Steadfast Insurance Company v. Greenwich Insurance Company

2019 WI 6
SUPREME COURT OF WISCONSIN
CASE NO.: 2016AP1631
COMPLETE TITLE: Steadfast Insurance Company,
Plaintiff-Respondent,
v.
Greenwich Insurance Company,
Defendant-Appellant-Petitioner.
REVIEW OF DECISION OF THE COURT OF APPEALS
Reported at 380 Wis. 2d 184, 908 N.W.2d 502
PDC No: 2018 WI App 11 - Published
OPINION FILED: January 25, 2019
SUBMITTED ON BRIEFS:
ORAL ARGUMENT: October 29, 2018
SOURCE OF APPEAL:
COURT: Circuit
COUNTY: Milwaukee
JUDGE: Glenn H. Yamahiro
JUSTICES:
CONCURRED: A.W. BRADLEY, J. concurs and dissents, joined by
DALLET, J. (opinion filed).
R.G. BRADLEY, J. concurs and dissents (opinion
filed).
DISSENTED:
NOT PARTICIPATING:
ATTORNEYS:
For the defendant-appellant-petitioner, there were briefs
filed by Pamela J. Tillman, Esq., Michael J. Cohen, Esq., and
Meissner Tierney Fisher & Nichols S.C., Milwaukee; with whom on
the briefs were Thomas G. Drennan, Esq., and Dinsmore & Shohl
LLP, Chicago, Illinois. There was an oral argument by Michael
J. Cohen.
For the plaintiff-respondent, there was a brief filed by
Monte E. Weiss, Charles W. Kramer, and Weiss Law Office, S.C.,
Mequon. There was an oral argument by Monte Weiss.
2019 WI 6
NOTICE
This opinion is subject to further
editing and modification. The final
version will appear in the bound
volume of the official reports.
No. 2016AP1631
(L.C. No. 2013CV1685)
STATE OF WISCONSIN : IN SUPREME COURT
Steadfast Insurance Company,
Plaintiff-Respondent,
FILED
v.
JAN 25, 2019
Greenwich Insurance Company,
Sheila T. Reiff
Defendant-Appellant-Petitioner. Clerk of Supreme Court
REVIEW of a decision of the Court of Appeals. Affirmed in
part, reversed in part.
¶1 PATIENCE DRAKE ROGGENSACK, C.J. We review a decision of the court of
appeals1 affirming the circuit court's2 grant of summary judgment to Steadfast Insurance
Company (Steadfast). Summary judgment granted Steadfast the right to recover from
Greenwich Insurance Company (Greenwich) based on Steadfast's and Greenwich's relationships
1
Steadfast Ins. Co. v. Greenwich Ins. Co., 2018 WI App 11,
380 Wis. 2d 184, 908 N.W.2d 502.
2
The Honorable Glenn H. Yamahiro of Milwaukee County
presided.
No. 2016AP1631
with Milwaukee Metropolitan Sewerage District (MMSD), who was sued for alleged negligent
inspection, maintenance, repair, and operation of Milwaukee's sewerage system.
¶2 MMSD tendered its defense to both Steadfast and Greenwich. Steadfast accepted
the tender; Greenwich did not, claiming that its policy was excess to Steadfast's based on its
"other insurance" clause. Steadfast disagreed and sued Greenwich to recover the defense costs it
paid to MMSD and the attorney fees incurred in suing Greenwich to reimburse it for those
defense costs.
¶3 First, we conclude that Greenwich, who insured the risk that United Water
Services Milwaukee, LLC (United Water) would negligently perform services for MMSD,
thereby causing damage, and Steadfast, who for a different period of time insured the risk that
Veolia Water Milwaukee, LLC (Veolia) would negligently perform services for MMSD, thereby
causing damage, were both primary and successive insurers in regard to MMSD, their common
additional insured.3
¶4 Second, we conclude that Greenwich breached its contractual duty to defend
MMSD. Third, we conclude that Steadfast's contractual subrogation claim against Greenwich
was timely filed as it comes within the six-year statute of limitations for contract actions.
¶5 Fourth, we conclude Steadfast had a contractual duty to defend MMSD that was
not abrogated by Greenwich's breach of its contractual duty to defend MMSD. Therefore, we
apply a pro-rata allocation of defense costs Steadfast paid to MMSD based on Steadfast's and
Greenwich's respective policy limits of $30 million and $20 million. Fifth, and finally, we
3
Veolia Water North American Central, LLC, d/b/a Veolia
Water Milwaukee, LLC, is a wholly owned subsidiary of WASCO LLC,
who is the actual named insured on the Steadfast policy. Veolia
and United Water were sued for sewage backups as well as MMSD.
2
No. 2016AP1631
conclude that Steadfast is entitled to recover attorney fees from Greenwich due to Steadfast's
stepping into the shoes of MMSD through contractual subrogation to force Greenwich to pay
defense costs.
¶6 Accordingly, we affirm the decision of the court of appeals in part and reverse it
in part.
I. BACKGROUND
¶7 This dispute arises out of historic rains that occurred in Milwaukee in June 2008.
Those heavy rains overwhelmed MMSD's sewerage system, which resulted in raw sewage
backing up into more than 8,000 homes. Lawsuits were filed against United Water, Veolia and
MMSD because of sewage backups, alleging negligence in the repair, maintenance, and
operation of the sewerage system both before and during the heavy rains.4
¶8 Beginning in 1998, MMSD entered into Operating Agreements with private
companies to operate and maintain its sewerage system. United Water provided operational
services for many years. MMSD's Operating Agreement with United Water required United
Water to maintain comprehensive liability insurance, naming MMSD as an additional insured.
United Water contracted with Greenwich for liability insurance with the last contract of
insurance beginning July 24, 2007 and ending July 24 2008; it named MMSD as an additional
insured. The Greenwich policy limits were $20 million. United Water maintains that it last
provided services under an Operating Agreement with MMSD on February 29, 2008.
4
Banicki, et al. v. Veolia, et al., Milwaukee Cty. Case
No. 09-CV-1860; Westmoreland v. Veolia, et al., Milwaukee Cty.
Case No. 09-CV-6121; FM Global v. Veolia, et al., Milwaukee Cty.
Case No. 09-CV-7594; Reep, et al. v. City of Milwaukee, et al.,
Milwaukee Cty. Case No. 09-CV-3483. FM Global and Westmoreland
were eventually consolidated into Banicki.
3
No. 2016AP1631
¶9 Beginning on March 1, 2008, and continuing through the June 2008 heavy rains,
MMSD contracted with Veolia to operate and maintain its sewerage system. Their Operating
Agreement similarly required Veolia to maintain comprehensive liability insurance, naming
MMSD as an additional insured. Steadfast provided the required insurance to Veolia, with
policy limits of $30 million.
¶10 The Greenwich policy obligated it to defend any claim
against its insureds, United Water and MMSD, as well as to
provide indemnification:
With respect to the insurance afforded by this Policy,
the Company shall defend any CLAIM against the INSURED
seeking DAMAGES to which this insurance applies, even
if any of the allegations are groundless, false or
fraudulent. Defense counsel may be designated by the
Company or designated by the INSURED . . . .
¶11 In a similar fashion, the Steadfast policy gave
Steadfast "the right and duty to assume the adjustment, defense
and settlement of any 'claim' to which this insurance applies."
Steadfast's policy, which insured Veolia and MMSD, also
contained a subrogation clause, which stated in relevant part:
In the event of any payment under this policy, we
shall be subrogated to all an "insured's" rights of
recovery against any person or organization. An
"insured" shall execute and deliver instruments and
papers and do whatever else is necessary to secure
such rights. An "insured" shall do nothing to
prejudice such rights.
¶12 After MMSD tendered its defense to both Steadfast and
Greenwich, it opted to hire its own counsel. The lawsuits were
settled without MMSD paying plaintiffs' claimed damages.
Steadfast participated in MMSD's defense by reimbursing MMSD for
4
No. 2016AP1631
$1.55 million in defense costs. However, when MMSD tendered its
defense to Greenwich and Steadfast, there was no way of knowing
that settlement would be achieved without paying something
toward claimed damages.
¶13 Greenwich, who had refused MMSD's tender, had sent
MMSD a letter explaining that "we fail to see how [United Water]
could be liable for causing a sewage backup in June 2008 when
its services for MMSD terminated in February 2008." Greenwich
further argued that "there is ample evidence that when [United
Water] turned over operational responsibilities to Veolia and
MMSD in February 2008, all systems, equipment, and machinery at
the subject sewage overflow diversion chamber were functioning
according to operational protocols."
¶14 One year later, MMSD renewed its tender to Greenwich.
It informed Greenwich that United Water had been named as a
defendant in lawsuits that resulted from the 2008 sewage
backups. Greenwich responded five months later, acknowledging
that "there may be a potential for coverage" and requesting
"additional information in order to determine Greenwich's
current coverage obligations." After receiving the requested
information, including confirmation that MMSD had satisfied its
$250,000 self-insured retention amount, Greenwich continued to
refuse the tender of MMSD's defense. Instead, it unilaterally
determined based on its "other insurance" clause that its policy
was excess to Steadfast's $30 million liability limit.
¶15 After the conclusion of the lawsuits that resulted
from the sewage backups, Steadfast sued Greenwich to recover the
5
No. 2016AP1631
$1.55 million in defense costs that it had paid to MMSD. The
circuit court granted summary judgment in favor of Steadfast,
awarding it the entire amount Steadfast paid MMSD, as well as
$325,000 in attorney fees that Steadfast incurred bringing this
lawsuit.
¶16 The court of appeals affirmed. Steadfast Ins. Co. v.
Greenwich Ins. Co., 2018 WI App 11, ¶4, 380 Wis. 2d 184, 908
N.W.2d 502. The court of appeals based its decision on the
following conclusions:
(1) Greenwich's policy provided primary, not excess,
coverage for claims against MMSD; (2) MMSD has
established that it met the $250,000 risk retention
amount by incurring $594,302.23 in defense costs;
(3) Steadfast's equitable subrogation claim is timely
because the six-year statute of limitations in Wis.
Stat. § 893.43 applicable to contract claims applies
to Steadfast's claim, which is premised on Greenwich's
breach of the duty to defend MMSD; (4) under the facts
of this case, because Greenwich breached its duty to
defend MMSD, Greenwich is not equitably entitled to an
allocation of MMSD's defense costs; and (5) under the
facts of this case, Steadfast is equitably entitled to
recover attorney fees in this lawsuit.
Id. We granted Greenwich's petition for review, and now affirm
in part and reverse in part.
II. DISCUSSION
A. Standard of Review
¶17 We review summary judgment decisions independently,
applying the same methodology as the circuit court and the court
of appeals, while benefitting from their discussions. Dufour v.
6
No. 2016AP1631
Progressive Classic Ins. Co., 2016 WI 59, ¶12, 370 Wis. 2d 313,
881 N.W.2d 678.
¶18 We also review insurance contract clauses
independently of decisions of the circuit court and court of
appeals, while again benefitting from their discussions.
Wadzinski v. Auto-Owners Ins. Co., 2012 WI 75, ¶10, 342 Wis. 2d
311, 818 N.W.2d 819. Therefore, whether a party is entitled to
attorney fees based on contractual subrogation is a question of
law for our independent review. Estate of Kriefall v. Sizzler
USA, 2012 WI 70, ¶16, 342 Wis. 2d 29, 816 N.W.2d 853.
¶19 Determining which statute of limitations applies to
contract issues involves a question of law that we also decide
independently. Zastrow v. Journal Commc'ns, Inc., 2006 WI 72,
¶12, 291 Wis. 2d 426, 718 N.W.2d 51. And finally, the proper
measure of damages for an insurer's breach of a contractual duty
to defend is likewise a question of law that we review
independently. Newhouse v. Citizens Sec. Mut. Ins. Co., 176
Wis. 2d 824, 837, 501 N.W.2d 1 (1993).
B. Contract Interpretation
¶20 The issues in this case all stem from Greenwich's
insurance contract with United Water and Steadfast's insurance
contract with Veolia. Each policy listed MMSD as an additional
insured. Therefore, the following general principles of
contract interpretation guide our initial discussion.
Wadzinski, 342 Wis. 2d 311, ¶11.
¶21 Our general task in contract interpretation is to
determine and carry out the parties' intentions. Preisler v.
7
No. 2016AP1631
Gen. Cas. Ins. Co., 2014 WI 135, ¶18, 360 Wis. 2d 129, 857
N.W.2d 136. The parties' intentions are presumed to be
expressed in the language of the contract. Wadzinski, 342
Wis. 2d 311, ¶11. Where the language of a contract is
unambiguous and the parties' intentions can be ascertained from
the face of the contract, we give effect to the words they
employed. Estate of Kriefall, 342 Wis. 2d 29, ¶21. However, if
the policy terms are ambiguous, we construe the policy from the
perspective of a reasonable insured. Wadzinski, 342 Wis. 2d
311, ¶11.
1. Risk and Loss
¶22 Greenwich and Steadfast issued comprehensive liability
insurance policies, which their Operating Agreements with MMSD
required. As a general matter, liability policies insure risks
that are dependent on various circumstances that cause insureds
to obtain insurance coverage. Couch on Insurance § 101:3 (3rd
ed. 1999). Stated otherwise, risk is the "type of liability the
insurer agreed to provide coverage for under the terms of the
policy." Id. There is a causal connection between risk and
loss.5 Id. That is, when the insured-for risk occurs, the
insurer indemnifies for the resulting-loss (damages) in accord
5
The Illinois Supreme Court recently provided a useful
distinction between risk and loss in the insurance context.
Courts analyze risk by looking prospectively at what the parties
set out to cover. Home Ins. Co. v. Cincinnati Ins. Co., 821
N.E.2d 269, 281 (Ill. 2004). Loss, in contrast, is analyzed
retrospectively by looking at the injury or damages actually
sustained in a particular case. Id.
8
No. 2016AP1631
with the policy provisions. Id. Insurance policy clauses "may
come into conflict" when two or more policies cover the same
risk for the same period of time. Id., § 219:2.
¶23 In the context presented herein, Greenwich's policy
insured the risk that United Water's conduct in managing the
Milwaukee sewerage system during the policy period would be
negligent, thereby causing damage to a third party.6 As an
"additional insured" under the Greenwich policy, MMSD's risk was
that it would be responsible in money damages for a third
party's damage caused by United Water's negligence.
¶24 Steadfast's policy insured the risk that Veolia would
negligently manage the Milwaukee sewerage system during the
policy period, causing damage to a third party.7 As an
6
The Greenwich policy provides in relevant part: Coverage
B – CONTRACTOR'S POLLUTION LEGAL LIABILITY
To pay on behalf of the INSURED all LOSS, in excess of the
Retention amount . . . which the INSURED becomes legally
obligated to pay as a result of an OCCURRENCE which arises out
of CONTRACTING SERVICES and which first commenced during the
POLICY PERIOD.
. . . .
G. INSURED means the NAMED INSURED and:
. . . .
7. Solely as respects Coverage B – Contractor's Pollution
Legal Liability, the client for whom the NAMED INSURED
performs or performed covered CONTRACTING
SERVICES . . . .
7
The Steadfast policy provides in relevant part:
CONTRACTOR'S POLLUTION LIABILITY . . . .
(continued)
9
No. 2016AP1631
"additional insured" of Steadfast, MMSD's risk was that it would
be responsible in money damages for a third party's damage
caused by Veolia's negligence. The plain language of both the
Greenwich policy and the Steadfast policy obligated insurers to
indemnify and defend their named insureds and MMSD against
claims of damage caused by the negligence of their named
insureds. To clarify further, while United Water was not
providing services at the time of the flooding, it was alleged
that its services during an earlier time when it was managing
the MMSD system were a cause of the resulting damage.
¶25 "Other insurance" clauses may be raised in disputes
between two insurance companies about whose policy is primary
and therefore must pay first and whose policy is excess, also
referred to as successive insurance, and pays subsequent to the
primary payment. Plastics Eng'g Co. v. Liberty Mut. Ins. Co.,
We will pay on behalf of an "insured" any "loss" an "insured" is
legally obligated to pay as a result of a "claim" caused by a
"pollution event" resulting from "covered operations" or
"completed operations" of the "covered operations" and provided
that the "covered operations" must commence on or after the
"retroactive date" and before the end of the "policy period" and
the "claim" is first made against the "insured" during the
"policy period" . . . .
. . . .
L. "Insured" means:
1. You or your; . . .
4. Any other person or organization endorsed onto this
policy as an "insured." (Milwaukee Metropolitan
Sewerage District is an endorsee.)
10
No. 2016AP1631
2009 WI 13, ¶48, 315 Wis. 2d 556, 759 N.W.2d 613. To explain
further, policies may be concurrent, i.e., cover the same time
period and risk, or successive, i.e., cover different time
periods and risks. However, "other insurance" clauses do not
apply unless two policies are concurrent. Id. "The accepted
meaning of 'other insurance' provisions does not include
application to successive insurance policies." Id. If the
"other insurance" clauses cannot be used to establish a primary
and an excess insurer, then "neither insurer is given priority
over the other and each contributes toward the loss pro rata."
Oelhafen v. Tower Ins. Co., 171 Wis. 2d 532, 536-37, 492 N.W.2d
321 (Ct. App. 1992) (citing Schoenecker v. Haines, 88 Wis. 2d
665, 672, 277 N.W.2d 782 (1979)).
¶26 As we have explained, concurrent insurance is required
before "other insurance" clauses are triggered. Two insurance
policies cannot be concurrent unless they insured "the same
risk, and the same interest, for the benefit of the same person,
during the same period." Plastics Eng'g, 315 Wis. 2d 556, ¶48
(quoting Douglas R. Richmond, Issues and Problems in "Other
Insurance," Multiple Insurance, and Self-Insurance, 22 Pepp. L.
Rev. 1373, 1376-82 (1995)).
¶27 The Greenwich and Steadfast policies were primary with
regard to each company's respective insurance of United Water
and Veolia. The policies were primary and successive in regard
to insuring MMSD's risk of damage because each policy relied on
the negligence of a different insured, whose alleged negligence
occurred during a different period of time, i.e., while that
11
No. 2016AP1631
primary insured was maintaining the sewerage system. Stated
otherwise, Greenwich would owe MMSD only if the negligence of
United Water caused damages for which MMSD was held responsible
and Steadfast would owe MMSD only if the negligence of Veolia
caused damages for which MMSD was held responsible.
Accordingly, we do not interpret the terms of the "other
insurance" clauses because under the undisputed facts as set out
above, Greenwich's "other insurance" clause provided successive
insurance to MMSD.
¶28 In addition, the duty to defend is broader than the
duty to indemnify. Acuity v. Bagadia, 2008 WI 62, ¶52, 310
Wis. 2d 197, 750 N.W.2d 817 (explaining that the duty to defend
arises from allegations in the complaint, while the duty to
indemnify is dependent on fully developed facts). Furthermore,
when an insurance policy provides potential coverage for one
claim alleged in a lawsuit, the insurer must defend the entire
suit, even when the claims are groundless. Fireman's Fund Ins.
Co. of Wis. v. Bradley Corp., 2003 WI 33, ¶21, 261 Wis. 2d 4,
660 N.W.2d 666. Accordingly, two insurance policies that insure
separate and distinct risks may nevertheless become implicated
in the same lawsuit, causing the two insurers to defend the same
loss in the form of their mutual insured's alleged liability for
damages and defense costs.
2. Greenwich Breached Its Duty To Defend
¶29 We have established a procedure for an insurance
company to follow when it disputes coverage. Wis. Pharmacal
Co., LLC v. Neb. Cultures of Cal., Inc., 2016 WI 14, ¶18, 367
12
No. 2016AP1631
Wis. 2d 221, 876 N.W.2d 72 (explaining that an insurer may avoid
breaching its duty to defend by requesting a bifurcated trial on
the issues of coverage and liability, with liability determined
after coverage has been established); Newhouse, 176 Wis. 2d at
836 (stating that the insurer should request a bifurcated trial
on the issues of coverage and liability when coverage is
disputed). An insurer who fails to follow this procedure risks
breaching its duty to defend if its coverage determination was
wrong. Id. at 837.
¶30 Alternatively, an insurer may choose to reject the
insured's tender of defense based on its determination that the
claim is not covered under the policy. However, it does so at
its own risk. Marks v. Houston Cas. Co., 2016 WI 53, ¶41 n.21,
369 Wis. 2d 547, 881 N.W.2d 309. If the insurer is wrong about
its potential coverage obligation, it "is guilty of a breach of
contract which renders it liable to the insured for all damages
that naturally flow from the breach." Id. (citing Newhouse, 176
Wis. 2d at 837). Finally, as mentioned earlier, an insurer has
a duty to defend the entire lawsuit "when an insurance policy
provides [potential] coverage for even one claim made in a
lawsuit." Fireman's Fund Ins. Co., 261 Wis. 2d 4, ¶21.
¶31 In this case, Greenwich did not seek a judicial
determination of its coverage obligations, nor did it pay any
amount toward MMSD's defense costs. Instead, it chose to rely
on its own unilateral determination that its policy was excess
to Steadfast's. As we have explained, Greenwich's unilateral
determination was erroneous; Greenwich's policy provided
13
No. 2016AP1631
potential coverage for a claim made in lawsuits based on sewage
backups. Therefore, Greenwich breached its duty to defend, and
it is responsible for all damages that naturally flow from the
breach. Marks, 369 Wis. 2d 547, ¶41 n.21.
3. Steadfast's Contractual Subrogation Claim
¶32 Steadfast asserts that it has a contractual
subrogation claim against Greenwich due to its payment of $1.55
million in defense costs and Greenwich's failure to provide a
defense. Greenwich asserts that if Steadfast has a claim, it
sounds in contribution, not subrogation. Greenwich further
asserts that the time has passed in which to bring a
contribution claim.
¶33 Subrogation is the "substitution of one party for
another whose debt the party pays, entitling the paying party to
rights, remedies, or securities that would otherwise belong to
the debtor." Dufour, 370 Wis. 2d 313, ¶15. "The doctrine of
subrogation enables an insurer that has paid an insured's
loss . . . to recoup that payment from the party responsible for
the loss." Id. (citations omitted). The insurer "steps into
the shoes" of its insured and pursues the legal rights or claims
to which the insured would have been entitled. Wilmot v. Racine
Cty., 136 Wis. 2d 57, 63, 400 N.W.2d 917 (1987).
¶34 Contribution claims sometimes occur between joint
tortfeasors, or in other circumstances, where one person has
paid more than that person's share of a joint obligation. Kafka
v. Pope, 194 Wis. 2d 234, 241, 533 N.W.2d 491 (1995) (concluding
that "[w]hether the common obligation be imposed by contract or
14
No. 2016AP1631
grows out of a tort, the thing that gives rise to the right of
contribution is that one of the common obligors has discharged
more than his fair equitable share of the common liability.").
¶35 Subrogation may arise in three different forms:
contractual, statutory, and equitable subrogation. Estate of
Kriefall, 342 Wis. 2d 29, ¶37. In a subrogation claim, the
subrogee seeks payment based on rights the subrogee acquired
from another. Millers Nat'l Ins. Co. v. City of Milwaukee, 184
Wis. 2d 155, 168, 516 N.W.2d 376 (1994). The "purpose of
subrogation is to place the loss ultimately on the wrongdoers."
Cunningham v. Metro. Life Ins. Co., 121 Wis. 2d 437, 444, 360
N.W.2d 33 (1985). When express contractual subrogation is
claimed, we examine the policy's provisions. Id. at 449. We
have given effect to express subrogation clauses contained in
insurance contracts. Id. at 446.
¶36 Here, Steadfast's policy expressly provided for
subrogation:
In the event of any payment under this policy, we
shall be subrogated to all an "insured's" rights of
recovery against any person or organization.
MMSD's right of recovery against Greenwich to which Steadfast is
contractually subrogated arises from Greenwich's breach of its
contractual obligation to defend MMSD. Accordingly, we examine
Steadfast's alleged right of recovery against Greenwich as an
express contractual subrogation right that arose from MMSD's
right to a defense from Greenwich.
15
No. 2016AP1631
¶37 Subrogation does not change the type of claim for
relief that was held by the subrogor. Wilmot, 136 Wis. 2d at 63
(explaining that "the identity of a cause of action is not
changed by the subrogation, and no new cause of action is
created thereby."). Because "[t]he original right of the
plaintiff measures the extent of the subrogated party's right,"
the statute of limitations for a subrogated claim is the same as
the statute of limitations that would apply to the claim if it
had not been subrogated. Gen. Accident Ins. Co. of Am. v.
Schoendorf & Sorgi, 202 Wis. 2d 98, 109, 549 N.W.2d 429 (1996).
Wisconsin has a six-year statute of limitations for breach of
contract claims. Wis. Stat. § 893.43(1) (2015-16).8 Steadfast
was subrogated to MMSD's contract claim that Greenwich breached
its duty to defend.
¶38 Steadfast paid MMSD's debt for defense costs, which
included what Greenwich was obligated to provide as well as
Steadfast's own portion of MMSD's defense costs, when it paid
MMSD $1.55 million. Because subrogation does not change the
identity of the cause of action, Steadfast's claim against
Greenwich is also for breach of contract. Claims for breach of
contract have a six-year statute of limitations. Wis. Stat.
§ 893.43(1). Steadfast's action was filed less than six years
after Greenwich's breach occurred, therefore, it was timely
filed.
8
All subsequent references to the Wisconsin Statutes are to
the 2015-16 version unless otherwise indicated.
16
No. 2016AP1631
4. Allocation of Defense Costs
¶39 Steadfast and Greenwich each had a contractual duty to
defend MMSD. Because MMSD chose to pay for its own defense, it
incurred $1.55 million in stipulated defense costs. Steadfast
paid $1.55 million to MMSD; however, part of that payment was
attributable to the defense that Steadfast, itself, was
obligated to provide.
¶40 The circuit court and the court of appeals ignored the
financial import of Steadfast's own duty to defend MMSD.
Instead, both courts focused on Greenwich's failure to defend
and adjudged the full amount of MMSD's defense costs as being
due from Greenwich to Steadfast.9 In so doing, they relieved
Steadfast of its contractual obligation for defense costs,
without recognition of the windfall that Steadfast received from
what amounted to a judicial forgiveness of Steadfast's duty to
defend MMSD. This placed Steadfast (as subrogee) in a better
position than MMSD (the subrogor) from whom Steadfast obtained
the contractual right of subrogation. To explain further, MMSD
litigated the defense through attorneys of its own choosing, but
it received no windfall when it was repaid $1.55 million in
litigation costs it actually incurred. Here, Steadfast obtained
9
The circuit court concluded that Greenwich waived the
right to raise coverage defenses by its breach of the duty to
defend. The court of appeals concluded that because Greenwich
breached its duty to defend MMSD, it was not equitably entitled
to an allocation of a portion of MMSD's defense costs to
Steadfast. Steadfast Ins. Co., 380 Wis. 2d 184, ¶4.
17
No. 2016AP1631
litigation costs beyond what it incurred in satisfying its duty
to defend.
¶41 We conclude that both Steadfast and Greenwich had a
duty to provide a defense to MMSD. Accordingly, the financial
sanction of an insurer who fails in its duty to defend does not
include judicial forgiveness of another insurer's financial
obligation for defense costs. Therefore, we conclude that the
$1.55 million in defense costs that Steadfast paid should be
allocated between Steadfast and Greenwich.
¶42 We have not directly addressed the proper formula for
allocating defense costs when two insurers have a duty to defend
the same insured. See Burgraff v. Menard, Inc., 2016 WI 11,
¶111, 367 Wis. 2d 50, 875 N.W.2d 596 (Roggensack, C.J.,
dissenting). However, in a well-reasoned opinion, the Utah
Supreme Court addressed the question of allocation of defense
costs between insurers, each of whom had a duty to defend. Ohio
Cas. Ins. Co. v. Unigard Ins. Co., 268 P.3d 180, 185-86 (Utah
2012). In Ohio Cas., the court noted the obligation of each
insurer to participate in defense costs and under the facts of
Ohio Cas., which involved a long term exposure, the court chose
the time-on-risk method of defense cost apportionment.10
10
Time-on-risk method of apportionment weights the defense
costs by the time that each policy was at risk for actions of
its insured that could require coverage. Sharon Steel Corp. v.
Aetna Cas. & Sur. Co., 931 P.2d 127, 140 (Utah 1997) (explaining
that damages based on the relative period of time for which
coverage was provided under each policy is an equitable method
of apportionment of defense costs).
18
No. 2016AP1631
Apportionment also may be done on an equal division among
insurers, and it has been ordered based on respective policy
limits. Sharon Steel Corp. v. Aetna Cas. & Sur. Co., 931 P.2d
127, 140 (Utah 1997). In discussions of apportionment, there
has been a uniform recognition of the obligation for defense
costs that both insurers faced.
¶43 In equal apportionment, defense costs are distributed
equally among any insurers with a duty to defend, for example
with two insurers each would pay one-half, with three insurers
each would pay one-third. See, e.g., Cargill, Inc. v. Ace Am.
Ins. Co., 784 N.W.2d 341 (Minn. 2010). This method is easy to
apply; however, it could lead to unfairness and upset the
parties' reasonable expectations if one insurer insures for
lesser policy limits and charges a lower premium. See, e.g.,
Sharon Steel Corp., 931 P.2d at 140 (pointing out that "insurers
do not stand on an equal footing where there are significantly
different liability limits.").
¶44 The third option is to apportion defense costs pro
rata, based on the parties' policy limits. For example, if
insurer A's policy limit is $1 million, and insurer B's policy
limit is $2 million, insurer A will be responsible for one-third
of defense costs. We have suggested that this is the preferred
approach. See Schoenecker, 88 Wis. 2d at 671; Oelhafen, 171
Wis. 2d at 537 ("The proportion [each insurer contributes toward
the insured's loss] usually is based on their respective policy
limits."). This approach better reflects the insurance
companies' respective bargains. See, e.g., Armstrong World
19
No. 2016AP1631
Indus., Inc. v. Aetna Cas. & Sur. Co., 52 Cal. Rptr. 2d 690, 707
(Cal. Ct. App. 1996) (explaining that apportioning damage
reflects that higher premiums generally are paid for higher per
person or per liability limits). Accordingly, we conclude that
pro rata allocation based on insurers' policy limits is the best
method for apportionment of defense costs in the matter before
us.
¶45 Here, Steadfast paid $1.55 million for MMSD's defense
costs. Greenwich and Steadfast have stipulated that this was
the "reasonable and necessary" cost of MMSD's defense.
Greenwich's policy limit was $20 million. Steadfast's policy
limit was $30 million. Therefore, Greenwich owed two-fifths of
$1.55 million in defense costs and Steadfast was responsible for
three-fifths of those costs. Accordingly, Steadfast is entitled
to recover from Greenwich $620,000, plus interest accruing on
that amount from the date of entry of the circuit court's
judgment. Wis. Stat. § 815.05(8).11
5. Attorney Fees
¶46 We conclude that Steadfast also is entitled to recover
attorney fees from Greenwich under principles of contractual
subrogation. We have held that when an insurer breaches its
duty to defend, it may be liable for attorney fees incurred by
its insured in successfully establishing coverage. Elliott v.
11
We do not address whether Wis. Stat. § 628.46 applies to
claims made within Steadfast's contractual subrogation clause
because neither party addressed § 628.46.
20
No. 2016AP1631
Donahue, 169 Wis. 2d 310, 324-25, 485 N.W.2d 403 (1992). See
also Newhouse, 176 Wis. 2d at 837 ("[W]here an insurer
wrongfully refuses to defend on the grounds that the claim
against the insured is not within the coverage of the policy,
the insurer is guilty of a breach of contract which renders it
liable to the insured for all damages that naturally flow from
the breach.").
¶47 As we have explained above, Steadfast had rights of
contractual subrogation based on its payment to MMSD.
Therefore, Steadfast asserted rights that MMSD had against
Greenwich for failing to defend. Stated otherwise, if MMSD were
to sue Greenwich to recover defense costs, it would have been
entitled to the attorney fees and costs incurred in such
litigation. Id. at 838. Here, by virtue of its express
subrogation rights, Steadfast stands in MMSD's shoes and seeks
attorney fees incurred in obtaining a judgment against Greenwich
for payment of defense costs just as MMSD could have recovered
were it to have brought this lawsuit.
¶48 Although Wisconsin courts have not yet awarded
attorney fees for breach of a duty to defend to an insurer who
was subrogated to an insured's rights, neither the principles of
contractual subrogation, nor the rationale behind attorney fee
awards for breach of a duty to defend, foreclose this result.
However, other states have approached this question. The
decisions of the Supreme Court of California and of Florida have
provided helpful discussions.
21
No. 2016AP1631
¶49 In Emp'rs Mut. Liab. Ins. Co. v. Tutor-Saliba Corp.,
951 P.2d 420 (Cal. 1998), a subcontractor's employee was injured
on the job. The subcontractor's insurer paid worker's
compensation, which made it "subrogated to all of the rights and
liabilities" of the subcontractor. Id. at 424. The underlying
contract between the subcontractor and general contractor stated
that in any dispute between the two, the prevailing party was
entitled to attorney fees. Id. at 422. The subrogated insurer
unsuccessfully sued the general contractor to recover its
worker's compensation payment. Id. The California Supreme
Court held that as the prevailing party, the general contractor
would be entitled to recover attorney fees from the subrogated
insurer: "the insurer should likewise be subrogated to——i.e.,
both benefited and bound by——any contract providing for attorney
fees to a prevailing party that the employer and the third party
have executed." Id. at 424. While this involved an award of
attorney fees against the subrogee, the court held that the
subrogee was "both benefited and bound by" the attorney fee
provision. Id.
¶50 Florida's supreme court appears to have followed suit.
In Cont'l Cas. Co. v. Ryan Inc. E., 974 So. 2d 368 (Fla. 2008),
it held that a subrogee surety could not pursue attorney fees
against the principal's insurer, but only because the principal
still had the right to pursue attorney fees. Id. at 377. If
the principal had assigned all its rights to the surety via
contractual subrogation, the surety would have been able to
recover attorney fees. Id.
22
No. 2016AP1631
¶51 Their reasoning is persuasive. We conclude that a
contractual subrogee's right to recovery may include an award of
attorney fees the subrogor would have been entitled to receive
had it brought the lawsuit. We have long recognized that
contractual subrogation "entitl[es] the paying party to rights,
remedies, or securities that would otherwise belong to the
debtor." Dufour, 370 Wis. 2d 313, ¶15; see also Wilmot, 136
Wis. 2d at 63. We decline to create an exception to this
longstanding rule by excluding attorney fees from the bundle of
contractual subrogation rights that arise from a specific
subrogation clause upon payment by the subrogee.
¶52 In this case, Greenwich breached its duty to defend,
so MMSD had the right to request attorney fees for successfully
establishing Greenwich's obligation to defend. Steadfast's
contract with Veolia and MMSD stated in relevant part: "In the
event of any payment under this policy, we shall be subrogated
to all an 'insured's' rights of recovery against any person or
organization." Because MMSD's "rights of recovery" against
Greenwich would include attorney fees incurred in successfully
establishing coverage, Steadfast is entitled to recover $325,000
in attorney fees from Greenwich as MMSD's subrogee, plus
interest accruing on that amount from the date of entry of the
circuit court's judgment. Wis. Stat. § 815.05(8). Furthermore,
nothing in this opinion prevents Steadfast from moving the
circuit court for an award of attorney fees incurred in
litigating the appeal and our review herein.
23
No. 2016AP1631
III. CONCLUSION
¶53 First, we conclude that Greenwich, who insured the
risk that United Water would negligently perform services for
MMSD, thereby causing damage, and Steadfast, who for a different
period of time insured the risk that Veolia would negligently
perform services for MMSD, thereby causing damage, were both
primary and successive insurers in regard to MMSD, their common
additional insured.
¶54 Second, we conclude that Greenwich breached its
contractual duty to defend MMSD. Third, we conclude that
Steadfast's contractual subrogation claim against Greenwich was
timely filed as it comes within the six-year statute of
limitations for contract actions.
¶55 Fourth, we apply a pro-rata allocation of defense
costs Steadfast paid to MMSD based on Steadfast's and
Greenwich's respective policy limits of $30 million and $20
million. Fifth, and finally, we conclude that Steadfast is
entitled to recover attorney fees from Greenwich due to
Steadfast's stepping into the shoes of MMSD through contractual
subrogation to force Greenwich to pay defense costs.
¶56 Accordingly, we affirm the decision of the court of
appeals in part and reverse it in part.
By the Court.—The decision of the court of appeals is
affirmed in part and reversed in part.
24
No. 2016AP1631.awb
¶57 ANN WALSH BRADLEY, J. (concurring in part,
dissenting in part). I agree with the majority that the "other
insurance" provisions are not triggered. Additionally, I agree
that Greenwich breached its duty to defend, and that Steadfast's
claim sounds in subrogation and not contribution.1
¶58 I write separately, however, because the majority errs
in two ways. First, it allocates defense costs between
Steadfast and Greenwich, allowing Greenwich to breach its duty
to defend with impunity. Second, it awards attorney fees to
Steadfast in derogation of the longstanding American Rule.
¶59 An insurer that breaches the duty to defend should not
be able to escape liability for the consequences of its
behavior. Our case law is clear that an insurer who refuses to
defend its insured proceeds at its own peril. Olson v. Farrar,
2012 WI 3, ¶30, 338 Wis. 2d 215, 809 N.W.2d 1.
¶60 Yet, the majority extinguishes the peril, allowing a
breaching insurer to refuse to uphold its duty to defend with
the security that it will suffer no financial consequence. In
doing so, it encourages a game of chicken between insurers that
may leave the insured as the only loser.
¶61 Further, our case law dictates that exceptions to the
American Rule be limited and narrow. Nevertheless, the majority
goes where no court has previously ventured.
¶62 In expanding the exception to the American Rule by
awarding attorney fees from one insurance company to another,
1
I join parts II.B.1, II.B.2, and II.B.3 of the majority
opinion.
1
No. 2016AP1631.awb
one wonders what is next. The majority's determination crafts a
new exception to the American Rule that is unsupported by case
law and that chips away at the vitality of the Rule. I fear
that "once the camel's nose is in the tent, the rest will likely
follow."
¶63 Accordingly, I concur in part and dissent in part.2
I
¶64 The majority errs first in its determination that
Greenwich is not liable for the entirety of MMSD's defense
costs. Instead, it pro-rates costs, turning the purpose of this
court's coverage framework on its head and creating a perverse
incentive for insurers to fail to uphold their duty to defend.
¶65 As the majority recognizes, this court has established
a preferred framework for an insurance company to follow when it
disputes coverage. Majority op., ¶29 (citing Wis. Pharmacal
Co., LLC v. Neb. Cultures of Cal., Inc., 2016 WI 14, ¶18, 367
Wis. 2d 221, 876 N.W.2d 72). Pursuant to such a framework, "the
proper procedure for an insurance company to follow when
coverage is disputed is to request a bifurcated trial on the
issues of coverage and liability and move to stay any
proceedings on liability until the issue of coverage is
resolved." Newhouse by Skow v. Citizens Sec. Mut. Ins. Co., 176
Wis. 2d 824, 836, 501 N.W.2d 1 (1993) (citing Elliott v.
Donahue, 169 Wis. 2d 310, 318, 485 N.W.2d 403 (1992)). When an
2
I dissent from parts II.B.4 and II.B.5 of the majority
opinion.
2
No. 2016AP1631.awb
insurer follows this procedure, the insurer runs no risk of
breaching its duty to defend. Id.
¶66 An insurer who unilaterally refuses to defend does so
at its own peril. Olson, 338 Wis. 2d 215, ¶30. Accordingly,
the "general rule is that where an insurer wrongfully refuses to
defend on the grounds that the claim against the insured is not
within the coverage of the policy, the insurer is guilty of a
breach of contract which renders it liable to the insured for
all damages that naturally flow from the breach." Newhouse, 176
Wis. 2d at 837.
¶67 Indeed, this court in Water Well Solutions Serv.
Group, Inc. v. Consolidated Ins. Co. recently warned that "an
insurer opens itself up to a myriad of adverse consequences if
its unilateral duty to defend determination turns out to be
wrong." 2016 WI 54, ¶28, 369 Wis. 2d 607, 881 N.W.2d 285. An
insurer's liability "may potentially be greater than what the
insurer would have paid had it defended its insured in the first
instance . . . ." Id.
¶68 Our established framework encourages insurers to
fulfill their duty to defend and thereby avoids negative
outcomes for both insurers and insureds. "A unilateral refusal
to defend without first attempting to seek judicial support for
that refusal can result in otherwise avoidable expenses and
efforts to litigants and courts, deprive insureds of their
contracted-for protections, and estop insurers from being able
to further challenge coverage." Liebovich v. Minnesota Ins.
Co., 2008 WI 75, ¶55, 310 Wis. 2d 751, 751 N.W.2d 764.
3
No. 2016AP1631.awb
¶69 The majority effectively rewards Greenwich for
ignoring this court's established framework and allows Greenwich
to escape the consequences of its willful breach of the duty to
defend. By allowing Greenwich to pay pro-rated costs, the
majority lessens the impact of the insurer's breach of the duty
to defend. It further encourages future insurers to follow a
similar course rather than seeking a bifurcated coverage trial
as this court has recommended numerous times.
¶70 According to the majority, Greenwich should suffer no
consequence at all for breaching the duty to defend. It pays
merely what it would have paid anyway if it had lived up to its
duty to defend in the first instance.
¶71 The result of the majority opinion is the
proliferation of a game of chicken between insurers. See
Southeast Wis. Prof'l Baseball Park Dist. v. Mitsubishi Heavy
Indus. Am., Inc., 2007 WI App 185, ¶64, 304 Wis. 2d 637, 738
N.W.2d 87. When there are two or more insurers from whom
coverage is sought, what incentive is there to provide coverage
if an insurer can simply refuse to defend the case and end up
paying the exact same amount later in the event it is sued?
Each insurer would simply hold out and hope that someone else
takes on the defense.
¶72 Rather than encouraging insurers to live up to their
contractual obligations, the majority opinion allows insurers to
rest comfortably in their decisions to deny a defense with the
knowledge that if a breach is later found, no financial
consequence will be forthcoming. The only loser in this game is
4
No. 2016AP1631.awb
the insured, who may be forced to expend resources for a defense
that should have been covered by insurance from the beginning.
¶73 Unlike the majority, I conclude that there must be
some element of penalty and deterrence to encourage insurance
companies to defend when they are obligated. See Water Well,
369 Wis. 2d 607, ¶28. I thus determine that Greenwich is liable
for the full cost of MMSD's defense.
¶74 My conclusion is further buttressed by the fact that
Greenwich's insurance policy does not contain a pro-ration
clause. Where a policy contains no pro-ration language, this
court is not to rewrite the policy to include it. Plastics
Eng'g Co. v. Liberty Mut. Ins. Co., 2009 WI 13, ¶59, 315
Wis. 2d 556, 759 N.W.2d 613. Yet by pro-rating defense costs,
the majority gives Greenwich the benefit of a bargain it did not
make.
¶75 Accordingly, I dissent from part II.B.4 of the
majority opinion, which effectively eliminates any incentives
for insurance companies to promptly defend lawsuits and fails to
encourage insurers to follow this court's preferred framework
for determining insurance coverage.
II
¶76 The majority errs further in its determination that
Steadfast is entitled to attorney fees incurred in litigating
this case. It fails to heed this court's warning that
exceptions to the American Rule are to be limited and narrow.
Instead, it opens up a new exception that is contrary to clear
precedent that arrives at a directly opposite outcome.
5
No. 2016AP1631.awb
¶77 Generally, we adhere to the American Rule, which
provides that parties to litigation are responsible for their
own attorney fees unless recovery is expressly allowed by either
contract or statute, or when recovery results from third-party
litigation. DeChant v. Monarch Life Ins. Co., 200 Wis. 2d 559,
571, 547 N.W.2d 592 (1996). Absent statutory authority or a
contractual provision to the contrary, Wisconsin courts strictly
follow this rule. Id.
¶78 In the insurance coverage context, analysis of
entitlement to attorney fees begins with Elliott v. Donahue, 169
Wis. 2d 310. The Elliott court determined that Wis. Stat.
§ 806.04(8), "which recognizes the principles of equity, permits
the recovery of reasonable attorney fees incurred by the insured
in successfully establishing coverage." Id. at 314. It
concluded that attorney fees were appropriate under the specific
facts that were present:
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, incurred by the insured in successfully
establishing coverage.
Id. at 322.
¶79 Subsequent case law has limited the application of
Elliott to its facts. Specifically, in Riccobono v. Seven Star,
Inc., the court of appeals denied a claim for attorney fees by
one insurer against a second insurer. 2000 WI App 74, 234
6
No. 2016AP1631.awb
Wis. 2d 374, 610 N.W.2d 501. The Riccobono court reasoned: "In
defining the dispute in Elliott, the supreme court stated: 'The
sole issue on review concerns whether an insured may recover
attorney fees incurred in successfully defending coverage under
an insurance policy.'" Id., ¶22. It then distinguished the
facts present in Riccobono from those in Elliott, writing that
"Society is not an insured and, thus, does not appear to fall
within the holding of the supreme court." Id., ¶22.
¶80 The Riccobono court found it dispositive that the
identity of the party seeking attorney fees was an insurer and
not an insured. On this issue, Riccobono is on all fours with
this case. Curiously, the majority fails to even mention
Riccobono.
¶81 Despite the majority's silence, Riccobono instructs
that attorney fees are not available to Steadfast because it is
an insurer, and not an insured. Even with such an instruction
in hand, an additional step is required in the analysis due to
7
No. 2016AP1631.awb
the fact that Steadfast's claim is one for subrogation, i.e., it
steps into the shoes of its insured.3
¶82 Finding the nature of Steadfast's subrogation claim
dispositive, the majority turns to the case law of other
jurisdictions in support of its result. Majority op., ¶¶48-51.
Because MMSD would have been entitled to attorney fees, the
majority reasons, so is Steadfast. Id., ¶47. I do not find
this approach persuasive.
¶83 The court of appeals in Riccobono was clear that
Elliott "does not encompass the payment of attorney fees and
costs from one insurer to another . . . ." 234 Wis. 2d 374, ¶2.
The driving factor behind the Elliott decision was that the
insured retained independent counsel who established that
coverage existed. See Gorton v. Hostak, Henzl & Bichler, S.C.,
217 Wis. 2d 493, ¶¶32-33, 577 N.W.2d 617 (1998).
3
Although the insurer requesting attorney fees in Riccobono
sought such fees pursuant to a theory of subrogation, the court
of appeals did not address this argument because it determined
that the insurer was not entitled to subrogation under the
language of the policy. Riccobono v. Seven Star, Inc., 2000 WI
App 74, ¶28, 234 Wis. 2d 374, 610 N.W.2d 501. As the court
stated, "the conditions under which Society might have been
subrogated to Seven Star's right to attorney fees and costs
never came into fruition." Id., ¶28. Nevertheless, the
Riccobono court's declaration that attorney fees are not
available under Elliott when one insurer seeks attorney fees
from another insurer is consistent with this court's previous
reluctance to extend Elliott beyond its particular facts and
circumstances regardless of whether the insurer is a subrogated
party. See DeChant v. Monarch Life Ins. Co., 200 Wis. 2d 559,
569, 547 N.W.2d 592 (1996); Elliott v. Donahue, 169 Wis. 2d 310,
485 N.W.2d 403 (1992).
8
No. 2016AP1631.awb
¶84 This court has expressly declined to extend Elliott
beyond its particular facts and circumstances. Id., ¶33 (citing
DeChant, 200 Wis. 2d at 569); see also Reid v. Benz, 2001 WI
106, ¶13, 245 Wis. 2d 658, 629 N.W.2d 262 ("The facts and
circumstances that gave rise to our decision in Elliott are
particularly significant, because our reasoning therein is
inextricably connected to those facts and circumstances.").
Instead, we have adhered to the maxim that exceptions to the
American Rule should be "limited and narrow." Gorton, 217
Wis. 2d 493, ¶33; Nationstar Mortg. LLC v. Stafsholt, 2018 WI
21, ¶27, 380 Wis. 2d 284, 908 N.W.2d 784. "Awarding attorney
fees, as we did in Elliott, should not be the usual result."
Reid, 245 Wis. 2d 658, ¶27.
¶85 Although generally Steadfast steps into MMSD's shoes
when pursuing a subrogation claim, to do so here flies in the
face of clear precedent. To allow such subrogated status to one
insurer seeking to recover attorney fees from another insurer
extends far beyond the "particular facts and circumstances" of
Elliott. See DeChant, 200 Wis. 2d at 569. Unlike the majority,
I would follow our case law indicating that such exceptions to
the American Rule must be narrowly circumscribed.
¶86 Accordingly, I dissent from part II.B.5 of the
majority opinion because it allows an insurer to recover
attorney fees from another insurer, contravening the long-
established American Rule.
¶87 In sum, for the reasons set forth above, I
respectfully concur in part and dissent in part.
9
No. 2016AP1631.awb
¶88 I am authorized to state that Justice REBECCA FRANK
DALLET joins this concurrence/dissent.
10
No. 2016AP1631.rgb
¶89 REBECCA GRASSL BRADLEY, J. (concurring in part,
dissenting in part). I agree with the majority that an
insured's defense costs should be allocated between insurers who
share a contractual, overlapping duty to defend the insured. I
also agree that the allocation between insurers should be pro
rata, based upon each insurer's policy limits. Accordingly, I
join part II.B.4 of the majority opinion to the extent it adopts
these legal principles. However, I disagree with the majority's
conclusion that Greenwich is responsible for any portion of
defense costs paid on behalf of MMSD. Vis-à-vis Steadfast's
policy of insurance covering MMSD, Greenwich's policy was excess
over Steadfast's, relieving Greenwich of any obligation to
contribute to MMSD's defense, which Steadfast was already
providing. The majority erroneously concludes otherwise,
deeming both Steadfast and Greenwich to be primary insurers,
each with a duty to defend MMSD in the consolidated lawsuits
stemming from the 2008 rain event. In reaching this result, the
majority declines to apply clear and unambiguous policy language
dictating a different priority of insurance, instead applying an
offhanded statement in a case involving an unrelated issue with
no application here. The majority errs. I would reverse the
judgment against Greenwich in its entirety.1
1
Because I conclude that Greenwich had no duty to defend, I
do not address the remaining issues resolved by the majority
because they are moot unless Greenwich had a duty to defend. I
do agree with Justice Ann Walsh Bradley's dissent to the extent
it would deny recovery of attorney fees by one insurer against
another.
1
No. 2016AP1631.rgb
I
¶90 Insurance policies are contracts. Wadzinski v. Auto-
Owners Ins. Co., 2012 WI 75, ¶11, 342 Wis. 2d 311, 818
N.W.2d 819. When interpreting contracts, we presume the
parties' intentions are expressed in the language they chose.
Id. Accordingly, when construing policy terms and conditions,
we begin with their plain language. See Johnson Controls, Inc.
v. London Mkt., 2010 WI 52, ¶59, 325 Wis. 2d 176, 784 N.W.2d 579
("Wisconsin case law instructs that the language of the policy
should be our initial focus."); see also BV/B1, LLC v.
InvestorsBank, 2010 WI App 152, ¶25, 330 Wis. 2d 462, 792
N.W.2d 622 ("When interpreting a contract clause, we begin with
the plain language of the clause."). "When the language of [an
insurance] contract is unambiguous, we apply its literal
meaning." Wisconsin Label Corp. v. Northbrook Prop. & Cas. Ins.
Co., 2000 WI 26, ¶23, 233 Wis. 2d 314, 607 N.W.2d 276.
Interpretation of policy language is a question of law we review
de novo. Wadzinski, 342 Wis. 2d 311, ¶10.
¶91 As a general rule, a primary insurer "has the primary
duty to defend a claim" while an excess insurer is not required
to contribute to the defense as long as "the primary insurer is
required to defend." Johnson Controls, Inc., 325 Wis. 2d 176,
¶57 (quoted source omitted). "Whenever two policies apply to
the same insured at the same time, the issue of which policy
must pay first——or which is primary and which is excess——is
dealt with by other insurance clauses." Burgraff v. Menard,
Inc., 2016 WI 11, ¶27, 367 Wis. 2d 50, 875 N.W.2d 596 (quotation
2
No. 2016AP1631.rgb
marks and quoted source omitted). In such situations, the
insurers may, by the terms of their policies, "define the extent
to which each is primary and each excess[.]" Wis. Stat.
§ 631.43(1); see also Burgraff, 367 Wis. 2d 50, ¶27.2 Regardless
of its status as primary or excess, whether an insurer has a
duty to defend "depends on the language of the policies."
Johnson Controls, Inc., 325 Wis. 2d 176, ¶58 (emphasis added).
II
¶92 While Steadfast and Greenwich issued their respective
policies to two different primary insureds, neither party
disputes that both policies cover the same additional insured:
MMSD. It is MMSD's losses——namely, defense costs——that are at
issue in this case. Therefore, the focus should be on MMSD as
the insured, not United Water or Veolia. Instead, the majority
views coverage from the standpoint of the primary insureds——
United Water and Veolia——who are entirely removed from this
coverage litigation: "Greenwich's policy insured the risk that
United Water's conduct in managing the Milwaukee sewerage system
during the policy period would be negligent . . . Steadfast's
policy insured the risk that Veolia would negligently manage the
Milwaukee sewerage system during the policy period[.]" Majority
op., ¶¶23, 24. The negligence of United Water and Veolia are
irrelevant for purposes of determining the respective insurers'
2
This holds true unless "the policies contain inconsistent
terms on that point," in which case "the insurers shall be
jointly and severally liable to the insured on any coverage
where the terms are inconsistent[.]" Wis. Stat. § 631.43(1).
3
No. 2016AP1631.rgb
duty to defend MMSD, a different insured altogether. By framing
the issue incorrectly, the majority's analysis collapses at the
outset.
¶93 The language of Greenwich's and Steadfast's insurance
contracts determines whether Greenwich and Steadfast provide
primary or excess coverage to MMSD. Under the "PROFESSIONAL
LIABILITY" section of its policy, Greenwich agreed "[t]o pay on
behalf of the INSURED all LOSS in excess of the Retention
amount . . . as a result of CLAIMS first made against the
INSURED . . . during the POLICY PERIOD . . . by reason of any
act, error or omission in PROFESSIONAL SERVICES
rendered . . . by the INSURED or by any person whose acts,
errors or omissions the INSURED is legally responsible."3 Under
the separate "CONTRACTOR'S POLLUTION LEGAL LIABILITY" section of
its policy, Greenwich agreed "[t]o pay on behalf of the INSURED
all LOSS, in excess of the Retention amount . . . as a result of
an OCCURRENCE which arises out of CONTRACTING SERVICES and which
first commenced during the POLICY PERIOD." Under the policy,
"LOSS"——what Greenwich is contractually obligated to pay to or
on behalf of MMSD——means not only "DAMAGES [i.e., a "monetary
judgment, award or settlement of compensatory damages"] which
the INSURED shall become legally obligated to pay as a result of
a CLAIM" but also "CLAIMS EXPENSE." Under the policy, "CLAIMS
EXPENSE" includes "all other fees, costs . . . and expenses
resulting from the . . . defense . . . of such CLAIM, if
3
Capitalization appears in Greenwich's policy to signify
defined terms.
4
No. 2016AP1631.rgb
incurred . . . with the written consent of the Company, by the
INSURED." In simpler terms, Greenwich insured MMSD not only for
"DAMAGES" MMSD would become legally obligated to pay as a result
of a covered claim (here there were none) but also "CLAIMS
EXPENSE," which includes attorney fees incurred by MMSD in
defending against such a claim, regardless of whether MMSD
became legally obligated to pay damages to a third party.
Despite the fact that only "CLAIMS EXPENSE" and not "DAMAGES"
are at issue in this case, the majority ignores in its analysis
of Greenwich's duty to defend the fact that "CLAIMS EXPENSE"
constitutes MMSD's exclusive "LOSS."
¶94 Steadfast's policy similarly promises to "pay on
behalf of an 'insured' any 'loss' an 'insured' is legally
obligated to pay as a result of a 'claim[.]'" Steadfast's
policy defines "Loss" to mean both (1) "Compensatory damages or
legal obligations arising from 'Bodily injury'" or "Property
damage" and (2) "Related 'claim expense.'" Under Steadfast's
policy, "Claim expenses" include attorney fees and "[a]ll other
fees, costs and expenses resulting from the defense . . . of a
'claim' if incurred by" Steadfast or MMSD with Steadfast's
consent.
¶95 In the underlying rain event litigation, no damages
were awarded or paid to the plaintiffs for their claims against
MMSD. MMSD sustained no "loss" under the first prong of that
definition in either Greenwich's or Steadfast's policies.
Instead, MMSD's "loss" as defined in each policy was limited to
attorney fees incurred in defending against the rain event
5
No. 2016AP1631.rgb
claims, included under the second prong of "loss" in each policy
and denominated as "CLAIMS EXPENSE" under Greenwich's policy and
as "Claim expenses" under Steadfast's policy. Although MMSD was
never found liable in the rain event litigation, nor did it
agree to pay damages in settlement of that litigation, MMSD did
incur an insurable loss under the policies, in the form of
attorney fees incurred in its defense.
¶96 At this step in the analysis, I conclude that both
Greenwich and Steadfast contractually agreed to pay MMSD's
attorney fees in defending the rain event litigation. The
analysis does not end there, however, because of course MMSD is
not entitled to recover double its attorney fees, nor was MMSD
entitled to duplicative defenses against the rain event claims.
If multiple policies cover the same insured during the same
period, then the policies' respective "other insurance"
provisions determine which insurer is primary and which is
excess.
¶97 Greenwich's "other insurance" clause in its policy
insuring MMSD provides in pertinent part: "this insurance shall
be in excess of the Retention amount . . . and any other valid
and collectible insurance available to the INSURED . . . unless
such other insurance is written only as a specific excess
insurance over the Limits of Liability provided in this policy."
(Emphasis added.) While Greenwich contractually declares its
insurance to be excess if other valid and collectible insurance
is available to MMSD, Steadfast's "other insurance" provision is
6
No. 2016AP1631.rgb
markedly different. Steadfast designates its insurance as
primary unless other primary insurance is available to MMSD:
L. OTHER INSURANCE
1. The insurance provided under this policy is primary
insurance, except when:
a. Stated in the Declarations or by endorsement to
apply in excess of or contingent upon the absence of
other insurance; or
b. Any other primary insurance is available covering
liability for any "claim" or "loss" . . . .
When this insurance is primary and the "insured" has
other insurance which is stated to be applicable to
the "claim" or "loss" on an excess basis, the amount
of our liability under this policy shall not be
reduced by the existence of such excess insurance.
(Emphasis added.) Both Greenwich and Steadfast agreed to pay
MMSD's "loss" in the form of attorney fees incurred in defending
the rain event litigation. Because Steadfast's policy provided
valid and collectible insurance to MMSD for this particular
loss, Greenwich's insurance covering this loss——attorney fees——
is excess. Steadfast's own policy declares its coverage to be
primary unless (1) otherwise stated in the declarations or an
endorsement, or (2) any other primary insurance is available.
Neither condition exists under these facts.
¶98 No one disputes Steadfast had a duty to defend MMSD
against the entire litigation, even though not all claims
implicated Veolia, Steadfast's primary insured. See Fireman's
Fund Ins. Co. of Wis. v. Bradley Corp., 2003 WI 33, ¶21, 261
Wis. 2d 4, 660 N.W.2d 666 ("[W]hen an insurance policy provides
coverage for even one claim made in a lawsuit, the insurer is
7
No. 2016AP1631.rgb
obligated to defend the entire suit.") Steadfast's "other
insurance" provision states that its policy provides primary
coverage. Greenwich also promised coverage for MMSD's defense
costs, but its "other insurance" provision states that
Greenwich's coverage is excess to any other valid and
collectible insurance. Steadfast's contractual obligation to
pay MMSD's defense costs constitutes "other valid and
collectible insurance," rendering Greenwich an excess insurer as
to that loss.
¶99 Despite this straightforward and unambiguous policy
language, the majority declines to interpret the "other
insurance" clauses, inexplicably stating that "we do not
interpret the terms of the 'other insurance' clauses because
under the undisputed facts . . . Greenwich's 'other insurance'
clause provided successive insurance to MMSD." Majority op.,
¶27. The majority does not explain how an "other insurance"
clause grants any coverage to an insured. Although the majority
contradictorily appears to have engaged in some interpretation
of Greenwich's "other insurance" clause (but not Steadfast's),
it does not include its analysis of that provision in the
opinion. Instead, the majority examines only the "damages"
aspect of "loss" despite the absence of any "damages" incurred
by MMSD. Based solely on the "damages" for which MMSD could
have been held liable (but was not), the majority holds that
both insurers provided primary coverage "in regard to insuring
MMSD's risk of damage[,]" majority op., ¶27, and therefore both
had a duty to defend. Majority op., ¶39. The majority's
8
No. 2016AP1631.rgb
disregard for the actual and only "loss" incurred by MMSD——
attorney fees——generates its analytical error.
¶100 The majority concludes that "concurrent insurance is
required before 'other insurance' clauses are triggered."
Majority op., ¶26. But the majority ignores the concurrent
coverage of the claim expense "loss" incurred by MMSD——attorney
fees——during overlapping policy periods. No one disputes that
both policies covered the 2008 rain event; therefore, the
majority's conclusion that the policies were successive is
logically impossible. The majority then quotes Plastics
Engineering4 for the proposition that "[t]wo insurance policies
cannot be concurrent unless they insured 'the same risk, and the
same interest, for the benefit of the same person, during the
same period.'" Majority op., ¶26. Relying upon the different
contractors insured by each policy rather than the common
insured (MMSD), the majority concludes that the policies were
successive, not concurrent. This contradicts the actual
language of the policies, which should have been the focus of
analysis in this case.
¶101 The majority's reliance on Plastics Engineering is
misplaced. The case did not, as the majority maintains, hold
that "[t]wo insurance policies cannot be concurrent unless they
insured 'the same risk, and the same interest, for the benefit
of the same person, during the same period.'" Majority op.,
¶26. Rather, the case addressed whether Wis. Stat. § 631.43(1)
4
Plastics Eng'g Co. v. Liberty Mut. Ins. Co., 2009 WI 13,
¶48, 315 Wis. 2d 556, 759 N.W.2d 613.
9
No. 2016AP1631.rgb
applies to successive policies; it did not address "other
insurance" clauses at all. Plastics Eng'g Co. v. Liberty Mut.
Ins. Co., 2009 WI 13, ¶44, 315 Wis. 2d 556, 759 N.W.2d 613. The
language the majority quotes from Plastics Engineering was
lifted from an explanatory parenthetical in a citation to a law
review article. Id., ¶48 (quoting Douglas R. Richmond, Issues
and Problems in "Other Insurance," Multiple Insurance, and Self-
Insurance, 22 Pepp. L. Rev. 1373, 1376-82 (1995)).5 Nothing in
Plastics Engineering should be read as supplanting the actual
policy language, which forms the contract between insurer and
insured, with a mechanical analysis of whether the policies
cover "the same risk, and the same interest, for the benefit of
the same person, during the same period." Significantly,
Greenwich's "other insurance" clause does not limit its excess
position to only those policies insuring "the same risk, and the
same interest, for the benefit of the same person, during the
same period." Instead, Greenwich's insurance is excess if there
is other valid and collectible insurance for the insured's loss—
—here, MMSD's attorney fees.
¶102 The majority effectively discards the policy language
in favor of loose generalizations from our case law. Whether
Greenwich's policy was primary or excess (and whether Greenwich
violated its contractual obligations) should be resolved by the
5
In context, this statement appears to reflect a general
description of how "other insurance" clauses operate. But a
general description of how courts have dealt with "other
insurance" clauses cannot rewrite the policy language the court
is supposed to interpret and apply.
10
No. 2016AP1631.rgb
actual language of the insurance contracts that govern our
analysis. See Johnson Controls, Inc., 325 Wis. 2d 176, ¶58
(whether a duty to defend exists depends on the language of the
policies). Instead, the majority centers its holding on a stray
citation to a law review article, resulting in a misguided
fixation on the claims made in the rain event litigation rather
than MMSD's actual "loss."
¶103 It is true that Greenwich had a duty to indemnify MMSD
for "damages" MMSD may have been liable to pay as a result of
the acts or omissions of United Water, while Steadfast had a
duty to indemnify MMSD for damages MMSD may have been liable to
pay as a result of the acts or omissions of Veolia. However,
indemnification for such damages is not the issue here. MMSD
did not incur any loss based on the acts or omissions of its
contractors. Instead, the issue is which insurer was primary as
to claim expenses, not damages. Both Greenwich and Steadfast
insured the same "loss," namely, MMSD's defense of the rain
event litigation, and both policies were in effect for
overlapping periods of time.6 Because Steadfast provided other
valid and collectible insurance for the attorney fees necessary
to defend against the rain event litigation, Greenwich's policy
6
Greenwich's pollution policy period was July 24, 2007 to
July 24, 2008, and Steadfast's claims-made policy period was
July 1, 2008 to July 1, 2009, with retroactive dates varying by
coverage type and ranging from March 1, 1998 to June 11, 2008.
11
No. 2016AP1631.rgb
provided excess coverage. Notably, MMSD did collect its defense
costs from Steadfast.7
¶104 Nothing prohibits an insurer from denying its
insured's tender of defense and stating the grounds for this
denial. See Water Well Sols. Serv. Grp. Inc. v. Consolidated
Ins. Co., 2016 WI 54, ¶28, 369 Wis. 2d 607, 881 N.W.2d 285.
While the insurer takes the risk that its coverage position will
later be found incorrect, see id., there is nothing improper
about taking this course of action, as Greenwich did. Based on
its policy language and the existence of other valid and
collectible insurance, Greenwich correctly determined that any
coverage under its policy for MMSD's claim expenses necessary to
defend the rain event litigation was excess to Steadfast's. It
is irrelevant that Greenwich might ultimately have been liable
to indemnify MMSD for any damages awarded against MMSD as a
result of United Water's services; Steadfast was obligated to
pay all the claim expenses necessary to resolve the entire
litigation, and in fact Steadfast did so. An "insurer breaches
the duty to defend by requiring the insured to incur attorney
fees to defend . . . on the issue of liability and to litigate
coverage simultaneously." Reid v. Benz, 2001 WI 106, ¶3, 245
7
Steadfast maintains that Greenwich's "other insurance"
clause does not apply because Steadfast's policy was not
collectible, arguing that "MMSD will never be able to 'collect'
on the Steadfast policy for any liability due to the vicarious
liability of United Water." Steadfast commits the same error as
the majority by focusing exclusively on the claims for damages
instead of the common loss insured by both Greenwich and
Steadfast: defense costs.
12
No. 2016AP1631.rgb
Wis. 2d 658, 629 N.W.2d 262. In this case, Steadfast paid
MMSD's attorney fees incurred to defend against the rain event
litigation; MMSD was not forced to bear the expense. And
Steadfast——not MMSD——litigated coverage for defense costs.
Accordingly, Greenwich did not breach any duty to defend MMSD;
as an excess insurer with respect to defense costs, Greenwich
had no obligation to provide a defense that MMSD was already
receiving from its primary insurer.
¶105 The majority disregards applicable policy language,
upsets the insurers' contractual allocation of risk, and binds
Greenwich to a risk for which it did not bargain. I would apply
the "other insurance" provisions of each contract and therefore
reverse the judgment against Greenwich in its entirety, holding
Greenwich had no duty to defend MMSD because its policy provided
only excess coverage for MMSD's defense costs. Other than the
principles of law regarding the pro rata allocation of defense
costs between insurers set forth in part II.B.4 of the majority
opinion, I respectfully dissent.
13
No. 2016AP1631.rgb
1