Maxwell v. Hartford Union High Sch. Dist.

• Decision Date: 30 May 2012
• Docket Number: No. 2009AP2176.,2009AP2176.
• Citation: 280 Ed. Law Rep. 420,33 IER Cases 1596,2012 WI 58,814 N.W.2d 484,341 Wis.2d 238
• Parties: Dawn L. MAXWELL, Plaintiff, v. HARTFORD UNION HIGH SCHOOL DISTRICT and Hartford Union High School Board of Education, Defendants–Third–Party Plaintiffs–Appellants, v. Community Insurance Corporation, Third–Party Defendant–Respondent–Petitioner.
• Court: Wisconsin Supreme Court

341 Wis.2d 238
814 N.W.2d 484
280 Ed. Law Rep. 420
33 IER Cases 1596
2012 WI 58

Dawn L. MAXWELL, Plaintiff,
v.
HARTFORD UNION HIGH SCHOOL DISTRICT and Hartford Union High School Board of Education, Defendants–Third–Party Plaintiffs–Appellants,
v.
Community Insurance Corporation, Third–Party Defendant–Respondent–Petitioner.

No. 2009AP2176.

Supreme Court of Wisconsin.

Argued Sept. 14, 2011.
Decided May 30, 2012.

[814 N.W.2d 486]

For the third-party-defendant-respondent-petitioner there were briefs filed by Lori M. Lubinsky, Sara K. Beachy and Axley Brynelson, LLP, Madison and oral argument by Lori M. Lubinsky.

For the third-party plaintiffs-appellants there was a brief by James W. Mohr, Jr. and Mohr & Anderson, LLC, Hartford, and oral argument by James W. Mohr, Jr.

DAVID T. PROSSER, J.

[341 Wis.2d 243]¶ 1 This is a review of a published decision of the court of appeals, Maxwell v. Hartford Union High School District, 2010 WI App 128, 329 Wis.2d 654, 791 N.W.2d 195, which reversed a judgment of the circuit court for Washington County, James K. Muehlbauer, Judge. The circuit court granted summary judgment to Community Insurance Corporation (CIC) on a claim by the Hartford Union High School Board of Education and the Hartford Union High School District (collectively “the District”) that insurance coverage had been created by virtue of the insurer's failure to issue a reservation of rights letter during its unsuccessful defense of the District in a contract lawsuit. The court of appeals reversed, holding that “CIC is estopped from denying coverage because the District relied on CIC's defense to its detriment and was prejudiced thereby.” Id., ¶ 33. The issue presented for review is whether an insurer's failure to issue a reservation of rights letter is sufficient to defeat, by waiver or estoppel, a coverage clause in an insurance contract that would

[814 N.W.2d 487]

otherwise justify the insurer's denial of coverage.

¶ 2 We conclude that the failure to issue a reservation of rights letter cannot be used to defeat, by waiver or estoppel, a coverage clause—as distinguished from grounds for forfeiture—in an insurance contract. [341 Wis.2d 244]We strongly urge insurers to communicate with their insureds about their potential coverage defenses, but we do not see the failure to issue a reservation of rights letter as grounds to require an insurer to provide insurance coverage that does not otherwise exist in the insurance contract. Consequently, we reverse the decision of the court of appeals.

I. FACTUAL BACKGROUND

¶ 3 Dawn Maxwell (Maxwell) began her employment with the District in 2000, always serving in administrative capacities. She entered into a new employment contract with the District in 2006. It covered the time period from July 1, 2006, to June 30, 2008. In January 2007, however, Maxwell was informed that her position would be eliminated at the end of the 2006–2007 school year. After a series of back and forth negotiations and events, including an interim settlement agreement, Maxwell was told that her employment would end on August 31, 2007.

¶ 4 On August 30, 2007, Maxwell filed a complaint against the District. CIC, the District's insurer, was not named as a party to this suit. Maxwell complained about the District's conduct in terminating her employment. She sought injunctive relief for immediate reinstatement of her position, monetary damages, and declaratory relief interpreting the contract. Her suit was based upon several alleged acts of misconduct by the District including breach of contract, breach of an interim agreement, violation of her due process rights under the Wisconsin Constitution, and violation of Wis. Stat. § 118.24. ¹

[341 Wis.2d 245]¶ 5 Hartford Union High School had a $10,000,000 Public Entity Liability Insurance Policy from Community Insurance Corporation that was in effect from October 1, 2006 to October 1, 2007. The policy included the following language:

Various provisions in this policy restrict coverage. Read the entire policy carefully to determine rights, duties and what is and is not covered.

....

SECTION II—DEFENSE AND SETTLEMENT

We have the right and duty to defend any “suit” against the insured seeking monetary damages on account of “bodily injury”, “personal injury”, “property damage” or “errors and omissions” or any combination thereof....

“Defense costs” are payable in addition to the policy limit after any applicable deductible has been exhausted....

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).

¶ 6 Attorney James W. Mohr was general counsel to the District. On September

[814 N.W.2d 488]

4, 2007, he entered an appearance in the Maxwell case on behalf of the District [341 Wis.2d 246]in Washington County Circuit Court. On September 5 he represented the District in opposing Maxwell's effort to obtain a temporary restraining order (TRO).

¶ 7 On September 7 Attorney Mohr forwarded the Summons and Complaint in the Maxwell matter to Brian Knee of Aegis Corporation (Aegis), the general administrator for CIC. Attorney Mohr acknowledged that Brian Knee had already spoken with Jerome Dudzik, the Director of Business Services for the District. Mohr also said that he had “been in relatively constant contact with Attorney Alan Levy” and was seeking confirmation that “the defense has been assigned to Attorney Alan Levy so that I [Attorney Mohr] can begin working directly with him.”

¶ 8 The next day, Brian Knee sent a letter via email to Attorney Levy to update Levy on the status of the litigation. He noted that Attorney Mohr had begun work on a response to the Complaint and had already appeared at the hearing on Maxwell's request for a TRO.

¶ 9 In early September, CIC assigned Attorney Levy to represent the District in the Maxwell case. Attorney Levy entered a formal appearance on September 21, but had been present in an unofficial capacity at the TRO hearing on September 5. Attorney Levy remained an attorney of record for the District until August 2009. During this time, Attorney Levy did not represent CIC; and neither CIC nor Aegis (on CIC's behalf) sent a reservation of rights letter to the District or Attorney Mohr.

¶ 10 Attorney Levy signed papers submitted on behalf of the District throughout the litigation. Attorney Mohr remained an attorney of record until July 1, 2008, and participated in the case to some extent during this period after Attorney Levy was assigned. For [341 Wis.2d 247]instance, he appeared with Levy at a motion hearing as a result of his personal knowledge of the events leading up to the termination of Maxwell's employment, and Brian Knee alleged in an affidavit that Attorney Mohr had “received drafts of every brief” before that brief was filed with the circuit court.

¶ 11 On June 11, 2008, after receiving numerous filings, the circuit court granted partial summary judgment to Maxwell on her claim for breach of contract. It awarded compensatory damages of $103,824.22 at a hearing September 8.

¶ 12 As noted, Attorney Mohr withdrew from the suit on July 1, 2008, after summary judgment had been granted but before damages had been awarded. On July 24 he emailed Attorney Levy, Michael Kremer (the superintendent of the District), and Brian Knee “to make one point perfectly clear”: that because CIC had furnished a defense to the District without issuing a reservation of rights letter, CIC could not deny coverage for any compensatory damages that might be awarded. To support his position, Mohr cited Pouwels v. Cheese Makers Mutual Casualty Co., 255 Wis. 101, 37 N.W.2d 869 (1949), and Koehring Co. v. American Mutual Liability Insurance Co., 564 F.Supp. 303 (E.D.Wis.1983). Mohr notified CIC that CIC could proceed however it wished “as long as the claim is fully covered,” and he threatened a claim for bad faith to secure coverage. Mohr also requested a response from Brian Knee.

¶ 13 On August 18, 2008, Knee, litigation manager for CIC via Aegis, sent a response by email-informing Mohr that CIC was not liable for any judgment for damages due under Maxwell's performance contract or any settlement for lost wages or lost benefits. Knee cited

[814 N.W.2d 489]

Shannon v. Shannon, 150 Wis.2d 434, 442 N.W.2d 25 (1989), and [341 Wis.2d 248]Ahnapee & Western Railway Co. v. Challoner, 34 Wis.2d 134, 148 N.W.2d 646 (1967). Knee notified Mohr that CIC would continue to defend the District, through appeal, but it was not liable for damages excluded from coverage in the policy.

¶ 14 On October 30, 2008, after compensatory damages had been awarded by the court, Mohr filed a motion for leave to file a third-party complaint against CIC because CIC had denied coverage for the monetary damages in the lawsuit. That complaint was filed in January 2009.

¶ 15 On April 21, 2009, Jerome Dudzik sent Brian Knee a letter expressing discontent with Attorney Levy and alleging Levy had a conflict of interest because he was paid by and reported to CIC.

¶ 16 Brian Knee responded to Dudzik on April 29, 2009, disputing that there was a conflict of interest on the part of Levy, but offering to provide the attorney that the District requested as long as the attorney reported to CIC and was paid directly by CIC.

II. PROCEDURAL HISTORY

¶ 17 On January 20, 2009, the District filed a Third–Party Complaint against CIC alleging eight “causes of action” seeking declaratory relief that the policy provided coverage and that CIC could “assert no coverage defenses, nor policy limit defenses.” Additionally, the District sought attorney fees and costs as well as punitive damages.

¶ 18 On March 19, 2009, CIC moved to dismiss the complaint pursuant to Wis. Stat. § 802.06(2)(a)6., for failure to state a claim upon which relief...