Court Opinion

ID: 9721243
Source: CourtListenerOpinion
Date Created: 2023-08-26 08:53:13.311832+00
Date Added: 2024-06-11T18:24:24.314215
License: Public Domain

ANNETTE KINGSLAND ZIEGLER, J.
A. The majority decision is contrary to longstanding principles of insurance law
¶ 90. True excess coverage "exists as a part of layered coverage created by specific design and is intended to come into play only when the limits of underlying primary coverage are exhausted." 14 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 200:39 (3d ed. 2007). As a general rule, an excess insurer is not required to defend until the primary insurer's policy limits are exhausted, even when the claim exceeds the primary insurer's policy limits or when the primary *215insurer refuses to defend. Id., §§ 200:41-43. While insurers and insureds are free to contract around these general rules, here, the parties did not do so.
¶ 91. The majority weaves together separate and distinct policies from different insurers to reach a particular outcome. In the same breath, the majority also concludes that the London Market policy's language is ambiguous. Essentially, the majority concludes that the policy is ambiguous because it does not specifically pen every conceivable limitation or exclusion. In so doing, the majority effectively imposes a requirement that insurance policies list all possible limitations and exclusions regardless of relevance to avoid ambiguity. The majority for the first time concludes that silence on an issue creates ambiguity and, thus, a duty.
¶ 92. The duty to defend is separate from the duty to indemnify. Neither common law nor statute mandates that an insurer always defend its insured. Novak v. Am. Family Mut. Ins. Co., 183 Wis. 2d 133, 137, 515 N.W.2d 504 (Ct. App. 1994); 14 Russ & Segalla, supra, § 200:5 ("An insurer does not have a duty to defend if there is no contractual obligation to defend."). The majority decision upsets these longstanding principles and creates new contractual obligations that have never before been required or recognized.
B. The London Market policy does not provide a duty to defend
¶ 93. The London Market policy is a policy of indemnification and does not provide a duty to defend its insured, Johnson Controls. Absent an express promise to defend, no reasonable insured would expect an excess insurance policy to provide a duty to defend, especially in light of the general rule that excess policies *216do not include a duty to defend. To the contrary, with respect to primary insurance policies, the standard industry practice is to provide a defense along with indemnification. Compare Gross v. Lloyd's of London Ins. Co., 121 Wis. 2d 78, 84, 358 N.W.2d 266 (1984) (noting that primary insurance policies "impose two duties on the insurer with respect to the insured — the duty to indemnify and the duty to defend") with 2 Arnold P. Anderson, Wisconsin Insurance Law §§ 11.16-.18 (5th ed. 2004) (noting that specific excess insurance and true excess insurance generally do not contain a duty to defend). Here, consistent with industry practice, London Market's policy is an excess policy that does not provide a duty to defend.
¶ 94. The majority cannot find a duty to defend within the terms of the London Market policy itself; therefore, it resorts to importing that duty from the Travelers policy by way of the London Market policy's "follow form" provision. In so doing, the majority rewrites the insurance policy in order to impose on London Market a duty for which it did not contract, that neither it nor its insured contemplated, and for which it was not paid.
¶ 95. The majority determines that the duty to defend was triggered, not upon the exhaustion of the underlying policies, but rather, upon the underlying insurer's denial of primary liability. Majority op., ¶¶ 4-5. The majority nonetheless acknowledges that "it is not certain whether London Market intended to provide a duty to defend when it drafted the policy" but nevertheless concludes that the proper, and only, inquiry is not what the policy says, but rather, how the policy language could be understood by the insured. Majority op., ¶ 42. Because "[a]n insurance policy is construed to give effect to the intent of the parties as *217expressed in the language of the policy," Folkman v, Quamme, 2003 WI 116, ¶ 12, 264 Wis. 2d 617, 665 N.W.2d 857, I turn to the policy language at issue.
¶ 96. The pertinent parts of the London Market policy's insuring agreement are as follows:
INSURING AGREEMENTS
1. COVERAGE
[London Market] hereby agree[s], subject to the limitations, terms and conditions hereinafter mentioned, to indemnify [Johnson Controls] for all sums, which [Johnson Controls] shall be obligated to pay ....
...
CONDITIONS
....
2. MAINTENANCE OF UNDERLYING UMBRELLA INSURANCE
This policy is subject to the same terms, definitions, exclusions and conditions (except as regards the premium, the amount and Limits of Liability and except as otherwise provided herein) as are contained in [the underlying Travelers policy] ....
(Emphasis added.) The part of Travelers policy that the majority incorporates into London Market's policy in order to create a duty to defend, reads as follows:
Liability. The company ... shall have the right and duty to defend any suit against [Johnson Controls] seeking damages on account of [a covered incident],...
(Emphasis added.) The majority must cut and paste that duty from the Travelers policy to the London Market policy in order to find a duty to defend.
*218¶ 97. The plain language of the London Market policy, however, shows that no duty to defend is incorporated because the duty to defend does not in any way modify or affect the duty to indemnify.1 Simply stated, the London Market policy: (1) promises to indemnify its insured; (2) subjects that promise of indemnification to various conditions; and (3) points to the Travelers policy for additional "terms, definitions, exclusions and conditions" to which the duty to indemnify is subject. The follow form provision, however, does not incorporate the entire Travelers policy by reference.
¶ 98. The majority opinion employs the London Market policy's follow form provision to incorporate the Travelers policy's obligation to defend. Instead of determining that the follow form addressed the level of underlying coverage and the type of claims that were covered so that the London Market policy remained truly an excess umbrella policy, the majority creates a duty to defend. In so doing, the majority operates contrary to the language of the insurance contract and the general rule for excess liability policies. 2 Anderson, supra, § 11.16.
*219¶ 99. Instead of acknowledging this plain reading of London Market's insurance policy, the majority sidesteps this point and incorporates a portion of the Travelers policy's "other insurance" clause into the London Market policy. The majority claims that under this clause "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." Majority op., ¶ 63.
¶ 100. In order to accomplish this additional rewriting of the contract, the majority ignores the "other insurance" clause already present in the London Market policy. The London Market policy's "other insurance" clause explicitly limits the policy to excess coverage, which is antithetical to dropping down to provide a primary defense. See infra Part C. Therefore, the London Market policy does provide terms other than the "other insurance" clause in the Travelers policy. As such, the Travelers policy's "other insurance" clause cannot be incorporated into London Market's policy, even under the majority's logic.2
¶ 101. Particularly troublesome here is that the plaintiff seeks to recover defense costs for an action commenced 25 years ago. Notwithstanding this, the majority has chosen to transform an excess insurance policy into a primary insurance policy. Under the majority's logic, when a primary insurer fails to defend, *220even if this occurs as soon as a lawsuit is commenced, an excess insurer must provide a defense to the insured.
¶ 102. The majority also concludes that any consideration of the cost of the premiums is "not helpful" in reaching its conclusion and states that "contract interpretation should be based on the language of the policy rather than a court's conjecture about extrinsic information." Majority op., ¶¶ 54, 52. In this case, the relatively low cost of the premiums could at least inform some part of the analysis as to the expectations of the parties in obtaining excess coverage, especially in light of the fact that the duty to defend does not appear anywhere in the London Market policy.3 See 2 Anderson, supra, § 11.16 ("An insurer typically charges a lower premium for specific or following-form excess insurance based on the decreased risk of a judgment or settlement within higher layers of coverage, as well as the absence of a duty to defend the insured.") (emphasis added).
¶ 103. In the end, the consumers of excess insurance policies will be the ones who pay for the majority's decision. No longer will an excess insurance carrier be able to charge only $20,000 for a $10 million policy of indemnity coverage as an excess policy. Under the holding of the majority opinion, a duty to defend can begin at the inception of the lawsuit because its holding *221causes the excess insurer to become the primary insurer whenever the primary insurer does not perform. Even if an insurance policy, such as the London Market policy here, fails to mention even one word about defending, the majority opinion imposes an unqualified obligation to defend. It matters not, according to the majority, that the London Market insurance policy specifically requires that the underlying insurance remain in full force and effect before any liability may arise for London Market.
¶ 104. Thus, after today, the excess insurer becomes a surety for the performance of the underlying umbrella and the primary insurer's obligations, even if the primary insurer has breached its duty to defend.
C. Even assuming, arguendo, that a duty to defend exists, the policy first requires exhaustion of the primary policy
¶ 105. Even if one were to conclude that the London Market policy incorporates a duty to defend from the Travelers policy, I must dissent because the London Market policy is an excess policy to the Travelers policy and is conditioned upon exhaustion of the Travelers policy. As previously stated, an " 'excess insurer is not obligated to defend until the primary [policy] limits are exhausted.' "Azco Hennes-Sanco, Ltd. v. Wis. Ins. Sec. Fund, 177 Wis. 2d 563, 568, 502 N.W.2d 887 (Ct. App. 1993) (citation omitted).4 London *222Market's policy makes clear, in at least two places that any duty it has to Johnson Controls is conditioned upon the exhaustion of the Travelers policy.5
¶ 106. The London Market policy clearly defines itself as an excess policy. The pertinent language at "Conditions" reads as follows:
5. OTHER INSURANCE
If other valid and collectible insurance with any other Insurer is available to [Johnson Controls] covering a loss also covered by this Policy, other than insurance that is specifically stated to be in excess of this Policy, the insurance afforded by this Policy shall be in excess of and shall not contribute with such other insurance.
(Emphasis added.) This clause solidifies London Market's place in the hierarchy of insurance policies— below all policies that specifically state they are in excess to London Market's policy and above all other policies.
*223¶ 107. Furthermore, the London Market policy at "Excess Umbrella Liability" expressly conditions its performance on exhaustion of the Travelers policy limits:
2. LIMIT OF LIABILITY-UNDERLYING LIMITS
It is expressly agreed that liability shall attach to [London Market] only after [Travelers] ha[s] paid or ha[s] been held liable to pay the full amount of [its] respective ultimate net loss liability ....
"[Ultimate net loss" is the $7 million underlying limits in the Travelers policy.
¶ 108. While it is true that the policy issued by London Market is a follow form insurance policy, its duties arise only after liability reaches a certain "excess" monetary level. See Allmerica Fin. Corp. v. Certain Underwriters at Lloyd's, London, 871 N.E.2d 418, 426 (Mass. 2007) ("Follow form language thus allows an insured to have coverage for the same set of potential losses (and with the same set of exceptions) in each layer of the insurance program. The language does not, however, bind the various insurers to a form of joint liability should coverage at a prior layer fail. The layer of risk each insurer covers is defined and distinct."); see also 2 Anderson, supra, § 11.18 (" 'An excess policy covering the same risks that are covered by the underlying policy is known as a "following form" policy.'") (quoting Coleman Co., Inc. v. Cal. Union Ins. Co., 960 F.2d 1529, 1530 n.1 (10th Cir. 1992)).
¶ 109. The majority's interpretation of London Market's "limits of liability" (or exhaustion) provision is somewhat confusing. Majority op., ¶¶ 65-75. The majority concedes that the limits of liability provision provides that " 'liability' does not attach until the underlying policies have been exhausted." Id., ¶ 67. How*224ever, the majority concludes that this provision is limited to the duty to indemnify and not the duty to defend. The majority inconsistently concludes that when it comes to indemnification, "liability" does not attach until the underlying policy is exhausted, but that "liability" attaches before exhaustion when it comes to the duty to defend. Its rationale is inconsistent and cannot be reconciled.
¶ 110. Specifically, the London Market excess umbrella policy states: " [Liabilities shall attach to [London Market] only after the Underlying Umbrella Insurers have paid or have been held liable to pay" their policy limits. Thus, despite the majority's creativity, any assumed duty to defend under the excess umbrella policy cannot arise when the coverage under the excess umbrella policy is yet to be invoked.
¶ 111. Simply stated, the majority wishes to have its cake and eat it too. On the one hand, the majority concludes that the London Market policy does not define the term "liability" and so it imports Travelers policy's definition in its rewriting of the contract to create that duty to defend. Thus, even if liability includes the duty to defend, as the majority would redefine it, such duty can reasonably attach only after Travelers has paid or been liable to pay the full amount of its ultimate net loss liability, that is, $7 million. This disparity magnifies the majority's overreaching when it comes to creating the duty to defend, because in point of fact, even if it can be said that there is a duty to defend, that duty can attach only after Travelers has exhausted its policy limits.
¶ 112. The majority's reasoning errs in its conclusion that once Travelers refuses to defend Johnson Controls, London Market is required to drop down to fill Travelers' shoes and provide a defense. It requires that London Market's duty to defend is in full force and *225effect. At the same time, Travelers' duty to defend is triggered, that is, from the day Johnson Controls tendered the defense to its insurers. If the majority indeed believes that Travelers' duty to defend was fully incorporated into London Market's policy and is not subject to the exhaustion requirement, the logical conclusion is that London Market's duty to defend is triggered on day one and converts an excess insurer into a primary insurer when it comes to the duty to defend. This conclusion misreads both the insurance policy's provisions and misstates Wisconsin law.
¶ 113. London Market's policy contains no promise to drop down in the event of denial of defense by Travelers. As just noted, London Market's policy attaches, at most, only after the Travelers policy is exhausted.
¶ 114. The majority states that there is no absolute rule of law that an excess insurer's duty to defend is never triggered until the underlying policy limits are exhausted. Of course this is true, since insurers and insureds can contract so that an excess insurer's duty to defend is triggered prior to the exhaustion of the underlying policy limits. However, the parties did not so contract here. Moreover, the majority opinion lacks any Wisconsin case in which a court required an excess insurer to provide a defense before the underlying policy limits were exhausted.
¶ 115. For example, the majority reads Teigen v. Jelco of Wisconsin, Inc., 124 Wis. 2d 1, 367 N.W.2d 806 (1985), as requiring a defense by the excess insurer before exhaustion of primary insurance. This reading of Teigen is far from complete. In Teigen, the insured plaintiff had executed a Loy6 release, in which the *226plaintiff accepted a settlement sum less than the defendant's primary insurer's policy limits, but in exchange released the defendant and his primary insurer for the full amount of the policy limits and for any amount above the limits of the excess insurer, specifically reserving a cause of action against the excess insurer. Id. The court held that the excess insurer had a duty to defend after the release was executed. Id. at 11-12.
¶ 116. While the plaintiff in Teigen was not paid the primary insurer's full policy limits, those limits were exhausted because the insured received the full protection of the primary policy for which he had bargained. Id. at 8 ("The trial court correctly concluded that [the primary insurer] has exhausted its liability by virtue of the Loy release. The effect of the settlement is that [the primary insurer] has discharged in toto its obligation to its insured.")(emphasis added).
¶ 117. Loy and Teigen highlight, rather than abrogate, the necessity of exhausting a primary insurer's policy limits before an excess insurer can be required to provide a defense. Absent a Loy release that exhausts a primary insurer's limits, a settlement below those limits does not trigger an excess insurer's duty to defend if the insurer had contracted to defend. See Azco, 177 Wis. 2d at 567 (holding that an excess insurer had no duty to defend a claim that settled within the primary insurer's limits, even where the original claim brought exceeded the primary insurer's limits).
¶ 118. The majority also cites American Motorists Insurance Co. v. Trane Co., 544 F. Supp. 669, 692 (W.D. Wis. 1982), for the proposition that "[i]f the underlying insurer has refused to defend.. . , the excess insurer will have a duty to defend . . . ." However, this reasoning was explicitly rejected in Azco, 177 Wis. 2d at 568 *227("Azco . . . argues that we should nonetheless follow the district court's reasoning. We decline to do so ....").
¶ 119. The Azco court went further than rejecting Trane; it endorsed and adopted the view of a majority of jurisdictions, which hold that an excess insurer has no obligation to defend its insured until the primary insurer's limits are exhausted, absent express policy language otherwise. Id. at 568 (citing Firemen's Fund Ins. Co. v. Rairigh, 475 A.2d 509, 518 (Md. Ct. Spec. App. 1984) cert. denied, 482 A.2d 501 (1984)).7
¶ 120. Finally, the majority relies on a footnote in Southeast Wisconsin Professional Baseball Park District v. Mitsubishi Heavy Industries America, Inc., 2007 WI App 185, ¶ 8 n.4, 304 Wis. 2d 637, 738 N.W.2d 87, which says that an excess insurer must drop down and *228defend when a primary insurer fails to do so. Reliance on this footnote is likewise misplaced. First, the question of whether an excess insurer was required to defend was not before the court. Second, the footnote cites to the opinion of the federal district court in Trane and ignored Azco's rejection of that opinion.8 Also, in Trane, unlike the case now before this court, the excess insurer elected to defend and later sought reimbursement from the primary insurer.
CONCLUSION
¶ 121. An insurance policy is a contract. There is no common law or statutory duty to defend. There is a duty to operate in good faith; a violation of that duty is a tort, not a breach of contract.9 Here, London Market's excess policy does not provide a duty to defend. Furthermore, even if one were to assume, arguendo, that there is a duty to defend, it cannot be invoked until the primary policy is exhausted because of the London Market policy language.
¶ 122. In sum, the majority's conclusion increases the likelihood of nonperformance by primary insurers or underlying insurers as it shifts costs to excess insurance providers.
*229¶ 123. London Market issued an excess liability policy that did not include a contractual undertaking to defend the policyholder. Judicially creating a duty to defend under this excess umbrella policy may benefit certain parties in the case at issue, but it adversely affects the future costs of excess coverage and ignores fundamental principles of insurance law, which underlie our system of justice.
¶ 124. For the foregoing reasons I dissent.
¶ 125. I am authorized to state that Justices PATIENCE DRAKE ROGGENSACK and MICHAEL J. GABLEMAN join this dissent.

 London Market undertook "to indemnify [Johnson Controls] for all sums which [Johnson Controls] shall be obligated to pay by reason of liability [] imposed upon [Johnson Controls] by law... for damages on account of: (i) Personal Injuries[;] (ii) Property Damage[;] (iii) Advertising Liability caused by or arising out of each occurrence...." London Market's own insuring language set forth the extent of its obligations on the policy and while it agreed to follow the terms of the underlying policies it did so "except as otherwise provided herein." By the majority imposing a duty to defend on London Market, it fails to give effect to the contractual provisions of the policy. Here, the excess policy terms explicitly preclude liability until after the underlying insurers "have paid or have been held liable to pay the full amount of their [limits]."

 The majority designs its definition of liability by concluding that liability is not otherwise provided in the London Market policy. As a result, once again, the majority picks and chooses which terms in which policy meet the outcome that it desires.

 With respect to the underlying policy, Travelers was paid yearly premiums of $195,000 and $273,500 to provide $7 million of umbrella coverage, including both indemnification and defense. In comparison, London Market was paid a yearly premium of $20,000 to provide $10 million of coverage excess to the Travelers policy for indemnification. The majority would have you believe that the $20,000 premium compensates London Market for not only the $10 million of indemnification, but also for providing a legal defense against all claims from day one.

 See also 2 Arnold P. Anderson, Wisconsin Insurance Law § 11.14 (5th ed. 2004) ("Excess or secondary insurance coverage attaches only after a predetermined amount of primary coverage is exhausted."); 1 Allen D. Windt, Insurance Claims & Disputes § 4.11 (5th ed. 2007) ("Most courts have held that an excess insurer that has a duty to defend is not obligated to *222provide a defense if the primary insurer is so obligated."); 14 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 200:43 (3d ed. 2007) ("As a general rule, a true excess insurer's duty to defend is not automatically triggered when the primary insurer denies coverage.").

 The Travelers policy is not the only policy that underlies the London Market policy. However, the Travelers policy did not condition either its duty to defend or its duty to indemnify on the exhaustion of policies that underlie the Travelers policy, as the London Market policy did. Instead, the Travelers policy provided that Travelers would "defend any suit against the insured seeking damages on account of [a covered] injury" and would share indemnification costs with the underlying insurance policies on one of two pro rata bases, depending on the language in the other insurance contract. For simplicity's sake, this dissent treats the Travelers policy as if it were primary.

 Loy v. Bunderson, 107 Wis. 2d 400, 320 N.W.2d 175 (1982).

 The Azco court went on to cite numerous other sources demonstrating the majority rule. Azco Hennes-Sanco, Ltd. v. Wis. Ins. Sec. Fund, 177 Wis. 2d 563, 569, 571-72 & nn.3-4, 502 N.W.2d 887 (Ct. App. 1993) (citing Signal Cos. v. Harbor Ins. Co., 612 P.2d 889 (Cal. 1980); Southgate State Bank & Trust Co. v. United Pac. Ins. Co., 588 P.2d 486 (Kan. Ct. App. 1979); James M. Fredericks, Comments, Excess Insurer's Duty to Defend After Primary Insurer Settles Within Policy Limits: Wisconsin After Loy and Teigen, 70 Marq. L. Rev. 285, 294-95 (1987); American Concept Ins. Co. v. Certain Underwriters at Lloyds of London, 467 N.W.2d 480 (S.D. 1991); Am. Sun Co. v. State Farm Mut. Auto. Ins. Co., 142 N.W.2d 304 (Minn. 1966); Hartford Accident & Indem. Co. v. Cont'l Nat'l Am. Ins. Cos., 861 F.2d 1184 (9th Cir. 1988); P.L. Kanter Agency, Inc. v. Cont'l Cas. Co., 541 F.2d 519 (6th Cir. 1976); West Am. Ins. Co. v. Allstate Ins. Co., 295 F.2d 513 (10th Cir. 1961); Colo. Farm Bureau Mut. Ins. Co. v. N. Am. Reinsurance Corp., 802 P.2d 1196 (Colo. Ct. App. 1990); Occidental Fire & Cas. Co. v. Underwriters at Lloyd's, London, 311 N.E.2d 330 (Ill. App. Ct. 1974); Mission Nat'l Ins. Co. v. Duke Transp. Co., Inc., 792 F.2d 550 (5th Cir. 1986); Radar v. Duke Transp. Inc., 492 So.2d 532 (La. Ct. App. 1986)).

 The court of appeals is not permitted to overrule its own holdings, which the footnote in Southeast tacitly does. See Cook v. Cook, 208 Wis. 2d 166, 189-90, 560 N.W.2d 246 (1997) ("[O]nly the supreme court, the highest court in the state, has the power to overrule, modify or withdraw language from a published opinion of the court of appeals."). Thus, footnote 4 from Southeast has no precedential value.

 Under the majority's logic, what happens to a bad faith claim now? Does the excess carrier become the injured party with respect to that cause of action?