Wis. Local Gov't Prop. Ins. Fund v. Lexington Ins. Co.

• Decision Date: 17 April 2015
• Docket Number: Case No. 15–CV–142–JPS.
• Citation: 100 F.Supp.3d 687
• Parties: State of WISCONSIN LOCAL GOVERNMENT PROPERTY INSURANCE FUND, Plaintiff, v. LEXINGTON INSURANCE COMPANY, The Cincinnati Insurance Company, and Milwaukee County, Defendants.
• Court: U.S. District Court — Eastern District of Wisconsin

100 F.Supp.3d 687

State of WISCONSIN LOCAL GOVERNMENT PROPERTY INSURANCE FUND, Plaintiff
v.
LEXINGTON INSURANCE COMPANY, The Cincinnati Insurance Company, and Milwaukee County, Defendants.

Case No. 15–CV–142–JPS.

United States District Court, E.D. Wisconsin.

Signed April 17, 2015.

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Patryk W. Silver, Robert C, Burrell, Borgelt Powell Peterson & Frauen SC, Milwaukee, WI, for Plaintiff.

David E. Heiss, Peter E. Kanaris, Jefferson D. Patten, Fisher Kanaris PC, John D. Kendzior, Scott R. Shinkan, James M. Hoey, Clausen Miller PC, Chicago, IL, Monte E. Weiss, Weiss Law Office SC, Mequon, WI, Paul Bargren, Milwaukee, WI, for Defendants.

ORDER

J.P. STADTMUELLER, District Judge.

This case involves an insurance dispute arising from a 2013 fire at the Milwaukee County Courthouse (“the Courthouse”). (Docket # 1, Ex. 2 ¶ 37). The plaintiff, State of Wisconsin Local Government Property Insurance Fund (“the Fund”), insures the Courthouse pursuant to its statutory obligations under Chapters 604 and 605 of the Wisconsin Statutes. (Id. ¶¶ 15–18). The Fund, in turn, engaged one of the defendant insurers, Lexington Insurance Company (“Lexington”), as its excess insurer or reinsurer (the parties disagree). (Id. ¶¶ 7–10). Meanwhile, Milwaukee County (“the County”)¹ obtained a separate insurance policy from the remaining defendant insurer, The Cincinnati Insurance Company (“Cincinnati”), to cover machinery and equipment that might otherwise be excluded from the County's policy from the Fund. (Id. ¶¶ 11–13, 21–27).

As the Court will discuss further, the Fund paid all but a small portion of the County's claimed losses. (Id. ¶ 42). The Fund and Cincinnati disagree over which should pay the County for the small portion that remains. (Id. ¶ 64). Pursuant to Joint Loss Agreements that exist in the County's policies with the Fund and Cincinnati (and which are integral to the motion

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to compel now before the Court), the Fund and Cincinnati are going to arbitrate their disagreement. (Id. ¶¶ 65–66, 69).

Lexington has now filed a motion seeking to compel the Fund and Cincinnati to allow Lexington to participate in that arbitration. (Docket # 12). Lexington has paid the Fund a large amount (id. ¶ 48), but there are still substantial disputes between the two about Lexington's obligations (id., ¶¶ 49–61). The Fund hopes to resolve those disputes by litigating this case, whereas Lexington, it seems, hopes to resolve the disputes in arbitration.

Lexington's motion to compel arbitration is now fully briefed and ready for decision. (Docket # 13, # 19, # 22, # 24). The Court first provides some additional background, after which it analyzes and applies the law.

1. BACKGROUND²

In July of 2013, the Courthouse was severely damaged as a result of a fire that is believed to have originated in the building's electrical system. (Docket # 1, Ex. 2 ¶ 37).

At that point, the County held two separate insurance policies covering the Courthouse. (See id. ¶¶ 11–13, 15–18, 21–27). The primary policy (“the Fund policy”) was issued by the Fund. (Docket # 13, Ex. 1). However, the Fund policy specifically excluded, among other things, certain forms of “[e]lectrical or mechanical breakdown.” (Id. at 17).³ The County supplemented the Fund policy with a machinery and equipment policy issued by Cincinnati (“the Cincinnati policy”). (Docket # 13, Ex. 3). The County is listed as the insured on both policies. (See, e.g., Docket # 13, Ex. 1 at 2; Docket # 13, Ex. 3 at 4).

Importantly, both policies include a Joint Loss Agreement (“JLA”). (Docket # 13, Ex. 1 at 24; Docket # 13, Ex. 3 at 17).⁴ In essence, the JLAs provide that, in the event of a dispute over which insurer should bear the costs of certain damage, the insurers are each required to pay one-half of the disputed amount and thereafter submit their dispute to arbitration. (Docket # 13, Ex. 1 at 24; Docket # 13, Ex. 3 at 17). The purpose of a JLA is to make the insured—in this case, the County—whole as quickly as possible, allowing the insurers to resolve their dispute over time.

In this case, the County took advantage of both policies and the JLAs. First, it filed a claim with the Fund. (Docket # 1, Ex. 2 ¶ 38; Docket # 23 ¶ 4). The Fund paid approximately $17.4 million in satisfaction of a huge portion of the County's claim. (Docket # 1, Ex. 2 ¶¶ 42–43; Docket # 23 ¶ 4). After the Fund's payments, only $1.6 million remained to make the County whole, but there was disagreement over whether the Fund or Cincinnati

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should be responsible for that remaining amount. (See Docket # 23 ¶ 5). Thus, the County sent letters to both the Fund and Cincinnati, invoking the JLA. (Docket # 19, Exs. A, B). In reliance on the JLA, both the Fund and Cincinnati paid $800,000 apiece (one-half of the $1.6 million in dispute) to the County,⁵ and now plan to arbitrate their dispute. (See, e.g., Docket # 1, Ex. 2, ¶¶ 42, 69; Docket # 23 ¶ 5).

The remaining piece of this puzzle is the insurance policy issued by Lexington to the Fund (“the Lexington policy”). (Docket # 13, Ex. 2). According to Lexington, this policy constituted an excess coverage policy,⁶ providing coverage for per-occurrence losses that exceed $1.8 million. (Docket # 13 at 3). Unlike the Fund and Cincinnati policies, the Lexington policy names the Fund—not the County—as the insured. (Docket # 13, Ex. 2 at 2). Also unlike the Fund and Cincinnati policies, the Lexington policy does not expressly include a JLA (although, as the Court will explain, Lexington argues that its policy incorporated the JLA from the Fund policy). (See Docket # 13, Ex. 2).

The Fund filed a claim with Lexington, seeking payment reimbursement for amounts paid to the County. (Docket # 1, Ex. 2 ¶ 47). Lexington has paid $5 million of the Fund's claim, but disagreements remain between Lexington and the Fund over whether Lexington must pay more. (See, e.g., Docket # 1, Ex. 2 ¶¶ 48–62).

This case is the Fund's effort to put that dispute to rest; Lexington, on the other hand, seeks to stay this case and compel the Fund and Cincinnati to allow Lexington to participate in arbitration. (Docket # 12). Presumably, Lexington would argue that Cincinnati should be responsible for a greater portion of the loss, thus requiring the Fund and, in turn, Lexington to reimburse a smaller amount.⁷ (See Docket # 24 at 2 (“all parties with a contract containing the arbitration provision can participate in the arbitration to determine the full amount of the disputed loss covered under Cincinnati's boiler and machinery insurance policy.”)).

Lexington argues that its policy incorporated the JLA from the Fund policy. (See, e.g., Docket # 13). Endorsement A to the Lexington policy states: “Policy follows form and is excess over the [Fund policy] and endorsements.” (Docket # 13, Ex. 2 at 32). According to Lexington, this provision essentially imports the terms of the entire Fund policy—most importantly the JLA—into the Lexington policy. (Docket # 13). And, on the basis of the JLA imported from the fund policy, Lexington now seeks to compel arbitration.⁸ (Id. )

2. ANALYSIS

This dispute gives rise to two overarching issues. The first is whether the Court should read the Fund policy's JLA as part of the Lexington policy. The second, assuming that the JLA is part of the Lexington policy, is whether the JLA compels Lexington's participation in arbitration.

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2.1 Does the Lexington Policy Include the JLA?

As to the first issue, it appears that the JLA is part of the Lexington policy by virtue of the follow-form endorsement.

“ ‘Following form’ is an insurance industry term of art that is typically understood by insurance professionals to suggest that an excess or umbrella policy incorporates the terms of another underlying policy.”Wadzinski v. Auto–Owners Ins. Co., 2012 WI 75, ¶ 29, 342 Wis.2d 311, 818 N.W.2d 819 (citing 23 Eric Mills Holmes, Holmes' Appleman on Insurance § 145.1 (2d ed. interim vol. 2003)).⁹ Typically, follow-form policies are extremely short, doing little more than incorporating the terms of an underlying policy “to ensure that the same terms of coverage are maintained between primary and excess levels of insurance.” Wadzinski, 2012 WI 75, ¶ 29, 342 Wis.2d 311, 818 N.W.2d 819 (citing Johnson Controls, Inc. v. London Mkt., 2010 WI 52, ¶ 34 & n. 7, 325 Wis.2d 176, 784 N.W.2d 579, reconsid. denied, 2011 WI 1, 330 Wis.2d 443, 793 N.W.2d 71; Holmes' Appleman § 145.1; 15 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 220:32 n. 31 (3d ed.2005 & Supp.2011)).

Nonetheless, follow-form policies “regularly include terms and provisions that afford distinct coverage or exclusions from those provided in the underlying policy.” Wadzinski, 2012 WI 75, ¶ 29, 342 Wis.2d 311, 818 N.W.2d 819 (citing Holmes' Appleman § 145.1). In the case that a follow-form policy has terms that provide for coverage or exclusions that differ from those in the underlying policy, the terms of the underlying policy will control in the event that the follow-form policy's terms do not apply or are not specific. See Johnson...