Opinion ID: 2120473
Heading Depth: 1
Heading Rank: 6

Heading: When the Duty to Defend Is Triggered

Text: ¶ 55 Having determined that London Market's policy incorporates the duty to defend found in the Travelers policies, we turn to address if and when that duty was triggered under these facts. Both London Market and the excess intervenors appear to assert that as a matter of law, an excess carrier's duty to defend may not be triggered until the limits of the underlying Travelers policies have been exhausted. [12] ¶ 56 In its brief, London Market explains: Wisconsin law is clear. An excess insurer is just that. It is not a co-primary insurer, responsible for providing a defense from dollar one. That obligation falls solely on the primary insurer.... This court should reaffirm Wisconsin law, holding that an excess insurer is not required to provide a defense where the primary is required to do so. London Market further asserts that the provisions of its policy are consistent with this general rule. ¶ 57 We agree that a primary insurer generally has the primary duty to defend a claim. An excess insurer usually is not required to contribute to the defense of the insured so long as the primary insurer is required to defend. 2 Arnold P. Anderson, Wisconsin Insurance Law § 11.33 (5th ed. 2004); see also Southeast Wis. Prof'l Baseball Park Dist., 304 Wis.2d 637, ¶ 64, 738 N.W.2d 87. True excess coverage attaches when a single insured has two policies that cover the same loss but only one policy is written with the expectation that the primary insurer will conduct all investigations, negotiations, and defense of claims until its limits are exhausted. Id., § 11.17. ¶ 58 However, this does not establish an immutable rule of law requiring exhaustion of all primary policies before an excess insurer's duty to defend can be triggered. Rather, it depends on the language of the policies. ¶ 59 Wisconsin case law instructs that the language of the policy should be our initial focus. After focusing on the policy language, we turn to examine Wisconsin cases that have held that an excess insurer's duty to defend may be triggered prior to the exhaustion of the primary policy.
¶ 60 As stated above, the London Market policy incorporates the provisions of the Travelers policies unless otherwise provided. The Travelers policies explain when Travelers' duties to indemnify and to defend endupon exhaustion of Travelers' limits of liability: [Travelers] shall not be obligated to pay any claim or judgment or to defend any suit filed after the applicable limit of the company's liability has been exhausted by payments of judgments or settlements. ¶ 61 According to the follow form provision, London Market's duty to defend would also be terminated upon the exhaustion of its limits of liability. Although the above language determines when Travelers and London Market's duties to indemnify and defend end, this language is silent regarding the question of when the duty to defend begins.
¶ 62 However, a separate provision in the Travelers policies, the other insurance provision, sheds light on the inquiry. This provision explains that if another insurer denies primary liability, Travelers will respond as though the other insurance were not available. [13] It provides: [I]f the insurer affording other insurance to the named insured denies primary liability under its policy, [Travelers] will respond under this policy as though such other insurance were not available. (Emphasis added.) A reasonable person in the position of the insured would interpret this provision as promising that, where the excess insurer has a contractual duty to defend, it will step in and provide a defense in the event that the primary insurer refuses to do so. [14] ¶ 63 Under the follow form provision, the language of the other insurance provision is incorporated into the London Market policy unless otherwise provided herein. Thus, London Market would be required to respond under [its] policy as though such other insurance were not available in the event that the underlying insurer denies primary liability under its policyunless the London Market policy otherwise provides. ¶ 64 We examine next whether the London Market policy does indeed otherwise provide. Our focus is directed to the meaning of the word liability.
¶ 65 London Market asserts that under the limits of liability provision in its policy, its duty to defend did not attach until the limits of the underlying Travelers policies were exhausted. The limits of liability provision states that liability shall attach to London Market only after Travelers has paid or has been held liable to pay its limits: It is expressly agreed that liability shall attach to the Underwriters only after the Underlying Umbrella Insurers have paid or have been held liable to pay the full amount of their respective net loss liability[.] ¶ 66 The limits of liability provision discusses when London Market's liability beginsafter Traveler's has paid or has been held liable to pay the full amount of its net loss liability. However, it does not expressly state when the duty to defend begins. In isolation, it is unclear whether the term liability encompasses the duty to defend. ¶ 67 Although the London Market policy provides that liability does not attach until the underlying policies have been exhausted, it does not define the term liability. An examination of the term liability as it is used in the context of the London Market policy indicates, however, that liability refers to indemnification for injuries or property for which Johnson Controls is held liable. It does not refer to the duty to defend. ¶ 68 For instance, London Market's coverage section provides that it promises to indemnify the Assured for all sums for which the Assured shall be obligated to pay by reason of the liability for damages on account of personal injuries, property damage, or advertising liability. In this context, liability is synonymous with indemnification. ¶ 69 The term liability appears to be used interchangeably with indemnification in other places throughout London Market's policy. The non cumulation of liability provision equates liability with payment for personal injury or property damage: [I]n the event that personal injury or property damage arising out of an occurrence covered hereunder is continuing at the time of the termination of this Policy [London Market] will continue to protect the Assured for liability in respect of such personal injury or property damage without payment of additional premium. Further, its notice of occurrence provision discusses injuries and damage for which the insured will be held liable: Whenever the Assured has information from which they may reasonably conclude that an occurrence covered hereunder involves injuries or damage which, in the event that the Assured shall be held liable, is likely to involve this Policy, notice shall be sent.... ¶ 70 It therefore appears that the exhaustion provision's discussion of when liability attaches means that London Market will not indemnify Johnson Controls for injury or property damage until the indemnification limits of the underlying policies have been exhausted. However, defense and indemnification are separate duties. Radke, 217 Wis.2d at 44, 577 N.W.2d 366. Even if London Market's duty to indemnify does not attach until exhaustion of the underlying policies, that does not mean that its duty to defend requires exhaustion to attach. [15] An insurer can have a duty to defend even under circumstances when there will ultimately be no indemnification under the policy. See id. ¶ 71 London Market makes one additional argument in support of its assertion that its duty to defend was not triggered until exhaustion of the Travelers policies. It shifts from examining the language of its own policy to focusing on the language of the Travelers policies. It points to the paragraph in the Travelers policies that imposes both the duty to indemnify and the duty to defend and explains that the first word in that paragraph is liability: Liability. The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages ..., and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such injury or damage[.] ¶ 72 Thus, London Market contends, the term liability encompasses both defense and indemnification obligations. At oral argument, counsel for London Market explained: [I]f the term `liability' is dependent upon what the Travelers policy says, it is clear that Travelers considers both the duty to defend and the duty to indemnify as part of liability.... Under that analysis, ... then the duty to defend and the duty to indemnify cannot attach until such time as there is exhaustion. ¶ 73 London Market's argument rests on an infirm foundation. In examining the language of the Travelers policies, it is far from clear that Travelers considers both the duty to defend and the duty to indemnify as part of liability. The term liability is not set forth in the definition section of the Travelers policies. Although not specifically defined, it appears in many places throughout the policies. In most places, the term liability is used to refer to the obligation to indemnify, and defense is treated as a separate obligation. [16] ¶ 74 Given a lack of definition and the disparate use of the term liability in the Travelers policies, it is not at all clear that the Travelers policies intend that liability be defined to include the duty to defend. Even if it were clear, however, such usage would conflict with the usage of the term liability in London Market's own policy. There, the term liability is consistently used to mean indemnification. As we previously explained, if there is a conflict between the London Market policy and the Travelers policies, the terms of the London Market policy control. See supra, ¶¶ 44-46 & n. 10. ¶ 75 We conclude that although London Market's duty to indemnify is conditioned upon exhaustion of the underlying Travelers policies, its duty to defend is not so conditioned. Rather, under the other insurance provision, London Market was required to respond under [its] policy as though such other insurance were not available because Travelers denie[d] primary liability under its policy. Thus, London Market was required to assume the defense.
¶ 76 Contrary to the assertion of London Market, this conclusion does not fly in the face of an overarching rule of law requiring exhaustion of all primary policies before the duty to defend can be triggered. Quite the contrary. Wisconsin case law recognizes that an excess insurer's duty to defend may under certain circumstances be triggered prior to the exhaustion of the primary policy. ¶ 77 In Teigen v. Jelco Wis., Inc., 124 Wis.2d 1, 367 N.W.2d 806 (1985), for example, this court approved a settlement agreement between a primary insurer and the plaintiff who brought suit against the insured. The settlement agreement was for less than the limits of the primary policy. It released all claims against the primary and the insured, but it left the excess carrier potentially liable. [17] Although the excess insurer argued that the primary wrongfully attempted to avoid its responsibility to defend the suit until it fully paid its policy limits, the court rejected that argument. Id. at 9-10, 367 N.W.2d 806. Thus, it concluded that the excess carrier was required to defend the suit, regardless of the fact that the underlying primary policy had not been fully exhausted. ¶ 78 Teigen is not alone. In American Motorists Insurance Co. v. Trane Co., 544 F.Supp. 669, 692 (W.D.Wis.1982), American Motorists' excess policy promised to defend against suits for losses covered by the American Motorists policy but not covered by the underlying policy. Id. at 692. The federal district court applied Wisconsin law to the policy and concluded that the excess insurer with a contractual duty to defend was required to do so in the event that the primary insurer refused to defend: [18] If the underlying insurer has refused to defend, asserting that there is no coverage under the substantive provisions of the underlying policy, the excess insurer will have a duty to defend, provided there is coverage under the excess policy and the claim falls within the policy limits of the excess insurer. Id. Additionally, the court concluded that a complaint which alleges damages in excess of the limits of the underlying policy triggers an excess insurer's duty to defend, even if the underlying insurer undertakes the defense as well. Id. ¶ 79 Eleven years later, the Wisconsin court of appeals revisited the holdings of American Motorists. In Azco Hennes Sanco, Ltd. v. Wisconsin Insurance Security Fund, 177 Wis.2d 563, 502 N.W.2d 887 (Ct.App.1993), a suit was filed against the insured, Azco, seeking damages in excess of the limits on Azco's primary insurance policy. Azco's primary insurer defended against the lawsuit. Additionally, Azco also hired a second attorney who was instrumental in ensuring that the case settled within the primary policy limits. Azco then sent the bills for the second attorney to its excess insurer, asserting that it was required to pay them under American Motorists. [19] The excess insurer refused, asserting that its duty to defend had not been triggered even though the complaint against Azco alleged damages in excess of the primary policy's limits. ¶ 80 The court of appeals noted that it was not bound to follow a federal district court's opinion on Wisconsin law. Id. at 568, 502 N.W.2d 887. It rejected the conclusion in American Motorists that alleged damages in excess of the primary policy's limits were sufficient to trigger an excess insurer's duty to defend. Id. ¶ 81 However, it did not disturb the other conclusion in American Motorists  that an excess insurer with a contractual duty to defend might be obligated to assume the defense if the primary insurer refused to do so. The Azco court stated that the American Motorists case is distinguishable on its facts. In American Motorists the primary insurer refused to defend, whereas in this case Azco's primary insurer undertook its defense in the action. Id. ¶ 82 American Motorists was also cited in a recent decision of the Wisconsin court of appeals, Southeast Wisconsin Professional Baseball Park District v. Mitsubishi Heavy Industries America, 2007 WI App 185, 304 Wis.2d 637, 738 N.W.2d 87. In that case, the primary insurer refused to defend despite the circuit court ordering it to defend on three separate occasions. Id., ¶ 13. As a result, an excess carrier provided a defense. Id., ¶ 8. ¶ 83 In a footnote, the court of appeals cited American Motorists and explained: If the underlying insurer has refused to defend, asserting that there is no coverage under the substantive provisions of the underlying policy, the excess insurer will have a duty to defend, provided there is coverage under the excess policy and the claim falls within the policy limits of the excess insurer. Id., ¶ 8, n. 4. Given that the primary had breached its primary duty to defend, however, the court required it to reimburse the excess insurer for the defense costs it incurred. Id., ¶¶ 61-64. ¶ 84 The United States Court of Appeals for the Tenth Circuit also relied on American Motorists when it addressed a situation strikingly similar to the facts of this case. See Hocker v. New Hampshire Ins. Co., 922 F.2d 1476 (10th Cir.1991). There, an umbrella insurer asserted that its duty to defend was never triggered because the primary policy limits had not been exhausted. Id. at 1481. The court rejected the argument, concluding that the language of the umbrella policy promised to defend suits not covered, as warranted and established that the umbrella insurer must drop down and defend upon the primary insurers' wrongful refusal to do so. Id. at 1482. ¶ 85 The court explained that as written, the umbrella policy explicitly addresses the possibility that the primary insurer will wrongfully deny coverage for occurrences that it had warranted would be covered by its primary policy. Id. In those circumstances, [t]he excess carrier must then drop down and provide a defense. Id. The court further clarified that had the umbrella insurer fulfilled this obligation, it would be able to maintain a subrogation claim against the primary insurer to recoup the legal expenses incurred. Id. at 1483, n. 6. ¶ 86 Some courts appear to have recognized a general rule that an insured that has purchased layers of coverageincluding layers of a contractual duty to defendshould not be left without a prompt and proper defense[.] New Hampshire Indem. Co., Inc. v. Budget Rent-A-Car Systems, Inc., 148 Wash.2d 929, 64 P.3d 1239 (Wash.2003). For example, the Washington Supreme Court stated: [I]f a primary insurer fails to assume the defense, for any reason, the secondary insurer which has a duty to defend should provide the defense[.] Id. at 1243; see also Anderson, supra, §§ 11.26, 11.33; Grossman v. Am. Family Mut. Ins. Co., 461 N.W.2d 489 (Minn.App., 1990). We need not and do not adopt a general rule to resolve this case, however, given that the language of the policies provides that London Market was required to assume the defense. [20]