Wisconsin Supreme Court issues significant insurance coverage opinion, finding that insurers cannot use preclusion principles to sidestep duty to defend.
On January 26, 2022, the Wisconsin Supreme Court weighed in on one potential exception to the “complaint test” as a method of determining whether an insurance company has a duty to defend a lawsuit brought against its insured. Dostal v. Strand, 2023 WI 6, __ N.W.2d __.
Generally, when an insured party is sued, the insurer must compare the four corners of the insurance policy with the four corners of the litigation complaint to determine whether the claim is covered under the insured’s policy. Sola Basic Indus., Inc. v. U.S. Fid. & Guar. Co., 90 Wis. 2d 641, 646–47, 280 N.W.2d 211 (1979). The insurer has a duty to defend its insured if the allegations contained within the four corners of the complaint, if proven, would result in liability of the insurer under the terms of the insurance policy. West Bend Mut. Ins. Co. v. Ixthus Med. Supply, Inc., 2019 WI 19, ¶ 10, 385 Wis. 2d 580, 923 N.W.2d 550. The existence of a duty to defend the lawsuit does not depend or rely on the merits of the claim, and the duty exists even if the lawsuit is groundless, false, or fraudulent. Grieb v. Citizens Cas. Co. of N.Y., 33 Wis. 2d 552, 557–58, 148 N.W.2d 103 (1967); Elliott v. Donahue, 169 Wis. 2d 310, 321, 485 N.W.2d 403 (1992). Consequently, insurers often find themselves defending their insureds in protracted litigation, even where the insurer knows (or at least strongly believes) that it ultimately will not need to indemnify the insured for any losses through a settlement or judgment.
Dostal weighs in on a potential exception to this rule. The case involved an insurer’s duty to defend (and indemnify) a defendant in a civil action brought after the defendant had been convicted in a criminal prosecution arising from the same circumstances. After the death of her child, Dostal brought civil claims against the child’s father, Strand, alleging that he negligently caused the infant’s death by dropping her in his home. Strand’s insurer sought summary judgment and a declaration that it had no duty to defend or indemnify Strand for any losses in the suit. Under the policy, the claim would only be insured if it arose out of an “accident”—insurance policies generally do not insure against intentional conduct. The insurer argued that, because Strand had already been convicted of a reckless criminal offense that caused the child’s death, the jury had necessarily found that the death was not an “accident.” The circuit court agreed with the insurer and granted it summary judgment. The court of appeals affirmed, finding, based on the criminal conviction, that no “accident” had occurred. Dostal v. Strand, 2021 WI App 79, 399 Wis. 2d 781, 967 N.W.2d 157.
The court of appeals seemingly created an issue-preclusion exception to the complaint rule, but only discussed preclusion once, in passing. Id.; see also Dostal, 2003 WI 6, ¶21, n.6 (noting that “even if the circuit court and court of appeals did not use the words ‘issue preclusion,’ their decisions clearly were grounded in the doctrine”). But the Supreme Court took on the preclusion issues directly. It reiterated that “[t]he doctrine of issue preclusion, formerly known as collateral estoppel, is designed to limit the re-litigation of issues that have been actually litigated in a previous action.” Dostal, 2003 WI 6, ¶22 (internal quotations omitted).
The Court further determined that the “issue of whether Strand’s conduct was an ‘accident’ was not actually litigated in the prior criminal proceeding. The jury here was presented with a question of guilty or not guilty and did not make a determination of what events actually occurred.” Id., ¶40. Specifically, Strand gave multiple explanations of what occurred, and multiple experts testified, based on their expertise, as to what may have occurred. There was no way to discern, solely from the criminal conviction, “exactly what took place” and therefore no way to rule out “the possibility that Strand committed two acts, one accidental and one reckless.” Id., ¶42, n.12. As a result, the Court “conclude[d] that issue preclusion does not bar Dostal from seeking insurance coverage for her claims against Strand. The issue of whether Strand’s conduct constituted an ‘accident’ was not actually litigated in the prior criminal proceeding.” Id., ¶45.
The three dissenting justices asserted that “the issue of whether Strand’s killing of Haeven was an ‘accident’ was fully litigated and unanimously decided beyond a reasonable doubt in Strand’s criminal trial.” Id, ¶64. “In finding Strand guilty of recklessly killing Haeven,” the dissent argued, “the jury explicitly rejected the possibility that her death was an ‘accident.’” Id., ¶76. The dissent concluded that “The jury’s verdict foreclosed Strand from later arguing that Haeven’s death was an “accident.” Id., ¶76.
After characterizing the jury’s verdict as “controlling” and finding that it “cannot be relitigated,” the dissent concluded that “[Strand] has no coverage under his policy with State Farm, which grants coverage for bodily injury caused by an ‘accident.’” Id., ¶60. As a result, the dissent contended, “Dostal is also precluded from making a claim against State Farm under Strand’s policy.” Id.
On remand, the insurer will likely look to bifurcate the coverage dispute and stay the underlying lawsuit between Dostal and Strand. In doing so, it would ask the Court to put a pause on its duty to defend, while the parties first litigate the issue of whether an “accident” occurred. If the court (at summary judgment) or the jury (at trial) finds that an “accident” occurred, then the insurer would have a duty to defend the Dostal-Strand dispute and a duty to indemnify for some or all of the losses in the lawsuit. If there proves to be no accident, then the insurer has no duty and is out of the case.
On one hand, Dostal is a victory for insureds in that it shuts down an easy avenue for insurers to evade their duty to defend. However, Dostal nonetheless opens the door to an exception to the “complaint test”—at least by implication. Dostal arguably indicates that in the proper cases (i.e., where intent is an element of the crime and was therefore “actually litigated”) the insurer may be able to rely on the criminal conviction to sidestep coverage from the outset of the case.
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