938 N.W.2d 548
Wis.2020Background:
- Six retired Germantown School District employees sued the District alleging the District’s 2012 decision to discontinue group long-term care (LTC) insurance for active employees caused retirees to lose LTC benefits.
- The School District tendered defense to its insurers (Wausau). The insurers issued a prompt denial letter, asserting the complaint alleged deliberate acts (not negligent acts) and thus was not covered.
- Within weeks the insurers moved to intervene and to bifurcate coverage from liability and to stay the liability case pending a coverage determination; the circuit court granted intervention and bifurcation but denied the requested stay.
- After the stay was denied, the insurers agreed to defend under a reservation of rights and to reimburse reasonable liability-defense fees retroactive to the date of tender; fee negotiations and payments followed.
- A coverage jury found the decisionmakers acted negligently (triggering coverage); the School District sought attorney fees for coverage litigation. The circuit court and court of appeals denied fee recovery; the Wisconsin Supreme Court affirmed.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an insurer breaches duty to defend by initially denying coverage then filing to intervene/bifurcate/stay and seeking a coverage ruling | Initial denial was an unambiguous breach; later defense cannot cure the breach | Promptly seeking judicial coverage determination is a judicially preferred method and avoids breach | No breach where insurer promptly used a judicially preferred method and then defended under reservation when stay was denied |
| What must an insurer do if the court denies a stay/bifurcation so insured would have to litigate liability concurrently | Insurer should have defended from day one and pay all fees | If stay denied, insurer must defend under reservation and reimburse reasonable liability fees retroactive to tender | If court denies stay, insurer must defend under reservation of rights and reimburse reasonable liability-defense fees retroactive to tender date |
| Whether delay in paying defense fees and partial reimbursement constitutes breach | Delay and failure to fully reimburse ~ $50k shows breach | Delay alone does not breach; insurer may negotiate and must pay only reasonable fees; record is insufficient | Delay/partial payment alone does not establish breach; insurer owes only reasonable fees and record deficiencies forfeited review |
| Whether the four-corners rule bars considering insurer conduct when assessing breach | Four-corners limits inquiry; court should not consider insurer’s extrinsic conduct | Four-corners governs whether duty to defend is triggered, but insurer conduct is relevant to whether insurer breached that duty | Four-corners governs duty-to-defend trigger; but courts may consider insurer’s actions (e.g., unilateral denial or use of judicially preferred methods) when assessing breach |
Key Cases Cited
- Newhouse by Skow v. Citizens Sec. Mut. Ins. Co., 176 Wis. 2d 824 (Wis. 1993) (insurer following judicially preferred method incurs no breach risk)
- Elliott v. Donahue, 169 Wis. 2d 310 (Wis. 1992) (insured may recover reasonable attorney fees incurred to establish coverage if insurer breaches duty to defend)
- Water Well Sols. Serv. Grp., Inc. v. Consolidated Ins. Co., 369 Wis. 2d 607 (Wis. 2016) (four-corners rule governs whether complaint triggers duty to defend; unilateral denials risk breach if no judicially preferred method used)
- Mowry v. Badger State Mut. Cas. Co., 129 Wis. 2d 496 (Wis. 1986) (insurer may be required to provide a defense if a separate coverage trial does not precede the liability trial)
- Danner v. Auto-Owners Ins. Co., 245 Wis. 2d 49 (Wis. 2001) (insurer not in bad faith for thorough investigation of a claim; reasonableness standard applies)
- Olson v. Farrar, 338 Wis. 2d 215 (Wis. 2012) (if complaint alleges facts that could give rise to coverage, insurer must provide defense until court resolves coverage)
- Estate of Sustache v. Am. Family Mut. Ins. Co., 311 Wis. 2d 548 (Wis. 2008) (duty to defend triggered by complaint allegations that, if proven, would constitute a covered claim)
- Carney v. Village of Darien, 60 F.3d 1273 (7th Cir. 1995) (an insurer that first seeks a coverage determination, per Wisconsin guidance, has not breached its duty to defend)