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Published: November 23, 2010
written by Sara K. Beachy
Under Wisconsin law, the doctrines of estoppel and waiver cannot generally create coverage in an insurance policy where none otherwise exists in the policy. In a recent published decision, Maxwell v. Hartford Union High School District, 2010 WI App 128 (Aug. 25, 2010), the Wisconsin Court of Appeals recognized a new exception to this rule. The court held that when an insurer exclusively controls the defense of a lawsuit without expressly reserving its rights, obtaining a result “to the detriment and prejudice of the insured,” the insurer is barred from denying coverage.
In Maxwell, the insurance company hired independent counsel to represent its insured, a school district, on the merits of an employment dispute with a teacher. The circuit court granted summary judgment in favor of the teacher. The school district subsequently sought to force the insurer to indemnify the district for damages including lost wages and benefits, despite a clear policy exclusion for those damages. The circuit court dismissed the school district’s claim for coverage.
The Court of Appeals reversed. The Court of Appeals agreed that the policy excluded coverage for the lost wages and benefits. Further, the court acknowledged the general rule that coverage under an insurance policy cannot be created either by waiver or estoppel. However, the court adopted an “exception” to the general rule. The exception applies when “the insurer fails to notify the insured of a coverage issue until after the insured suffered prejudice.” Because the insurer failed to notify the district of the coverage exclusion in a written reservation of rights letter, the insurer was estopped from enforcing the coverage clauses in its policy.
In reaching its conclusion, the court relied on treatises and case law from other jurisdictions that applied the exception. The court also pointed to two cases, Pouwels v. Cheese Makers Mutual Casualty Co., 255 Wis. 101, 37 N.W.2d 869 (1949) and Koehring Co. v. American Mutual Liability Ins. Co., 564 F. Supp. 303 (E.D. Wis. 1983), which the court claimed applied the exception.
The Court of Appeals was also heavily influenced by the rationale underlying Grube v. Daun, 173 Wis. 2d 30, 496 N.W.2d 106 (Ct. App. 1992), which established the general rule that an insurer loses its right to enforce coverage clauses when the insurer breaches the duty to defend. Maxwell is the first time that a Wisconsin court has applied the Grube rationale when the insurer has not breached its duty to defend.
The insurer in Maxwell has filed a Petition for Review with the Wisconsin Supreme Court arguing that the decision conflicts with established case law, contains erroneous factual assumptions not supported by the record, and extinguishes any obligation by insureds, however minimal, to actually read their policies. However, unless the Supreme Court accepts review and overturns or modifies the decision, the Court of Appeals decision remains the law.
Bottom Line: Insurers may wish to consult counsel to discuss how to adequately reserve their rights when they appoint counsel pursuant to a duty to defend. If an insurer does not adequately reserve its rights, it may be stuck footing a larger bill than expected upon the conclusion of litigation.
For more information on Wisconsin enforceable policy exclusions, contact Attorney Gesina Seiler at 608.283.6787 or gseiler@axley.com.
This article was featured in the November 2010 issue of the Wisconsin Insurance Law Alert, which is edited by Axley Brynelson attorneys Lori M. Lubinsky, Gesina (Ena) M. Seiler and Jodi S. Yin.
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