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By William T. Barker, Partner, SNR Denton
Most jurisdictions hold that a liability insurer that assumes control of its insured's defense without reserving a right to deny indemnity can be estopped from asserting indemnity coverage defenses that it knew or should have known about but failed to reserve. Maxwell v. Hartford Union High School District rejected that rule but approved a rule forfeiting indemnity coverage defenses if the insurer breaches its duty to defend.
The commentary describes the facts as follows:
Community Insurance Corporation ("CIC") issued a public entity liability insurance policy to the District, which was sued for wrongful discharge by Dawn Maxwell. The policy excluded indemnity coverage for amounts actually or allegedly due under any contract or for any amount paid as compensation for lost salary or fringe benefits. The District was initially represented by James Mohr, its general counsel in response to a motion for temporary restraining order. CIC appointed Alan Levy to defend, which he did for the remainder of the litigation. Mohr remained of record and reviewed all pleadings and briefs until after summary judgment on liability was granted to Maxwell. CIC never reserved its right to deny coverage based on the exclusion. When Mohr withdrew his appearance (before there was hearing on damages), he sent CIC a letter asserting that the lack of a reservation meant that CIC would be obligated to pay any judgment. CIC responded by asserting its exclusions.
The circuit court concluded that the exclusions barred coverage and that waiver or estoppel could not create coverage, granting summary judgment to CIC. The Wisconsin Court of Appeals concluded that there was an exception to the latter rule where an insured was prejudiced by an insurer's assumption of the defense without reserving rights. Finding that the District had been prejudiced, it granted judgment for the District. The Wisconsin Supreme Court reinstated the judgment for CCI.
It approved the rule that coverage may not be expanded by waiver or estoppel:
An insurer is liable for all risks it agrees to assume in the insurance contract. Exclusions in the contract are written to limit coverage. The insurer bases premiums on anticipated risks and the realization that ambiguities in the policy are likely to be construed against the insurer. An insured is entitled to the coverage it has paid for, provided that it does not forfeit that coverage by violating some provision of the contract. A contract of insurance should not be rewritten to bind the insurer to a risk it did not contemplate and for which it has not been paid.
The court recognized existence of a line of cases saying that a liability insurer's breach of its duty to defend would cause it to be estopped to assert any defenses to indemnity coverage. In its view, these cases did not involve estoppel at all. "Rather, when an insurer breaches the insurance contract by breaching its duty to defend its insured, the insurer is liable for the damages resulting from that breach of contract." But that rule had no application in Maxwell, because CIC had defended.
This commentary criticizes the court's reasoning and considers possible ramifications for cases in which an insurer has breached the duty to defend.
William T. Barker is a member of SNR Denton's Insurance Litigation & Coverage Practice Group and practices in the firm's Chicago office. He has a nationwide practice in the area of complex commercial insurance litigation, including coverage, claim practices, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is the co-author, with Ronald D. Kent of THE NEW APPLEMAN INSURANCE BAD FAITH LITIGATION, SECOND EDITION and with Charles Silver of the forthcoming PROFESSIONAL RESPONSIBILITIES OF INSURANCE DEFENSE COUNSEL; he has written over 100 published articles on insurance and litigation subjects. He has been described as "[t]he leading lawyer commentator" on the relationships between insurance and civil procedure. Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 & n.4 (1995). He is an Adviser to the American Law Institute project on Principles of the Law of Liability Insurance. He is a member of the EDITORIAL BOARD OF THE NEW APPLEMAN ON INSURANCE LAW LIBRARY EDITION and THE NEW APPLEMAN INSURANCE LAW PRACTICE GUIDE. He is Editorial Board Director and Senior Contributing Editor of INSURANCE LITIGATION REPORTER and a member of the Board of Editors of DEFENSE COUNSEL JOURNAL.
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