Court Opinion

ID: 9689832
Source: CourtListenerOpinion
Date Created: 2023-08-24 18:48:35.099735+00
Date Added: 2024-06-11T18:18:52.446556
License: Public Domain

WILLIAM A. BABLITCH, J.
¶ 38. (dissenting). Insurance companies have more than enough incentive to deny coverage for claims made against their insured. They are, after all, in the business to make a profit. Unfortunately, the majority opinion provides further incentive for them to refuse coverage in close claims against their insured. In cases not involving bad faith, the insurance company can now deny coverage, and it wins under any scenario; in contrast, the insured loses under any scenario. The majority opinion is not only anti-consumer, it is also bad law. Accordingly, I respectfully dissent.
¶ 39. First, the opinion is anti-consumer. As a matter of public policy, denying insureds recovery of attorney fees in successfully contesting a denial of coverage leads to highly beneficial results for the insurance company and highly inequitable results for insureds.
¶ 40. Under the majority's result, a denial of coverage leads to a no-lose situation for insurance companies in every likely scenario. If the insured does not contest the denial of coverage, the insurance company wins because it pays nothing. If the insured contests, but loses, the insurance company wins again because it pays nothing. Finally, if the insured contests *683and wins, the insurance company wins yet again because it is forced to pay out no more than what it would have paid under the claim initially — an amount, in retrospect, they were obligated to pay under the policy.
¶ 41. In contrast, the insured is faced with a no-win situation from a denial of coverage under any likely scenario. If the insured does not contest the denial, the insured loses because it has to pay the value of the claim. If the insured contests, but loses, the insured loses because it must then pay both the value of the claim and the attorney fees paid in contesting the denial of coverage. Lastly, if the insured contests and wins, the insured also loses because the insured will have to pay attorney fees to get the coverage that in retrospect it had paid for. This was exactly the outcome in Benz's case. She incurred almost $7,000 in attorney fees in her declaratory judgment action against American Family that, in retrospect, she had paid for.
¶ 42. In sum, it is a win-win-win for the insurance company and a lose-lose-lose for the insured. Insurance companies will be motivated to deny all claims in close cases involving coverage, knowing that under the worst case scenario they stand to lose nothing but their attorney costs, if any, in defending their denial. On the other hand, the denial of coverage will require insureds to either pursue the costly alternative of contesting coverage or to pay the claim themselves because it will cost less than undertaking litigation against their own insurance company.
¶ 43. The above is particularly true in cases involving claims that involve an amount closely approaching the amount that it would cost the insured in attorney fees to contest the denial. It would be foolish, except perhaps as a matter of principle, for an *684insured to contest a denial that would end up costing the insured more in attorney fees than the claim was worth. And it is undeniable that claims managers will be aware of that fact as well.
¶ 44. As a further matter of public policy, denying attorney fees to insureds fails to recognize that an insurance policy represents a unique type of legally enforceable contract. See Elliott v. Donahue, 169 Wis. 2d 310, 320, 485 N.W.2d 403 (1992). Its unique nature is illustrated when an insurance company refuses to perform on the contract. When this occurs, the insured cannot merely turn to another supplier of insurance for coverage. The insured is locked into this relationship with his or her insurance company and must seek a declaratory judgment to obtain coverage, despite the cost. In light of this fact, it is fair to assign the costs of refusing to perform on the contract to the insurance company when it is later determined that coverage exists under the policy.
¶ 45. In addition to the bad public policy that results from the majority opinion, it is also bad law: it ignores the ambiguities in the insurance contract; it fails to honor the reasonable expectations of the insured; and it errs in its interpretation of relevant case law.
¶ 46. To begin, I find that ambiguity exists in the insurance contract on whether Benz is entitled to such attorney fees. In reaching this result, an examination must first be undertaken of American Family's duties and obligations under the terms of its policy issued to Benz. The policy reveals that, in exchange for premiums paid by Benz, American Family assumed the contractual duties of indemnification and defense for claims described in the policy. Specifically, with *685respect to its duty to defend, the policy defines the limits of this duty as follows:

Defense Provision.

If a suit is brought against any insured for damages because of bodily injury or property damage caused by an occurrence to which this policy applies, we will provide a defense at our expense by counsel of our choice. We will defend any suit or settle any claim for damages payable under this policy as we think proper.
Associated with this duty to defend, the policy provides that American Family will cover certain expenses for claims and suits that it is "obligated to defend," stating:
Claim and Defense Expenses. We will pay the expenses described below for a claim or suit we are obligated to defend under the Personal Liability Coverage:
a. all expenses we incur and costs taxed against any insured;
c. reasonable expenses (other than loss of earnings) any insured incurs at our request;
We have noted that an insurer's duty to defend is broad, extending beyond its duty of indemnification. Elliott, 169 Wis. 2d at 320-21.
¶ 47. The question then becomes whether the policy language provides coverage for attorney fees incurred by the insured when the insured successfully contests the insurance company's denial of coverage. This question requires an interpretation of the insurance contract.
*686¶ 48. Any language in the policy must be interpreted according to "what a reasonable person in the position of an insured would have understood the words to mean." Elliott, 169 Wis. 2d at 322. "Words or phrases in a contract are ambiguous when they are fairly susceptible to more than one construction." Kremers-Urban Co. v. Am. Employers Ins., 119 Wis. 2d 722, 735, 351 N.W.2d 156 (1984). Any ambiguity in the insurance contract must be construed directly against the insurance company. Leatherman v. Am. Family Mut. Ins. Co., 52 Wis. 2d 644, 649-50, 190 N.W.2d 904 (1971).
¶ 49. An interpretation of the policy language leads to one conclusion: it is unclear as to whether the policy requires payment for such attorney fees. A reasonable insured could understand the policy language to mean that he or she will be made whole if there is coverage. See Elliott, 169 Wis. 2d at 318-19. I recognize, however, that the language may be susceptible to other reasonable interpretations. In light of this ambiguity, the insurance policy is still appropriately construed against American Family, and accordingly, Benz must be paid her attorney fees under the policy.
¶ 50. This interpretation is also consistent with the expectations of an insured under the contract. "The public policy purpose of honoring the reasonable expectations of the insured is applied when the language of an insurance contract is interpreted and construed." Smith v. Gen. Cas. Ins. Co., 2000 WI 127, ¶ 27, 239 Wis. 2d 646, 619 N.W.2d 882. An insured who is entitled to coverage under a policy expects that the insurance company will provide coverage in full, including costs for any litigation which leads to the determination that coverage exists under the policy. Insureds do not expect that, if their policy provides coverage, they will receive *687such coverage less any attorney fees required to establish coverage. In particular, in this case, Benz, as a reasonable insured, could not have expected to incur almost $7,000 in attorney fees in order to receive coverage that she was entitled to in the first place.
¶ 51. Finally, the majority errs in their interpretation of Elliott. We made two separate holdings in Elliott on whether the insured in that case was entitled to attorney fees after successfully defending coverage. First, we determined that the insurer had not breached its duty to defend by denying coverage to the insured because the issue of coverage was fairly debatable. Therefore, the insured could not recover attorney fees based on any such breach. We concluded, however, that the insurer did breach its duty to defend by failing to follow the mandate of Mowry v. Badger State Mut. Cas. Co., 129 Wis. 2d 496, 385 N.W.2d 171 (1986), which required the insurer to stay any proceedings on liability until coverage was resolved. In light of this breach, we held that the insurer was liable for the attorney fees incurred by the insured in defending the issue of liability.
¶ 52. Our second determination was that, pursuant to Wis. Stat. § 806.04(8), the insured was entitled to attorney fees incurred in successfully establishing coverage. This decision, however, in no way related back, as the majority states, to the insurer's breach of its duty to defend. Instead, we determined that under the principles of equity — none of which related to the defendant's breach — an insured may recover attorney fees under § 806.04(8) when successfully defending coverage. Indeed, although our holding in Elliott was limited in the sense that we granted recovery under § 806.04(8) instead of finding an exception to the American Rule, we in no way limited our award of attorney *688fees for defending coverage based on the insured's breach of its duty to defend. In turn, under a plain reading, Elliott could apply in this case to allow Benz to recover her attorney fees.
¶ 53. On the whole, the rule laid down by the majority permits insurance companies to do by indirection that which it cannot do directly. See Elliott, 169 Wis. 2d at 323. An insurance company cannot directly refuse to follow its contractual duty to defend. However, under the majority's conclusion, insurance companies can now achieve this same result indirectly, by denying coverage and effectively leaving some insureds without coverage because the insureds cannot afford to contest it, especially in close cases. In turn, the same result is achieved, that is, a refusal to follow their contractual duty to defend. Because the majority's opinion leads to this undesirable outcome, I respectfully dissent.
¶ 54. I am authorized to state that Chief Justice SHIRLEY S. ABRAHAMSON joins this dissent.