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Does an Excess Umbrella Insurer Have a Duty to Defend when a Primary Umbrella Insurer Refuses to Defend? A Wisconsin Appellate Court Punts

It’s late afternoon when the partner that you report to drops a file on your desk and informs you that the client needs an answer by the end of business tomorrow. The client is an excess insurer that wrote an umbrella insurance policy for a chain of coffee shops. The policy provides that the client is to indemnify the insured for those damages that exceed the limits of the underlying primary insurance policy. The umbrella policy specifically states that the client will pay any claim against the insured only after the primary insurer has paid the full amount of the primary insurance. The insured has been sued, and the primary insurer has rejected the insured’s request to defend and indemnify the insured on the basis that the lawsuit alleges actions that do not constitute an “occurrence” under the primary policy.
You know the answer. The client clearly has no duty to defend the insured at this point. You look at the clock. You can do a quick hour of Lexis research and still get out of the office in time to get to the end-of-summer Phish concert that you have been anticipating for months; actually you’ve been waiting five years for the group to get back together and do a tour. You pick up your iPhone and send a quick text to your husband, telling him you will be running late and to have your tie-dye shirt and glow stick ready so the two of you can make a fast dash to the concert.
As you rush through your research results on lexis.com, you stumble across a recent decision from Wisconsin. You heart stops as you read the last paragraph of Johnson Controls, Inc. v. London Market, 2009 Wisc. App. LEXIS 404 (Wis. Ct. App. Feb. 19, 2009). “We see very little guidance in Wisconsin law as to whether an excess insurer has a primary, rather than secondary, duty to defend, and under what circumstances a secondary duty to defend would be triggered. Given the number of excess insurance policies which are no doubt in effect in this state, we believe clarification from the Wisconsin Supreme Court on these issues would be very helpful to both the insurance industry and policyholders.” You pick up your iPhone again, this time to call your husband and tell him that there will be no Phish concert tonight. Maybe Trey Anastasio and Mike Gordon will stay together and do another tour next summer.
The Supreme Court of Wisconsin accepted the petition to certify of the Wisconsin Court of Appeals in April, Johnson Controls, Inc. v. London Mkt., 2009 Wisc. LEXIS 264 (Wis. 2009), but oral arguments have not yet been scheduled. Although the Johnson Controls litigation, revolving around whether there was insurance coverage for CERCLA clean up costs, has involved numerous litigation and appeals for over a decade, the issues in the latest appeal are straight-forward. Johnson Controls contends that the defendants, the underwriters of an excess umbrella liability policy, had an obligation to defend Johnson Controls even though the primary underlying umbrella insurers declined to defend Johnson Controls and the full amount of the underlying primary umbrella policies were not paid.
The defendants’ excess umbrella policy did not contain a duty to defend provision, but it did contain a “follow form” provision that stated that it was “subject to the same terms, definitions, exclusions and conditions” of the underlying primary umbrella policies, all of which contained duty to defend provisions. Johnson Controls contends that the defendants had a duty to defend because that duty was incorporated through the “follow form” provision, and that the defendants also had a common law duty to defend because their policy did not disclaim a duty to defend. The defendants assert that their policy only provided for indemnification of excess liability, that defendants did not collect a premium for a duty to defend, and that any implied common law duty to defend does not apply to an excess insurer, which is a secondary insurer by definition.
The defendants also argue that the majority rule in Wisconsin is that an “excess insurer is not obligated to defend until the primary policy limits are exhausted.” Thus, they argue that even if there is an implied common law duty to defend, it was not triggered because the policy limits of the underlying primary umbrella policies were not exhausted, and thus the limitation of liability clause in their policy applies to both their duty to defend and their duty to indemnify. Johnson Controls responds that “An insurer may have a primary duty to defend even when its duty to indemnify is secondary. It relies on the general rule that a duty to defend is broader than the duty to indemnify, such that an insurer is required to tender a defense whenever liability coverage is fairly debatable.” Thus, even if defendants “did not have a primary duty to defend in the first instance”, the defendants “had at least a duty to drop down and defend once the underlying insurance carriers refused to do so.”
Even if Wisconsin law is silent on this issue, one has to wonder why the court of appeals did not look at the case law of other states and issue a ruling, considering that the prevailing rule is that an excess insurer does not have a duty to defend after a primary insurer refuses to defend. In Padilla Construction Co., Inc. v. Transportation Ins. Co., 150 Cal. App. 4th 984 (Cal. App. 4th Dist. 2007), a California appellate court ruled that an umbrella insurer had no duty to defend a contractor in an action alleging continuous damage because an unexhausted primary policy provided other insurance. That court took note of the difference in premiums charged by primary as opposed to excess insurers. “A primary policy imposes on an insurer a ‘primary duty of defense’ while an excess (or ‘secondary’ or ‘umbrella’) policy attaches only after primary coverage has been exhausted; hence the latter is cheaper….A primary policy can fund a long war of attrition. By contrast, defense obligations of an excess policy are far less likely to be triggered, and that improbability is reflected in a cheaper premium.” In another California decision, Eaton Hydraulics Inc. v. Continental Casualty Co., 132 Cal. App. 4th 966 (Cal. App. 2d Dist. 2005), an excess insurer did not have a duty to defend environmental claims because “An excess insurer's obligation to defend the insured does not even arise until the insured's primary coverage is exhausted….Thus, the primary insurer's refusal, while still on the risk, to defend does not trigger the excess insurer's duty to defend, even where the amount of the claim approaches or exceeds the primary's policy limits.”
In an action brought by a primary insurer relating to its obligation to defend and an excess insurer's obligation to defend, a federal court ruled in Scottsdale Ins. Co. v. Knox Park Constr., Inc., 2003 U.S. Dist. LEXIS 19937 (N.D. Tex. Nov. 6, 2003), that “Generally, when an insured maintains both primary and excess policies, the excess liability insurer is not obligated to participate in the defense of the insured until the limits of the primary policy are exhausted.” In a situation where the primary insurer failed to provide a defense to the insured because the primary insurer had been declared to be insolvent, Value City, Inc. v. Integrity Ins. Co., 30 Ohio App. 3d 274 (Ohio Ct. App., Franklin County 1986), the excess insurer did not have a duty to provide a defense to the insured. “Accordingly, reading the contract as a whole in accordance with the plain meaning of the words used, and finding no ambiguity in the scope of coverage, we conclude that the excess insurance contract does not obligate Integrity to step into the shoes of the primary carrier and bear the risk of loss of paying and defending claims within the limits of the underlying insurance upon the event of insolvency of a primary insurance carrier.”
In Castronovo v. Nat'l Union Fire Ins. Co., 571 F.3d 667 (7th Cir. Ind. 2009), the primary insurer, Owners, tendered the policy limits, and the secondary primary insurer, Travelers, initially declined to provide coverage, but later paid the policy limits. The plaintiff then argued that the excess insurer, National Union, had a duty to defend and indemnify. The court held otherwise, stating that “As plaintiff concedes, Owners was the primary insurer for Lavery and provided coverage to Lavery and Lively in the underlying litigation. Travelers' apparent denial of a defense to Lavery and Lively did not create a defense obligation on the part of National Union.” The Supreme Court of Colorado also found that an excess insurer did not owe a duty to defend the insured after the primary insurer declined to defend under a qualified pollution exclusion in Cotter Corp. v. Am. Empire Surplus Lines Ins. Co., 90 P.3d 814 (Colo. 2004).
Finally, there are numerous decisions which have stated that an excess insurer does not have a duty to defend until the policy limits of the underlying primary policy are exhausted. Those decisions may be distinguished on the basis that the insureds or primary insurers were only seeking the participation of the excess insurers while the primary insurers carried out their duty to defend, but the language of those decisions would seem to support the position of defendants in Johnson Controls, Inc. v. London Market. Possibly the Wisconsin Supreme Court will view the instant case as unique because the defendants were excess insurers over umbrella insurers, as opposed to excess insurers over primary insurers, or the Supreme Court will find something unique in Wisconsin law. Or maybe the case will be determined on an interpretation of the “follow form” provision. But it seems more likely that the defendants will prevail in the Wisconsin Supreme Court.