Mike Aylward and Eric Barber on “Getting the Drop on Excess Insurer: The Wisconsin Supreme Court Finds that an Excess Insurer Has a Duty to Defend in Johnson Controls in the Absence of Underlying Exhaustion”

  By Mike Aylward and Eric Barber

The article, “Getting the Drop on Excess Insurer: The Wisconsin Supreme Court Finds that an Excess Insurer Has a Duty to Defend in Johnson Controls in the Absence of Underlying Exhaustion,” by Michael F. Aylward and Eric Barber  appears in the September/October 2010 issue of Coverage. The authors find that a recent decision adds to a growing list of exceptions to the rule that an excess insurer’s obligation to reimburse defense costs does not arise until the underlying insurance limits of coverage are exhausted. Previous decisions in the 1980s and early 1990s held that excess insurance might be required to “drop down” to cover policies of insolvent primary insurers. Recently, policyholders have asserted that excess insurance should also drop down where the primary insurer refuses to defend. The article traces 20 years of coverage litigation involving a major manufacturer of electrical products culminating in the Wisconsin Supreme Court’s decision of Johnson Controls, Inc . v. London Market, 2010 WI 52, 784 N.W.2d 579 (2010) [enhanced version available to lexis.com subscribersunenhanced version available from lexisONE Free Case Law]. The court first found that while the excess policy did not expressly contain a defense obligation, it was a “follow form” policy and incorporated by reference the duty to defend provisions from the underlying umbrella insurance. The duty to defend was triggered by the “other insurance” provision in the underlying umbrella insurance providing that the umbrella insurer would respond if the primary insurer denied liability under its policy. The divided court found that although the excess insurer’s duty to indemnify was conditioned upon the exhaustion of the underlying umbrella insurer’s policy, this wasn’t the case as to the duty to defend. Dissenting justices argued that “[a]bsent 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 do not include a duty to defend.” Nevertheless, the authors of this article warn that where an excess policy fails to state it does not follow form of the underlying policy as to the duty to defend, the decision in Johnson Controls suggests that the duty to defend may be incorporated into the excess policy.

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Michael F. Aylward is a senior partner in the Boston office of Morrison Mahoney LLP, where he chairs the firm's Complex Insurance Claims Resolution group. For the past thirty years, he has represented insurers in coverage disputes around the country, including environmental, construction defect and intellectual property disputes. During this time, he has served in a leadership capacity in numerous legal defense organizations, including the Defense Research Institute (Board of Directors, past Chair of Insurance Law Committee); Federation of Defense and Corporate Counsel (past Chair, Reinsurance, Excess and Surplus Lines Committee) and the International Association of Defense Counsel (past Chair, Reinsurance, Excess and Surplus Lines Committee). His analyses of insurance coverage issues have appeared in numerous publications, including two chapters in the New Appleman Insurance Law Practice Guide (2008).
Eric Barber is an attorney in the Madison, Wisconsin office of Perkins Coie LLP, where he represents policyholders in disputes with their insurance carriers. He also counsels policyholders in designing their insurance programs. After graduating from the University of Wisconsin Law School, Eric clerked for Chief Justice Shirley Abrahamson of the Wisconsin Supreme Court and Judge Richard Wesley of the U.S. Court of Appeals for the Second Circuit. Prior to joining Perkins Coie, Eric was an associate at Heller Ehrman LLP