dictates that litigants are responsible for attorney fees they incur unless a statute or enforceable contract holds that a prevailing party shall be awarded these fees. Wisconsin has invoked this rule to prevent fee-shifting in coverage contests. Thus, the insured must bear its own costs in litigating to establish coverage, if such a contest arises.
III. Timing Issues
What happens if time passes between the insured’s tender of defense and an insurer’s acceptance of the defense?
Wisconsin courts have held that an insurer that does not immediately agree to defend and follows the appropriate procedure to contest coverage does not breach its defense obligation. In Kenefick v. Hitchcock, for example, the insureds alleged the insurer breached the duty to defend because the insurer did not move to stay and did not move to bifurcate until about six months after the underlying complaint was filed. The insureds argued they were “left alone to defend themselves,” and incurred defense costs, such as responding to discovery and attending depositions. The Court of Appeals disagreed, finding the insurer did “precisely what was required of it”: it followed the preferred procedure, and the liability and coverage issue did not proceed simultaneously. The case was remanded to determine what defense fees, if any, the insureds incurred that could be recovered from the insurer. However, the court clearly held the delay did not constitute a breach of the duty to defend.
Other Wisconsin courts have agreed with Kenefick. In Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of California, Inc., for instance, the insurer’s delay in providing a defense arose from its initial rejection of the insured’s tender on the case, which the insurer did to discover more facts regarding the coverage issue. The Wisconsin Supreme Court held that the insurer did not violate its duty to defend because it moved to bifurcate and stay, and the coverage issue was resolved before liability proceedings began.
The Wisconsin Court of Appeals also held, in Lakeside Foods, Inc. v. Liberty Mutual Fire Insurance Co., that an insurer’s three month delay in accepting a defense did not amount to a violation of the duty to defend because the insured was represented by counsel, which it was allowed to keep, and the insurer agreed to pay for the defense while investigating coverage. Essentially, the passage of time between the insured’s tender and the insurer’s acceptance of defense does not constitute a breach if the insurer follows proper court procedure to contest coverage and covers the insured’s defense fees when and if coverage is established.
Federal courts agree that the passage of time does not mean the insurer violates its duty. For example, the Eastern District of Wisconsin found in American Design & Build, Inc. v. Houston Casualty Co. that “an insurer may investigate a claim before accepting the defense, so long as it reimburses the insured for the defense retroactive to the date of the claim.” In this case, the insured, an architectural firm, had a contractual dispute with a customer at the same time it was applying for a new policy with the insurer. After investigating coverage, the insurer accepted the insured’s tender of defense under a reservation of rights. The court determined that despite the time taken to investigate, the insurer reimbursed the insured’s defense fees retroactive to the date the insured received notice of the claim and properly “raised a coverage issue without breaching its duty.” The court therefore found the insured’s “too little, too late” argument to be “unpersuasive.”
The Western District agreed in Haley v. Kolbe & Kolbe Millwork Co. that a delay pending investigation into coverage does not constitute a breach, especially where the insured has counsel during the investigation which the insurer agrees to pay retroactively. The court noted that an insurer can either defend immediately or use “alternate methods to reduce the costs of providing a defense until the coverage issue is decided.” Because permitting the insured to retain its own counsel while the insurer investigated coverage and paying for said counsel was an “alternative method” to satisfying the duty to defend, the insurer did not leave the insured, as the court put it, “high and dry.”
Finally, the Seventh Circuit considered timing Carney v. Village of Darien. In this case, the insurer did not move to bifurcate the coverage and liability issues and did not file its coverage motion until the insured moved for summary judgment on the coverage issue. The court rejected the insured’s argument that the insurer breached the defense obligation, holding that an insurer avoids breaching the defense obligation if it seeks a determination on coverage before a liability trial
IV. Payment Discrepancies
Similarly, what happens if the insurer pays less than the full amount of defense fees incurred?
Wisconsin courts have found in several cases that a payment discrepancy does not necessarily amount to a breach of the duty to defend. In Lakeside, discussed above, the insured claimed the insurer breached its duty to defend because the insurer covered less than the full amount of the insured’s attorney fees. The Wisconsin Court of Appeals disagreed, noting that based on the record, there was a question of fact regarding the amount the insurer owed for defense fees. Importantly, the court determined that not paying the full amount of defense fees requested was not a breach of the duty to defend.
Moreover, in DeMarco v. Keefe Real Estate, Inc., the insured argued its insurers were estopped from contesting coverage because they breached the duty to defend by failing to pay the final invoice from the defense counsel and failing to contribute the amount they had promised to settlement. While the Court of Appeals found the insurers were obligated to pay the defense costs and settlement amount promised, the court rejected the argument the insurers breached the duty to defend.
Finally, in an older case, Sauk County v. Employers Insurance, the Court of Appeals held that an insurer’s alleged partial payment of defense fees did not constitute a breach of the duty to defend. Here, after the insured complied with the Department of Natural Resources’ environmental cleanup demand, it filed suit against alleged waste contributors. The contributors then filed counterclaims which the insured tendered to its insurer. The insurer agreed to defend the counterclaims under a reservation of rights, and as the case proceeded, the insured was represented by one attorney for the claims and counterclaims. The insurer only paid 16.6% of the insured’s legal bills, believing this percentage represented the defense fees attributed to the counterclaims. The court agreed with the insurer, holding that its partial payment was actually full payment for defending the insured on the counterclaims. Accordingly, the court determined the payment did not constitute a breach of the defense obligation.
V. Recent Decision on Timing and Payment Discrepancies
The Wisconsin Court of Appeals addressed both timing and discrepancy regarding unpaid defense fees in a recent decision: Choinsky v. Germantown School District. Believing the underlying matter outside the scope of coverage, the insurer immediately moved to intervene, bifurcate and stay the coverage and liability proceedings. However, nearly four months passed before the circuit court heard the motion. When the court heard the motion, it granted the requests to intervene and bifurcate but denied the request to stay, such that the liability and coverage cases proceeded simultaneously. Following a jury trial on the coverage issues, the circuit court determined there was coverage under the policy. In motions after verdict, the insured claimed the insurer breached its duty to defend by not immediately agreeing to defend and claimed the breach led it to incur attorney fees to defend the liability case. The circuit court disagreed, finding the insurer did not breach its duty to defend because it followed the proper procedure to contest coverage.
The circuit court’s decision was affirmed on appeal. The court of appeals held the alleged delay did not amount to a breach, as the insurer followed court-approved procedure and any lapse in the insurer agreeing to defend stemmed from the time it took the circuit court to rule on the motion to bifurcate and stay. The insurer was found to have responded in a timely fashion whenever required to do so.
The court of appeals also considered whether the insurer’s payment of less than the full amount of defense fees incurred constituted a breach of the duty to defend. The court noted a dispute as to whether defense fees were owed, insufficient proof as to what amount might be owed, and a lack of authority to support the argument a “disagreement over the particulars of fees … constitutes a breach of the duty to defend.” On these bases, the court determined the insured failed to establish that unpaid defense fees constituted a breach of the duty to defend.
A reasonable delay in an insurer’s acceptance of a defense does not constitute a breach of the duty to defend as long as the insurer properly contests coverage and covers defense fees when and if coverage is established. Moreover, while an insurer may be obligated to pay particular defense fees, a payment discrepancy does not constitute a breach of the duty to defend under most circumstances.
However, it is important to note that certain circumstances could influence a different result. For example, the insureds in the cases discussed above had the resources to retain and pay counsel to defend the liability cases while the insurers’ motions to bifurcate and stay were pending. Wisconsin courts have not yet addressed whether there may be a breach of the defense obligation resulting from a delay or payment discrepancy because an insured lacks these resources.
Mollie Kugler is a partner in the Milwaukee, Wisconsin office of Hinshaw & Culbertson LLP. She holds B.A.s in Government and English from Georgetown University and a J.D. from Fordham University School of Law, in New York City. Mollie focuses her practice on insurance services, with an emphasis on insurance coverage issues. She also litigates many types of insurance defense and other civil and commercial cases. Mollie is licensed to practice in Wisconsin, Illinois, and several federal courts.
Mollie wishes to acknowledge the assistance of Joshua S. Greenberg, a law clerk at Hinshaw & Culbertson LLP, in drafting this article.
See Water Well Solutions Serv. Group Inc. v. Consol. Ins. Co., 2016 WI 54, ¶ 12, 369 Wis. 2d 607, 881 N.W.2d 285 (quoting Olson v. Farrar, 2012 WI 3, ¶ 27, 338 Wis. 2d 215, 809 N.W.2d 1).
Elliot v. Donahue, 169 Wis. 2d 310, 317, 485 N.W.2d 403 (1992).
Burgraff v. Menard, Inc., 2016 WI 11, ¶ 77, 367 Wis. 2d 50, 875 N.W.2d 596.
Mowry v. Badger State Mut. Casualty Co., 129 Wis. 2d 496, 528-29, 385 N.W.2d 171 (1986); see also Elliot, 169 Wis. 2d at 318; Newhouse v. Citizens Sec. Mut. Ins. Co., 176 Wis. 2d 824, 836, 501 N.W.2d 1 (1993); Reid v. Benz, 2001 WI 106, ¶ 22, 245 Wis. 2d 658, 629 N.W.2d 262; Steadfast Ins. Co. v. Greenwich Ins. Co., 2019 WI 6, ¶ 29, 385 Wis. 2d 213, 922 N.W.2d 71.
Mowry, 129 Wis. 2d at 528-29.
Southeast Wisconsin Prof'l Baseball Park Dist. v. Mitsubishi Heavy Indus. Am., Inc., 2007 WI App 185, ¶ 42, 304 Wis. 2d 637, 738 N.W.2d 87.
Steadfast, 385 Wis. 2d 213, ¶ 29 (citing Newhouse, 176 Wis. 2d at 837).
Newhouse, 176 Wis. 2d at 838.
Mowry, 129 Wis. 2d at 528.
Elliot, 169 Wis. 2d at 318.
Reid, 245 Wis. 2d 658, ¶ 2 (citing Elliot, 169 Wis. 2d at 323).
See id. ¶ 34.
Kenefick v. Hitchcock, 187 Wis. 2d 218, 233 n.6, 522 N.W.2d 261 (Ct. App. 1994) (overruled on other grounds by Marks v. Houston Cas. Co., 2016 WI 53, ¶ 75, 369 Wis. 2d 547, 881 N.W.2d 309).
Id. at 234-35.
Id. at 236.
Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of California, Inc., 2016 WI 14, 367 Wis. 2d 221, 876 N.W.2d 72.
Id. ¶ 19.
Lakeside Foods, Inc. v. Liberty Mutual Fire Insurance Co., 2010 WI App 120, ¶ 43, 329 Wis. 2d 270, 789 N.W.2d 754 (unpublished opinion citable for persuasive value pursuant to Wis. Stat. § 809.23(3)).
American Design & Build, Inc. v. Houston Casualty Co., No. 11-C-293, 2012 U.S. Dist. LEXIS 28268, at *29 (E.D. Wis. Mar. 5, 2012).
Id. at *15-16.
Id. at *25-26.
Id. at *27-29.
Id. at *29.
Haley v. Kolbe & Kolbe Millwork Co., No. 14-cv-99-bbc, 2015 U.S. Dist. LEXIS 148023, at *11-12 (W.D. Wis. Nov. 2, 2015) (reversed and remanded on other grounds by Haley v. Kolbe & Kolbe Millwork Co., 866 F.3d 824 (7th Cir. 2017)).
Id. at *7 (quoting Grube v. Daun, 173 Wis. 2d 30, 76, 496 N.W.2d (Ct. App. 1992)). The court noted the issue in Grube had “nothing to do with timing.” Id. Nevertheless, the court accepted the insured’s argument from Grube as an accurate statement of the law, finding the insurer had complied with what was required under Grube. Id. at *7-8.
Id. at *6-8.
Carney v. Village of Darien, 60 F.3d 1273 (7th Cir. 1995).
Id. at 1277.
Lakeside, 329 Wis. 2d 270, ¶ 16.
Id. ¶¶ 37-38 (finding the amount owed depended on whether a rate agreement had been reached and whether the fees requested were reasonable).
Id. ¶ 50.
DeMarco v. Keefe Real Estate, Inc., 2014 WI App 16, ¶ 25, 352 Wis. 2d 573, 842 N.W.2d 536 (citing Grube, 173 Wis. 2d 30 at 75-76) (unpublished opinion citable for persuasive value pursuant to Wis. Stat. § 809.23(3)).
Id. at ¶¶ 27-28.
Sauk County v. Employers Insurance, 202 Wis. 2d 433, 445-46, 55 N.W.2d 439 (Ct. App. 1996).
Id. at 435-36.
Id. at 437.
Id. at 444.
Id. at 444-45.
Id. at 446.
Choinsky v. Germantown School District , 2019 WI App 12, 386 Wis. 2d 285. The insured filed a petition for review with the Wisconsin Supreme Court on March 22, 2019.
Id. ¶ 6.
Id. ¶¶ 6-7.
Id. ¶ 7.
Id. ¶¶ 7, 17, 19.
Id. ¶ 26.
Id. ¶ 17.
Id. ¶ 29.
Id. ¶ 30.
Id. ¶ 32.
Id. ¶¶ 33-35.
Id. ¶¶ 32-36.