(Article from Insurance Law Alert, July/August 2016)
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In two recent decisions, the Supreme Court of Wisconsin reinforced an insurer’s right to refuse to defend or provide coverage based on unambiguous policy exclusions.
In Marks v. Houston Casualty Company, 2016 WL 3545848 (Wis. June 30, 2016), the court ruled that an insurer had no duty to defend underlying lawsuits based on a business enterprise exclusion, rejecting prior case law that suggested that an insurer that refuses to defend relinquishes its right to rely on policy exclusions in subsequent coverage litigation.
The coverage dispute arose out of lawsuits filed against David Marks and Titan Global Holdings, a holding company for which Marks was the principal shareholder and chairman. The suits alleged fraud, misrepresentation, negligence and statutory claims based on the collapse of various business arrangements. Marks tendered defense of the suits to Houston Casualty, his professional liability insurer. Houston refused to defend on several bases, including a business enterprise exclusion that excluded coverage for liability arising out of Marks’ services and/or capacity as an officer, director, partner, trustee, or employee of a business enterprise not identified in the policy declarations. The only entities named in the declarations were two trusts for which Marks served as trustee. A Wisconsin trial court granted Houston’s summary judgment motion, finding that the business enterprise exclusion precluded coverage.
The Wisconsin Supreme Court assumed, without deciding, that the policy provided an initial grant of coverage for the underlying claims. The court then held that the business enterprise exclusion unambiguously applied because all of the underlying allegations were based on Marks’ position as director or officer at Titan. Any allegations relating to Marks’ position as trustee for the trusts (which would fall outside the scope of the exclusion) were “conspicuously absent” from the underlying complaints.
Significantly, the court rejected the argument that an insurer that denies coverage and refuses to defend is estopped from relying on policy exclusions in subsequent coverage litigation. The court rejected holdings from a series of appellate court cases supporting this proposition, finding that they conflicted with well-established Wisconsin precedent and constituted a “stunted strand of law that conflicts with our four-corners jurisprudence.” The court clarified that an insurer is estopped from contesting coverage only if a court has determined that it breached its duty to defend.
The court also dismissed Marks’ assertion that the exclusion rendered the policy illusory because it “completely swallows the coverage granted in the insuring agreement” by excluding coverage for liability arising out of Marks’ services as a trustee, among other things. In this context, the court held that even assuming a particular portion of the exclusion (relating to Marks’ capacity as trustee) rendered the policy illusory, the appropriate remedy would be reformation of that specific clause rather than voiding the exclusion in its entirety.
In Water Well Solutions Service Group Inc. v. Consolidated Insurance Company, 2016 WL 3545838 (Wis. June 30, 2016), issued on the same day as Marks, the Wisconsin Supreme Court reinforced a strict “four-corners” rule governing an insurer’s duty to defend and held that an insurer may refuse to defend based on a policy exclusion without resort to extrinsic evidence, even where it is undisputed that the policy provides an initial grant of coverage.
Water Well tendered defense of a negligence suit to Consolidated Insurance. Consolidated conceded that its general liability policy’s grant of coverage encompassed the claims, but refused to defend based on two policy exclusions. A Wisconsin trial court and appellate court agreed, finding that policy exclusions barred coverage. On appeal to the Wisconsin Supreme Court, Water Well asked the court to “craft an exception to the four-corners rule allowing courts to consider extrinsic evidence when an insurer has unilaterally decided that no duty to defend exists based on exclusions in the insurance policy.” The court declined to do so, stating that “[w]e now unequivocally hold that there is no exception to the four-corners rule in duty to defend cases in Wisconsin.”
The court also rejected Water Well’s assertion that under the four-corners rule, the court’s comparison of the complaint to the insurance policy should be limited to the portion of the policy providing the initial grant of coverage. Instead, the court ruled that in evaluating an insurer’s duty to defend, the entire policy, including exclusions, should be examined. Specifically, the court concluded that a “Your Product” exclusion unambiguously barred coverage because the underlying complaint alleged only damage to Water Well’s own products. Rejecting Water Well’s argument that damage to other property could be reasonably inferred from the underlying allegations, the court refused to engage in “guess-work and supposition repeatedly rejected in Wisconsin’s duty-to-defend jurisprudence.”