Last month, the Wisconsin Supreme Court confronted several insurance coverage issues that can arise when allegations against an insured trigger the defense obligations of multiple liability insurers. See Steadfast Ins. Co. v. Greenwich Ins. Co., 2019 WI 6.
At issue was defense coverage for lawsuits filed against the Milwaukee Metropolitan Sewerage District (“MMSD”) following the historic June 2008 rainfall that resulted in raw sewage backing up into thousands of Milwaukee-area residences. The main theory of liability against MMSD was that the sewerage system had been negligently repaired, maintained, and/or operated prior to and during the rainfall. MMSD had outsourced those responsibilities to United Water Services Milwaukee, LLC (“United Water”) from 1998 through February 2008 and subsequently to Veolia Water Milwaukee, LLC (“Veolia”) from March 2008 leading up to the June 2008 heavy rainfalls.
MMSD’s operating agreements with United Water and Veolia required each entity to maintain liability insurance that named MMSD as an additional insured. United Water had a $20 million policy from Greenwich Insurance Company (“Greenwich”) and Veolia had a $30 million policy from Steadfast Insurance Company (“Steadfast”).
MMSD faced a myriad of lawsuits seeking to recover for property damages related to the rainfall. The lawsuits alleged MMSD negligence during the respective time periods when United Water and Veolia operated the sewerage system. MMSD tendered defense of the lawsuits to both insurers and also opted to retain its own counsel. While Steadfast agreed to pay for MMSD’s defense, Greenwich denied its defense obligations on the grounds that an “other insurance” provision rendered the Greenwich policy excess to the Steadfast policy.
MMSD ultimately resolved the lawsuits without agreeing to any liability payments to the underlying claimants. In the process of settling for no liability, however, it incurred $1.55 million in defense fees. Steadfast reimbursed MMSD the full $1.55 million and then exercised its contractual subrogation rights, which allowed it to “stand in the shoes” of MMSD and sue Greenwich for breaching the insurer’s defense obligations under its policy with MMSD.
The circuit court found that Greenwich had breached its defense obligations to MMSD and consequently granted Steadfast judgment against Greenwich for recovery of the full $1.55 million paid in defense fees and an additional $325,000 in attorney’s fees incurred bringing the lawsuit. The court of appeals affirmed. The Supreme Court granted Greenwich’s petition for review and issued a decision addressing the following interesting coverage issues.
Interpretation of “Other Insurance” Policy Provisions
Greenwich ultimamely denied its obligation to defend MMSD by invoking what is commonly referred to as an “other insurance” provision in its policy. Such provisions exist to resolve disputes among insurance companies regarding which insurer must pay first when multiple policies are triggered. In a nutshell, Greenwich believed that its “other insurance” provision rendered its coverage excess over the Steadfast policy; on that basis, Greenwich argued it was obligated to provide MMSD a defense only after MMSD exhausted the full limits of its coverage from Steadfast.
In rejecting this position, the Supreme Court held that “other insurance” provisions apply only when multiple policies are concurrent—that is, they insure the same risk, and the same interest, for the benefit of the same insured, during the same period. Slip Op. at ¶ 26 (citing Plastics Eng’g Co. v. Liberty Mut. Ins. Co., 2009 WI 13). The Court concluded that the Steadfast and Greenwich policies were successive, not concurrent. Id. ¶ 27. Because the policies insured different risks at different points in time, both insurers’ defense obligations were triggered by the lawsuits against MMSD notwithstanding any particular “other insurance” policy language. The Court therefore affirmed the lower courts’ decision that Greenwich had breached its defense obligations to MMSD.
Justice Rebecca Grassl Bradley was the only dissenter on this point, noting that the majority erred by issuing a blanket conclusion regarding “other insurance” provisions rather than examining the particular policy language at issue in the Steadfast and Greenwich policies. Slip Op. at ¶ 89 (R.G. Bradley, J., concurring in part, dissenting in part). Upon examining the respective provisions, Justice Bradley concluded that they operated to designate the Greenwich policy as excess of the Steadfast policy, thus relieving Greenwich of its defense obligations. Id. at ¶¶ 90-105.
Allocation of Defense Costs
Having concluded that Steadfast’s claim against Greenwich was pursuant to the subrogation rights it acquired from MMSD under its policy rather than a traditional contribution claim (see Slip. Op. at ¶¶ 32-38), the Court then addressed whether Greenwich was entitled to an allocation of defense costs between itself and Steadfast. The Court found that allowing Steadfast to recover from Greenwich 100% of the defense costs incurred would amount to an unjustified windfall because Steadfast indisputably was also an insurer with a contractual duty to defend MMSD. Id. at ¶¶ 39-41. Rather, in the Court’s eyes, an allocation was necessary to prevent Steadfast, as the subrogee, from being placed in a better position than MMSD would have been as the subrogor. Id.
Noting that allocation of defense costs among multiple insurers was an open question under Wisconsin law, the Court examined various methodologies used in other jurisdictions and concluded that a pro rata allocation based on the insurers’ respective policy limits was the most equitable method. Id. at ¶¶ 42-45. The Court therefore held that Steadfast was entitled to reimbursement of 40% of the defense costs from Greenwich (amounting to $620,000), as the Greenwich policy had insured 40% of the $50 million worth of coverage in place (with Steadfast insuring the remaining 60%). Id.
In a concurring separate opinion, Justices Ann Walsh Bradley and Rebecca Frank Dallet issued a strong argument against granting Greenwich any allocation under the circumstances. The two Justices noted that, under settled Wisconsin law, insurers that breach their defense obligations face severe financial consequences (often times greater than what they would have paid had they defended). Slip. Op. at ¶¶ 66-67 (A.W. Bradley, J., concurring in part, dissenting in part). The two Justices further reasoned that allowing breaching insurers to offset these consequences at the expense of non-breaching insurers contravenes those principles, incentivizing a “proliferation of a game of chicken between insurers” in which the loser faces minimal adverse financial consequences. Id. at ¶¶ 68-71. The two Justices argued that the only logical way to deter insurers from breaching their defense obligations under these circumstances would be to allow the non-breaching insurer to recover 100% of the costs incurred in defending the insured. Id. at ¶¶ 73-75.
Recovery of Attorney’s Fees
The final issue addressed by the Court was whether Steadfast was entitled to recover its legal costs in pursuing its subrogated breach of contract claim against Greenwich. Interestingly, after allocating MMSD’s defense costs to prevent Steadfast from receiving a windfall, the Court held that Steadfast was entitled to recover its attorney’s fees from Greenwich. The Court noted that MMSD undoubtedly would have been entitled to recover its legal fees from Greenwich as a breaching insurer under settled Wisconsin law, and that Steadfast had acquired all of MMSD’s “rights of recovery” through the Steadfast policy’s subrogation provision. Slip. Op. at ¶¶ 51-52. The Court ultimately “decline[d] to create an exception to this longstanding rule by excluding attorney fees from the bundle of contractual subrogation rights.” Id. at ¶ 51.
Justices Ann Walsh Bradley, Rebecca Frank Dallet, and Rebecca Grassl Bradley all dissented from the majority’s holding as inconsistent with previous Wisconsin decisions holding that exceptions to the “American Rule” (under which each party pays its own attorney) should be limited and narrow. The justices asserted that Elliott, the precedent entitling an insured to its attorney’s fees when an insurer breaches its defense coverage obligations, has appropriately been limited to its particular factual circumstances by subsequent cases refusing to allow one insurer to recover legal fees from another. Slip Op. at ¶¶ 77-85 (A.W. Bradley, J., concurring in part, dissenting in part). According to the dissenters, there was no legitimate reason to deviate from the American Rule under these circumstances.
Taken in full, both the majority and the partial concurrences likely leave most readers puzzled by their inconsistencies. Steadfast brought a contractual subrogation claim against Greenwich, asserting the rights of MMSD as Greenwich’s insured. The most logical approach would seem to be treating the dispute no differently than if MMSD itself had brought the breach of coverage claim against Greenwich.
Instead, both the majority and concurrence pick and choose when to view Steadfast as “standing in the shoes” of MMSD and when to ignore that context. The majority recognizes this principle with respect to the recovery of attorney’s fees, but finds that a different result is warranted on how much of MMSD’s defense costs are recoverable. The concurrence is similarly inconsistent in the opposite way; it argues that the insurer should be allowed to stand in the insured’s shoes to recover 100% of the defense costs but cannot recover any of its own attorney’s fees from the coverage suit because of its status as a subrogated insurer. This leaves insurers with little guidance as to what precise “rights to recovery” they acquire from an insured via contractual subrogation.
The most settled takeaway appears to be that Wisconsin law limits the circumstances under which “other insurance” provisions may be invoked by insurers. Six of the seven justices agree that such provisions apply only when policies are truly “concurrent,” insuring the same risk and interest, for the benefit of the same entity, during the same coverage period. Going forward, insurers should be especially cautious when seeking to rely on such provisions to avoid any coverage responsibilities, regardless of how straightforward and unambiguous they deem the particular policy language.
A potentially more complicated issue in the wake of this decision is an insured’s ability to recover its defense costs where allegations of liability trigger coverage under multiple successive policies issued by more than one insurer. The Supreme Court previously had decided that Wisconsin was an “all sums” jurisdiction, meaning that an insurer must provide a full defense and indemnify its insured for all sums up to the policy limits, even if the time periods implicated by the relevant allegations exceed the coverage period. See Plenco, 2009 WI 13, ¶¶ 60-61. Applying this standard to the multiple insurer context, an insured would be entitled to choose which insurer to provide it a full defense and that insurer would be obligated to do so regardless of the presence of other potentially applicable coverage.
In Plenco, however, there were not multiple insurers. Because the Court here adopted a pro rata allocation of defense costs in the context of contractual subrogation claim (where the insurer stood in the shoes of the insured rather than in a traditional insurer v. insurer contribution claim), one could envision insurers interpreting this decision to abrogate the “all sums” Plenco decision under circumstances involving policies issued by multiple insurers. That interpretation would oblige insureds to pursue each and every liability insurer to receive a fully funded defense under such circumstances. Given that none of the justices cited Plenco with regard to the allocation issue, they likely intended to limit application of the pro rata defense cost allocation only to disputes between insurers (either through subrogation or contribution) after an insured has received a complete defense. Nonetheless, insurers and insureds will want to follow how this issue plays out in the lower courts.
Finally, it is worth noting that only four of the seven current justices concluded that an insurer should be able to recover its attorney’s fees when bringing a contractual subrogation claim against a fellow insurer for reimbursement of defense costs. This holding certainly seems vulnerable to be narrowed or even overturned as the composition of the Supreme Court changes.