Recent Decisions Underscore Importance of Communication With Carriers
Two recent Wisconsin decisions - one from the Supreme Court and the other from the Court of Appeals, District 4 - highlight the need for communication between policyholders and insurers early in the claims-handling process. From the standpoint of policyholders, such communications can prevent future disputes, unexpected costs and conflicts of interest.
Reserving Rights is Not a Prerequisite to Contesting Coverage: Maxwell v. Hartford Union High School District, 2012 WI 58.
Policyholders reasonably assume that liability insurers who provide a defense without reserving rights to contest coverage will pay any resulting judgment up to policy limits. The Wisconsin Supreme Court clarified in Maxwell v. Hartford Union High School District that this is not necessarily the case - an insurer who assumes the defense of its insured without reserving its rights to contest coverage can nonetheless later seek to foist the costs of an adverse judgment on the policyholder. This seemingly represents a departure from previous authority - or at least conventional wisdom - to the effect that insurers need to reserve rights in order to contest coverage. In Maxwell, the policyholder, Hartford Union High School District, faced a wrongful termination lawsuit, which it tendered to its liability insurer. The insurer provided a defense without reserving rights to contest coverage. Only after the litigation resulted in a six-figure judgment against the policyholder did the insurer point to policy language excluding coverage for the wrongful termination lawsuit. Based on a "general rule" that neither waiver nor estoppel can expand coverage beyond that provided in the policy, the Supreme Court held - subject to a vigorous dissent - that the insurer had not waived its right to contest coverage, leaving the policyholder liable for the judgment.
The Court narrowed its holding in two respects. First, it drew a distinction between coverage clauses and forfeiture clauses, finding that the "general rule" applies to the former but not the latter. In other words, an insurer that intends to deny coverage based on the policyholder's breach of a forfeiture clause (e.g., a notice or cooperation clause) must timely reserve its rights or risk waiving the forfeiture defense.
Second, the Court was careful to distinguish and preserve a separate, but related, line of authority holding that insurers who breach their duty to defend or act in bad faith are liable for all damages naturally flowing from such conduct, including any ensuing judgment against the policyholder, even if the judgment is for damages not covered under the policy and/or is in excess of policy limits. Nevertheless, insurers may try to limit this aspect of Maxwell and argue that liability for noncovered damages does not flow naturally from a breach of the duty to defend or bad faith conduct.
An Insurer's Defense Obligation May Cease After Settlement of Covered Claims: Society Insurance v. Bodart, 2010AP2442.
Policyholders often tender to insurers lawsuits that include both covered and noncovered claims against the policyholder. Under Wisconsin law, insurers must provide a defense against all claims in a lawsuit, so long as any claim is potentially covered. Until recently, no Wisconsin court had considered whether an insurer could negotiate a settlement to resolve the covered claims, but not the noncovered claims, and then exit the case. The Wisconsin Court of Appeals did just that in Society Insurance v. Bodart, holding that an insurer's duty to defend ends once all potentially covered claims are dismissed, even if noncovered claims remain. The Court noted two important exceptions: (1) the settlement of covered claims must be in good faith; and (2) the insurer's withdrawal cannot prejudice the policyholder's defense of noncovered claims.
Practical Considerations in the Wake of Maxwell and Bodart:
As mentioned at the outset, these decisions highlight the need for early and frequent communication between policyholders and insurers. Until now, such communications were probably more important for insurers than policyholders, but the recent decisions in Maxwell and Bodart suggest that the policyholder should, if the insurer does not, be prepared to flesh out the insurer's position at the outset of litigation. Before turning control of its defense over to an insurer, a policyholder should take reasonable steps to learn the insurer's coverage position, including whether the insurer will contest coverage for some or all of the claims against the policyholder. If the insurer does not provide a reservation of rights letter with such information, the policyholder can submit written requests for the information. If the insurer refuses to provide the information, the policyholder can retain coverage counsel to perform a coverage analysis and ultimately be in a stronger position from a bad faith standpoint.
The goal is to prevent a situation in which the policyholder turns control of its defense over to the insurer, only to learn later that the insurer will not pay the resulting judgment or, even more disturbingly, will seek to resolve only covered claims in order to leave the policyholder "holding the bag" so to speak. A policyholder who learns early that its interests are potentially adverse to those of the insurer can request independent counsel - which of course should be confirmed through a clear engagement letter - to avoid future disputes and conflicts of interest with the insurer. Maxwell and Bodart make the issue of independent counsel all the more critical in cases where coverage is potentially at issue.
For more information on the Wisconsin court decisions, please contact Patrick Nolan at (414) 277-5465 / patrick.nolan@quarles.com, Keith Bruett at (414) 277-5411 / keith.bruett@quarles.com, Patrick Murphy at (414) 277-5459 / patrick.murphy@quarles.com, Brandon Gutschow at (414) 277-5745 / brandon.gutschow@quarles.com or your Quarles & Brady attorney.