2010 WI App 128
court of appeals of
published opinion
Case No.: |
2009AP2176 |
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Complete Title of Case: |
†Petition For Review Filed |
Opinion Filed: |
August 25, 2010 |
Submitted on Briefs: |
March 19, 2010 |
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JUDGES: |
Brown, C.J., Neubauer, P.J., and |
Concurred: |
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Dissented: |
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Appellant |
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ATTORNEYS: |
On behalf of the defendants-third-party plaintiffs-appellants,
the cause was submitted on the briefs of James W. Mohr, Jr. of Mohr & Anderson, LLC, |
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Respondent |
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ATTORNEYS: |
On behalf of the third-party defendant-respondent, the cause was submitted on the brief of Lori M. Lubinsky and Sara K. Beachy of Axley Brynelson, LLP, Madison. |
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2010 WI App 128
COURT OF APPEALS DECISION DATED AND FILED August 25, 2010 A.
John Voelker Acting Clerk of Court of Appeals |
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NOTICE |
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This opinion is subject to further editing. If published, the official version will appear in the bound volume of the Official Reports. A party may file with the Supreme Court a petition to review an adverse decision by the Court of Appeals. See Wis. Stat. § 808.10 and Rule 809.62. |
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Appeal No. |
Cir. |
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STATE OF |
IN COURT OF APPEALS |
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Dawn L. Maxwell, Plaintiff, v. School Board of Education,
Defendants-Third-Party
Plaintiffs-Appellants, v. Community Insurance Corporation, Third-Party
Defendant-Respondent. |
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APPEAL
from a judgment of the circuit court for
Before
Brown, C.J., Neubauer, P.J., and
¶1 ANDERSON, J. The
Hartford Union High School District and Hartford Union High School Board of
Education (collectively, the District) appeal from summary judgment granted to
Community Insurance Corporation (CIC) declaring that it did not owe the
District coverage for Dawn L. Maxwell’s breach of contract lawsuit. The District contends that CIC, in assuming
full dominion and control over the defense of the lawsuit, without a
reservation of rights, is estopped from denying coverage after it lost the
case. We agree. When an insurer forgoes a reservation of
rights and exclusively controls the defense of a lawsuit, obtaining a result to
the detriment and prejudice of the insured, it is barred from denying
coverage. Therefore, we reverse.
Facts
¶2 In 2007, the District gave notice to Maxwell that for budgetary reasons it was terminating her contract as director of special ed/pupil services at the end of the 2006-07 school year. Since Maxwell had a contract that included the 2007-08 school year, she filed a breach of contract action against the District. At the time, the District carried a public entity liability policy issued by CIC and administered by Aegis Corporation.
¶3 After being served, the District’s director of business services, Jerry Dudzik, contacted Kim R. Hurtz, vice president of sales for Aegis. Hurtz was the District’s contact for claims or potential claims but did not make any decisions as to coverage of claims. Hurtz told Dudzik that “CIC would provide a defense to the Maxwell lawsuit but that CIC would only hire an attorney from CIC’s approved list.” Hurtz referred Dudzik to Brian J. Knee, litigation manager for Aegis. In an affidavit, Knee stated:
7. Ms. Maxwell’s Complaint contained the
potential for different types of damages, some of which were covered by the
Policy and some of which were not.
Accordingly, CIC provided the School District with a defense as to the Maxwell Complaint, consistent with
8. Upon notice of the Maxwell claim from the
9. At no time in my conversation with Mr. Dudzik did we talk about “coverage” of any damages that could result for the lawsuit. In fact, our conversation occurred before the School Board hearing which resulted in Ms. Maxwell’s termination. Therefore, at the time of my conversation with Mr. Dudzik, the nature and extent of the alleged damages were not clear.
Without issuing a reservation
of rights letter, Attorney Alan Levy of
¶4 In ruling on a series of partial summary judgment motions brought by Maxwell, first, on June 11, 2008, the circuit court found the District was liable for breach of Maxwell’s employment contract. Next, on September 8, 2008, the court awarded Maxwell compensatory damages of $103,824.22 in salary and benefits but rejected her request for attorney fees of $44,672.60.
¶5 Shortly after the June 11, 2008 determination of liability, Dudzik wrote to Knee demanding a new attorney because the District believed that, based on Knee’s representation that the damages were not covered, Levy had a conflict of interest. While disputing whether there was a conflict of interest, Knee agreed to appoint the District’s current general counsel to replace Levy.
¶6 On July 24, 2008, Mohr emailed Knee claiming that CIC was
obligated to pay the damages that might be assessed by the circuit court. Knee responded, asserting that the CIC policy
issued to the District contained a clause specifically excluding coverage for
amounts due under a performance contract and for lost wages and benefits.[2] Knee invoked a series of
¶7 The District reacted to CIC’s denial of coverage by seeking leave to file a third-party complaint, which the circuit court granted. In the third-party complaint, the District sought a declaratory judgment that the policy provides coverage and CIC was barred from asserting coverage defenses and policy limit defenses. A flurry of motions resulted in a hearing on the District’s motion for summary judgment and CIC’s motion to dismiss the third-party complaint for failure to state a claim and for a declaration that there is no coverage under the terms of the insurance policy.
¶8 In a thoughtful decision, the circuit court identified the critical issue as “whether, regardless of [the exclusion of coverage] Community’s conduct has created coverage where none would otherwise exist.” The court recognized:
There is no question but that a split of authority
exists as to whether based on waiver, estoppel, negligence, failure to
disclaim, or substantial prejudice, an insurer’s conduct can create coverage
where none otherwise exists. It is
interesting to note that the disagreement among appellate courts has been
described by Appleman as an “eroding majority rule” of no coverage, by the
Wisconsin Court of Appeals as a “misapplication of estoppel and waiver.” Utica
Mutual Insurance Company v. Klein & Son, 157 Wis. 2d [552, 564, 460
N.W.2d 763 (Ct. App. 1990)], and by the Illinois Court of Appeals as an
“emerging trend” towards finding coverage, Nationwide
Mutual Insurance Company v. Filos, 285
¶9 Ultimately, the circuit court elected to follow “the latest
Wisconsin Supreme Court decision dealing with the subject of insurance coverage
by waiver or estoppel, namely Shannon v. Shannon[,
150
In applying Shannon, this court rules regardless
of
¶10 The District appeals.
Standard of Review
¶11 We review the circuit court’s grant of summary judgment de novo,
using the same methodology as the circuit court. Mullen v. Walczak, 2003 WI 75, ¶11,
262
Background
¶12 A little background on the law of contesting coverage under an
insurance policy is helpful in understanding our discussion that follows. In Grube v. Daun, 173
¶13 We held that Secura had a duty to defend the entire action
against its insured even if some allegations fell outside of the scope of the
insurance coverage. Grube, 173
Rather than raising the issue in court, an insurer cannot deliberately reach its own conclusion on coverage and then maintain that a clause in the policy would have excused it from indemnifying had the coverage issue correctly been decided by a court originally. There are several procedures insurers can use to raise the coverage issue and thus retain their right to challenge coverage. The insurer and the insured could enter into a nonwaiver agreement in which the insurer would agree to defend, and the insured would acknowledge the right of the insurer to contest coverage. However, the insured is not obligated to sign such an agreement. Alternatively, the insurer could request a bifurcated trial or a declaratory judgment so that the coverage issue would be addressed separately by a court. In addition, the insurer could give the insured notice of intent to reserve rights. When a reservation of rights is made, the insured can pursue his own defense not subject to the control of the insurer, but the insurer still would be liable for legal fees incurred.
¶14 What constitutes a sufficient reservation of rights letter has not been addressed in Wisconsin but has been addressed in other jurisdictions and collected in Lee R. Russ & Thomas F. Segalla, 14 Couch on Insurance § 202:47 (3d 1999) (footnotes omitted):
[A]n insurer’s reservation of rights has been held adequate, where the insurer’s communication to the insureds explicitly reserved all rights to contest the policy’s applicability, where the insurer’s letter adequately informed anyone of average intelligence that the insurer was claiming policy defenses to the underlying litigation against the insured under the policy even though the insured’s representative stated that he or she did not understand the letter and simply filed it away, where the reservation of rights letter informed the insured that the insurer would provide a defense under reservation of rights, pointed out specific policy provisions that could result in noncoverage, and informed the insureds that because there might be liability in excess of policy limits, they had right to secure independent counsel, and where a reservation of rights letter specifically identified the policy in question, informed the estate that an attorney had been retained to defend a wrongful death action brought against the estate, and apprised the estate of the initial results of the insurer’s investigation.
Discussion
¶15 On appeal, the District acknowledges “the general rule that
coverage cannot be created by the doctrines of estoppel or waiver. See,
for example, Shannon … 150
¶16 CIC cites Utica Mutual Insurance Co. v. Klein &
Son, Inc., 157
¶17 The parties are correct that the general rule emanating from Shannon
and
¶18 However, Shannon and
¶19 In Shannon, an injured child commenced a lawsuit against her
parents and their insurer. Shannon,
150
¶20 In
¶21 As we set forth in the facts, this case presents an entirely different situation: CIC accepted the defense of the Maxwell suit; CIC did not issue a reservation of rights letter; CIC retained counsel, Levy, from its approved list of attorneys to represent both it and the District; the attorney actively defended the District, participating in all proceedings, including the summary judgment motions brought by Maxwell.
¶22 Levy was counsel of record for the District and CIC when an adverse final judgment was entered against the District.
¶23 Unlike Shannon and
¶24 Treatises, case law from other jurisdictions, and case law from Wisconsin create an exception to the general rule that coverage cannot be created by the doctrines of estoppel or waiver under precisely the facts presented here—where the insurer exercised dominion and control over the litigation, without a reservation of rights or nonwaiver agreement.
Although the doctrine of waiver and estoppel cannot generally be used to create insurance coverage where none exists under terms of the policy, an exception to the rule exists where a liability insurer assumes the insured’s defense with knowledge of facts indicating noncoverage and without declaring a reservation of rights or obtaining a nonwaiver agreement in which case all policy defenses, including those of noncoverage, are waived.
14 Couch on insurance § 202:54 (footnotes omitted). This case falls squarely into this
exception. CIC admits that at the time
it undertook the defense of the District, it knew that Maxwell was pursuing a
cause of action for breach of contract and the policy it issued excluded
coverage for “[a]ny amount actually or allegedly due under the terms of any
payment or performance contract or agreement.” Further, as we note above, see ¶3, CIC proceeded without issuing a
reservation of rights letter.
¶25 This exception comes into play under the facts that exist is this case:
Generally, it is held that if a liability insurer, with knowledge of a ground of forfeiture or noncoverage under the policy, assumes and conducts the defense of an action brought against the insured without disclaiming liability and giving notice of its reservation of rights, it is thereafter precluded in an action upon the policy from setting up such a ground of forfeiture or noncoverage, at least where its conduct has prejudiced the insured in the interim.
Observation:….
The insurer’s conduct in this respect operates as an estoppel to later contest an action upon the policy, regardless of the insurer’s good faith in defending the suit[,] of whether the insurer’s conduct may have been due to a mistake of law, or of whether the insurer has made no misrepresentation or concealment of material facts, even though the facts may have been within the knowledge of both the insured as well as the insurer.
14 Couch on insurance § 202:55 (footnotes omitted).
¶26 Representative case law from other jurisdictions includes Nationwide
Mutual Insurance Co. v. Filos, 673 N.E.2d 1099 (Ill. App. Ct.
1996). From early 1989 until August
1993, Nationwide defended the manufacturer of a dough breaker machine in a
products liability case.
¶27 The Illinois Appellate Court reversed, first recognizing that
“the doctrine of estoppel cannot be used to create primary liability or to
increase coverage provided under an insurance policy.”
The second exception to the general rule, which is germane to the instant case, applies where an insurer defends an action on behalf of an insured, with knowledge of facts that would provide a defense to coverage, but without a reservation of rights. Under those circumstances, if the insurer attempts to deny coverage at a later date, it is estopped from raising the known facts as a defense.
This exception to the general rule “is predicated upon the insurer’s conflict of interest: it is too likely to be defending the insured in the lawsuit while at the same time formulating policy defenses to deny coverage.” It has also been justified by the fact that the insured is deprived of his [or her] right to control his [or her] defense.
¶28 There are two
Throughout these proceedings Mr. Ginsberg had been represented by Mr. Lehner, the attorney employed by the Cheese Makers Mutual Casualty Company, the defendant-appellant. The company paid Mr. Lehner for all his services, including his services on appeal. There had been no denial of liability, no notice of reservation of rights, and no attempt of any kind had been made by the company to reserve any of its rights under the policy.
The insurance company by its conduct waived its right to assert the policy defense of noncoverage.
¶29 The second case from Wisconsin arises in the United States
District Court for the Eastern District of Wisconsin, Koehring Company v. American
Mutual Liability Insurance Co., 564 F. Supp. 303 (E.D. Wis. 1983), the
endgame in twenty-two years of litigation.
The details of the litigation are unimportant. Suffice it to say, American defended Koehring
in two lawsuits, resulting in adverse verdicts, including the assessment of
punitive damages, and then advised Koehring that it would not pay any punitive
damage amounts.
It has been stated that it is a strong policy of this state that an insurer should not be able to purport to provide coverage and then escape liability when a claim is made for reimbursement. A fortiori, an insurer should not be allowed to escape liability where it attempts to tie the hands of its insured, claiming to have the exclusive right to control an insured’s defense under the pretense that the policy provides coverage of all claims, and then when the cause is determined against it, insist that upon closer reading or upon some public policy ground the insured ought to be liable for at least part of the damages awarded.
¶30 In both this case and Koehring, the insurer assumed the defense without a reservation of rights; in both cases the insurer had full knowledge of the damages claimed; in both cases the insurer assumed full trial responsibilities; and in both cases the insurers declined the insureds’ request to have its counsel assume trial responsibility. See id. In Koehring, the insurer’s exercise of full dominion and control over the case resulted in Judge Evans observing:
[O]ne aspect of the present dispute simply leaps up and demands attention. The issue is waiver and estoppel. Clearly, if there ever was a case where those doctrines should apply, this is it.
[A]n insurer cannot change its mind after having tried and lost a case which it tried under an assurance of coverage. There is considerable authority to the effect that a liability insurer, by assuming the defense of an action against an insured, is thereafter estopped to claim that the loss resulting to the insured from an adverse judgment is not within the coverage of the policy. See Appleman’s Insurance Law and Practice, § 4692. This is based on the premise that assumption of the insured’s defense or unreasonable delay in asserting a defense to coverage clearly prejudices the insured.
Koehring Co., 564 F. Supp. at 313.
¶31 Judge Evans then detailed the prejudice to the insured when the insurer exercises full dominion and control over the defense:
In most jurisdictions, an insurer’s control of the defense of a suit is automatically presumed to be prejudicial to the insured.
Prejudice is presumed because the insurer has taken away from the insured innumerable rights associated with the control of the defense, including the choice of trial by judge or jury; the ability to negotiate a settlement; and the ability to decide when and if certain defenses or claims will be asserted.
¶32 CIC’s position is that even after an insurer, without a
reservation of rights, exercises full dominion and control over a lawsuit and a
final judgment detrimental to the insured is entered, the insurer can avoid
coverage by invoking the general rule from Shannon that coverage cannot be
created by the doctrines of estoppel or waiver.
See Shannon, 150
¶33 We agree with the rationale of the authorities we have discussed, especially the reasoning in Koehring. Accordingly, we hold that CIC is estopped from denying coverage because the District relied on CIC’s defense to its detriment and was prejudiced thereby. We reverse the judgment of the circuit court and remand for proceedings consistent with this decision.
By the Court.—Judgment reversed and cause remanded.
[1] Attorney James W. Mohr, Jr., of Mohr & Anderson, LLC. At the time, Mohr served as general counsel for the District.
[2] The exclusion provides:
SECTION V—EXCLUSIONS
This policy does not apply to:
….
D. Any liability for:
1. Any amount actually or allegedly due under the terms of any payment or performance contract or agreement, or
2. for that part of any award or settlement which is, or reasonably could be deemed to be, compensation for loss of salary or fringe benefits of your employee(s)….
[3] A national treatise offers the same alternatives to an insurer who questions whether it has a duty to defend an insured:
An insurer, faced with the dilemma of whether to defend or refuse to defend a proffered claim, has several options—
1. Completely decline to assume insured’s defense.
2. Seek declaratory judgment as to its obligations and rights before or pending trial of the underlying action.
3. Defend under reservation of rights or nonwaiver agreement and adjudicate coverage issues in a supplemental suit.
4. Assume insured’s unqualified defense.
Lee R. Russ & Thomas F. Segalla, 14 Couch on Insurance § 202:1 (3d 1999) (footnotes omitted).
[4] The terms “waiver” and “estoppel” are defined in Von Uhl v. Trempealeau County Mutual Insurance Co., 33 Wis. 2d 32, 37, 146 N.W.2d 516 (1966):
The terms “waiver” and “estoppel” are often not distinguished and used interchangeably. “Waiver” is the voluntary and intentional relinquishment of a known right; intent to relinquish the right is an essential element of waiver. “Estoppel,” on the other hand, consists of the action or nonaction of one party which induces reliance thereon by another, either in the form of action or nonaction, to his [or her] detriment. Further, intent to waive may arise as a matter of law from the conduct of the parties, or may be determined as a question of fact where the inference does not conclusively arise as a matter of law.
[5] Other representative cases include: Employer’s Liab. Assurance Corp., Ltd. v. Vella, 321 N.E.2d 910, 914 (Mass. 1975) (“if the insurer knows of its right to disclaim and exercises dominion over the case at an important point without disclaiming liability or reserving rights, subsequent disclaimer is barred”); Royal Ins. Co. v. Process Design Assocs., Inc., 582 N.E.2d 1234, 1240 (Ill. App. Ct. 1991) (“an insurer is generally estopped to assert a defense of noncoverage where the insurer undertakes to defend its insured in the underlying suit without reserving its rights”); Management Specialists, Inc. v. Northfield Ins. Co., 117 P.3d 32, 38 (Colo. App. 2004) (an insurer is estopped to deny coverage if the insured relied upon the insurer’s defense to its detriment and was prejudiced thereby); and Utica Mut. Ins. Co. v. 215 West 91st St. Corp., 283 A.D.2d 421, 422-23 (N.Y. App. Div. 2001) (“If an insurer assumes the defense of an action and controls its defense on behalf of an insured with knowledge of facts constituting a defense to the coverage of the policy without reserving its right to deny coverage, the insurer is estopped from denying coverage at a later time, even if mistaken on the requirement of coverage.”).
[6] We
recognize that in both Shannon v. Shannon, 150
We acknowledge that in Pouwels v. Cheese Makers Mutual
Casualty Co., 255