Court Opinion

ID: 8203851
Source: CourtListenerOpinion
Date Created: 2022-09-09 23:49:58.788896+00
Date Added: 2024-06-11T16:41:04.672046
License: Public Domain

¶ 67. N. PATRICK CROOKS, J.
{dissenting). Our case law is absolutely clear about the proper procedure that an insurer must follow to contest coverage. "In cases where the coverage and liability issues are not bifurcated, insurance companies can protect themselves by defending under a reservation of rights. In this way the insurer gives up none of its rights should it ultimately be determined that coverage does not exist under the policy." Newhouse v. Citizens Sec. Mut. Ins. Co., 176 Wis. 2d 824, 839, 501 N.W.2d 1 (1993). This case illustrates precisely the kind of unfairness that reservation of rights letters are intended to prevent. The majority does away with a perfectly clear and effective rule that was intended to protect insureds without providing any good reason to do so.
¶ 68. This dispute could have been avoided easily if Community Insurance Corporation ("CIC") had issued a reservation of rights letter when it provided a *268defense to its insured, Hartford Union High School District and Hartford Union High School Board of Education (collectively "the District"). If CIC had done so, there would be no question that CIC could later challenge coverage. Instead, CIC now denies coverage to the District despite controlling its defense throughout litigation on the merits that resulted in an adverse judgment, and only later raising coverage issues.
¶ 69. The majority's error begins with its presentation of the issue as "whether an insurer's failure to issue a reservation of rights letter is sufficient to defeat, by waiver or estoppel, a coverage clause in an insurance contract that would otherwise justify the insurer's denial of coverage." Majority op., ¶ 1. This leads the majority to erroneously conclude that this case is controlled by a "general rule" that waiver or estoppel applies only where the insurer seeks to assert a forfeiture clause as a defense to coverage and not if the clause at issue is a coverage clause.
¶ 70. The issue should be stated more precisely, and more faithfully to the specific facts presented, as whether CIC has waived, or is estopped from asserting, any coverage defense because it controlled the District's defense throughout litigation resulting in an adverse judgment against the District, and only later contested coverage. When the issue is examined in this way, Wisconsin law clearly provides that CIC has waived, or is estopped from asserting, a defense to coverage because it failed to follow the proper procedure for contesting coverage when providing a defense to its insured. See, e.g., Pouwels v. Cheese Makers Mut. Cas. Co., 255 Wis. 101, 37 N.W.2d 869 (1949); Koehring Co. v. Am. Mut. Liab. Ins. Co., 564 F. Supp. 303 (E.D. Wis. 1983).
¶ 71. The majority's decision leaves the District without a remedy for the prejudice it suffered. It *269conflicts with well-established case law that holds an insurer accountable if it fails to give proper notice, in advance, that it intends to deny coverage. It also conflicts with the "strong policy of [Wisconsin] that an insurer should not be able to purport to provide coverage and then escape liability when a claim is made for reimbursement." Koehring, 564 F. Supp. at 312. There is no good reason to do away with this perfectly sound rule. For those reasons, I respectfully dissent.
I
¶ 72. On August 30, 2007, Dawn Maxwell (Maxwell) filed suit against the District based on an alleged breach of her employment contract. The District provided its insurer, CIC, with notice of the suit around September 7, 2007. CIC agreed to tender a defense and provided counsel to the District who was approved and retained by CIC. CIC did not notify the District that it was contesting coverage, did not issue a reservation of rights letter, and did not move to bifurcate the trial in order to contest coverage before defending the District, either in a trial on the merits or on a motion for summary judgment.
¶ 73. Counsel for the District was provided by CIC and ultimately lost the case on summary judgment. The circuit court granted Maxwell's motion for partial summary judgment on June 11, 2008, concluding that the District breached Maxwell's employment contract. The circuit court awarded Maxwell $103,824.22 in compensatory damages.
¶ 74. Only after the circuit court determined that the District was liable did CIC contest coverage for the first time, sometime between August and October 2008. As a result, the District filed a third-party complaint *270against CIC seeking a declaratory judgment that there was coverage under the District's policy, and that CIC had waived, or was estopped from asserting, any coverage defenses. CIC conceded that it did not issue a reservation of rights or contest coverage prior to the liability finding but asserted that waiver and estoppel do not apply to coverage clauses such as the exclusion that CIC argues applies here. The circuit court agreed with CIC and granted summary judgment in its favor on the basis that waiver and estoppel cannot be employed to create coverage where none otherwise exists.
¶ 75. The court of appeals disagreed, reversed and remanded to the circuit court. Maxwell v. Hartford Union High Sch. Dist., 2010 WI App 128, 329 Wis. 2d 654, 791 N.W.2d 195. The court of appeals distinguished Shannon v. Shannon, 150 Wis. 2d 434, 442 N.W.2d 25 (1989), and Utica Mut. Ins. Co. v. Klein & Son, Inc., 157 Wis. 2d 552, 460 N.W.2d 763 (Ct. App. 1990), which held, in the context of those cases, that waiver or estoppel could be applied only to forfeiture and not to coverage clauses. Maxwell, 329 Wis. 2d 654, ¶¶ 18-23. Instead, the court of appeals concluded that Wisconsin case law, treatises, and case law from other jurisdictions provide that in this precise situation, the doctrines of waiver or estoppel preclude CIC from asserting a coverage defense. Id., ¶¶ 24-33 (providing that "where a liability insurer assumes the insured's defense with knowledge of facts indicating noncoverage and without declaring a reservation of rights or obtaining a nonwaiver agreement... all policy defenses, including those of noncoverage, are waived" (quoting 14 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 202:54, at 202-127 (3d ed. 2005)), and relying on Pouwels, 255 Wis. 101, Koehring, 564 F. Supp. 303, and case law from other jurisdictions).1
*271II
¶ 76. An insurer has a duty to provide its insured with a defense if the policy provides arguable coverage for the claims asserted based on the complaint. Estate of Sustache v. Am. Family Mut. Ins. Co., 2008 WI 87, ¶ 20, 311 Wis. 2d 548, 751 N.W.2d 845. But an insurer does not waive its right to later contest the existence of actual coverage by providing a defense to its insured. Hickey v. Wis. Mut. Ins. Co., 238 Wis. 433, 366, 300 N.W. 364 (1941). An insurer has several options to comply with its duty to defend while preserving its right to challenge coverage.
There are several procedures insurers can use to raise the coverage issue and thus retain their right to challenge coverage. The insurer and the insured could enter into a nonwaiver agreement in which the insurer would agree to defend, and the insured would acknowledge the right of the insurer to contest coverage. However, the insured is not obligated to sign such an agreement. Alternatively, the insurer could request a bifurcated trial or a declaratory judgment so that the coverage issue would be addressed separately by a court. In addition, the insurer could give the insured notice of intent to reserve rights. When a reservation of rights is made, the insured can pursue his own defense not subject to the control of the insurer, but the insurer still would be liable for legal fees incurred.
Grube v. Daun, 173 Wis. 2d 30, 75, 496 N.W.2d 106 (Ct. App. 1992) (footnote omitted).
*272¶ 77. Our precedent makes clear that an insurer providing a defense to its insured must do something to retain its right to challenge coverage; it must, in some manner, notify the insured of its intent to challenge coverage. Id. at 75-76 (providing the procedures available to insurers to "raise the coverage issue and thus retain their right to challenge coverage" when providing an initial defense) (emphasis added); see also Pouwels, 255 Wis. at 106-07; Koehring, 564 F. Supp. at 312-13; Wisconsin Transp. Co. v. Great Lakes Cas. Co., 241 Wis. 523, 531, 6 N.W.2d 708 (1942).
¶ 78. The majority wrongly concludes that the only penalty for an insurer's failure to follow these procedures is that it waives any forfeiture clauses. According to the majority, waiver or estoppel cannot be applied to coverage clauses. This court, in Shannon, 150 Wis. 2d at 453-54, has described a coverage clause as one "of either an inclusionary or exclusionary nature going to the scope of the coverage assumed," and a forfeiture clause as one "furnishing a ground for the forfeiture of coverage or defeasance of liability." There is no question that the exclusion relied upon by CIC here to dispute coverage is a coverage clause.
¶ 79. Despite the majority's attempt to graft the forfeiture/coverage clause distinction into every insurance case alleging waiver or estoppel, examples abound in which an insurer has been precluded from asserting any coverage defense, whether based on a coverage or forfeiture clause, through waiver or estoppel. See, e.g., Prof'l Office Bldgs., Inc. v. Royal Indem. Co., 145 Wis. 2d 573, 586, 427 N.W.2d 427 (Ct. App. 1988) ("We conclude, therefore, that Royal, having breached its duty to defend the Mississippi action, may not now challenge or otherwise litigate the coverage issues."); Grube, 173 Wis. 2d at 76 ("We conclude that Secura, by *273not contesting coverage in court and by breaching its duty to defend Achter, is estopped from raising any challenges to coverage and must indemnify Achter up to the limits of his policy."); Benjamin v. Dohm, 189 Wis. 2d 352, 365, 525 N.W.2d 371 (Ct. App. 1994) (recognizing that "[a]n insurer will lose its right to contest coverage and to control the defense when it improperly refuses to defend the insured," but concluding that the insurer did not breach its duty to defend); Radke v. Fireman's Fund Ins. Co., 217 Wis. 2d 39, 48, 577 N.W.2d 366 (Ct. App. 1998) ("Wisconsin law is clear. When an insurer wrongfully refuses to defend on the grounds that a claim against its insured is not within the coverage of the policy, the insurer cannot later contest coverage, but is liable to the insured."); Wisconsin Transp. Co., 241 Wis. at 531 ("Under the terms of the policy in question the defendant was obligated to defend the action. If it desired to negative any waiver of its rights by so defending all that was necessary for it to do was to notify the defendant in that action and the plaintiff in this action that by so doing it was not waiving any of its rights or defenses with respect to coverage or liability."). The majority recognizes that these cases depart from its "general rule." The majority dismisses this disparity by concluding that waiver or estoppel was applied in these cases only because it did not operate to expand coverage, but instead provided damages to the insured flowing from the breach.
¶ 80. Similar to cases involving an insurer's breach of one of its contractual duties are other cases involving conduct by an insurer that prejudices an insured during litigation. Wisconsin law provides that an insurer may have waived, or will be estopped from asserting, any coverage defense based on certain conduct, such as CIC's conduct in this case: providing a *274defense to the District without issuing a reservation of rights or otherwise contesting coverage and controlling the defense throughout litigation resulting in an adverse judgment against the District. Pouwels, 255 Wis. 101; Koehring, 564 F. Supp. 303; Arnold E Anderson, Wisconsin Insurance Law § 7.91, at 83 (6th ed. 2011). As in duty to defend cases, an insurer can be held liable to cover damages for which it would have otherwise had a valid defense based on the insurer's own actions during litigation that have prejudiced the insured. Pouwels and Koehring, cases that addressed this precise situation, compel the conclusion that CIC's own conduct in providing a defense to the District without properly contesting coverage results in waiver or estoppel of its coverage defenses.
¶ 81. In Pouwels, the insurer, Cheese Makers Mutual Casualty Company (Cheese Makers), defended itself and also provided a defense for its insured, A1 Ginsberg (Ginsberg), in a liability action arising from an automobile accident. 255 Wis. at 102-03. Cheese Makers was dismissed from the liability action, but it continued to provide a defense to Ginsberg, ultimately resulting in a judgment against Ginsberg. Id. Ginsberg sued Cheese Makers for coverage, asserting that either the insurance contract had to be reformed to provide coverage or that coverage should be afforded because Cheese Makers waived its right to assert a coverage defense by providing a defense without properly raising coverage issues. Id. at 103-06. In regard to waiver of its coverage defenses, this court explained, "There had been no denial of liability, no notice of reservation of rights, and no attempt of any kind had been made by the company to reserve any of its rights under the policy. The insurance company by its conduct waived its right to assert the policy defense of non-coverage." Id. at *275107 (emphasis added). Pouwels is directly on point and controls in this situation, as the United States District Court for the Eastern District of Wisconsin recognized in Koehring, 564 F. Supp. 303.
¶ 82. Many years of litigation preceded the court's decision in Koehring. Suffice it to say that American Mutual Liability Insurance Company (American Mutual) issued an insurance policy to Koehring Company (Koehring), and when Koehring was sued, American Mutual provided a defense under a reservation of rights but later withdrew its reservation of rights and stated that there was coverage. Id. at 308-09. Koehring was found liable for actual and punitive damages. Id. at 310. Only after judgment did American Mutual assert that it would not cover punitive damages. Id. Koehring sought a declaratory judgment that American Mutual must provide full coverage for the judgment against Koehring. Id. at 311.
¶ 83. The Koehring court concluded that American Mutual had waived or was estopped from asserting any coverage defenses after providing Koehring with a defense throughout litigation resulting in an adverse judgment against it, without maintaining a reservation of rights. Id. at 312-13. The district court relied on Pouwels, 255 Wis. 101, concluding:
Under some circumstances an insurance company may change its mind and issue a disclaimer after it initially acknowledges coverage. But it may not do so after it has exercised dominion over the case at an important point. . . .
Some cases talk in terms of estoppel instead of waiver or failure to disclaim, but all reach the same conclusion: an insurer cannot change its mind after having tried *276and lost a case which it tried under an assurance of coverage. There is considerable authority to the effect that a liability insurer, by assuming the defense of an action against an insured, is thereafter estopped to claim that the loss resulting to the insured from an adverse judgment is not within the coverage of the policy. See Appleman's Insurance Law and Practice, § 4692. This is based on the premise that assumption of the insured's defense or unreasonable delay in asserting a defense to coverage clearly prejudices the insured.
Id. at 313 (emphasis added).
¶ 84. Arnold E Anderson relied on both of the above cases in his treatise discussing waiver or estoppel of coverage defenses as a result of an insurer's failure to issue a reservation of rights letter. Anderson explained the rule thus:
While an insurance company may have a valid basis for refusing to defend, if it employs an attorney to represent the insured with no denial of liability or no attempt to reserve its rights under the policy, the insurance company may be deemed by its conduct to have waived its right to raise the policy defense of noncoverage.
Anderson, Wisconsin Insurance Law § 7.91, at 83.
¶ 85. These authorities address the precise situation presented here and provide the remedy to which the District is entitled in this case: CIC cannot deny coverage under these circumstances. The majority tries to minimize the significance of Pouwels and Koehring on the basis that, according to the majority, waiver and estoppel could never be used to create or expand coverage where none exists. At the heart of the majority's erroneous interpretation of the law is a misunderstanding of how waiver and estoppel operate in insurance cases.
*277¶ 86. The majority concludes that waiver and estoppel may never apply to coverage clauses, because doing so would impermissibly expand coverage. To the contrary, our precedent provides that for certain conduct, applying waiver or estoppel does not expand coverage, but rather provides a just remedy for an insurer's prejudicial actions. Pouwels, Koehring, and the treatises cited explain that an insurer's conduct— breaching its duty to defend or duty of good faith or prejudicing the insured in litigation as CIC did in this case — may make it liable for an insured’s losses, no matter what coverage defenses the insurer may have. The majority's conclusion that the "general rule" precludes applying waiver or estoppel to coverage clauses relies on case law involving conduct that is distinct from the precise conduct at issue here.
¶ 87. The majority distinguishes Pouwels and Koehring primarily because they do not conform to what the majority asserts is the "general rule" provided in McCoy v. Northwestern Mutual Relief Association, 92 Wis. 577, 66 N.W. 697 (1896), Ahnapee & Western Railway Company v. Challoner, 34 Wis. 2d 134, 148 N.W.2d 646 (1967), and Shannon, 150 Wis. 2d 434, that waiver or estoppel apply only to forfeiture and not coverage clauses. However, none of these cases address the precise situation presented in this case.
¶ 88. The doctrines of waiver and estoppel were addressed in McCoy regarding whether, despite a suicide exclusion, the insured, William McCoy (McCoy), was covered for his death by suicide based on the representations of the insurer, Northwestern Mutual Relief Association (Northwestern Mutual). 92 Wis. at 578-80. Specifically, McCoy's beneficiary asserted that Northwestern Mutual should be estopped from denying coverage because it represented to McCoy, prior to his *278death, that death by suicide was covered by the policy. Id. This court concluded that neither waiver nor estoppel was applicable to the suicide exclusion in this context. The court distinguished between forfeiture clauses that can be waived and coverage clauses that cannot be waived. Id. at 584-85.
¶ 89. In Ahnapee, the insured, Ahnapee & Western Railway Company (Ahnapee), sought reformation of the insurance contract based on mutual mistake regarding the policy limits. 34 Wis. 2d at 137. Ahnapee also argued that, even if the contract were not reformed, the insurer, Employers Mutual Liability Insurance Company (Employers), should be estopped from denying coverage because an agent of Employers represented to Ahnapee that Employers covered the same risks as another insurance policy held by Ahnapee, which did provide coverage. Id. at 136-39. This court held that waiver or estoppel could not be used to expand the coverage clause beyond that provided in the policy simply based on Employers' representations to Ahnapee. Id. at 140-44.
¶ 90. Unlike this case, McCoy and Ahnapee addressed the applicability of waiver or estoppel based on an insurer's representations to its insured before the litigation, or even before the incident giving rise to the litigation. Here, waiver or estoppel is invoked based on CIC's conduct during litigation to control the District's defense throughout litigation without issuing a reservation of rights, and resulting in an adverse judgment. As discussed in Pouwels and Koehring, applying waiver or estoppel to any coverage defenses later asserted by the insurer is warranted based on such conduct.
¶ 91. The Shannon Court addressed several issues, and relevant here is the argument by the insureds, the Shannons, that their insurer, United States *279Automobile Association (USAA), waived the family member exclusion by failing to refer to that exclusion (1) in its answer, and (2) in the nonspecific reservation of rights letter that it sent to the Shannons. 150 Wis. 2d at 437, 450. The underlying negligence action was brought against the Shannons and their insurer, USAA, on behalf of the Shannons' daughter for injuries that she suffered when she nearly drowned in a lake. Id. at 438-39. USAA provided counsel for itself and the Shannons, issued a reservation of rights letter, and moved for a bifurcated trial, in order to resolve the coverage issues before any trial on liability. Id. at 439, 450. Under these facts, this court concluded that Ahnapee and McCoy controlled and prohibited the use of waiver to defeat the insurer's defense based on the family member exclusion. The Shannon court's discussion of waiver and estoppel is not particularly helpful here because Shannon is distinct from this case in two key respects: (1) USAA did issue a reservation of rights letter to the Shannons, and (2) there had not been any liability determination or adverse judgment against the Shannons prior to the coverage dispute and determination.
¶ 92. It is consistent with our case law and also consistent with sound public policy to apply waiver or estoppel where an insurer controlled the insured's defense throughout litigation without issuing a reservation of rights, and resulting in an adverse judgment. As explained in Koehring:
[I]t is a strong policy of [Wisconsin] that an insurer should not he able to purport to provide coverage and then escape liability when a claim is made for reimbursement. A fortiori, an insurer should not be allowed to escape liability where it attempts to tie the hands of its insured, claiming to have the exclusive right to control an insured's defense under the pretense that *280the policy provides coverage of all claims, and then when the cause is determined against it, insist that upon closer reading or upon some public policy ground the insured ought to be liable for at least part of the damages awarded.
564 F. Supp. at 312 (emphasis added).
¶ 93. In this situation, prejudice to the insured may be presumed for a number of reasons. "Prejudice is presumed because the insurer has taken away from the insured innumerable rights associated with the control of the defense, including the choice of trial by judge or jury; the ability to negotiate a settlement; and the ability to decide when and if certain defenses or claims will be asserted." Id. at 313. Additionally, it is difficult to later quantify all of the ways in which an insurer's control of the insured's defense might have prejudiced the insured. The District conducted its defense through the attorney provided by CIC with the understanding that CIC would not later dispute coverage. It is difficult to say what avenues the District would have taken had it known that CIC planned to dispute coverage after the liability trial. For this reason, as well as the myriad rights affected when an insurer controls an insured's defense, it should be presumed that the District was prejudiced by CIC's control of its defense, without a reservation of rights, throughout litigation that resulted in an adverse judgment.
¶ 94. For the reasons set forth herein, I respectfully dissent.
¶ 95. I am authorized to state that Chief Justice SHIRLEY S. ABRAHAMSON and Justice ANN WALSH BRADLEY join this dissent.

 See Nationwide Mut. Ins. Co. v. Filos, 673 N.E.2d 1099, *2711103-04 (Ill. App. Ct. 1996); Emp'rs Liab. Assurance Corp., Ltd. v. Vella, 321 N.E.2d 910, 914 (Mass. 1975); Royal Ins. Co. v. Process Design Assocs., Inc., 582 N.E.2d 1234, 1240 (Ill. App. Ct. 1991); Mgmt. Specialists, Inc. v. Northfield Ins. Co., 117 P.3d 32, 38 (Colo. Ct. App. 2004); Utica Mut. Ins. Co. v. 215 W. 91st St. Corp., 283 A.D.2d 421, 422-23 (N.Y. App. Div. 2001).