534 F.Supp.3d 1011
W.D. Wis.2021Background
- April 2015: Badger purchased "Goose Landing" real estate and obtained an Owners Title Insurance policy from First American.
- 2017 underlying suit by NFP and others alleged a 2013 fraudulent transfer of NFP assets to NFP II and later claims relating to Badger’s 2015 purchase; complaint included claims (quiet title, conversion, unjust enrichment, constructive trust, etc.) that sometimes targeted Badger and sometimes other defendants.
- Badger tendered defense Sept. 2017; First American denied coverage and refused to defend, citing exclusions for defects "created, suffered, assumed or agreed to by the Insured" and for fraudulent conveyances.
- Badger defended the underlying case, settled/dismissed in June 2019 (settlement included Badger paying $200,000), and incurred ~$1,011,500 in defense fees; it received reimbursements from an escrow (~$779,561) and from Hartford (~$160,502).
- This suit: Badger sued First American for breach of contract (duty to defend) and bad faith; cross-motions for summary judgment were filed. The court held First American breached its duty to defend as to at least some claims, denied summary judgment on bad faith, and reserved damages allocation for trial.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Scope of duty to defend under the title policy | Policy requires defense where a third party asserts a claim covered by the policy adverse to the insured; many underlying counts concern title defects predating Badger’s purchase and therefore are covered | Duty is narrow; title insurer need only defend claims that are within the policy’s coverage and exclusions bar coverage for most claims | Court: Insurer had a duty to defend some underlying claims that implicated title defects predating Badger’s purchase; duty limited to covered claims (no "complete-defense" rule expansion) |
| Does insurer only owe defense when insured is named as a defendant | Badger: policy language covers claims "adverse to the insured," not only claims "against the insured"; insurer must defend even if insured not named when claim attacks title insured by the policy | First Am.: duty should require insured be named; cases differ | Court: follows Sixth Circuit / Wisconsin approach — insurer must defend when complaint asserts claim covered by policy adverse to insured even if insured not named |
| Applicability of exclusions ("insured-created" / fraudulent transfer / knowing-violation) | Many underlying counts do not allege Badger’s knowledge or complicity and thus fall outside those exclusions; exclusions must be construed narrowly | First Am.: most claims alleged Badger’s knowing participation; exclusions therefore preclude coverage and defense | Court: Exclusions preclude defense for counts that require Badger’s knowing fraud, but do not apply to claims that challenge pre-2015 title defects or claims (conversion, unjust enrichment, constructive trust) that do not require proof of knowing fraud; insurer breached duty as to those non-excluded claims |
| Bad faith (reasonable basis / subjective element) | Denial was unreasonable because First American relied on "knowing" exclusions without parsing which counts required intent; bad faith as a matter of law | First Am.: it had a reasonable basis to deny and may require expert proof of what a reasonable insurer would do | Court: Objective element (lack of reasonable basis) satisfied for summary judgment; subjective element (knowledge or reckless disregard) not resolved — denied summary judgment, reserved for trial |
| Damages allocation and collateral-source credits | Badger seeks full reimbursement of defense costs and its $200,000 settlement payment; collateral-source receipts (escrow, Hartford) should not reduce recovery under Wisconsin collateral-source principles | First Am.: collateral-source rule should not apply to reduce plaintiff’s recovery here; at least offset reimbursements | Court: Reserved on awarding damages and on application of collateral-source rule; will determine at trial what portion of defense costs and settlement relate to claims insurer was obliged to defend and whether offsets apply |
Key Cases Cited
- Water Well Sols. Serv. Grp., Inc. v. Consolidated Ins. Co., 881 N.W.2d 285 (Wis. 2016) (policy interpretation and four-corners duty-to-defend principles)
- Fireman’s Fund Ins. Co. of Wis. v. Bradley Corp., 660 N.W.2d 666 (Wis. 2003) (duty-to-defend standard)
- Philadelphia Indemnity Ins. Co. v. Chicago Title Ins. Co., 771 F.3d 391 (7th Cir. 2014) (title insurance duty to defend limited to covered title claims)
- Fifth Third Mortgage Co. v. Chicago Title Ins. Co., 692 F.3d 507 (6th Cir. 2012) (policy language "adverse to the insured" can trigger defense even if insured not named)
- GMAC Mortgage LLC v. First Am. Title Ins. Co., 985 N.E.2d 823 (Mass. 2013) (title-insurer defense duty analyzed narrowly)
- BB Syndication Servs., Inc. v. First Am. Title Ins. Co., 780 F.3d 825 (7th Cir. 2015) (ambiguities construed against insurer; discussion of title-insurance scope)
- West Bend Mut. Ins. Co. v. Ixthus Med. Supply, Inc., 923 N.W.2d 550 (Wis. 2019) ("knowing violation" exclusion application and claim-by-claim parsing)
- Steadfast Ins. Co. v. Greenwich Ins. Co., 922 N.W.2d 71 (Wis. 2019) (insurer breach of duty to defend can expose insurer to insured’s attorneys’ fees for establishing coverage)