Choinsky v. Emp'rs Ins. Co. of Wausau

• Citation: 2020 WI 13,390 Wis.2d 209,938 N.W.2d 548
• Decision Date: 13 February 2020
• Docket Number: No. 2018AP116,2018AP116
• Parties: Roger CHOINSKY, Gary Finn, William Gay, David Kliss, Carol Rudebeck and Janice Weinhold, Plaintiffs, v. EMPLOYERS INSURANCE COMPANY OF WAUSAU and Wausau Business Insurance Company, Intervenors-Respondents, Germantown School District Board of Education and Germantown School District, Defendants-Appellants-Petitioners.
• Court: United States State Supreme Court of Wisconsin

390 Wis.2d 209

938 N.W.2d 548

2020 WI 13

Roger CHOINSKY, Gary Finn, William Gay, David Kliss, Carol Rudebeck and Janice Weinhold, Plaintiffs,

v. EMPLOYERS INSURANCE COMPANY OF WAUSAU and Wausau Business Insurance Company, Intervenors-Respondents,Germantown School District Board of Education and Germantown School District, Defendants-Appellants-Petitioners.

No. 2018AP116

Supreme Court of Wisconsin.

Oral Argument: October 28, 2019

Opinion Filed: February 13, 2020

For the defendants-appellants-petitioners, there were briefs filed by Kirk D. Strang, Jenna E. Rousseau and Strang, Patteson, Renning, Lewis & Lacy, S.C., Madison and Green Bay. There was an oral argument by Kirk D. Strang.

For the intervenors-respondents, there was a brief filed by Thomas R. Schrimpf and Hinshaw & Culbertson LLP, Milwaukee, and Todd G. Smith and Godfrey & Kahn, S.C., Madison. There was an oral argument by Thomas R. Schrimpf.

For amicus Wisconsin Insurance Alliance, a brief was filed by Robert I. Fassbender and Great Lakes Legal Foundation, Madison.

REBECCA GRASSL BRADLEY, J.

¶1 The Germantown School District Board of Education and Germantown School District (collectively, the "School District") seek review of a court of appeals decision¹ affirming the circuit court's order and judgment,² which denied the School District's motion for attorney fees. The School District argues that its insurers, Employers Insurance Company of Wausau and Wausau Business Insurance Company (collectively, the "Insurer"), breached the duty to defend the School District in a lawsuit brought by retired employees; therefore, the School District claims its Insurer should pay, as a remedy for the breach, all the attorney fees incurred by the School District.³

¶2 This case presents an insurance coverage duty-to-defend issue of first impression: does an insurer breach its duty to defend its insured when it denies a tendered claim and then follows the judicially preferred procedure of filing a motion to intervene and stay the underlying lawsuit pending a coverage determination, which is ultimately resolved in the insured's favor? Additionally, we consider the insurer's obligations in order to avoid breaching its duty to defend when the circuit court denies the motion to stay.⁴

¶3 We conclude that when an insurer initially denies a tendered claim but promptly proceeds with one of our judicially preferred methods for determining coverage, it does not breach its duty to defend. If a circuit court denies any part of an insurer's motion to bifurcate the coverage issue from the underlying liability lawsuit and stay the latter, causing an insured to simultaneously defend the liability suit and litigate coverage against the insurer, an insurer must defend its insured in the liability lawsuit, retroactive to the date of tender, under a reservation of rights, until a court decides the coverage issue. Because the School District's Insurer followed this procedure, the Insurer did not breach its duty to defend and the Insurer is not responsible for any of the attorney fees the School District paid for the coverage dispute. See Newhouse v. Citizens Sec. Mut. Ins. Co., 176 Wis. 2d 824, 832-39, 501 N.W.2d 1 (1993) (when an insurer follows a judicially preferred method, the insurer "runs no risk of breaching its duty to defend"); see also Carney v. Village of Darien, 60 F.3d 1273, 1277 (7th Cir. 1995) ("[A]n insurer who properly follows the procedure recommended by the Wisconsin Supreme Court of first seeking a determination on coverage prior to the liability issue, has not breached its duty to defend."); Reid v. Benz, 2001 WI 106, ¶¶26-28, 32-35, 245 Wis. 2d 658, 629 N.W.2d 262 (explaining an award of coverage attorney fees is limited to cases in which insurer breaches duty to defend and equity demands a fee-shifting).

¶4 In reaching this decision, we reject the School District's claims that: (1) its Insurer's initial outright denial of coverage followed by a delayed decision to defend under a reservation of rights constituted a breach of its duty to defend; (2) its Insurer's delay in paying liability fees and its failure to reimburse the School District for the entire amount it paid to its liability lawyer constitutes a breach of its duty to defend; and (3) the circuit court's assessment of whether the Insurer breached its duty to defend is subject to the four-corners rule.

¶5 We hold: (1) the Insurer's initial denial of coverage did not breach its duty to defend because the Insurer promptly followed a judicially-approved method to resolve the coverage dispute; further, it defended the School District upon denial of the stay motion, agreeing to reimburse the School District for liability attorney fees retroactive to the date of the tender; (2) a delay in payment of liability attorney fees alone does not mean an insurer breached its duty to defend and an insurer is obligated to pay only reasonable attorney fees; and (3) the four-corners rule applies in determining whether a duty to defend exists but does not preclude a court's consideration of whether the insurer unilaterally denied coverage or whether it chose a judicially preferred method of resolving a coverage dispute, in assessing whether an insurer breached its duty to defend. We affirm the decision of the court of appeals.

I. BACKGROUND

¶6 In July 2013, six retired Germantown School District employees, as representatives in a class action, filed suit against the School District alleging four causes of action: (1) breach of contract, (2) breach of implied contract, (3) breach of the duty of good faith and fair dealing, and (4) promissory estoppel. The lawsuit arose from the School District's 2012 decision to discontinue group long-term care ("LTC") insurance for its current employees. This decision caused the retired employees to lose their LTC insurance benefit. The retirees' Complaint repeatedly describes the School District's decision as a "unilateral action" to terminate the insurance benefit, and alleges that "Defendants' act of discontinuing LTC benefits for active employees caused termination" of LTC insurance benefits for retirees. The Complaint further asserts the School District "by their unilateral acts terminated the group LTC policy for Plaintiffs in intentional and willful disregard of Plaintiffs' rights." In the Complaint's general allegations of fact, the retirees alleged that the School District "knew or should have known" that eliminating the LTC insurance for current employees would cause the retirees to lose LTC coverage.

¶7 After being served with the lawsuit, the School District tendered the defense of the suit to its Insurer. About a week later, the Insurer sent a letter to the School District denying the tender, explaining that the policies covered the School District for negligent acts, not deliberate acts, and because the Insurer determined the lawsuit did not allege negligence, there was no coverage under the insurance policies. The letter asked the School District to advise whether it agreed with this coverage determination and whether the School District would agree to withdraw its tender. If the School District disagreed, or if the Insurer did not hear anything by August 20, 2013, the letter explained that the Insurer would file a motion in circuit court to obtain a coverage determination.

¶8 On August 29, 2013, after the School District notified the Insurer that it would not withdraw the tender, the Insurer filed a motion asking the circuit court to allow the Insurer to intervene in the lawsuit, and requested that the circuit court bifurcate the liability and coverage issues and stay the liability lawsuit until coverage could be resolved. About three weeks after the motion was filed, the circuit court held a hearing on the motion, but it did not render a decision until three months later. On December 12, 2013, the circuit court granted the Insurer's motion to intervene and bifurcate, but it denied the motion to stay the liability proceedings.⁵

¶9 One week after the decision, the Insurer filed its own Complaint for declaratory judgment asking the circuit court for a declaration that the Insurer had no duty to defend or indemnify the School District. On December 30, 2013, the Insurer filed a motion for summary judgment asking the circuit court to rule it had no duty to defend or indemnify. In this motion, the Insurer notified the circuit court that because the stay motion was denied, the Insurer decided to provide a full defense for its insured until coverage could be resolved. Two weeks after that filing, the Insurer sent a letter directly to the School District saying it would provide a full defense under a reservation of rights. The Insurer agreed to pay the fees the Insured incurred in defending the liability lawsuit, retroactive to the date of the tender.

¶10 The January 2014 letter advised that the School District could continue to use the attorney it had hired as long as the attorney and the Insurer could agree on "hourly rates." The Insurer started paying the School District's attorney directly in May 2014 and reached an agreement on previously paid attorney fees by June 2014.

¶11 In July 2014, the circuit court denied the Insurer's motion for summary judgment because the facts required further development. In October 2014, the Insurer filed a second motion for summary judgment seeking a declaration that it did not owe a duty to defend or indemnify. In June 2015, the circuit court denied the Insurer's second motion for summary judgment. The circuit court explained it could not decide as a matter of law whether the individuals who made the decision to terminate LTC insurance for current employees acted negligently or intentionally with respect to the impact that decision would have on retired employees. As a result, this issue was presented to a jury at the coverage trial in April 2016. The jury found that the School District decisionmakers acted negligently; based on that finding, the circuit...