Publication

March 12, 2020Client Alert

Wisconsin Supreme Court Decision Muddies the Water on When an Insurer Must Begin Paying for a Policyholder’s Defense

Litigation in 2020 is often risky, expensive, and time consuming. The cost of defending a lawsuit, alone, can have crippling effects on a company’s cash flow, even if the lawsuit itself is meritless.  That is why an insurance company’s obligation to defend its policyholder is such a critical component of modern liability insurance. When faced with the inherent uncertainties involved in litigation, policyholders want the certainty that their insurer is going to defend them. A worst-case scenario for policyholders arises when they face both an underlying lawsuit, and a dispute with their insurer about whether the underlying lawsuit is covered by insurance.    

Wisconsin law used to be clear that an insurer that contested coverage was obligated to defend its policyholder while the coverage dispute was pending, or risk being found to have breached its duty to defend if the court ruled against it on coverage. But a recent decision of the Wisconsin Supreme Court, Choinsky v. Employers Ins. Co. of Wausau, renders that decades old principal of Wisconsin law less clear.

In Choinsky v. Employers Ins. Co. of Wausau, Germantown School District Board of Education and Germantown School District (collectively, the “School District”), former employees of the Germantown School District filed a class action lawsuit against the School District based on the School District’s decision to discontinue group long-term care insurance. The School District tendered the claim to its insurers, Employers Insurance Company of Wausau and Wausau Business Insurance Company (collectively, the “Insurers”.)  The Insurers denied coverage and moved to intervene in, and then bifurcate and stay the lawsuit against the School District (the “Underlying Litigation”). The circuit court allowed the Insurers to intervene, and bifurcated coverage issues from liability issues, but denied the Insurers’ motion to stay.

The Insurers did not agree to defend the School District until after the circuit court denied their motion to stay the Underlying Lawsuit. Moreover, the Insurers did not begin paying attorneys’ fees until approximately five months after conditionally accepting their defense obligations. Thus, when the School District ultimately prevailed on the coverage issues in the case, it argued that the Insurers’ delay in defending the School District was a breach of the duty to defend, which made the Insurers liable for not only defense fees, but also the School Districts fees incurred in contesting coverage.

But the Circuit Court, Court of Appeals, and Wisconsin Supreme Court all disagreed with the School District’s argument. The Supreme Court appears to have adopted a rule that allows insurers to delay payment of defense costs until after the circuit court has denied a motion to stay liability proceedings while coverage issues are litigated. As noted in Justice Kelly’s dissenting opinion, the idea of insurance companies paying defense costs “retroactively” contradicts much of the Court’s prior case law regarding the scope of an insurance company’s duty to defend.

Given the Court’s decision in Choinsky, policyholders can expect insurers to seek additional ways to delay and/or minimize their defense obligations. The insurance recovery team at Michael Best is experienced in helping clients obtain the full benefit of the bargain they paid for under their insurance policies.

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