The Wisconsin Court of Appeals Reverses $68 Million Judgment in an Environmental Insurance Coverage Case

WDC Journal Edition: Summer 2019
By: Heidi Vogt, von Briesen & Roper, S.C.; Jason Fathallah, von Briesen & Roper, S.C.; and David Frank, von Briesen & Roper, S.C.

In Johnson Controls, Inc. v. Central National Insurance Company of Omaha, the Wisconsin Court of Appeals held that Central National Insurance Company of Omaha and Westchester Fire Insurance Company (collectively “Central National”) owed no duty to defend Johnson Controls, Inc. (“Johnson Controls”) against environmental contamination claims, reversing a $68 million judgment against Central National in a case that was 30 years old.

I. Background

In the mid-1980s, Johnson Controls was identified as a potentially responsible party (“PRP”) at numerous environmental contamination sites across the country. The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”) potentially required Johnson Controls to contribute to the environmental investigation and remediation. Johnson Controls notified its various primary, umbrella, and excess insurers, seeking defense and indemnity under liability policies issued between 1954 and 1985. The insurers did not defend or indemnify Johnson Controls, contending their policies did not cover CERCLA costs.

Johnson Controls filed suit against all of its insurers in 1989, seeking defense and indemnification for fees and costs incurred in connection with the contamination sites. Before the circuit court determined the insurers’ obligations, the Wisconsin Supreme Court decided City of Edgerton v. General Casualty Co. of Wisconsin. There, the Wisconsin Supreme Court held that a standard commercial general liability policy did not provide indemnification coverage for costs associated with the cleanup of an environmentally contaminated site when the remediation was conducted pursuant to a request or directive under CERCLA, or its state counterparts. The Edgerton court also held that a PRP letter did not constitute a “suit” triggering an insurer’s duty to defend. On this basis, the circuit court and court of appeals both ultimately ruled that the insurers did not have a duty to defend or indemnify Johnson Controls. But in 2003, the Wisconsin Supreme Court overruled Edgerton in Johnson Controls, Inc. v. Employers Ins. of Wausau (“JCI III”), holding that an insured’s costs for restoring and remediating environmentally contaminated property are covered damages. The JCI III court also concluded that the receipt of PRP letters triggered the insurer’s duty to defend, provided there is coverage under the policy.

After JCI III, Johnson Controls systematically began to target its insurers to recover significant settlements. Johnson Control’s litigation strategy was no secret. Its key tactic – summarized by the court of appeals in Johnson Controls, Inc. v. London Market (“JCI IV”) – was to avoid proceeding against all of its insurers at once to recover its claimed remediation and defense costs. Johnson Controls instead went after each insurer separately (or in small groups) successively, starting from the bottom layer of coverage, demanding all of the remediation costs it allegedly incurred at all of the contaminated sites. Then it would move (or threaten to move) for summary judgment against an insurer or insurers, demanding its full claimed costs, then would inevitably settle for some percentage of the demand, while structuring the settlement terms vaguely so as to avoid expressly allocating the payment to particular sites or costs. Johnson Controls would then repeat the process with the next insurer higher up on the coverage chart, again seeking its full claimed costs with no reduction for its prior recoveries, obtaining some percentage of the full amount with vague non-allocation language, and then repeat the cycle again.

This strategy began in 2005 when Johnson Controls filed a motion for declaratory judgment against a primary insurer, Employers Insurance of Wausau (“Employers”). Johnson Controls claimed that Employers breached the duty to defend and sought reimbursement for remediation and defense costs in excess of $150 million. Johnson Controls soon settled with Wausau and then moved on to each of its remaining insurers – one by one – seeking the same unreduced amount in defense and remediation costs.

Anticipating that it was next, an excess insurer, London Market, moved for partial summary judgment arguing that its policy was an indemnity-only excess umbrella policy that contained no duty to defend, and that even if there was a duty to defend, the duty did not ripen unless and until the underlying policies were exhausted. In JCI IV, the supreme court held that London Market had a duty to defend, which did not depend on the exhaustion of the underlying policies, based on an “other insurance” provision that triggered a duty to defend when an underlying insurer denied liability. Although London Market lost JCI IV, as discussed further below, JCI IV’s rulings were the foundation of Central National’s defense.

In 2012, all the remaining parties filed cross-motions for summary judgment. The circuit court granted summary judgment in favor of Johnson Controls, reasoning that the duty to defend exists when coverage is arguable.

The circuit court then appointed a special master as to the issue of damages. Even though all of the remaining insurers besides Central National had settled, Johnson Controls argued that Central National was responsible for the full amount of its damages as the “automatic consequence” of a breach of the duty to defend. The special master rejected Johnson Controls’ argument and instead recommended an equal share apportionment of damages. The circuit court declined to adopt the special master’s recommendations and awarded Johnson Controls the full amount of its claimed damages, plus post-judgment interest at 4.25%. The circuit court reasoned that insurers who breach the duty to defend could be rewarded for engaging in a game of “litigation chicken” if the “automatic consequences” that follow from a wrongful refusal to defend were merely an equal share portion of the damages. The court found that the special master’s equal share approach to damages was contrary to the “well-established case law” requiring harsh consequences for breaching insurers.

Central National appealed, arguing that its policies included a contingent and limited defense provision that applied only when occurrences covered by its policies were not covered by underlying insurance. Because the scope of coverage for environmental liability between the primary and excess policies was identical, there was no duty to defend. Johnson Controls cross-appealed as to damages, challenging the circuit court’s denial of additional attorney fees and prejudgment interest. It also contended that it was entitled to 12% postjudgment interest.

II. The Court of Appeals Decision

The court of appeals began its analysis with a discussion of insurance policy interpretation and the duty to defend. The court recognized that the duty to defend is separate from the duty to indemnify. The general rule for primary insurers is to provide a defense along with indemnification. True excess coverage comes into play only after liability reaches a certain excess monetary level. “An excess policy generally does not provide a defense from the outset of any suit against the insured; rather, true excess coverage attaches when an insured has several policies that cover the same loss but only one policy is written with the expectation that the primary insurer will conduct all investigations, negotiations, and defense of claims until its limits are exhausted.” However, as the court emphasized – general practices do not dictate the result in particular cases. Excess insurers and insureds are free to contract around general rules, and some excess policies will contain a duty to defend under various circumstances even when primary coverage is not exhausted. Ultimately, the duty to defend depends on the language of the applicable policy and the court will not rewrite policies by filling in gaps; instead, courts will look to the policy language itself.

Moreover, the Wisconsin Supreme Court’s decision in JCI IV (which the court of appeals relied upon in this case) made clear that the analysis always must be “driven by the specific policy language at issue in th[e] case.” In other words, a “true excess insurer’s defense obligations are contingent upon the excess policy’s terms and conditions.”

The “specific policy language” construed in JCI IV provides one example of language creating an excess carrier’s duty to defend even absent primary exhaustion. That policy followed form to a Travelers policy providing that “if the insurer affording other insurance to the named insured denies primary liability under its policy, [Travelers] will respond under this policy as though such other insurance were not available.” According to JCI IV, that language means that when the excess policy otherwise establishes “a contractual duty to defend,” the excess insurer will defend not only when primary insurance is exhausted, but also when “the primary insurer refuses to do so.”

In Hocker v. New Hampshire Ins. Co. (a Tenth Circuit Court of Appeals case cited in JCI IV), an excess policy provision established a duty to defend for risks “not covered, as warranted” by the primary policy. As the Hocker court explained, the “as warranted” modification creates a duty to provide a defense, even absent exhaustion, when the primary insurer simply fails to defend: the “inclusion of the term ‘as warranted’ modifies ‘not covered’ and changes [the excess insurer’s] obligation; the excess carrier agrees to drop down when the terms of the underlying policy warrant that coverage is provided for the occurrence, but the primary insurer nevertheless wrongfully denies coverage.”

The Wisconsin Supreme Court was explicit in JCI IV, however, that it was declining to adopt a “general rule” requiring an excess insurer to provide a defense whenever underlying insurers fail to defend. Instead, the court repeatedly emphasized that its analysis was based on the specific language of the London Market policy, and that a “different result is contingent upon different policy language.” In Burgraff v. Menard, Inc., the supreme court reiterated that an insurer’s duty to defend depends on the text of its policy, and that “[a]ny alteration in an insurer’s duty to defend must be explicitly stated in the policy.”

With these principles in mind, the court of appeals recognized that Johnson Controls had conceded that Central National agreed to provide a defense only for occurrences covered under its policy, but not covered under the underlying policies; and (2) it was undisputed that the scope of coverage for the environmental claims brought by Johnson Controls was the same in the primary policies as in the excess policies. In light of these acknowledgments, the court determined that if an occurrence was covered under the underlying policies, then Central National had no duty to defend since its policies provided a defense only when an occurrence was not covered under the underlying policies. And if the occurrences were not covered under the underlying policies, then there was no coverage under the excess policies because the scope of coverage was the same.

Relying on Johnson Controls IV, the court emphasized that the duty to defend analysis is driven by policy language as opposed to generalized concepts about the role of excess insurance and the duties of excess insurers. The court of appeals found that the circuit court incorrectly focused on general concepts instead of the policy language, leading it to conclude that since “coverage under the facts of the claim was fairly debatable, the court could find that there was a duty to defend[.]” However, the court of appeals refused to ignore the specific policy language. The claims against Johnson Controls could not trigger Central National’s duty to defend because it was undisputed that the excess insurance and the underlying insurance provided the same scope of coverage for the environmental claims. As the court explained:

Therefore, under the policy language it was logically impossible for an occurrence to be “covered” under the Central National excess policies but “not covered” under the [underlying] policies – as would be required to trigger Central National’s duty to defend. Because the excess policies’ coverage for environmental claims was identical to the underlying policies’ coverage, the claims against Johnson Controls presented only two options: either the occurrences were covered by all policies – or there was no coverage under any of the policies, also resulting in no duty to defend for Central National.

Further, the court reasoned that in light of Johnson Control’s concession regarding the duty to defend, “no reasonable insured would expect the Central National policy language to establish a duty upon Central National to drop down and provide a defense in the event the primary insurer refused to do so where it is undisputed the primary and excess policies provided identical coverage for the claimed loss.” Accordingly, the court of appeals concluded that Central National owed no duty to defend Johnson Controls. Since the court determined that there was no duty to defend, it did not reach the damages issues. Johnson Control’s cross-appeal was dismissed as moot.

III. Conclusion

The Wisconsin Court of Appeals was unwilling to rely on generalized concepts regarding the duty to defend and instead based its decision on the particular excess policy language. In this case, the policy language required Central National to provide a defense only for occurrences covered under the policy, but not covered under the underlying policies – an impossibility in this instance because the scope of coverage for environmental claims was the same.

Author Biographies:

Heidi Vogt is a Shareholder and Co-Chair of the Litigation and Risk Management Practice Group at von Briesen & Roper, S.C. She has substantial and broad experience in litigation matters with a particular focus on insurance coverage disputes, commercial disputes and complex litigation. Heidi serves as the Chair of the Insurance Coverage and Risk Management Section. She has represented insurance companies in Wisconsin and across the country in both state and federal courts in complex insurance coverage matters for more than 25 years. She represents and counsels insurance clients on a wide variety of topics including general liability, environmental, asbestos, toxic tort, products, construction defect, mold, bad faith, mass tort, trucking, intellectual property, firearms litigation, employer liability, first party property, and professional liability. She is frequently retained to negotiate and draft allocation agreements among insurers and develop creative solutions to various insurance coverage issues. Heidi lectures on a wide variety of topics including environmental insurance coverage, environmental issues, bad faith litigation, motor carrier issues, and advertising injury liability/personal injury liability coverage. Heidi is a Fellow of the Litigation Counsel of America. She is recognized by The Best Lawyers in America® as “Lawyer of the Year” for Litigation - Insurance in Milwaukee (2017). She is listed in The Best Lawyers in America® for Litigation-Insurance and Insurance Law (2016-2019). She is also recognized as a Wisconsin Super Lawyer® (2005-2006, 2008-2018). As a Wisconsin Super Lawyer® she is recognized as one of the “Top 25 Women in Wisconsin” (2016-2018), as one of the “Top 25 Attorneys in Milwaukee” (2018) and as one of the “Top 50 Attorneys in Wisconsin” (2018). Heidi is AV Preeminent® Peer Review Rated by Martindale-Hubbell®. Heidi is a member of the Federation of Defense & Corporate Counsel, the Wisconsin Defense Counsel, the Defense Research Institute, the American and Milwaukee Bar Associations, and the State Bar of Wisconsin.

Jason Fathallah is a Shareholder in the firm’s Litigation and Risk Management Practice Group and Co-Chair of the Insurance Coverage and Risk Management Section at von Briesen & Roper, S.C. Jason specializes in identifying creative dispute resolution outcomes that avoid litigation, minimize business interruption, and reduce costs. When litigation cannot be avoided, Jason draws on his substantial experience winning complex matters involving commercial and business disputes, insurance coverage, shareholder oppression, fraud, and IT disputes, among others. Jason is licensed to practice in Wisconsin and Michigan, and he routinely handles cases and appeals across the country. He obtains results that reflect a high degree of skill and tireless commitment to win. Recent results include:

  • Reversed a $68 million judgment in a breach of contract dispute with instructions to have judgment entered on behalf of clients with costs
  • Obtained dismissal of multiple breach of insurance contract and bad faith actions filed in Indiana state and federal courts; Jason argued before the United States Court of Appeals for the Seventh Circuit where he prevailed in a unanimous decision
  • Obtained complete defense verdict under New York law in dispute related to software development
  • After conducting investigation and filing suit, leveraged a highly favorable settlement related to theft of software code, including liquidated damages
  • Won summary judgment in breach of contract dispute in the U.S. District Court for the Northern District of Illinois that included significant damages, attorney fees and costs
  • Won summary judgment in multi-million dollar dispute between primary and excess insurance carriers in the U.S. District Court for the Northern District of Georgia
  • Represented a member of joint venture in multiple disputes against another member and ultimately leveraged a highly favorable buyout
  • Jason frequently presents at corporate in-house CLE events. He generally presents on matters related to commercial litigation, insurance coverage and ethics. Jason is co-authoring the Wisconsin chapter of the DRI’s compendium on rescission of insurance contracts.
  • Jason is involved in the greater Milwaukee community and currently serves on the Milwaukee Zoological Society’s Associate Board. Jason actively litigates pro bono matters in federal court on behalf of pro se litigants. He is also an active member of the Seventh Circuit Bar Association. Jason is recognized as a Rising StarSM by Wisconsin Super Lawyers®.

    David Frank is a member of the Litigation and Risk Management Practice Group and the Insurance Coverage and Risk Management Section at von Briesen & Roper, S.C. He focuses his practice on insurance coverage disputes and litigation. He has experience in aviation and aerospace litigation and served as a Naval Flight Officer in the United States Navy for more than eight years. He also served as a law clerk to The Honorable William W. Brash III and The Honorable Karen E. Christenson of the Milwaukee County Circuit Court. Dave is a member of the State Bar of Wisconsin, the Eastern District of Wisconsin Bar Association, the Milwaukee Bar Association, Wisconsin Defense Counsel and Defense Research Institute.

    Johnson Controls, Inc. v. Central Nat’l Ins. Co. of Omaha ,2018 WI App 35, 382 Wis. 2d 269, 915 N.W.2d 729, review denied, 2018 WI 100, ¶ 1, 384 Wis. 2d 767, 920 N.W.2d 917, and review denied, 2018 WI 111, ¶ 1, 384 Wis. 2d 465, 922 N.W.2d 295.

    Id. ¶ 2.

    Id.

    Id.

    Id. ¶ 3.

    Id.

    City of Edgerton v. Gen. Cas. Co. of Wis., 184 Wis. 2d 750, 517 N.W.2d 463 (1994).

    Id. at 782-86.

    Id. at 771, 775.

    Johnson Controls, Inc., 382 Wis. 2d 269, ¶ 4; see Johnson Controls, Inc. v. Employers Ins. of Wausau, Nos. 1995-179, 1995-2591, unpublished slip op. at 4 (WI App Oct. 13, 1998) (“JCI I”); see also Johnson Controls, Inc. v. Employers Ins. of Wausau, 2002 WI 30, ¶ 5, 250 Wis. 2d 319, 640 N.W.2d 205 (2001) (“JCI II”).

    Johnson Controls, Inc. v. Employers Ins. of Wausau, 2003 WI 108, 264 Wis. 2d 60, 665 N.W.2d 257.

    Id. ¶¶ 5, 92.

    Johnson Controls, Inc., 382 Wis. 2d 269, ¶ 6.

    Id.

    Id.; see Johnson Controls, Inc. v. London Mkt., 2010 WI 52, ¶¶ 87-88, 325 Wis. 2d 176, 784 N.W.2d 579.

    Johnson Controls, Inc., 382 Wis. 2d 269, ¶ 7.

    Id.

    Id. ¶ 8.

    Id. ¶¶ 9-11 (The special master noted that under an equal share approach, Johnson Controls’ damages would be divided by 23 (number of insurers) and judgment would be entered against Central National individually in the amount of $3,916,500 or $5,931,002, depending upon the court’s decision on prejudgment interest.).

    Id. ¶ 12.

    Id.

    Id.

    Id. ¶ 13.

    Id.

    Id.

    Id.

    Id.

    Id.

    Id.

    Id.

    Id. ¶ 16.

    Id.

    Id.

    JCI IV, 325 Wis. 2d 176, ¶ 86 n. 20.

    14 Couch on Insurance 3d § 200:43.

    JCI IV, 325 Wis. 2d 176, ¶ 62.

    Id.

    Id. ¶¶ 84-85 (emphasis added) (discussing Hocker v. N.H. Ins. Co., 922 F.2d 1476 (10th Cir. 1991)).

    Hocker, 922 F.2d at 1482 & n. 5 (“as warranted” modification “explicitly addresses the possibility that the primary insurer will wrongfully deny coverage for occurrences that it had warranted would be covered by its primary policy,” in which case “[t]he excess carrier must then drop down and provide a defense”).

    Johnson Controls, Inc., 382 Wis. 2d 269, ¶ 86.

    Id. ¶ 86 & n. 20.

    Burgraff v. Menard, Inc., 2016 WI 11, ¶ 52, 367 Wis. 2d 50, 875 N.W.2d 596.

    Johnson Controls, Inc., 382 Wis. 2d 269, ¶ 18.

    Id. ¶ 19.

    Id. ¶ 20.

    Id.

    Id. ¶ 23.

    Id.

    Id. ¶ 26.

    Id. ¶ 39.

    Id.