Roger Choinsky v. Germantown School District Board of Education ( 2020 )

2020 WI 13
SUPREME COURT OF WISCONSIN
CASE NO.: 2018AP116
COMPLETE TITLE: Roger Choinsky, Gary Finn, William Gay, David
Kliss, Carol
Rudebeck and Janice Weinhold,
Plaintiffs,
v.
Employers Insurance Company of Wausau and Wausau
Business
Insurance Company,
Intervenors-Respondents,
Germantown School District Board of Education
and
Germantown School District,
Defendants-Appellants-Petitioners.
REVIEW OF DECISION OF THE COURT OF APPEALS
Reported at 2019 WI App 12, 386 Wis. 2d 285,926
N.W.2d 196 - Published
OPINION FILED: February 13, 2020
SUBMITTED ON BRIEFS:
ORAL ARGUMENT: October 28, 2019
SOURCE OF APPEAL:
COURT: Circuit
COUNTY: Washington
JUDGE: Todd K. Martens
JUSTICES:
REBECCA GRASSL BRADLEY, J., delivered the majority opinion of
the Court, in which ROGGENSACK, C.J., ANN WALSH BRADLEY,
ZIEGLER, and DALLET, JJ., joined. KELLY, J., filed a dissenting
opinion.
NOT PARTICIPATING:
HAGEDORN, J., did not participate.
ATTORNEYS:
For the defendants-appellants-petitioners, there were briefs
filed by Kirk D. Strang, Jenna E. Rousseau and Strang, Patteson,
Renning, Lewis & Lacy, S.C., Madison and Green Bay. There was an
oral argument by Kirk D. Strang.
For the intervenors-respondents, there was a brief filed by
Thomas R. Schrimpf and Hinshaw & Culbertson LLP, Milwaukee, and
Todd G. Smith and Godfrey & Kahn, S.C., Madison. There was an oral
argument by Thomas R. Schrimpf.
For amicus Wisconsin Insurance Alliance, a brief was filed by
Robert I. Fassbender and Great Lakes Legal Foundation, Madison.
2
2020 WI 13
NOTICE
This opinion is subject to further
editing and modification. The final
version will appear in the bound
volume of the official reports.
No. 2018AP116
(L.C. No. 2013CV527)
STATE OF WISCONSIN : IN SUPREME COURT
Roger Choinsky, Gary Finn, William Gay, David
Kliss, Carol
Rudebeck and Janice Weinhold,
Plaintiffs,
v.
Employers Insurance Company of Wausau and
FILED
Wausau Business
FEB 13, 2020
Insurance Company,
Sheila T. Reiff
Clerk of Supreme Court
Intervenors-Respondents,
Germantown School District Board of Education
and
Germantown School District,
Defendants-Appellants-Petitioners.
REBECCA GRASSL BRADLEY, J., delivered the majority opinion of the
Court, in which ROGGENSACK, C.J., ANN WALSH BRADLEY, ZIEGLER, and
DALLET, JJ., joined. KELLY, J., filed a dissenting opinion.
HAGEDORN, J., did not participate.
REVIEW of a decision of the Court of Appeals. Affirmed.
No. 2013CV52718AP116
¶1 REBECCA GRASSL BRADLEY, J. The Germantown School
District Board of Education and Germantown School District
(collectively, the "School District") seek review of a court of
appeals decision1 affirming the circuit court's order and
judgment,2 which denied the School District's motion for attorney
fees. The School District argues that its insurers, Employers
Insurance Company of Wausau and Wausau Business Insurance Company
(collectively, the "Insurer"), breached the duty to defend the
School District in a lawsuit brought by retired employees;
therefore, the School District claims its Insurer should pay, as
a remedy for the breach, all the attorney fees incurred by the
School District.3
¶2 This case presents an insurance coverage duty-to-defend
issue of first impression: does an insurer breach its duty to
defend its insured when it denies a tendered claim and then follows
the judicially preferred procedure of filing a motion to intervene
1 Choinsky v. Germantown Sch. Dist. Bd. of Educ., 2019 WI App
12, 386 Wis. 2d 285, 926 N.W.2d 196.
2 The Honorable James G. Pouros of the Washington County
Circuit Court presided until January 2015 when the case was
reassigned to the Honorable Todd K. Martens.
Two of the dates in the circuit court's November 30, 2017
Order for Judgment and Judgment (Record item No. 590) are
incorrect. The year "2017" in the second and third lines should
be "2016." Both the coverage trial and the special verdict
resulting therefrom occurred in April 2016, not April 2017.
3 The final circuit court order and judgment from which the
School District appealed addressed only attorney fees with respect
to coverage, not disputed fees relating to the liability defense.
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No. 2013CV52718AP116
and stay the underlying lawsuit pending a coverage determination,
which is ultimately resolved in the insured's favor? Additionally,
we consider the insurer's obligations in order to avoid breaching
its duty to defend when the circuit court denies the motion to
stay.4
¶3 We conclude that when an insurer initially denies a
tendered claim but promptly proceeds with one of our judicially
preferred methods for determining coverage, it does not breach its
duty to defend. If a circuit court denies any part of an insurer's
motion to bifurcate the coverage issue from the underlying
liability lawsuit and stay the latter, causing an insured to
simultaneously defend the liability suit and litigate coverage
against the insurer, an insurer must defend its insured in the
liability lawsuit, retroactive to the date of tender, under a
reservation of rights, until a court decides the coverage issue.
Because the School District's Insurer followed this procedure, the
Insurer did not breach its duty to defend and the Insurer is not
responsible for any of the attorney fees the School District paid
for the coverage dispute. See Newhouse v. Citizens Sec. Mut. Ins.
Co., 176 Wis. 2d 824, 832-39, 501 N.W.2d 1 (1993) (when an insurer
4 We use "coverage" to refer to the coverage issue and
"liability" to refer to the resolution of the underlying lawsuit
that triggered the insurance issue. This terminology is frequently
used in insurance cases, particularly when referring to
bifurcating the "coverage" determination from the "liability"
resolution. We note, however, that "liability" may also be
referred to as the "merits" issue. "Merits" refers to a
determination of the underlying lawsuit, i.e., resolving the
question of the insured's liability to the plaintiff.
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No. 2013CV52718AP116
follows a judicially preferred method, the insurer "runs no risk
of breaching its duty to defend"); see also Carney v. Village of
Darien, 60 F.3d 1273, 1277 (7th Cir. 1995) ("[A]n insurer who
properly follows the procedure recommended by the Wisconsin
Supreme Court of first seeking a determination on coverage prior
to the liability issue, has not breached its duty to defend.");
Reid v. Benz, 2001 WI 106, ¶¶26-28, 32-35, 245 Wis. 2d 658, 629
N.W.2d 262 (explaining an award of coverage attorney fees is
limited to cases in which insurer breaches duty to defend and
equity demands a fee-shifting).
¶4 In reaching this decision, we reject the School
District's claims that: (1) its Insurer's initial outright denial
of coverage followed by a delayed decision to defend under a
reservation of rights constituted a breach of its duty to defend;
(2) its Insurer's delay in paying liability fees and its failure
to reimburse the School District for the entire amount it paid to
its liability lawyer constitutes a breach of its duty to defend;
and (3) the circuit court's assessment of whether the Insurer
breached its duty to defend is subject to the four-corners rule.
¶5 We hold: (1) the Insurer's initial denial of coverage
did not breach its duty to defend because the Insurer promptly
followed a judicially-approved method to resolve the coverage
dispute; further, it defended the School District upon denial of
the stay motion, agreeing to reimburse the School District for
liability attorney fees retroactive to the date of the tender; (2)
a delay in payment of liability attorney fees alone does not mean
4
No. 2013CV52718AP116
an insurer breached its duty to defend and an insurer is obligated
to pay only reasonable attorney fees; and (3) the four-corners
rule applies in determining whether a duty to defend exists but
does not preclude a court's consideration of whether the insurer
unilaterally denied coverage or whether it chose a judicially
preferred method of resolving a coverage dispute, in assessing
whether an insurer breached its duty to defend. We affirm the
decision of the court of appeals.
I. BACKGROUND
¶6 In July 2013, six retired Germantown School District
employees, as representatives in a class action, filed suit against
the School District alleging four causes of action: (1) breach of
contract, (2) breach of implied contract, (3) breach of the duty
of good faith and fair dealing, and (4) promissory estoppel. The
lawsuit arose from the School District's 2012 decision to
discontinue group long-term care ("LTC") insurance for its current
employees. This decision caused the retired employees to lose
their LTC insurance benefit. The retirees' Complaint repeatedly
describes the School District's decision as a "unilateral action"
to terminate the insurance benefit, and alleges that "Defendants'
act of discontinuing LTC benefits for active employees caused
termination" of LTC insurance benefits for retirees. The Complaint
further asserts the School District "by their unilateral acts
terminated the group LTC policy for Plaintiffs in intentional and
willful disregard of Plaintiffs' rights." In the Complaint's
general allegations of fact, the retirees alleged that the School
5
No. 2013CV52718AP116
District "knew or should have known" that eliminating the LTC
insurance for current employees would cause the retirees to lose
LTC coverage.
¶7 After being served with the lawsuit, the School District
tendered the defense of the suit to its Insurer. About a week
later, the Insurer sent a letter to the School District denying
the tender, explaining that the policies covered the School
District for negligent acts, not deliberate acts, and because the
Insurer determined the lawsuit did not allege negligence, there
was no coverage under the insurance policies. The letter asked
the School District to advise whether it agreed with this coverage
determination and whether the School District would agree to
withdraw its tender. If the School District disagreed, or if the
Insurer did not hear anything by August 20, 2013, the letter
explained that the Insurer would file a motion in circuit court to
obtain a coverage determination.
¶8 On August 29, 2013, after the School District notified
the Insurer that it would not withdraw the tender, the Insurer
filed a motion asking the circuit court to allow the Insurer to
intervene in the lawsuit, and requested that the circuit court
bifurcate the liability and coverage issues and stay the liability
lawsuit until coverage could be resolved. About three weeks after
the motion was filed, the circuit court held a hearing on the
motion, but it did not render a decision until three months later.
On December 12, 2013, the circuit court granted the Insurer's
6
No. 2013CV52718AP116
motion to intervene and bifurcate, but it denied the motion to
stay the liability proceedings.5
¶9 One week after the decision, the Insurer filed its own
Complaint for declaratory judgment asking the circuit court for a
declaration that the Insurer had no duty to defend or indemnify
the School District. On December 30, 2013, the Insurer filed a
motion for summary judgment asking the circuit court to rule it
had no duty to defend or indemnify. In this motion, the Insurer
notified the circuit court that because the stay motion was denied,
the Insurer decided to provide a full defense for its insured until
coverage could be resolved. Two weeks after that filing, the
Insurer sent a letter directly to the School District saying it
would provide a full defense under a reservation of rights. The
Insurer agreed to pay the fees the Insured incurred in defending
the liability lawsuit, retroactive to the date of the tender.
¶10 The January 2014 letter advised that the School District
could continue to use the attorney it had hired as long as the
attorney and the Insurer could agree on "hourly rates." The
Insurer started paying the School District's attorney directly in
5 The circuit court denied the stay based on "the unique
factual background of this particular case (as compared to other
reported insurance coverage cases)" because it involved
elimination of the retired employees LTC benefits, which, if
needed, could have caused "personal financial devastation." As it
turned out, the coverage trial preceded the liability trial by
over a year even though the circuit court denied the requested
stay. The coverage trial resulted in a finding in favor of
coverage and the liability trial resulted in no liability.
7
No. 2013CV52718AP116
May 2014 and reached an agreement on previously paid attorney fees
by June 2014.
¶11 In July 2014, the circuit court denied the Insurer's
motion for summary judgment because the facts required further
development. In October 2014, the Insurer filed a second motion
for summary judgment seeking a declaration that it did not owe a
duty to defend or indemnify. In June 2015, the circuit court
denied the Insurer's second motion for summary judgment. The
circuit court explained it could not decide as a matter of law
whether the individuals who made the decision to terminate LTC
insurance for current employees acted negligently or intentionally
with respect to the impact that decision would have on retired
employees. As a result, this issue was presented to a jury at the
coverage trial in April 2016. The jury found that the School
District decisionmakers acted negligently; based on that finding,
the circuit court concluded the Insurer had a duty to defend based
on the Complaint's allegation that the School District "should
have known" the adverse effect its decision to eliminate LTC
insurance for current employees would have on its retired
employees. The School District's motion after verdict asked for
an award of attorney fees, but the circuit court delayed deciding
the attorney fees issue to afford the parties the opportunity to
resolve it on their own. The Insurer attempted to appeal the
coverage decision, but the appeal was dismissed by the court of
appeals because the circuit court had not yet decided whether the
Insurer owed the School District additional attorney fees.
8
No. 2013CV52718AP116
¶12 The case proceeded to trial on liability in June 2017
and the jury returned a verdict in favor of the School District.
The parties then resurrected the unresolved attorney fees issue
and the circuit court issued a written decision on November 3,
2017. In that order, the circuit court explained that because the
Insurer followed a judicially preferred approach to the coverage
dispute, it did not breach its duty to defend; therefore, the
School District was not entitled to recover any attorney fees it
expended in establishing coverage. The November 3rd order does
not address any unpaid attorney fees related to liability. The
School District did not seek clarification of the circuit court's
order, nor did it object to the proposed Order for Judgment and
Judgment the Insurer's attorney submitted to the circuit court.
On November 30, 2017, the circuit court entered its Order for
Judgment and Judgment, attaching its November 3, 2017 written order
on attorney fees. The School District appealed from the November
30th and November 3rd circuit court orders, and the court of
appeals affirmed the circuit court. The School District then
petitioned this court for review and we granted the petition.
II. STANDARD OF REVIEW
¶13 This case requires the court to interpret an insurance
contract to determine whether the Insurer breached its duty to
defend; this presents a question of law reviewed de novo. Water
Well Sols. Serv. Grp., Inc. v. Consolidated Ins. Co., 2016 WI 54,
¶12, 369 Wis. 2d 607, 881 N.W.2d 285 (citations omitted). Whether
an Insurer should pay for its insured's attorney fees relating to
9
No. 2013CV52718AP116
establishing coverage is also reviewed independently. Reid, 245
Wis. 2d 658, ¶12.
III. ANALYSIS
A. Insurance Law
¶14 This court has provided much guidance on an insurer's
duty to defend and how an insurer can avoid breaching that duty.
See, e.g., Water Well, 369 Wis. 2d 607, ¶¶15-17; Olson v. Farrar,
2012 WI 3, ¶29, 338 Wis. 2d 215, 809 N.W.2d 1; Newhouse, 176
Wis. 2d at 832-39; Elliott v. Donahue, 169 Wis. 2d 310, 317-21,
485 N.W.2d 403 (1992). It is the breach of the duty to defend and
not the existence of the duty itself that triggers equitable fee-
shifting in insurance cases. See Reid, 245 Wis. 2d 658, ¶37
(explaining that coverage attorney fees were awarded in Elliott as
a "matter of equity"); see generally Elliott, 169 Wis. 2d 310.6
In Elliott, we held that an insured was entitled to recover from
its insurer any attorney fees the insured incurred to establish
coverage if the insurer breached its duty to defend. Elliott, 169
Wis. 2d at 314, 318, 322. Elliott recognized that the attorney
fees awarded must be "reasonable" and remanded the matter to the
circuit court "for a determination of the reasonable attorney fees
incurred." Id. at 325; see also Newhouse, 176 Wis. 2d at 837-38
6 In Elliott v. Donahue, we held the insurer's initial denial
was not a breach of its duty to defend. 169 Wis. 2d 310, 318, 485
N.W.2d 403 (1992). The insurer's breach of its duty to its insured
was the insurer's failure to move for bifurcation and a stay so
that coverage could be decided before the insured incurred attorney
fees at the liability trial. Id.
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No. 2013CV52718AP116
(explaining that a breach of the duty to defend results in damages
naturally flowing from that breach).
¶15 Since our decision in Elliott, this court established
several judicially preferred procedures for an insurer to follow
in order to avoid breaching its duty to defend, which will avert
exposure to an Elliott/Newhouse fees award against it. These
judicially preferred methods are designed to strike a fair balance
between the respective interests of insurers and insureds.
Insureds who pay for insurance policies should receive a defense
paid by its insurer whenever facing a lawsuit that "appear[s] to
give rise to coverage" under the policy. Olson, 338 Wis. 2d 215,
¶30. On the other hand, if a complaint does not allege a claim
covered under the policy, the insurer should not be obligated to
defend its insured. Water Well, 369 Wis. 2d 607, ¶¶32-40. If "a
claim is 'fairly debatable,' the insurer is entitled to debate
it[.]" Anderson v. Continental Ins. Co., 85 Wis. 2d 675, 691, 271
N.W.2d 368 (1978).
¶16 The duty to defend arises when an insurer is served with
a complaint that "alleges facts that, if proven, would constitute
a covered claim" or when an insured who is served with a complaint
alleging a covered claim tenders the defense to its insurer. See
Estate of Sustache v. Am. Family Mut. Ins. Co., 2008 WI 87, ¶27,
11
No. 2013CV52718AP116
311 Wis. 2d 548, 751 N.W.2d 845 (quoted sources omitted).7 The
"four corners" rule is used to determine whether the complaint
alleges a covered claim, by comparing the words in the complaint
to the language of the entire insurance policy. See Water Well,
369 Wis. 2d 607, ¶15. The allegations of the complaint "must state
or claim a cause of action for the liability insured against or
for which indemnity is paid in order for the suit to come within
any defense coverage of the policy[.]" Grieb v. Citizens Cas.
Co., 33 Wis. 2d 552, 557-58, 148 N.W.2d 103 (1967). If a complaint
alleges a covered claim, an insurer must provide a defense to its
insured or follow one of the judicially preferred methods to
resolve any dispute over coverage. Water Well, 369 Wis. 2d 607,
¶27; Sustache, 311 Wis. 2d 548, ¶¶25-26. An insurer is obligated
to defend "only if it could be held bound to indemnify the
7 Wisconsin cases have been rather imprecise in pronouncing
the test that triggers coverage. Some express the test as whether
a complaint alleges an "arguably" covered claim, see, e.g.,
Fireman's Fund Ins. Co. v. Bradley Corp., 2003 WI 33, ¶20, 261
Wis. 2d 4, 660 N.W.2d 666 ("duty to defend is triggered by
arguable, as opposed to actual, coverage"), and others discuss
whether coverage under the allegations in the complaint is "fairly
debatable," see, e.g., Red Arrow Prod. Co., Inc. v. Employers Ins.
of Wausau, 2000 WI App 36, ¶¶16-19, 233 Wis. 2d 114, 607
N.W.2d 294. At least one Wisconsin insurance law treatise suggests
the "fairly debatable" language "should not apply when determining
whether a complaint triggers coverage." Rather, the "fairly
debatable" test relates solely to assessing bad faith, "or, in the
right circumstances, a breach-of-contract claim." Arnold P.
Anderson, Wisconsin Insurance Law § 7.30-7.33 (6th ed. 2013)
(noting this term first appeared in the "bad-faith case of Anderson
v. Continental Ins. Co., 85 Wis. 2d 675, 693, 271 N.W.2d 368
(1978), which concluded there was no bad faith in denying claim if
it was 'fairly debatable.'").
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No. 2013CV52718AP116
insured[.]" Nichols v. Am. Employers Ins. Co., 140 Wis. 2d 743,
747, 412 N.W.2d 547 (Ct. App. 1987) (quoting Grieb, 33 Wis. 2d at
558). All doubts about the duty to defend must be resolved in
favor of the insured. Fireman's Fund Ins. Co. v. Bradley Corp.,
2003 WI 33, ¶20, 261 Wis. 2d 4, 660 N.W.2d 666 (courts "resolve
any doubt regarding the duty to defend in favor of the insured");
Sustache, 311 Wis. 2d 548, ¶21; Liebovich v. Minnesota Ins. Co.,
2008 WI 75, ¶18, 310 Wis. 2d 751, 751 N.W.2d 764; Sola Basic
Indus., Inc. v. United States Fid. & Guar. Co., 90 Wis. 2d 641,
646-47, 280 N.W.2d 211 (1979). In contrast, if the complaint does
not allege a covered claim, the insurer has no obligations under
the policy. See generally Menasha Corp. v. Lumbermens Mut. Cas.
Co., 361 F. Supp. 2d 887, 891 (E.D. Wis. 2005). Insurers should
not have to defend an insured if a complaint does not allege any
claims covered under the insurance policy. See, e.g., Water Well,
369 Wis. 2d 607, ¶¶32-40 (holding insurer had no duty to defend
and did not breach its duty to defend by unilaterally refusing to
defend when the complaint contained no allegations covered by the
policy).
¶17 Of course, insurers and insureds do not always agree as
to whether a complaint alleges covered claims. For those
situations, we have articulated several judicially preferred
procedures to follow and have repeatedly held that when an insurer
follows one of those approaches, it is not at risk of breaching
its duty to defend. See, e.g., Newhouse, 176 Wis. 2d at 836 (when
an insurer follows a judicially preferred method, the insurer "runs
13
No. 2013CV52718AP116
no risk of breaching its duty to defend"); see also Carney, 60
F.3d at 1277 ("[A]n insurer who properly follows the procedure
recommended by the Wisconsin Supreme Court of first seeking a
determination on coverage prior to the liability issue, has not
breached its duty to defend."). Our cases identify four judicially
preferred procedures:
 Defend under a reservation of rights;
 Defend under a reservation of rights but seek a
declaratory judgment on coverage;
 Enter into a nonwaiver agreement under which the insurer
defends the insured but the insured acknowledges that
the insurer has the right to contest coverage;
 File a motion with the circuit court requesting a
bifurcated trial on coverage and liability and a stay of
the proceedings on liability until coverage is
determined.
Water Well, 369 Wis. 2d 607, ¶27.
¶18 Under the first three options, the insurer elects to
defend the insured under a reservation of rights and provide a
defense while the issue of coverage is resolved. Provided the
circuit court stays the liability proceedings, the fourth option
does not require the insurer to defend the insured pending
resolution of the coverage issue. Rather, a successful motion to
stay halts the liability case so that the insured does not incur
attorney fees litigating liability until a coverage determination
is made by the circuit court. With all four judicially preferred
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No. 2013CV52718AP116
methods, the goal is to protect the insured from having to
simultaneously pay to defend itself in a liability trial while
litigating coverage against its insurer.
¶19 This case presents a problem with the fourth option when
the circuit court denies the bifurcation or stay motion, resulting
in the insured defending itself for a period of time on both
liability and coverage. We remedy that problem by clarifying the
bifurcation/stay procedure: if a circuit court denies bifurcation
or a stay of the liability case, in order to protect itself from
being found in breach of its duty to defend, the insurer must
defend its insured under a reservation of rights so that the
insured does not have to pay to defend itself on liability and
coverage at the same time.8 Additionally, the insurer must
reimburse its insured for reasonable attorney fees expended on a
liability defense, retroactive to the date of tender.
¶20 Although we recognize this court has not previously been
presented with this particular factual scenario, the well-
established judicially preferred procedures nevertheless apply
because the controlling legal principle is not new. In Mowry v.
Badger State Mut. Cas. Co., we said:
An insurer may need to provide a defense to its insured
when the separate trial on coverage does not precede the
trial on liability and damages . . . . Thus, we have
noted that an insurer may be required to furnish a free
8 See Elliott, 169 Wis. 2d at 317-21; Mowry v. Badger State
Mut. Cas. Co., 129 Wis. 2d 496, 528-29, 385 N.W.2d 171 (1986);
Barber v. Nylund, 158 Wis. 2d 192, 197-98, 461 N.W.2d 809 (Ct.
App. 1990).
15
No. 2013CV52718AP116
defense to its insured prior to the determination of
coverage.
129 Wis. 2d 496, 528-29, 385 N.W.2d 171 (1986) (citation omitted).
Although the facts and procedural history in Mowry differ from
this case, Mowry alerted insurers to this additional precondition
to avoiding a breach of the duty to defend, which arises when the
circuit court denies a motion to bifurcate or stay. Of course,
just as the insurer can unilaterally deny coverage without
following any of the judicially preferred approaches, the insurer
can decline to provide this retroactive defense if the circuit
court denies the bifurcation or stay motion. However, an insurer
that does not follow a judicially preferred procedure, or maintains
its position when a stay motion is denied, runs the risk of
breaching its duty to defend if coverage is later established.
B. Application
¶21 We now turn to the specific circumstances of this case.
The School District makes three arguments. First, it argues its
Insurer breached its duty to defend because it initially
"unambiguously and complete[ly]" refused to provide a defense and
should not be allowed to avoid the consequences of its choice by
agreeing to defend six months later. Second, it argues its Insurer
breached its duty to defend because the Insurer did not start
paying for the defense for almost one year after the Insurer's
initial denial, and the Insurer did not fully reimburse the School
District for the attorney fees the School District incurred in
defending the liability suit before the Insurer stepped in. Third,
the School District says the four-corners rule prohibits the
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No. 2013CV52718AP116
circuit court from considering the Insurer's actions in attempting
to secure a coverage determination. The School District asks this
court to reverse the court of appeals decision, hold that the
Insurer is responsible for both unreimbursed liability attorney
fees and all attorney fees incurred to establish coverage, and
remand the case to the circuit court for a determination of the
amount of those fees.
1. Insurer's Initial Coverage Refusal and Delayed Defense
¶22 The School District argues the Insurer's initial
coverage denial constituted a breach of its duty to defend and the
Insurer's later decision to defend and pay attorney fees
retroactive to the date of tender cannot remedy the breach. We
conclude that the Insurer's actions did not constitute a breach of
its duty to defend because, even though the Insurer initially
denied coverage, it followed one of this court's preferred methods
to obtain a judicial determination on coverage before the liability
suit proceeded. See Newhouse, 176 Wis. 2d at 836 (when an insurer
follows a judicially preferred method, the insurer "runs no risk
of breaching its duty to defend"); see also Carney, 60 F.3d at
1277 ("[A]n insurer who properly follows the procedure recommended
by the Wisconsin Supreme Court of first seeking a determination on
coverage prior to the liability issue, has not breached its duty
to defend.").
¶23 The School District misconstrues Water Well, 369
Wis. 2d 607, to mean that an Insurer who initially denies coverage
is in breach even if it proceeds to follow one of the judicially
17
No. 2013CV52718AP116
preferred methods. Water Well does not say that. In Water Well,
the insurer unilaterally denied coverage during the pendency of
the underlying lawsuit. The insurer in Water Well did not follow
any of the judicially preferred methods because it determined the
complaint did not allege any covered claims. In that case, this
court contrasted the unilateral denial with the judicially
preferred methods only because the insurer never changed its
unilateral denial posture. The School District's case involves a
unilateral denial, shortly after which the Insurer followed one of
the judicially preferred methods. In order to avoid breaching the
insurance contract, an insurer who initially denies must timely
seek a judicial determination on coverage. See United States Fire
Ins. Co. v. Good Humor Corp., 173 Wis. 2d 804, 830-31, 496
N.W.2d 730 (Ct. App. 1993) (holding an Insurer's motion seeking
declaratory judgment on coverage was untimely because it was not
filed until after liability case had resolved). Water Well does
not support the School District's argument.
¶24 Moreover, an insurer has the "right and obligation to
make timely investigation" as "a condition precedent to [its]
contractual duties of defense and coverage." Gerrard Realty Corp.
v. American States Ins. Co., 89 Wis. 2d 130, 140, 277 N.W.2d 863
(1979). The law necessarily permits an insurer to investigate a
claim before accepting the defense: "Certainly, an insurer cannot
make a reasoned judgment as to its duty to defend or provide
coverage until [it has] had the opportunity to examine and review
the factual situation and the pleadings as they relate to the terms
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No. 2013CV52718AP116
of the[] policy of insurance." Id. at 142. An insurer cannot
breach its duty to defend based on its insured having incurred
defense costs during the investigation period if an insurer
reimburses the insured for defense costs retroactive to the date
of the claim. Lakeside Foods, Inc. v. Liberty Mut. Fire Ins. Co.,
No. 2009AP1428, unpublished slip op., ¶¶41-43 (Wis. Ct. App. July
21, 2010) (holding insurer did not breach its duty to defend
because the three-month delay was attributed to the insurer's
investigation of the matter); see generally Danner v. Auto-Owners
Ins., 2001 WI 90, ¶58, 245 Wis. 2d 49, 629 N.W.2d 159 (noting an
insurer "should not be found to have acted in bad faith for
thoroughly investigating a claim" because sometimes it is
difficult for the insurer to distinguish between legitimate and
fraudulent claims).
¶25 It is undisputed that the Insurer, when presented with
the School District's tender, responded by letter within a week,
explaining why the Insurer concluded that the Complaint did not
allege any covered claims. The Insurer explained that the
allegations in the Complaint assert "deliberate" acts not covered
by the insurance policies, which cover only negligent acts. In
the letter, the Insurer asked the School District to notify the
Insurer if it agreed with the Insurer's coverage analysis and
advised that if the School District did not agree, the Insurer
would seek a coverage determination in the circuit court.
¶26 Within a week of receiving the School District's written
notification that it would dispute the denial of coverage, the
19
No. 2013CV52718AP116
Insurer filed a motion asking to intervene in the liability
lawsuit, to bifurcate the liability and coverage issues, and to
stay the liability case so that coverage could be decided promptly.
These actions precisely followed one of the judicially preferred
approaches this court has said will protect an insurer from
breaching its duty to defend. Specifically, the Insurer moved "to
bifurcate and stay" the liability suit pending a coverage
determination. The Insurer cannot be faulted for doing exactly
what this court for years has instructed insurers to do.
¶27 The time gap between the filing of the Insurer's motion
and the circuit court's decision necessarily caused the School
District to incur attorney fees it would not have had to pay had
the circuit court granted the Insurer's motion to stay the
liability proceedings. The circuit court did not decide the motion
for three-and-a-half months, leaving the School District with
defense costs as litigation over liability continued. During that
time, the School District's attorney filed and argued a motion to
dismiss, which was denied. The School District paid an attorney
to defend it on the liability claim while also paying its attorney
to litigate the coverage issue. When the circuit court finally
decided the Insurer's motions on December 12, 2013, it allowed the
Insurer to intervene and granted the motion to bifurcate, but it
denied the motion to stay liability, resulting in the insured
20
No. 2013CV52718AP116
incurring additional attorney fees.9 The circuit court's decision
caused the School District to pay attorney fees for litigating
both coverage and liability, which the judicially preferred
procedures in coverage disputes are designed to prevent.
¶28 Within two weeks of the circuit court's decision denying
the stay of liability proceedings, the Insurer notified the circuit
court that it would pay for the defense of the School District.
Within one month of the circuit court's decision denying the motion
to stay, the Insurer notified the School District that it would
defend the School District under a reservation of rights.10 The
letter suggests prior communication between the School District
and the Insurer, as the Insurer acknowledges "its understanding"
that the School District wanted to retain the attorney the School
District had hired. The Insurer indicated doing so was "acceptable
to The Insurers provided an agreement can be reached on the hourly
rates to be charged by the firm." The Insurer also asked the
Between December 12, 2013 and January 14, 2014, the record
9
contains 29 items, including filings related to the School
District's request for a stay so that it could seek an
interlocutory appeal challenging the circuit court's denial of its
motion to dismiss. Some of the record items relate solely to the
coverage issue, including the Insurer's Complaint for Declaratory
Judgment and its motion seeking summary judgment on coverage.
The School District argues the Reservation of Rights letter
10
was infirm because the letter reserved the Insurer's right "to
seek reimbursement of defense costs paid in this action in whole
or in part to the extent permitted by applicable law." We decline
to address this argument because it involves actions that did not
occur. "Courts will not render merely advisory opinions." Tammi
v. Porsche Cars N. Am., Inc., 2009 WI 83, ¶3, 320 Wis. 2d 45, 768
N.W.2d 783 (quoted source omitted).
21
No. 2013CV52718AP116
School District to have the firm send its fee schedule to the
Insurer for approval.
¶29 The Insurer acted consistently with well-established
cases outlining an insurer's obligations in order to avoid
breaching its duty to defend. It followed a judicially preferred
approach and when the circuit court's rulings forced its Insured
to simultaneously defend itself on both liability and coverage,
the Insurer stepped in to defend the School District on liability
and agreed to pay for all reasonable liability attorney fees the
School District incurred retroactive to the date of tender. The
circuit court acknowledged that it, not the Insurer, was
responsible for the Insured having to simultaneously pay both
liability and coverage attorney fees. The Insurer cannot be deemed
in breach of its duty to its Insured given that it acted to prevent
its Insured from paying for both liability and coverage, but the
22
No. 2013CV52718AP116
circuit court's actions thwarted its attempt. The Insurer
satisfied its obligations under the insurance contract.11
¶30 The judicially preferred methods in coverage disputes
are designed to prevent this double pay scenario for insureds.
Promptly employing the "recommended bifurcation procedure of first
conducting a trial on the coverage issue" protects insureds against
concurrently paying for both a liability defense as well as
coverage attorney fees. Barber v. Nylund, 159 Wis. 2d 192, 197,
461 N.W.2d 809 (Ct. App. 1990). Indeed, staying liability after
granting bifurcation is generally the best practice. See Reid,
245 Wis. 2d 658, ¶27 (noting that after bifurcation, resolution of
the coverage issue is "a relatively simple matter" and encouraging
courts "to expedite resolution of the coverage issue"). Since at
least 1986, this court has been encouraging circuit courts to
11 Any damage to the insured as a result of the delay is
remedied by an insurer paying for reasonable liability attorney
fees retroactive to the date of tender, and any additional damages
arising from an insurer's unreasonable actions or reckless
disregard for its duties under the insurance contract can be
pursued in a bad faith suit. See Am. Design & Build, Inc. v.
Houston Cas. Co., No. 11-C-293, 2012 WL 719061, at *11 (E.D. Wis.
Mar. 5, 2012) (citing Lakeside Foods, Inc. v. Liberty Mut. Fire
Ins. Co., No. 2009AP1428, unpublished slip op., ¶¶31-32, 40-49
(Wis. Ct. App. July 21, 2010); Anderson v. Continental Ins. Co.,
85 Wis. 2d 675, 691, 271 N.W.2d 368 (1978) ("To show a claim for
bad faith, a plaintiff must show the absence of a reasonable basis
for denying benefits of the policy and the defendant's knowledge
or reckless disregard of the lack of a reasonable basis for denying
the claim."). The School District did not assert any bad faith
claims against the Insurer. Nor could it. The record confirms
the Insurer acted reasonably, in conformance with this court's
guidelines, and consistent with its contractual obligations.
23
No. 2013CV52718AP116
resolve the coverage issue expeditiously for the benefit of the
insured:
It would seem that, once an order to bifurcate has been
made, a trial on a coverage issue should be a relatively
simple matter. We, therefore, encourage a court which
has ordered bifurcation to expedite the coverage issue
by placing the trial on its calendar at an early date to
assist in avoiding a needlessly protracted claim against
the insured.
See Mowry, 129 Wis. 2d at 529 n.4 (emphasis added). We continue
to encourage circuit courts to decide bifurcation and stay motions
expeditiously and to grant the requested stay unless case-specific
factors weigh against it.
2. Attorney Fees Payment Issues
a. Delay in Paying for Defense
¶31 The School District also faults the Insurer for the delay
in reaching an agreement on attorney fees. The School District
argues this establishes a breach of the Insurer's duty to defend.
We disagree.
¶32 The record is woefully inadequate for a complete review
of this issue; consequently, the School District forfeited review.
Nickel v. United States (In re Rehab. of Segregated Account of
Ambac Assurance Corp.), 2012 WI 22, ¶10, 339 Wis. 2d 48, 810 N.W.2d
450 ("Our case law is clear and consistent: failure to [adequately]
preserve issues at the circuit court means that they are waived.").
It is unclear if the School District or its attorney engaged in
fee negotiations with the Insurer, or what those negotiations
entailed. Without any information regarding what negotiations
took place or when, it is impossible to determine whether or to
24
No. 2013CV52718AP116
what extent any delay is attributable to the Insurer, the School
District, its attorney, or other factors.
¶33 We do know that in January 2014, the Insurer asked the
School District to share its fee schedule so that negotiations
could occur. We also know the School District amended its cross-
claim in April 2014 to allege that its attorney "advised" the
Insurer of its fee schedule in January 2014, March 2014, and twice
in April 2014. The cross-claim alleged that the Insurer "failed
and refused to respond" to each advisement. However, the Insurer's
reply to the cross-claim denies this.
¶34 There is also an indication that the Insurer never
received one of the attorney's invoices. An affidavit from the
School District's attorney attests that the attorney sent invoices
to the Insurer as it requested, describing: (1) the amount of the
invoices; (2) the amount the Insurer paid; and (3) the difference
between those two amounts that remained unreimbursed. However,
the affidavit does not identify the dates the attorney sent the
invoices to the Insurer or the date the Insurer paid each invoice.
Additionally, the affidavit is vague as to whether the Insurer
made payment to the attorney or the School District.
¶35 Moreover, the Invoices attached to the liability
attorney's affidavit are substantially redacted, with some
descriptions of services completely blacked out and others listed
only as "Review" or "Continue Review" or something similar. The
limited content of the invoices certainly could have impeded the
Insurer's determination of what fees were reimbursable and whether
25
No. 2013CV52718AP116
each itemized service represented the attorney's work on liability
or something else.
¶36 Further, the record does not reflect the exact date fee
negotiations concluded. There is a reference to non-payment for
three months, as well as indications that a fee agreement was
reached in April 2014, in May 2014, or no later than June 1, 2014.
The record does show that as of June 22, 2016, the Insurer paid
liability attorney fees in the amount of $260,021.32.
¶37 It is not surprising that negotiations on attorney fees
would take some time given that the School District retained its
own attorney prior to the commencement of the lawsuit, and the
Insurer subsequently stepped in to defend, agreeing to allow its
insured's chosen attorney to continue the representation.12 The
Insurer is obligated to compensate the liability attorney only at
a reasonable rate, reflecting the market standard associated with
the type of case and for that geographic location, among other
relevant factors. See Fireman's Fund Ins. Co., 261 Wis. 2d 4,
¶¶68-69; 14 Couch on Ins. § 202:34 ("An insurer's obligation to
reimburse independent counsel is limited to reasonable attorney's
fees and disbursements."). Even when an insurer breaches its duty
to defend, the attorney fees awarded as damages must be reasonable.
See Elliott, 169 Wis. 2d at 325 (remanding for a determination of
reasonable attorney fees).
12The School District was aware of the impending lawsuit
because the retired employees had filed a Notice of Claim.
26
No. 2013CV52718AP116
¶38 Accordingly, we reject the School District's argument
that the delay in payment of fees means the Insurer breached its
duty to defend. Because the law requires attorney fees to be
reasonable, an Insurer is entitled to review fees and negotiate a
reasonable rate. The record in this case contains no determination
from the circuit court on any of these issues, without which we
cannot assess whether a delay in payment constituted a breach of
the Insurer's duty. The inadequacy of the record means the School
District forfeited review of this issue. Nickel, 339 Wis. 2d 48,
¶10 ("Our case law is clear and consistent: failure to
[adequately] preserve issues at the circuit court means that they
are waived.").
b. Unreimbursed Liability Attorney Fees
¶39 The School District also argues the Insurer breached its
duty to defend by failing to reimburse it for the full amount it
expended in liability fees. It contends the Insurer's
reimbursement fell short by approximately $50,000. We reject this
contention for the same reasons we rejected the School District's
argument regarding delayed reimbursement: (1) attorney fees must
be reasonable, and (2) the record on unreimbursed liability
attorney fees is sorely incomplete. While the record contains the
specific amounts of liability fees in dispute as well as the amount
the Insurer paid, we agree with the court of appeals that it is
"impossible to properly consider [the School District's] unpaid
fees argument" because "[t]he District leaves us to guess as to
27
No. 2013CV52718AP116
the scope and details of the agreements" between the parties.13
Additionally, the School District appealed from an order
addressing only coverage fees, not unreimbursed liability fees.
Furthermore, it is undisputed that neither the School District nor
its liability attorney utilized the Insurer's process for
appealing the Insurer's decision to pay less than the amount of
the attorney fees invoice.
3. Four-Corners Rule
¶40 The School District also asserts the circuit court
should examine only the four corners of the complaint to assess
whether the Insurer breached its duty to defend and cannot consider
any actions by the Insurer. The four-corners rule is the well-
established standard used to assess whether a duty to defend
exists. Water Well, 369 Wis. 2d 607, ¶¶19-20. No extrinsic
evidence can be used to ascertain whether the Complaint alleges a
covered claim. Id., ¶24.
¶41 The School District misunderstands this court's holding
in Water Well. We never prohibited a circuit court from
considering the actions an insurer took to obtain a judicial
determination on coverage. Nor did we say the circuit court cannot
take into account that the insurer followed a judicially preferred
method to determine coverage. We held the circuit court cannot
consider extrinsic evidence the insured, insurer, or anyone else
might know about circumstances relating to the substance of the
Complaint that are not within the four corners of the Complaint.
13 See Choinsky, 386 Wis. 2d 285, ¶¶13-14, 18, 34 n.10.
28
No. 2013CV52718AP116
In Water Well, the insured asked the court to consider extrinsic
evidence about the product at issue, claiming the complaint's
allegations about the product were "factually incomplete or
ambiguous." Id., ¶2. This court refused Water Well's request and
reaffirmed that in assessing whether the duty to defend exists, a
court cannot look beyond the four corners of the Complaint. Id.,
¶¶23-24. Once the duty to defend has been established, the four-
corners rule no longer applies. See Sustache, 311 Wis. 2d 548,
¶¶27-29.
¶42 Water Well did not disturb Wisconsin coverage law: a
court is bound by the four-corners rule when deciding whether the
Complaint alleges a covered claim triggering the insurer's duty to
defend. Once a court concludes a duty to defend exists, the
insurer's actions——unilaterally denying coverage, opting for a
judicially preferred procedure to determine coverage, or something
else——will be examined to decide whether the insurer breached its
duty to defend.
IV. CONCLUSION
¶43 The Insurer did not breach its duty to defend the School
District because even though it concluded the Complaint did not
allege a covered claim and issued a denial letter, it followed a
judicially preferred method for having coverage decided before
liability. When the circuit court denied the Insurer's motion to
stay the liability proceedings, the Insurer provided a full
defense, retroactive to the date of tender. By doing so, the
Insurer complied with its contractual responsibilities to its
29
No. 2013CV52718AP116
Insured and therefore is not responsible for the School District's
coverage attorney fees. This court has repeatedly said that when
an insurer follows a judicially preferred procedure to resolve a
coverage dispute, it will not risk breaching its duty to defend.
When an insurer seeks bifurcation and a stay, it must defend the
insured and pay its attorney fees retroactive to the date of tender
if the circuit court denies any part of the motion. We strongly
encourage circuit courts to promptly decide these motions and to
grant a stay of the liability proceedings whenever possible and
appropriate.
¶44 We reject the School District's assertions that the
delayed defense, the time necessary to negotiate reasonable
attorney fees, and the unreimbursed $50,000 in liability fees
establish a breach by the Insurer. The law permits an insurer to
investigate a claim before defending and requires payment of only
reasonable attorney fees. An insufficient record prevents full
review of the fees issues the School District raises.
¶45 Finally, we reject the School District's contention that
the four-corners rule confines the circuit court's consideration
of whether an insurer breached its duty to defend. The four-
corners rule governs the determination of whether a duty to defend
exists, but courts necessarily consider the insurer's actions in
unilaterally denying coverage, or following a judicially preferred
approach to obtaining a judicial decision on coverage, in order to
assess whether the insurer breached its duty to defend.
30
No. 2013CV52718AP116
By the Court.—The decision of the court of appeals is
affirmed.
¶46 BRIAN HAGEDORN, J., did not participate.
31
No. 2018AP116.dk
¶47 DANIEL KELLY, J. (dissenting). I agree (mostly) with
the court's statement of the law governing an insurer's duty to
defend its insured when there is disagreement over coverage. I
don't agree, however, that an insurer can buy its way out of its
breach of that duty by reimbursing its insured for defense costs.
Because the Insurer1 in this case refused to provide attorneys for
their insured during a period of time that our cases unmistakably
say they owed the insured a defense, I conclude it breached its
contractual obligations. For these reasons, I respectfully
dissent.
¶48 This case is, as the court stated, about the Insurer's
defense obligations when it chooses to protect its interests by
filing a motion "requesting a bifurcated trial on coverage and
liability and a stay of the proceedings on liability until coverage
is determined." Majority op., ¶17. The court said "[t]his case
presents a problem with [the bifurcate-and-stay] option when the
circuit court denies the bifurcation or stay motion, resulting in
the insured defending itself for a period of time on both liability
and coverage." Id., ¶19. To protect itself from a breach of
contract claim under such circumstances, the court says, "the
insurer must defend its insured under a reservation of rights so
that the insured does not have to pay to defend itself on liability
and coverage at the same time." Id.
1 I will collectively refer to Employers Insurance Company of
Wausau and Wausau Business Insurance Company as the "Insurer" to
be consistent with the court's opinion.
1
No. 2018AP116.dk
¶49 I agree with this much of the court's statement of the
law. But I think it requires greater clarification because the
application of that principle in this case demonstrates its
statement provides a lacuna in the Insurer's defense obligations
that leaves the insured paying for attorneys to litigate both the
merits and coverage aspects of the case.
¶50 The duty to defend, as the court correctly states, begins
upon service or tender of a coverage-implicating complaint: "The
duty to defend arises when an insurer is served with a complaint
that 'alleges facts that, if proven, would constitute a covered
claim' or when an insured who is served with a complaint alleging
a covered claim tenders the defense to its insurer." Id., ¶16
(quoting Estate of Sustache v. Am. Family Mut. Ins. Co., 2008
WI 87, ¶27, 311 Wis. 2d 548, 751 N.W.2d 845).
¶51 The insurer fulfills its duty to defend, of course, by
"appoint[ing] defense counsel for its insured . . . ." Estate of
Sustache, 311 Wis. 2d 548, ¶27 (internal marks omitted). And the
insurer's duty to provide defense counsel continues until final
resolution of the coverage issue: "Wisconsin policy is clear. If
the allegations in the complaint, construed liberally, appear to
give rise to coverage, insurers are required to provide a defense
until the final resolution of the coverage question by a court."
Olson v. Farrar, 2012 WI 3, ¶30, 338 Wis. 2d 215, 809 N.W.2d 1
(emphasis added).
¶52 This duty is unaffected by an insurer's request to
bifurcate and stay the merits phase of the case. Mowry v. Badger
State Mut. Cas. Co., 129 Wis. 2d 496, 523, 385 N.W.2d 171 (1986)
2
No. 2018AP116.dk
("[I]f an insurer is granted a bifurcated trial under [Wis. Stat.]
§ 803.04(2)(b) [(1985-1986)], . . . an insurer's duties to its
insured should not be suspended pending the outcome of the coverage
trial." (emphasis added)); Barber v. Nylund, 158 Wis. 2d 192, 198,
461 N.W.2d 809, (Ct. App. 1990) ("The law appears settled that
even if an insurer is granted a bifurcated trial under
[§] 803.04(2)(b) [(1989-1990], . . . an insurer's duties to its
insured are not suspended pending the outcome of the coverage
trial." (emphasis added)). It necessarily follows that if granting
a bifurcated trial on the merits does not relieve the insurer of
its defense obligations, the obligations existed prior to the
motion. Once triggered by service or tender of a qualifying
complaint, therefore, the duty to defend continues unabated until
final resolution of the coverage question, notwithstanding the
filing of a motion to bifurcate and stay the merits phase of the
case.
¶53 Here, however, the court allowed the Insurer to escape
its defense obligations. The circuit court declared that the
complaint described a cause of action that, if proved, would be
covered by the insurance policies at issue. Consequently, the
duty to defend arose when the School District tendered the
complaint to the Insurer. But the Insurer did not provide a
defense; it rejected the tender, and thereafter filed a complaint
requesting a declaration that it owed no duty to defend or
indemnify the School District. It then moved the circuit court to
bifurcate and stay the merits phase of the underlying case. The
circuit court granted the bifurcation motion, but did not grant
3
No. 2018AP116.dk
the requested stay. The Insurer then said it would defend under
a reservation of rights, but it did not start doing so until
January 14, 2014 (the date on which it started paying for the
School District's attorneys).
¶54 For a period of over 5 months, therefore, the Insurer
did not, in fact, provide a defense. And this failure occurred
during a period of time our cases say the Insurer owed an unabated
duty to defend the School District. So the Insurer breached its
contractual obligations. The court concludes otherwise, however,
stating that "the Insurer's actions did not constitute a breach of
its duty to defend because, even though the Insurer initially
denied coverage, it followed one of this court's preferred methods
to obtain a judicial determination on coverage before the liability
suit proceeded." Majority op., ¶22. But as discussed above,
filing a motion to bifurcate and stay the merits phase of the case
does not relieve the Insurer of its duty to defend.
¶55 I don't know how to describe the unexcused failure to
perform an unabated contractual obligation as anything but a breach
of contract. Insurers know their refusal to provide a defense is
courting liability to its insured:
An insurer also has the option to "[d]eny the tender of
defense and state the grounds for deciding that the
complaint does not trigger any obligation to defend
under the policy." If, however, an insurer chooses this
option "it does so at its own peril." By declining to
defend an insured, an insurer opens itself up to a myriad
of adverse consequences if its unilateral duty to defend
determination turns out to be wrong. For example, an
insurer that breaches its duty to defend is liable for
all costs naturally flowing from the breach.
4
No. 2018AP116.dk
Water Well Sols. Serv. Grp., Inc. v. Consol. Ins. Co., 2016 WI 54,
¶28, 369 Wis. 2d 607, 881 N.W.2d 285 (quoted source omitted). The
Insurer gambled that its evaluation of the complaint against the
School District was correct. It was not, and so it bears the
consequences of losing that gamble. Id.
¶56 The court, however, allows the Insurer to buy its way
out of its failed gamble. It says that, in such circumstances,
"[a]n insurer cannot breach its duty to defend based on its insured
having incurred defense costs during the investigation period if
an insurer reimburses the insured for defense costs retroactive to
the date of the claim." Majority op., ¶24. Here, then, is as
entirely new concept in the continued effort to achieve a détente
between the interests of insurers and their insureds. Introducing
the concept of a "retroactive defense" allows an insurer to refuse
its duty to defend between: (a) tender of a coverage-implicating
complaint; and (b) the court's resolution of coverages issues. It
risks nothing doing so because, in the worst case, it simply pays
for the defense it refused to provide.
¶57 The "retroactive defense" concept may or may not be a
wise policy, but it is definitely new. The primary case the court
cited in support of this proposition was an unpublished court of
appeals decision (which, by definition, can supply no new statement
of the law). Lakeside Foods, Inc. v. Liberty Mut. Fire Ins. Co.,
No. 2009AP1428, 2010 WL 2836401, unpublished slip op., (Wis. Ct.
App. Jul. 21, 2010). And Lakeside Foods, Inc. did not even purport
to analyze this issue, merely stating that "during the pendency of
its coverage investigation, Liberty knew that Lakeside was
5
No. 2018AP116.dk
represented by counsel, and presumably knew that it would be
obligated to pay Lakeside's fees dating back to the tender of
defense." Id., ¶43. That is not a statement of law, it's just a
description of what the insurer in that case believed its
obligation to be. The Lakeside Foods, Inc. court did not say the
insurer was correct in its observation, did not analyze the issue,
and made no normative statement on the subject.
¶58 The only other authority the court offered in support of
its "retroactive defense" proposition was Danner v. Auto-Owners
Ins., 2001 WI 90, ¶58, 245 Wis 2d 49, 629 N.W.2d 159. The court
says Danner noted that "an insurer 'should not be found to have
acted in bad faith for thoroughly investigating a claim' because
sometimes it is difficult for the insurer to distinguish between
legitimate and fraudulent claims." Majority op., ¶24. That may be
so, but it didn't have anything to say about the duty to defend,
or the concept of a "retroactive defense," mostly because Ms.
Danner was not the defendant. Instead, Ms. Danner had made a claim
under her underinsured motorist policy. To the extent Danner
addressed the thorough investigation of a claim, it did so in the
context of indemnification, not the duty to defend.
¶59 Additionally, citing Danner in the context of this case
carries the uncomfortable suggestion that an insurer's duty to
defend can be deferred pending a thorough investigation of the
claim. It can't. Investigation into the duty to defend goes no
further than comparing the complaint to the insurance policy.
Estate of Sustache, 311 Wis. 2d 548, ¶27 ("[W]hen a complaint
alleges facts that, if proven, would constitute a covered claim,
6
No. 2018AP116.dk
the insurer must appoint defense counsel for its insured without
looking beyond the complaint's four corners." (internal marks
omitted)).2
¶60 Finally, because I conclude that the Insurers breached
their duty to defend, the School District is entitled to recover
certain damages resulting from that breach. See Water Well Sols.
Serv. Grp., 369 Wis. 2d 607, ¶28 ("[A]n insurer that breaches its
duty to defend is liable for all costs naturally flowing from the
breach."). Those damages include the attorney's fees necessary to
establish coverage. Elliott v. Donahue, 169 Wis. 2d 310, 322, 485
N.W.2d 403 (1992). There, we said:
The insurer that denies coverage and forces the insured
to retain counsel and expend additional money to
establish coverage for a claim that falls within the
ambit of the insurance policy deprives the insured the
benefit that was bargained for and paid for with the
periodic premium payments. Therefore, the principles of
equity call for the insurer to be liable to the insured
for expenses, including reasonable attorney fees,
2 See also W. Bend Mut. Ins. Co. v. Ixthus Med. Supply, Inc.,
2019 WI 19, ¶10, 385 Wis. 2d 580, 923 N.W.2d 550 ("In assessing
whether a duty to defend exists, we compare the four corners of
the underlying complaint to the terms of the entire insurance
policy." (internal marks and quoted source omitted)); Water Well
Sols. Serv. Grp., Inc. v. Consol. Ins. Co., 2016 WI 54, ¶15, 369
Wis. 2d 607, 881 N.W.2d 285 ("Longstanding case law requires a
court considering an insurer's duty to defend its insured to
compare the four corners of the underlying complaint to the terms
of the entire insurance policy."); Olson v. Farrar, 2012 WI 3,
¶29, 338 Wis. 2d 215, 809 N.W.2d 1 ("Accordingly, an insurer must
defend all suits where there would be coverage if the allegations
were proven, even if the allegations are 'utterly specious.'
(quoted source omitted)); Newhouse by Skow v. Citizens Sec. Mut.
Ins. Co., 176 Wis. 2d 824, 835, 501 N.W.2d 1 (1993) ("The duty to
defend is triggered by the allegations contained within the four
corners of the complaint.").
7
No. 2018AP116.dk
incurred by the insured in successfully establishing
coverage.
Id. Thus, we ought to remand this matter to the circuit court for
a determination of fees the School District reasonably incurred in
establishing coverage.
* * *
So, I agree with the court that when an insurer follows one
of the judicially-prescribed methods for contesting coverage it
does not breach its contractual obligations. Until today, however,
no part of the judicially-prescribed options allowed an insurer to
refuse its defense obligations in favor of reimbursing its
insured's defense costs at some undefined future date. Therefore,
I respectfully dissent.
8
No. 2018AP116.dk
1