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Insurance Law

Wisconsin Appeals Court Puts The End In Defend: Insurer Can Settle The Only Covered Claim And Then Withdraw From The Defense

Randy Maniloff   Randy J. Maniloff, White and Williams, LLP

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Consider this - An insurer is defending its insured in a case that has both covered and uncovered claims. The insurer settles the covered claims. So with only uncovered claims remaining, the insurer now withdraws its defense. After all, the duty to defend only attaches if there is the potential for coverage. And because of the settlement, there is no longer any potential for coverage. This seems simple enough. But, needless to say, this is unlikely to sit well with the insured, who will likely scream bad faith, and a few other choice words that are not suitable for a family insurance publication.

This is exactly what the insurer did in Society Ins. v. Bodart. And the Court of Appeals of Wisconsin had no trouble concluding that the insurer's conduct was appropriate.

The case is as straightforward as they come. Bodart Landscaping was named in a civil action in Michigan alleging five claims. The Wisconsin appellate court didn't even say a single thing about the underlying claims -- as is was not relevant to the coverage dispute. All that matters is this:

Society Insurance filed an action in Wisconsin seeking a declaration regarding its duty to defend Bodart in the Michigan action. The trial court concluded that Bodart's policy with Society provided at least arguable coverage for one of the five claims in the Michigan action and that Society therefore had a duty to defend. Bodart at 2. So Society assumed the defense. It then settled three of the five claims, including the only claim that the trial court had concluded was at least arguably covered. Id. at 3.

"Society sent Bodart a letter informing him that, in light of the settlement and dismissal, it would withdraw its defense as to the remaining two claims. Society's letter stated: 'Since, according to the [duty-to-defend order], Society has now settled the only covered claim against you, together with two other claims which were not covered, Society will no longer be furnishing a defense to you in the Michigan action.' In response, Bodart filed a motion for contempt in this action, asserting that Society's unilateral decision to withdraw its defense violated the duty-to-defend order." Id.

There you have it. That's the entire factual scenario. The Wisconsin appellate court then set out to answer this single question: "[W]hether Society had a continuing duty to defend Bodart after the only arguably covered claim against Bodart was settled and dismissed, leaving only non-covered claims." Id. at 4. The court held that the insurer did not.

In answering this question the court noted that it needed to consider two sources of authority: any relevant policy terms and any rules which, while not stated in the policy, are well established in case law.

Turning to the terms of the Society policy, the court focused on the provision that "gives the insurer discretion to settle claims and provides notice to the insured that the insurer 'will have no duty to defend the insured against any 'suit' ... to which this insurance does not apply.'" Id. at 5.

The court's conclusion with respect to the policy language was this:

It is true that this provision does not expressly address the particular question of whether Society's duty might continue when the only arguably covered claim has been settled and dismissed. In this respect, the policy language could be said to be silent on that question. We conclude, however, that a reasonable insured would understand this language as Society does, to mean that Society has no duty to defend an insured in a suit once it has become clear that the suit no longer involves any claim that is even arguably covered. Stated another way, once all at least arguably covered claims are settled and dismissed, those claims are no longer part of the suit, and the insurance no longer applies to that suit.

Now turning to case law for guidance, the parties agreed that no Wisconsin case had decided whether an insurer has a continuing duty to defend remaining claims after all at least arguably covered claims are settled and dismissed. However, the court concluded from the parties' briefing and its own research [case law and secondary sources that the court addressed] "that the general rule consistently reflected in persuasive authority is this: An insurer's duty to defend ends after all at least arguably covered claims are settled and dismissed." Id. at 6.

The Bodart court capped its decision by noting that this general rule, from this persuasive authority, was consistent with several well-established duty to defend rules under Wisconsin case law, such as the following:

   An insurer's duty to defend is determined based on the allegations in the underlying complaint, construed liberally.

   Any doubt regarding the duty to defend is resolved in favor of the insured. Consistent with this rule, once all covered (and arguably covered) claims have been settled and dismissed, all doubt has been resolved against the insurer's duty to defend.

   The insurer is under an obligation to defend only if it could be held bound to indemnify the insured, assuming that the injured person proved the allegations of the complaint.

   The duty to defend extends to the "entire suit" against an insured, even if only one claim in the suit is covered. Consistent with this rule, once all covered (and arguably covered) claims have been settled and dismissed, there is no longer even one covered claim in the suit.

   We do not construe insurance policies to cover risks that the insurer did not contemplate and for which the insurer has not received a premium. Id. at 7-8.

Lastly, the Bodart court "hastened to add:" "[T]he persuasive authority on which we rely includes exceptions to that rule. At a minimum, these sources suggest that the rule may not apply when the insurer's withdrawal from the action would prejudice the insured's defense of the remaining, non-covered claims, (citation omitted) or when the insurer has purported to 'settle' claims out of a case but has done so in bad faith[.]" Id. at 9. Prejudice may come from withdrawal at a time or under circumstances that undermine the ability of the insured to produce a material witness or to otherwise adequately prepare his or her defense to the remaining claims. Id., n.4. The bad faith example that the court cited was so unique as to make it devoid of guidance on such point. [These exceptions are likely to be what the dispute is all about. The Bodart court did not provide any real guidance on these issues as they did not see them as applicable.]

A free copy of the Court of Appeals of Wisconsin's June 7th decision can be accessed here: Society Ins. v. Bodart (recommended for publication).

Sign in with your ID to access the full text of the Lexis enhanced version of the Soc'y Ins. v. Bodart, 2012 Wisc. App. LEXIS 469 (Wis. Ct. App. June 7, 2012) decision with case summary, headnotes, and Shepard's.

Please let me know if you have any questions.

Randy J. Maniloff
White and Williams LLP
1800 One Liberty Place | Philadelphia, PA 19103-7395
Direct Dial: 215.864.6311 | Direct Fax: 215.789.7608

The views expressed herein are solely those of the author and not necessarily those of the firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. The term "Binding Authority" is used herein for literary purposes only and is not an admission that any case discussed herein is in fact binding authority on any court.

Randy J. Maniloff is a Partner at White and Williams, LLP in Philadelphia.  He concentrates his practice in the representation of insurers in coverage disputes over various types of claims.  He writes frequently on insurance coverage topics for a variety of industry publications.  Maniloff's views on coverage issues have been quoted by numerous media including The Wall Street Journal, The New York Times, USA Today, Associated Press and Dow Jones Newswires.  Randy is co-author of "General Liability Insurance Coverage - Key Issues In Every State," a book addressing the law in all 50 states on twenty key liability insurance coverage issues (Second Edition; Oxford University Press 2012) (with Professor Jeffrey Stempel of the University of Nevada Las Vegas Boyd School of Law).

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