The recent Wisconsin Supreme Court ruling that Steadfast has the right to recover from Greenwich Insurance Company due to Greenwich breaching their duty to defend provides insurers direction on how defense costs should be shared. This ruling adds to the ongoing debate about the consequences of an insurer’s breach of the duty to defend.
In 2008, raw sewage backed up into more than 8,000 Milwaukee homes. Lawsuits by homeowners were brought against the Milwaukee Metropolitan Sewage District (MMSD) and two companies, United Water and Veolia -both of whom operated and maintained MMSD’s systems during different time periods. United Water was insured by Greenwich with MMSD as an additional insured, and Veolia was insured by Steadfast, which also named MMSD as an additional insured. This made MMSD an additional insured on two general liability policies that provided coverage for negligence during successive policy periods.
When MMSD filed claims with Steadfast and Greenwich, Steadfast defended, providing coverage in MMSD’s defense and reimbursed MMSD for 1.55 million in defense costs. Greenwich did not defend, and then further denied MMSD coverage a year later when a renewed tender was filed. Greenwich stated that its reason for not defending was that the language in its policy’s “other insurance” clause made its coverage excess insurance to the Steadfast policy.
The lawsuits against MMSD were eventually settled without MMSD paying any damages.
The Breakdown of Steadfast Insurance Company v. Greenwich Insurance Company
Steadfast brought a subrogation action against Greenwich to recover the $1.55 million in defense costs it had paid to MMSD.
- Circuit Court granted summary judgment to Steadfast for the full $1.55 million, ruling that Greenwich breached the duty to defend and therefore waived its rights to raise coverage defense. Additionally, the Circuit Court awarded Steadfast $325,000 in attorney fees incurred in the subrogation action.
- Court of Appeals reasoned that it would be inequitable to reward Greenwich for its flagrant breach of contract by assigning to it only a proportional share of the costs of defending MMS, and therefore assigned 100% of the defense costs to Greenwich.
- The Court of Appeals had found that the Greenwich policy was not excess but rather primary insurance and that Greenwich therefore had a duty to defend MMSD which it breached. Once it breached, the Appeals court found, Greenwich was responsible for all defense costs and must reimburse Steadfast for the money it had spent in MMSD’s defense, plus attorney’s fees.
- Greenwich had argued that should the court find it responsible for defense costs, they should be allocated among all insurers. The Appellate Court had ruled otherwise because Greenwich’s correspondence had acknowledged that there may be a potential for coverage, yet Greenwich had never taken the procedural steps Wisconsin courts had established by which insurers denying coverage might protect themselves from breach of contract and the remedies that may flow from that breach.
- On January 25, 2019, the Wisconsin Supreme Court in its majority opinion agreed with the Court of Appeals that the policies were primary, not excess. Also, it agreed that Greenwich had breached its contractual duty to MMSD. Where it parted company with the Appellate Court however was in how it would allocate the shares of defense costs between insurers.
- The Supreme Court noted in its opinion that both Steadfast and Greenwich had a duty to defend under the MMSD policies. Even though Steadfast, unlike Greenwich had defended MMSD under its policy, the Supreme Court still found that pro rata allocation was the proper method of determining the insurer’s share of defense costs. It decided to use each insurer’s policy limits as the best means of apportioning defense costs. Where Steadfast’s policy limit was $30 million and Greenwich’s limits were $20 million, it found that Steadfast was responsible for 3/5 and directed Greenwich to pay the remaining 2/5 of the defense cost.
- The Supreme Court’s majority opinion found no problem with the Court of Appeals analysis that Steadfast’s policy had language giving it the right of subrogation to any claims that MMSD might have, Steadfast’s claim to “stand in the shoes” of MMSD was based in contract. In this capacity, it reasoned, Steadfast was also entitled to a recoupment of the attorney’s fees it had incurred on MMSD’s behalf to prove Greenwich’s coverage.
- However, the Supreme Court noted that this was a case of first impressions in Wisconsin. Never before had a Wisconsin court awarded attorney’s fees for a breach of a duty to defend to an insurer that was subrogated to an insured’s rights.
- Therefore, the Court looked to other jurisdictions to see how this had been handled there. It decided that Florida and California’s rulings were persuasive in this regard. It therefore found that there was no reason to create an exception to the long-standing rule that contractual subrogation entitles the paying party to the rights, remedies or securities that arise from a specific subrogation clause upon payment by a subrogee.
- Thus, it upheld the Court of Appeals decision that Greenwich should compensate Steadfast for the attorney fees incurred in its efforts to get Greenwich to cover MMSD.
What’s worthy of note here is that Wisconsin Supreme Court’s opinion in this case was not unanimous. Three Supreme Court Justices dissented from the majority opinion, two arguing against the allocation of defense costs where there was such a unilateral refusal to defend. Allowing Greenwich to only pay part of the whole defense cost, the two stated, was rewarding it for its refusal to abide by Wisconsin law and utilize the legal framework the Court had put in place to check the errant insurer. They judged that the majority’s opinion encouraged insurers to play “a game of chicken” when more than one insurer insured the same risk. A third Justice agreed with the majority that prorated allocation was the best way to apportion defense costs but expressed the opinion that Greenwich should not have been held responsible for any portion of the defense costs because Greenwich’s policy was excess to Steadfast’s policy.
The new Wisconsin Supreme Court decision allowed for an equitable allocation for carrier found in breach of duty to defend, rather than shouldering the entire cost of defense. This could provide insurers a reason to strategize against other carriers on claims.
Future decisions will determine if the Steadfast case represents a significant change in how carriers address the duty to defend.
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Dave O’Neil, JD, Director of Investigations
Dave has over 20 years of experience in claims recovery on behalf of corporate policyholders involving environmental property damage, toxic tort, and asbestos exposure claims. He has worked on over 700 projects including the reconstruction of insurance coverage for the countrywide roll up of the largest waste disposal company.