Title: Choinsky v. Germantown School District Board of Education

State: wisconsin

Issuer: Wisconsin Supreme Court

Document:

2020 WI 13 
 
SUPREME COURT OF WISCONSIN 
 
 
 
 
 
CASE NO.: 
2018AP116 
 
 
 
COMPLETE TITLE: 
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. 
 
 
 
 
 
REVIEW OF DECISION OF THE COURT OF APPEALS 
Reported at 2019 WI App 12, 386 Wis. 2d 285,926 
N.W.2d 196 - Published 
 
 
OPINION FILED: 
February 13, 2020   
SUBMITTED ON BRIEFS: 
        
ORAL ARGUMENT: 
October 28, 2019   
 
 
SOURCE OF APPEAL: 
 
 
COURT: 
Circuit   
 
COUNTY: 
Washington   
 
JUDGE: 
Todd K. Martens   
 
 
 
JUSTICES: 
 
REBECCA GRASSL BRADLEY, J., delivered the majority opinion of 
the Court, in which ROGGENSACK, C.J., ANN WALSH BRADLEY, 
ZIEGLER, and DALLET, JJ., joined.  KELLY, J., filed a dissenting 
opinion.   
NOT PARTICIPATING: 
HAGEDORN, J., did not participate.   
 
 
 
ATTORNEYS: 
 
 
 
2 
 
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.  
 
 
2020 WI 13 
 
NOTICE 
This opinion is subject to further 
editing and modification.  The final 
version will appear in the bound 
volume of the official reports.   
No.  2018AP116 
(L.C. No. 
2013CV527) 
STATE OF WISCONSIN  
 
 
   : 
IN SUPREME COURT 
 
 
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. 
 
FILED 
 
FEB 13, 2020 
 
Sheila T. Reiff 
Clerk of Supreme Court 
 
 
 
 
REBECCA GRASSL BRADLEY, J., delivered the majority opinion of the 
Court, in which ROGGENSACK, C.J., ANN WALSH BRADLEY, ZIEGLER, and 
DALLET, JJ., joined.  KELLY, J., filed a dissenting opinion.   
 
HAGEDORN, J., did not participate. 
 
 
REVIEW of a decision of the Court of Appeals.  Affirmed. 
No. 
2013CV52718AP116   
 
 
2 
 
 
 
¶1 
REBECCA GRASSL BRADLEY, J.   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 
                                                 
1 Choinsky v. Germantown Sch. Dist. Bd. of Educ., 2019 WI App 
12, 386 Wis. 2d 285, 926 N.W.2d 196. 
2 The Honorable James G. Pouros of the Washington County 
Circuit Court presided until January 2015 when the case was 
reassigned to the Honorable Todd K. Martens. 
Two of the dates in the circuit court's November 30, 2017 
Order for Judgment and Judgment (Record item No. 590) are 
incorrect.  The year "2017" in the second and third lines should 
be "2016."  Both the coverage trial and the special verdict 
resulting therefrom occurred in April 2016, not April 2017. 
3 The final circuit court order and judgment from which the 
School District appealed addressed only attorney fees with respect 
to coverage, not disputed fees relating to the liability defense. 
No. 
2013CV52718AP116   
 
 
3 
 
 
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. 
                                                 
4 We use "coverage" to refer to the coverage issue and 
"liability" to refer to the resolution of the underlying lawsuit 
that triggered the insurance issue.  This terminology is frequently 
used 
in 
insurance 
cases, 
particularly 
when 
referring 
to 
bifurcating the "coverage" determination from the "liability" 
resolution.  We note, however, that "liability" may also be 
referred to as the "merits" issue.  "Merits" refers to a 
determination of the underlying lawsuit, i.e., resolving the 
question of the insured's liability to the plaintiff. 
No. 
2013CV52718AP116   
 
 
4 
 
 
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) 
No. 
2013CV52718AP116   
 
 
5 
 
 
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 
No. 
2013CV52718AP116   
 
 
6 
 
 
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 
No. 
2013CV52718AP116   
 
 
7 
 
 
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 
                                                 
5 The circuit court denied the stay based on "the unique 
factual background of this particular case (as compared to other 
reported 
insurance 
coverage 
cases)" 
because 
it 
involved 
elimination of the retired employees LTC benefits, which, if 
needed, could have caused "personal financial devastation."  As it 
turned out, the coverage trial preceded the liability trial by 
over a year even though the circuit court denied the requested 
stay.  The coverage trial resulted in a finding in favor of 
coverage and the liability trial resulted in no liability. 
No. 
2013CV52718AP116   
 
 
8 
 
 
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 court concluded the Insurer had a duty to defend based 
on the Complaint's allegation that the School District "should 
have known" the adverse effect its decision to eliminate LTC 
insurance for current employees would have on its retired 
employees.  The School District's motion after verdict asked for 
an award of attorney fees, but the circuit court delayed deciding 
the attorney fees issue to afford the parties the opportunity to 
resolve it on their own.  The Insurer attempted to appeal the 
coverage decision, but the appeal was dismissed by the court of 
appeals because the circuit court had not yet decided whether the 
Insurer owed the School District additional attorney fees. 
No. 
2013CV52718AP116   
 
 
9 
 
 
¶12 The case proceeded to trial on liability in June 2017 
and the jury returned a verdict in favor of the School District.  
The parties then resurrected the unresolved attorney fees issue 
and the circuit court issued a written decision on November 3, 
2017.  In that order, the circuit court explained that because the 
Insurer followed a judicially preferred approach to the coverage 
dispute, it did not breach its duty to defend; therefore, the 
School District was not entitled to recover any attorney fees it 
expended in establishing coverage.  The November 3rd order does 
not address any unpaid attorney fees related to liability.  The 
School District did not seek clarification of the circuit court's 
order, nor did it object to the proposed Order for Judgment and 
Judgment the Insurer's attorney submitted to the circuit court.  
On November 30, 2017, the circuit court entered its Order for 
Judgment and Judgment, attaching its November 3, 2017 written order 
on attorney fees.  The School District appealed from the November 
30th and November 3rd circuit court orders, and the court of 
appeals affirmed the circuit court.  The School District then 
petitioned this court for review and we granted the petition. 
II. STANDARD OF REVIEW 
¶13 This case requires the court to interpret an insurance 
contract to determine whether the Insurer breached its duty to 
defend; this presents a question of law reviewed de novo.  Water 
Well Sols. Serv. Grp., Inc. v. Consolidated Ins. Co., 2016 WI 54, 
¶12, 369 Wis. 2d 607, 881 N.W.2d 285 (citations omitted).  Whether 
an Insurer should pay for its insured's attorney fees relating to 
No. 
2013CV52718AP116   
 
 
10 
 
 
establishing coverage is also reviewed independently.  Reid, 245 
Wis. 2d 658, ¶12. 
III. ANALYSIS 
A.  Insurance Law 
¶14 This court has provided much guidance on an insurer's 
duty to defend and how an insurer can avoid breaching that duty.  
See, e.g., Water Well, 369 Wis. 2d 607, ¶¶15-17; Olson v. Farrar, 
2012 WI 3, ¶29, 338 Wis. 2d 215, 809 N.W.2d 1; Newhouse, 176 
Wis. 2d at 832-39; Elliott v. Donahue, 169 Wis. 2d 310, 317-21, 
485 N.W.2d 403 (1992).  It is the breach of the duty to defend and 
not the existence of the duty itself that triggers equitable fee-
shifting in insurance cases.  See Reid, 245 Wis. 2d 658, ¶37 
(explaining that coverage attorney fees were awarded in Elliott as 
a "matter of equity"); see generally Elliott, 169 Wis. 2d 310.6  
In Elliott, we held that an insured was entitled to recover from 
its insurer any attorney fees the insured incurred to establish 
coverage if the insurer breached its duty to defend.  Elliott, 169 
Wis. 2d at 314, 318, 322.  Elliott recognized that the attorney 
fees awarded must be "reasonable" and remanded the matter to the 
circuit court "for a determination of the reasonable attorney fees 
incurred."  Id. at 325; see also Newhouse, 176 Wis. 2d at 837-38 
                                                 
6 In Elliott v. Donahue, we held the insurer's initial denial 
was not a breach of its duty to defend.  169 Wis. 2d 310, 318, 485 
N.W.2d 403 (1992).  The insurer's breach of its duty to its insured 
was the insurer's failure to move for bifurcation and a stay so 
that coverage could be decided before the insured incurred attorney 
fees at the liability trial.  Id. 
No. 
2013CV52718AP116   
 
 
11 
 
 
(explaining that a breach of the duty to defend results in damages 
naturally flowing from that breach). 
¶15 Since our decision in Elliott, this court established 
several judicially preferred procedures for an insurer to follow 
in order to avoid breaching its duty to defend, which will avert 
exposure to an Elliott/Newhouse fees award against it.  These 
judicially preferred methods are designed to strike a fair balance 
between the respective interests of insurers and insureds.  
Insureds who pay for insurance policies should receive a defense 
paid by its insurer whenever facing a lawsuit that "appear[s] to 
give rise to coverage" under the policy.  Olson, 338 Wis. 2d 215, 
¶30.  On the other hand, if a complaint does not allege a claim 
covered under the policy, the insurer should not be obligated to 
defend its insured.  Water Well, 369 Wis. 2d 607, ¶¶32-40.  If "a 
claim is 'fairly debatable,' the insurer is entitled to debate 
it[.]"  Anderson v. Continental Ins. Co., 85 Wis. 2d 675, 691, 271 
N.W.2d 368 (1978). 
¶16 The duty to defend arises when an insurer is served with 
a complaint that "alleges facts that, if proven, would constitute 
a covered claim" or when an insured who is served with a complaint 
alleging a covered claim tenders the defense to its insurer.  See 
Estate of Sustache v. Am. Family Mut. Ins. Co., 2008 WI 87, ¶27, 
No. 
2013CV52718AP116   
 
 
12 
 
 
311 Wis. 2d 548, 751 N.W.2d 845 (quoted sources omitted).7  The 
"four corners" rule is used to determine whether the complaint 
alleges a covered claim, by comparing the words in the complaint 
to the language of the entire insurance policy.  See Water Well, 
369 Wis. 2d 607, ¶15.  The allegations of the complaint "must state 
or claim a cause of action for the liability insured against or 
for which indemnity is paid in order for the suit to come within 
any defense coverage of the policy[.]"  Grieb v. Citizens Cas. 
Co., 33 Wis. 2d 552, 557-58, 148 N.W.2d 103 (1967).  If a complaint 
alleges a covered claim, an insurer must provide a defense to its 
insured or follow one of the judicially preferred methods to 
resolve any dispute over coverage.  Water Well, 369 Wis. 2d 607, 
¶27; Sustache, 311 Wis. 2d 548, ¶¶25-26.  An insurer is obligated 
to defend "only if it could be held bound to indemnify the 
                                                 
7 Wisconsin cases have been rather imprecise in pronouncing 
the test that triggers coverage.  Some express the test as whether 
a complaint alleges an "arguably" covered claim, see, e.g., 
Fireman's Fund Ins. Co. v. Bradley Corp., 2003 WI 33, ¶20, 261 
Wis. 2d 4, 660 N.W.2d 666 ("duty to defend is triggered by 
arguable, as opposed to actual, coverage"), and others discuss 
whether coverage under the allegations in the complaint is "fairly 
debatable," see, e.g., Red Arrow Prod. Co., Inc. v. Employers Ins. 
of Wausau, 2000 WI App 36, ¶¶16-19, 233 Wis. 2d 114, 607 
N.W.2d 294.  At least one Wisconsin insurance law treatise suggests 
the "fairly debatable" language "should not apply when determining 
whether a complaint triggers coverage."  Rather, the "fairly 
debatable" test relates solely to assessing bad faith, "or, in the 
right circumstances, a breach-of-contract claim."  Arnold P. 
Anderson, Wisconsin Insurance Law § 7.30-7.33 (6th ed. 2013) 
(noting this term first appeared in the "bad-faith case of Anderson 
v. Continental Ins. Co., 85 Wis. 2d 675, 693, 271 N.W.2d 368 
(1978), which concluded there was no bad faith in denying claim if 
it was 'fairly debatable.'"). 
No. 
2013CV52718AP116   
 
 
13 
 
 
insured[.]"  Nichols v. Am. Employers Ins. Co., 140 Wis. 2d 743, 
747, 412 N.W.2d 547 (Ct. App. 1987) (quoting Grieb, 33 Wis. 2d at 
558).  All doubts about the duty to defend must be resolved in 
favor of the insured.  Fireman's Fund Ins. Co. v. Bradley Corp., 
2003 WI 33, ¶20, 261 Wis. 2d 4, 660 N.W.2d 666 (courts "resolve 
any doubt regarding the duty to defend in favor of the insured"); 
Sustache, 311 Wis. 2d 548, ¶21; Liebovich v. Minnesota Ins. Co., 
2008 WI 75, ¶18, 310 Wis. 2d 751, 751 N.W.2d 764; Sola Basic 
Indus., Inc. v. United States Fid. & Guar. Co., 90 Wis. 2d 641, 
646-47, 280 N.W.2d 211 (1979).  In contrast, if the complaint does 
not allege a covered claim, the insurer has no obligations under 
the policy.  See generally Menasha Corp. v. Lumbermens Mut. Cas. 
Co., 361 F. Supp. 2d 887, 891 (E.D. Wis. 2005).  Insurers should 
not have to defend an insured if a complaint does not allege any 
claims covered under the insurance policy.  See, e.g., Water Well, 
369 Wis. 2d 607, ¶¶32-40 (holding insurer had no duty to defend 
and did not breach its duty to defend by unilaterally refusing to 
defend when the complaint contained no allegations covered by the 
policy). 
¶17 Of course, insurers and insureds do not always agree as 
to whether a complaint alleges covered claims.  For those 
situations, we have articulated several judicially preferred 
procedures to follow and have repeatedly held that when an insurer 
follows one of those approaches, it is not at risk of breaching 
its duty to defend.  See, e.g., Newhouse, 176 Wis. 2d at 836 (when 
an insurer follows a judicially preferred method, the insurer "runs 
No. 
2013CV52718AP116   
 
 
14 
 
 
no risk of breaching its duty to defend"); see also Carney, 60 
F.3d at 1277 ("[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.").  Our cases identify four judicially 
preferred procedures: 
 Defend under a reservation of rights; 
 Defend under a reservation of rights but seek a 
declaratory judgment on coverage; 
 Enter into a nonwaiver agreement under which the insurer 
defends the insured but the insured acknowledges that 
the insurer has the right to contest coverage; 
 File a motion with the circuit court requesting a 
bifurcated trial on coverage and liability and a stay of 
the 
proceedings 
on 
liability 
until 
coverage 
is 
determined. 
Water Well, 369 Wis. 2d 607, ¶27. 
¶18 Under the first three options, the insurer elects to 
defend the insured under a reservation of rights and provide a 
defense while the issue of coverage is resolved.  Provided the 
circuit court stays the liability proceedings, the fourth option 
does not require the insurer to defend the insured pending 
resolution of the coverage issue.  Rather, a successful motion to 
stay halts the liability case so that the insured does not incur 
attorney fees litigating liability until a coverage determination 
is made by the circuit court.  With all four judicially preferred 
No. 
2013CV52718AP116   
 
 
15 
 
 
methods, the goal is to protect the insured from having to 
simultaneously pay to defend itself in a liability trial while 
litigating coverage against its insurer. 
¶19 This case presents a problem with the fourth option when 
the circuit court denies the bifurcation or stay motion, resulting 
in the insured defending itself for a period of time on both 
liability and coverage.  We remedy that problem by clarifying the 
bifurcation/stay procedure:  if a circuit court denies bifurcation 
or a stay of the liability case, in order to protect itself from 
being found in breach of its duty to defend, the insurer must 
defend its insured under a reservation of rights so that the 
insured does not have to pay to defend itself on liability and 
coverage at the same time.8  Additionally, the insurer must 
reimburse its insured for reasonable attorney fees expended on a 
liability defense, retroactive to the date of tender. 
¶20 Although we recognize this court has not previously been 
presented with this particular factual scenario, the well-
established judicially preferred procedures nevertheless apply 
because the controlling legal principle is not new.  In Mowry v. 
Badger State Mut. Cas. Co., we said: 
An insurer may need to provide a defense to its insured 
when the separate trial on coverage does not precede the 
trial on liability and damages . . . .  Thus, we have 
noted that an insurer may be required to furnish a free 
                                                 
8 See Elliott, 169 Wis. 2d at 317-21; Mowry v. Badger State 
Mut. Cas. Co., 129 Wis. 2d 496, 528-29, 385 N.W.2d 171 (1986); 
Barber v. Nylund, 158 Wis. 2d 192, 197-98, 461 N.W.2d 809 (Ct. 
App. 1990). 
No. 
2013CV52718AP116   
 
 
16 
 
 
defense to its insured prior to the determination of 
coverage. 
129 Wis. 2d 496, 528-29, 385 N.W.2d 171 (1986) (citation omitted).  
Although the facts and procedural history in Mowry differ from 
this case, Mowry alerted insurers to this additional precondition 
to avoiding a breach of the duty to defend, which arises when the 
circuit court denies a motion to bifurcate or stay.  Of course, 
just as the insurer can unilaterally deny coverage without 
following any of the judicially preferred approaches, the insurer 
can decline to provide this retroactive defense if the circuit 
court denies the bifurcation or stay motion.  However, an insurer 
that does not follow a judicially preferred procedure, or maintains 
its position when a stay motion is denied, runs the risk of 
breaching its duty to defend if coverage is later established. 
B.  Application 
¶21 We now turn to the specific circumstances of this case.  
The School District makes three arguments.  First, it argues its 
Insurer breached its duty to defend because it initially 
"unambiguously and complete[ly]" refused to provide a defense and 
should not be allowed to avoid the consequences of its choice by 
agreeing to defend six months later.  Second, it argues its Insurer 
breached its duty to defend because the Insurer did not start 
paying for the defense for almost one year after the Insurer's 
initial denial, and the Insurer did not fully reimburse the School 
District for the attorney fees the School District incurred in 
defending the liability suit before the Insurer stepped in.  Third, 
the School District says the four-corners rule prohibits the 
No. 
2013CV52718AP116   
 
 
17 
 
 
circuit court from considering the Insurer's actions in attempting 
to secure a coverage determination.  The School District asks this 
court to reverse the court of appeals decision, hold that the 
Insurer is responsible for both unreimbursed liability attorney 
fees and all attorney fees incurred to establish coverage, and 
remand the case to the circuit court for a determination of the 
amount of those fees. 
1. Insurer's Initial Coverage Refusal and Delayed Defense 
¶22 The School District argues the Insurer's initial 
coverage denial constituted a breach of its duty to defend and the 
Insurer's later decision to defend and pay attorney fees 
retroactive to the date of tender cannot remedy the breach.  We 
conclude that the Insurer's actions did not constitute a breach of 
its duty to defend because, even though the Insurer initially 
denied coverage, it followed one of this court's preferred methods 
to obtain a judicial determination on coverage before the liability 
suit proceeded.  See Newhouse, 176 Wis. 2d at 836 (when an insurer 
follows a judicially preferred method, the insurer "runs no risk 
of breaching its duty to defend"); see also Carney, 60 F.3d at 
1277 ("[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."). 
¶23 The School District misconstrues Water Well, 369 
Wis. 2d 607, to mean that an Insurer who initially denies coverage 
is in breach even if it proceeds to follow one of the judicially 
No. 
2013CV52718AP116   
 
 
18 
 
 
preferred methods.  Water Well does not say that.  In Water Well, 
the insurer unilaterally denied coverage during the pendency of 
the underlying lawsuit.  The insurer in Water Well did not follow 
any of the judicially preferred methods because it determined the 
complaint did not allege any covered claims.  In that case, this 
court contrasted the unilateral denial with the judicially 
preferred methods only because the insurer never changed its 
unilateral denial posture.  The School District's case involves a 
unilateral denial, shortly after which the Insurer followed one of 
the judicially preferred methods.  In order to avoid breaching the 
insurance contract, an insurer who initially denies must timely 
seek a judicial determination on coverage.  See United States Fire 
Ins. Co. v. Good Humor Corp., 173 Wis. 2d 804, 830-31, 496 
N.W.2d 730 (Ct. App. 1993) (holding an Insurer's motion seeking 
declaratory judgment on coverage was untimely because it was not 
filed until after liability case had resolved).  Water Well does 
not support the School District's argument. 
¶24 Moreover, an insurer has the "right and obligation to 
make timely investigation" as "a condition precedent to [its] 
contractual duties of defense and coverage."  Gerrard Realty Corp. 
v. American States Ins. Co., 89 Wis. 2d 130, 140, 277 N.W.2d 863 
(1979).  The law necessarily permits an insurer to investigate a 
claim before accepting the defense:  "Certainly, an insurer cannot 
make a reasoned judgment as to its duty to defend or provide 
coverage until [it has] had the opportunity to examine and review 
the factual situation and the pleadings as they relate to the terms 
No. 
2013CV52718AP116   
 
 
19 
 
 
of the[] policy of insurance."  Id. at 142.  An insurer cannot 
breach its duty to defend based on its insured having incurred 
defense costs during the investigation period if an insurer 
reimburses the insured for defense costs retroactive to the date 
of the claim.  Lakeside Foods, Inc. v. Liberty Mut. Fire Ins. Co., 
No. 2009AP1428, unpublished slip op., ¶¶41-43 (Wis. Ct. App. July 
21, 2010) (holding insurer did not breach its duty to defend 
because the three-month delay was attributed to the insurer's 
investigation of the matter); see generally Danner v. Auto-Owners 
Ins., 2001 WI 90, ¶58, 245 Wis. 2d 49, 629 N.W.2d 159 (noting an 
insurer "should not be found to have acted in bad faith for 
thoroughly investigating a claim" because sometimes it is 
difficult for the insurer to distinguish between legitimate and 
fraudulent claims). 
¶25 It is undisputed that the Insurer, when presented with 
the School District's tender, responded by letter within a week, 
explaining why the Insurer concluded that the Complaint did not 
allege any covered claims.  The Insurer explained that the 
allegations in the Complaint assert "deliberate" acts not covered 
by the insurance policies, which cover only negligent acts.  In 
the letter, the Insurer asked the School District to notify the 
Insurer if it agreed with the Insurer's coverage analysis and 
advised that if the School District did not agree, the Insurer 
would seek a coverage determination in the circuit court. 
¶26 Within a week of receiving the School District's written 
notification that it would dispute the denial of coverage, the 
No. 
2013CV52718AP116   
 
 
20 
 
 
Insurer filed a motion asking to intervene in the liability 
lawsuit, to bifurcate the liability and coverage issues, and to 
stay the liability case so that coverage could be decided promptly.  
These actions precisely followed one of the judicially preferred 
approaches this court has said will protect an insurer from 
breaching its duty to defend.  Specifically, the Insurer moved "to 
bifurcate and stay" the liability suit pending a coverage 
determination.  The Insurer cannot be faulted for doing exactly 
what this court for years has instructed insurers to do. 
¶27 The time gap between the filing of the Insurer's motion 
and the circuit court's decision necessarily caused the School 
District to incur attorney fees it would not have had to pay had 
the circuit court granted the Insurer's motion to stay the 
liability proceedings.  The circuit court did not decide the motion 
for three-and-a-half months, leaving the School District with 
defense costs as litigation over liability continued.  During that 
time, the School District's attorney filed and argued a motion to 
dismiss, which was denied.  The School District paid an attorney 
to defend it on the liability claim while also paying its attorney 
to litigate the coverage issue.  When the circuit court finally 
decided the Insurer's motions on December 12, 2013, it allowed the 
Insurer to intervene and granted the motion to bifurcate, but it 
denied the motion to stay liability, resulting in the insured 
No. 
2013CV52718AP116   
 
 
21 
 
 
incurring additional attorney fees.9  The circuit court's decision 
caused the School District to pay attorney fees for litigating 
both coverage and liability, which the judicially preferred 
procedures in coverage disputes are designed to prevent. 
¶28 Within two weeks of the circuit court's decision denying 
the stay of liability proceedings, the Insurer notified the circuit 
court that it would pay for the defense of the School District.  
Within one month of the circuit court's decision denying the motion 
to stay, the Insurer notified the School District that it would 
defend the School District under a reservation of rights.10  The 
letter suggests prior communication between the School District 
and the Insurer, as the Insurer acknowledges "its understanding" 
that the School District wanted to retain the attorney the School 
District had hired.  The Insurer indicated doing so was "acceptable 
to The Insurers provided an agreement can be reached on the hourly 
rates to be charged by the firm."  The Insurer also asked the 
                                                 
9 Between December 12, 2013 and January 14, 2014, the record 
contains 29 items, including filings related to the School 
District's request for a stay so that it could seek an 
interlocutory appeal challenging the circuit court's denial of its 
motion to dismiss.  Some of the record items relate solely to the 
coverage issue, including the Insurer's Complaint for Declaratory 
Judgment and its motion seeking summary judgment on coverage. 
10 The School District argues the Reservation of Rights letter 
was infirm because the letter reserved the Insurer's right "to 
seek reimbursement of defense costs paid in this action in whole 
or in part to the extent permitted by applicable law."  We decline 
to address this argument because it involves actions that did not 
occur.  "Courts will not render merely advisory opinions."  Tammi 
v. Porsche Cars N. Am., Inc., 2009 WI 83, ¶3, 320 Wis. 2d 45, 768 
N.W.2d 783 (quoted source omitted). 
No. 
2013CV52718AP116   
 
 
22 
 
 
School District to have the firm send its fee schedule to the 
Insurer for approval. 
¶29 The Insurer acted consistently with well-established 
cases outlining an insurer's obligations in order to avoid 
breaching its duty to defend.  It followed a judicially preferred 
approach and when the circuit court's rulings forced its Insured 
to simultaneously defend itself on both liability and coverage, 
the Insurer stepped in to defend the School District on liability 
and agreed to pay for all reasonable liability attorney fees the 
School District incurred retroactive to the date of tender.  The 
circuit court acknowledged that it, not the Insurer, was 
responsible for the Insured having to simultaneously pay both 
liability and coverage attorney fees.  The Insurer cannot be deemed 
in breach of its duty to its Insured given that it acted to prevent 
its Insured from paying for both liability and coverage, but the 
No. 
2013CV52718AP116   
 
 
23 
 
 
circuit court's actions thwarted its attempt.  The Insurer 
satisfied its obligations under the insurance contract.11 
¶30 The judicially preferred methods in coverage disputes 
are designed to prevent this double pay scenario for insureds. 
Promptly employing the "recommended bifurcation procedure of first 
conducting a trial on the coverage issue" protects insureds against 
concurrently paying for both a liability defense as well as 
coverage attorney fees.  Barber v. Nylund, 159 Wis. 2d 192, 197, 
461 N.W.2d 809 (Ct. App. 1990).  Indeed, staying liability after 
granting bifurcation is generally the best practice.  See Reid, 
245 Wis. 2d 658, ¶27 (noting that after bifurcation, resolution of 
the coverage issue is "a relatively simple matter" and encouraging 
courts "to expedite resolution of the coverage issue").  Since at 
least 1986, this court has been encouraging circuit courts to 
                                                 
11 Any damage to the insured as a result of the delay is 
remedied by an insurer paying for reasonable liability attorney 
fees retroactive to the date of tender, and any additional damages 
arising from an insurer's unreasonable actions or reckless 
disregard for its duties under the insurance contract can be 
pursued in a bad faith suit.  See Am. Design & Build, Inc. v. 
Houston Cas. Co., No. 11-C-293, 2012 WL 719061, at *11 (E.D. Wis. 
Mar. 5, 2012) (citing Lakeside Foods, Inc. v. Liberty Mut. Fire 
Ins. Co., No. 2009AP1428, unpublished slip op., ¶¶31-32, 40-49 
(Wis. Ct. App. July 21, 2010); Anderson v. Continental Ins. Co., 
85 Wis. 2d 675, 691, 271 N.W.2d 368 (1978) ("To show a claim for 
bad faith, a plaintiff must show the absence of a reasonable basis 
for denying benefits of the policy and the defendant's knowledge 
or reckless disregard of the lack of a reasonable basis for denying 
the claim.").  The School District did not assert any bad faith 
claims against the Insurer.  Nor could it.  The record confirms 
the Insurer acted reasonably, in conformance with this court's 
guidelines, and consistent with its contractual obligations. 
No. 
2013CV52718AP116   
 
 
24 
 
 
resolve the coverage issue expeditiously for the benefit of the 
insured: 
It would seem that, once an order to bifurcate has been 
made, a trial on a coverage issue should be a relatively 
simple matter.  We, therefore, encourage a court which 
has ordered bifurcation to expedite the coverage issue 
by placing the trial on its calendar at an early date to 
assist in avoiding a needlessly protracted claim against 
the insured.   
See Mowry, 129 Wis. 2d at 529 n.4 (emphasis added).  We continue 
to encourage circuit courts to decide bifurcation and stay motions 
expeditiously and to grant the requested stay unless case-specific 
factors weigh against it. 
2. Attorney Fees Payment Issues 
a. Delay in Paying for Defense 
¶31 The School District also faults the Insurer for the delay 
in reaching an agreement on attorney fees.  The School District 
argues this establishes a breach of the Insurer's duty to defend.  
We disagree. 
¶32 The record is woefully inadequate for a complete review 
of this issue; consequently, the School District forfeited review.  
Nickel v. United States (In re Rehab. of Segregated Account of 
Ambac Assurance Corp.), 2012 WI 22, ¶10, 339 Wis. 2d 48, 810 N.W.2d 
450 ("Our case law is clear and consistent: failure to [adequately] 
preserve issues at the circuit court means that they are waived.").  
It is unclear if the School District or its attorney engaged in 
fee negotiations with the Insurer, or what those negotiations 
entailed.  Without any information regarding what negotiations 
took place or when, it is impossible to determine whether or to 
No. 
2013CV52718AP116   
 
 
25 
 
 
what extent any delay is attributable to the Insurer, the School 
District, its attorney, or other factors. 
¶33 We do know that in January 2014, the Insurer asked the 
School District to share its fee schedule so that negotiations 
could occur.  We also know the School District amended its cross-
claim in April 2014 to allege that its attorney "advised" the 
Insurer of its fee schedule in January 2014, March 2014, and twice 
in April 2014.  The cross-claim alleged that the Insurer "failed 
and refused to respond" to each advisement.  However, the Insurer's 
reply to the cross-claim denies this. 
¶34 There is also an indication that the Insurer never 
received one of the attorney's invoices.  An affidavit from the 
School District's attorney attests that the attorney sent invoices 
to the Insurer as it requested, describing:  (1) the amount of the 
invoices; (2) the amount the Insurer paid; and (3) the difference 
between those two amounts that remained unreimbursed.  However, 
the affidavit does not identify the dates the attorney sent the 
invoices to the Insurer or the date the Insurer paid each invoice.  
Additionally, the affidavit is vague as to whether the Insurer 
made payment to the attorney or the School District. 
¶35 Moreover, the Invoices attached to the liability 
attorney's affidavit are substantially redacted, with some 
descriptions of services completely blacked out and others listed 
only as "Review" or "Continue Review" or something similar.  The 
limited content of the invoices certainly could have impeded the 
Insurer's determination of what fees were reimbursable and whether 
No. 
2013CV52718AP116   
 
 
26 
 
 
each itemized service represented the attorney's work on liability 
or something else. 
¶36 Further, the record does not reflect the exact date fee 
negotiations concluded.  There is a reference to non-payment for 
three months, as well as indications that a fee agreement was 
reached in April 2014, in May 2014, or no later than June 1, 2014.  
The record does show that as of June 22, 2016, the Insurer paid 
liability attorney fees in the amount of $260,021.32. 
¶37 It is not surprising that negotiations on attorney fees 
would take some time given that the School District retained its 
own attorney prior to the commencement of the lawsuit, and the 
Insurer subsequently stepped in to defend, agreeing to allow its 
insured's chosen attorney to continue the representation.12  The 
Insurer is obligated to compensate the liability attorney only at 
a reasonable rate, reflecting the market standard associated with 
the type of case and for that geographic location, among other 
relevant factors.  See Fireman's Fund Ins. Co., 261 Wis. 2d 4, 
¶¶68-69; 14 Couch on Ins. § 202:34 ("An insurer's obligation to 
reimburse independent counsel is limited to reasonable attorney's 
fees and disbursements.").  Even when an insurer breaches its duty 
to defend, the attorney fees awarded as damages must be reasonable.  
See Elliott, 169 Wis. 2d at 325 (remanding for a determination of 
reasonable attorney fees). 
                                                 
12 The School District was aware of the impending lawsuit 
because the retired employees had filed a Notice of Claim. 
No. 
2013CV52718AP116   
 
 
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¶38 Accordingly, we reject the School District's argument 
that the delay in payment of fees means the Insurer breached its 
duty to defend.  Because the law requires attorney fees to be 
reasonable, an Insurer is entitled to review fees and negotiate a 
reasonable rate.  The record in this case contains no determination 
from the circuit court on any of these issues, without which we 
cannot assess whether a delay in payment constituted a breach of 
the Insurer's duty.  The inadequacy of the record means the School 
District forfeited review of this issue.  Nickel, 339 Wis. 2d 48, 
¶10 ("Our case law is clear and consistent:  failure to 
[adequately] preserve issues at the circuit court means that they 
are waived."). 
b. Unreimbursed Liability Attorney Fees 
¶39 The School District also argues the Insurer breached its 
duty to defend by failing to reimburse it for the full amount it 
expended 
in 
liability 
fees. 
 
It 
contends 
the 
Insurer's 
reimbursement fell short by approximately $50,000.  We reject this 
contention for the same reasons we rejected the School District's 
argument regarding delayed reimbursement:  (1) attorney fees must 
be reasonable, and (2) the record on unreimbursed liability 
attorney fees is sorely incomplete.  While the record contains the 
specific amounts of liability fees in dispute as well as the amount 
the Insurer paid, we agree with the court of appeals that it is 
"impossible to properly consider [the School District's] unpaid 
fees argument" because "[t]he District leaves us to guess as to 
No. 
2013CV52718AP116   
 
 
28 
 
 
the scope and details of the agreements" between the parties.13  
Additionally, the School District appealed from an order 
addressing only coverage fees, not unreimbursed liability fees.  
Furthermore, it is undisputed that neither the School District nor 
its liability attorney utilized the Insurer's process for 
appealing the Insurer's decision to pay less than the amount of 
the attorney fees invoice. 
3.  Four-Corners Rule 
¶40 The School District also asserts the circuit court 
should examine only the four corners of the complaint to assess 
whether the Insurer breached its duty to defend and cannot consider 
any actions by the Insurer.  The four-corners rule is the well-
established standard used to assess whether a duty to defend 
exists.  Water Well, 369 Wis. 2d 607, ¶¶19-20.  No extrinsic 
evidence can be used to ascertain whether the Complaint alleges a 
covered claim.  Id., ¶24. 
¶41 The School District misunderstands this court's holding 
in Water Well.  We never prohibited a circuit court from 
considering the actions an insurer took to obtain a judicial 
determination on coverage.  Nor did we say the circuit court cannot 
take into account that the insurer followed a judicially preferred 
method to determine coverage.  We held the circuit court cannot 
consider extrinsic evidence the insured, insurer, or anyone else 
might know about circumstances relating to the substance of the 
Complaint that are not within the four corners of the Complaint.  
                                                 
13 See Choinsky, 386 Wis. 2d 285, ¶¶13-14, 18, 34 n.10. 
No. 
2013CV52718AP116   
 
 
29 
 
 
In Water Well, the insured asked the court to consider extrinsic 
evidence about the product at issue, claiming the complaint's 
allegations about the product were "factually incomplete or 
ambiguous."  Id., ¶2.  This court refused Water Well's request and 
reaffirmed that in assessing whether the duty to defend exists, a 
court cannot look beyond the four corners of the Complaint.  Id., 
¶¶23-24.  Once the duty to defend has been established, the four-
corners rule no longer applies.  See Sustache, 311 Wis. 2d 548, 
¶¶27-29. 
¶42 Water Well did not disturb Wisconsin coverage law:  a 
court is bound by the four-corners rule when deciding whether the 
Complaint alleges a covered claim triggering the insurer's duty to 
defend.  Once a court concludes a duty to defend exists, the 
insurer's actions——unilaterally denying coverage, opting for a 
judicially preferred procedure to determine coverage, or something 
else——will be examined to decide whether the insurer breached its 
duty to defend. 
IV. CONCLUSION 
¶43 The Insurer did not breach its duty to defend the School 
District because even though it concluded the Complaint did not 
allege a covered claim and issued a denial letter, it followed a 
judicially preferred method for having coverage decided before 
liability.  When the circuit court denied the Insurer's motion to 
stay the liability proceedings, the Insurer provided a full 
defense, retroactive to the date of tender.  By doing so, the 
Insurer complied with its contractual responsibilities to its 
No. 
2013CV52718AP116   
 
 
30 
 
 
Insured and therefore is not responsible for the School District's 
coverage attorney fees.  This court has repeatedly said that when 
an insurer follows a judicially preferred procedure to resolve a 
coverage dispute, it will not risk breaching its duty to defend.  
When an insurer seeks bifurcation and a stay, it must defend the 
insured and pay its attorney fees retroactive to the date of tender 
if the circuit court denies any part of the motion.  We strongly 
encourage circuit courts to promptly decide these motions and to 
grant a stay of the liability proceedings whenever possible and 
appropriate. 
¶44 We reject the School District's assertions that the 
delayed defense, the time necessary to negotiate reasonable 
attorney fees, and the unreimbursed $50,000 in liability fees 
establish a breach by the Insurer.  The law permits an insurer to 
investigate a claim before defending and requires payment of only 
reasonable attorney fees.  An insufficient record prevents full 
review of the fees issues the School District raises. 
¶45 Finally, we reject the School District's contention that 
the four-corners rule confines the circuit court's consideration 
of whether an insurer breached its duty to defend.  The four-
corners rule governs the determination of whether a duty to defend 
exists, but courts necessarily consider the insurer's actions in 
unilaterally denying coverage, or following a judicially preferred 
approach to obtaining a judicial decision on coverage, in order to 
assess whether the insurer breached its duty to defend. 
No. 
2013CV52718AP116   
 
 
31 
 
 
By the Court.—The decision of the court of appeals is 
affirmed. 
¶46 BRIAN HAGEDORN, J., did not participate. 
 
No.  2018AP116.dk 
 
1 
 
 
¶47 DANIEL KELLY, J.   (dissenting).  I agree (mostly) with 
the court's statement of the law governing an insurer's duty to 
defend its insured when there is disagreement over coverage.  I 
don't agree, however, that an insurer can buy its way out of its 
breach of that duty by reimbursing its insured for defense costs.  
Because the Insurer1 in this case refused to provide attorneys for 
their insured during a period of time that our cases unmistakably 
say they owed the insured a defense, I conclude it breached its 
contractual obligations.  For these reasons, I respectfully 
dissent. 
¶48 This case is, as the court stated, about the Insurer's 
defense obligations when it chooses to protect its interests by 
filing a motion "requesting a bifurcated trial on coverage and 
liability and a stay of the proceedings on liability until coverage 
is determined."  Majority op., ¶17.  The court said "[t]his case 
presents a problem with [the bifurcate-and-stay] option when the 
circuit court denies the bifurcation or stay motion, resulting in 
the insured defending itself for a period of time on both liability 
and coverage."  Id., ¶19.  To protect itself from a breach of 
contract claim under such circumstances, the court says, "the 
insurer must defend its insured under a reservation of rights so 
that the insured does not have to pay to defend itself on liability 
and coverage at the same time."  Id.   
                                                 
1 I will collectively refer to Employers Insurance Company of 
Wausau and Wausau Business Insurance Company as the "Insurer" to 
be consistent with the court's opinion. 
No.  2018AP116.dk 
 
2 
 
¶49 I agree with this much of the court's statement of the 
law.  But I think it requires greater clarification because the 
application of that principle in this case demonstrates its 
statement provides a lacuna in the Insurer's defense obligations 
that leaves the insured paying for attorneys to litigate both the 
merits and coverage aspects of the case. 
¶50 The duty to defend, as the court correctly states, begins 
upon service or tender of a coverage-implicating complaint:  "The 
duty to defend arises when an insurer is served with a complaint 
that 'alleges facts that, if proven, would constitute a covered 
claim' or when an insured who is served with a complaint alleging 
a covered claim tenders the defense to its insurer."  Id., ¶16 
(quoting Estate of Sustache v. Am. Family Mut. Ins. Co., 2008 
WI 87, ¶27, 311 Wis. 2d 548, 751 N.W.2d 845).   
¶51 The insurer fulfills its duty to defend, of course, by 
"appoint[ing] defense counsel for its insured . . . ."  Estate of 
Sustache, 311 Wis. 2d 548, ¶27 (internal marks omitted).  And the 
insurer's duty to provide defense counsel continues until final 
resolution of the coverage issue:  "Wisconsin policy is clear.  If 
the allegations in the complaint, construed liberally, appear to 
give rise to coverage, insurers are required to provide a defense 
until the final resolution of the coverage question by a court."  
Olson v. Farrar, 2012 WI 3, ¶30, 338 Wis. 2d 215, 809 N.W.2d 1 
(emphasis added).   
¶52 This duty is unaffected by an insurer's request to 
bifurcate and stay the merits phase of the case.  Mowry v. Badger 
State Mut. Cas. Co., 129 Wis. 2d 496, 523, 385 N.W.2d 171 (1986) 
No.  2018AP116.dk 
 
3 
 
("[I]f an insurer is granted a bifurcated trial under [Wis. Stat.] 
§ 803.04(2)(b) [(1985-1986)], . . . an insurer's duties to its 
insured should not be suspended pending the outcome of the coverage 
trial." (emphasis added)); Barber v. Nylund, 158 Wis. 2d 192, 198, 
461 N.W.2d 809, (Ct. App. 1990) ("The law appears settled that 
even if an insurer is granted a bifurcated trial under 
[§] 803.04(2)(b) [(1989-1990], . . . an insurer's duties to its 
insured are not suspended pending the outcome of the coverage 
trial." (emphasis added)).  It necessarily follows that if granting 
a bifurcated trial on the merits does not relieve the insurer of 
its defense obligations, the obligations existed prior to the 
motion.  Once triggered by service or tender of a qualifying 
complaint, therefore, the duty to defend continues unabated until 
final resolution of the coverage question, notwithstanding the 
filing of a motion to bifurcate and stay the merits phase of the 
case. 
¶53 Here, however, the court allowed the Insurer to escape 
its defense obligations.  The circuit court declared that the 
complaint described a cause of action that, if proved, would be 
covered by the insurance policies at issue.  Consequently, the 
duty to defend arose when the School District tendered the 
complaint to the Insurer.  But the Insurer did not provide a 
defense; it rejected the tender, and thereafter filed a complaint 
requesting a declaration that it owed no duty to defend or 
indemnify the School District.  It then moved the circuit court to 
bifurcate and stay the merits phase of the underlying case.  The 
circuit court granted the bifurcation motion, but did not grant 
No.  2018AP116.dk 
 
4 
 
the requested stay.  The Insurer then said it would defend under 
a reservation of rights, but it did not start doing so until 
January 14, 2014 (the date on which it started paying for the 
School District's attorneys).   
¶54 For a period of over 5 months, therefore, the Insurer 
did not, in fact, provide a defense.  And this failure occurred 
during a period of time our cases say the Insurer owed an unabated 
duty to defend the School District.  So the Insurer breached its 
contractual obligations.  The court concludes otherwise, however, 
stating that "the Insurer's actions did not constitute a breach of 
its duty to defend because, even though the Insurer initially 
denied coverage, it followed one of this court's preferred methods 
to obtain a judicial determination on coverage before the liability 
suit proceeded."  Majority op., ¶22.  But as discussed above, 
filing a motion to bifurcate and stay the merits phase of the case 
does not relieve the Insurer of its duty to defend.   
¶55 I don't know how to describe the unexcused failure to 
perform an unabated contractual obligation as anything but a breach 
of contract.  Insurers know their refusal to provide a defense is 
courting liability to its insured: 
An insurer also has the option to "[d]eny the tender of 
defense and state the grounds for deciding that the 
complaint does not trigger any obligation to defend 
under the policy."  If, however, an insurer chooses this 
option "it does so at its own peril."  By declining to 
defend an insured, an insurer opens itself up to a myriad 
of adverse consequences if its unilateral duty to defend 
determination turns out to be wrong.  For example, an 
insurer that breaches its duty to defend is liable for 
all costs naturally flowing from the breach. 
No.  2018AP116.dk 
 
5 
 
Water Well Sols. Serv. Grp., Inc. v. Consol. Ins. Co., 2016 WI 54, 
¶28, 369 Wis. 2d 607, 881 N.W.2d 285 (quoted source omitted).  The 
Insurer gambled that its evaluation of the complaint against the 
School District was correct.  It was not, and so it bears the 
consequences of losing that gamble.  Id. 
¶56 The court, however, allows the Insurer to buy its way 
out of its failed gamble.  It says that, in such circumstances, 
"[a]n insurer cannot breach its duty to defend based on its insured 
having incurred defense costs during the investigation period if 
an insurer reimburses the insured for defense costs retroactive to 
the date of the claim."  Majority op., ¶24.  Here, then, is as 
entirely new concept in the continued effort to achieve a détente 
between the interests of insurers and their insureds.  Introducing 
the concept of a "retroactive defense" allows an insurer to refuse 
its duty to defend between:  (a) tender of a coverage-implicating 
complaint; and (b) the court's resolution of coverages issues.  It 
risks nothing doing so because, in the worst case, it simply pays 
for the defense it refused to provide.   
¶57 The "retroactive defense" concept may or may not be a 
wise policy, but it is definitely new.  The primary case the court 
cited in support of this proposition was an unpublished court of 
appeals decision (which, by definition, can supply no new statement 
of the law).  Lakeside Foods, Inc. v. Liberty Mut. Fire Ins. Co., 
No. 2009AP1428, 2010 WL 2836401, unpublished slip op., (Wis. Ct. 
App. Jul. 21, 2010).  And Lakeside Foods, Inc. did not even purport 
to analyze this issue, merely stating that "during the pendency of 
its coverage investigation, Liberty knew that Lakeside was 
No.  2018AP116.dk 
 
6 
 
represented by counsel, and presumably knew that it would be 
obligated to pay Lakeside's fees dating back to the tender of 
defense."  Id., ¶43.  That is not a statement of law, it's just a 
description of what the insurer in that case believed its 
obligation to be.  The Lakeside Foods, Inc. court did not say the 
insurer was correct in its observation, did not analyze the issue, 
and made no normative statement on the subject.  
¶58 The only other authority the court offered in support of 
its "retroactive defense" proposition was Danner v. Auto-Owners 
Ins., 2001 WI 90, ¶58, 245 Wis 2d 49, 629 N.W.2d 159.  The court 
says Danner noted that "an insurer 'should not be found to have 
acted in bad faith for thoroughly investigating a claim' because 
sometimes it is difficult for the insurer to distinguish between 
legitimate and fraudulent claims."  Majority op., ¶24. That may be 
so, but it didn't have anything to say about the duty to defend, 
or the concept of a "retroactive defense," mostly because Ms. 
Danner was not the defendant.  Instead, Ms. Danner had made a claim 
under her underinsured motorist policy.  To the extent Danner 
addressed the thorough investigation of a claim, it did so in the 
context of indemnification, not the duty to defend.   
¶59 Additionally, citing Danner in the context of this case 
carries the uncomfortable suggestion that an insurer's duty to 
defend can be deferred pending a thorough investigation of the 
claim.  It can't.  Investigation into the duty to defend goes no 
further than comparing the complaint to the insurance policy.  
Estate of Sustache, 311 Wis. 2d 548, ¶27 ("[W]hen a complaint 
alleges facts that, if proven, would constitute a covered claim, 
No.  2018AP116.dk 
 
7 
 
the insurer must appoint defense counsel for its insured without 
looking beyond the complaint's four corners." (internal marks 
omitted)).2 
¶60 Finally, because I conclude that the Insurers breached 
their duty to defend, the School District is entitled to recover 
certain damages resulting from that breach.  See Water Well Sols. 
Serv. Grp., 369 Wis. 2d 607, ¶28 ("[A]n insurer that breaches its 
duty to defend is liable for all costs naturally flowing from the 
breach.").  Those damages include the attorney's fees necessary to 
establish coverage.  Elliott v. Donahue, 169 Wis. 2d 310, 322, 485 
N.W.2d 403 (1992).  There, we said: 
The insurer that denies coverage and forces the insured 
to retain counsel and expend additional money to 
establish coverage for a claim that falls within the 
ambit of the insurance policy deprives the insured the 
benefit that was bargained for and paid for with the 
periodic premium payments.  Therefore, the principles of 
equity call for the insurer to be liable to the insured 
for expenses, including reasonable attorney fees, 
                                                 
2 See also W. Bend Mut. Ins. Co. v. Ixthus Med. Supply, Inc., 
2019 WI 19, ¶10, 385 Wis. 2d 580, 923 N.W.2d 550 ("In assessing 
whether a duty to defend exists, we compare the four corners of 
the underlying complaint to the terms of the entire insurance 
policy." (internal marks and quoted source omitted)); Water Well 
Sols. Serv. Grp., Inc. v. Consol. Ins. Co., 2016 WI 54, ¶15, 369 
Wis. 2d 607, 881 N.W.2d 285 ("Longstanding case law requires a 
court considering an insurer's duty to defend its insured to 
compare the four corners of the underlying complaint to the terms 
of the entire insurance policy."); Olson v. Farrar, 2012 WI 3, 
¶29, 338 Wis. 2d 215, 809 N.W.2d 1 ("Accordingly, an insurer must 
defend all suits where there would be coverage if the allegations 
were proven, even if the allegations are 'utterly specious.' 
(quoted source omitted)); Newhouse by Skow v. Citizens Sec. Mut. 
Ins. Co., 176 Wis. 2d 824, 835, 501 N.W.2d 1 (1993) ("The duty to 
defend is triggered by the allegations contained within the four 
corners of the complaint."). 
No.  2018AP116.dk 
 
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incurred by the insured in successfully establishing 
coverage. 
Id.  Thus, we ought to remand this matter to the circuit court for 
a determination of fees the School District reasonably incurred in 
establishing coverage. 
* * * 
So, I agree with the court that when an insurer follows one 
of the judicially-prescribed methods for contesting coverage it 
does not breach its contractual obligations.  Until today, however, 
no part of the judicially-prescribed options allowed an insurer to 
refuse its defense obligations in favor of reimbursing its 
insured's defense costs at some undefined future date.  Therefore, 
I respectfully dissent. 
 
 
No.  2018AP116.dk 
 
 
 
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