The rule in Wisconsin for insurance coverage cases is that, when a policyholder tenders a claim to its insurance carrier for coverage, the carrier must intervene in the underlying action and seek a judicial determination as to whether or not coverage exists, while defending the insured. Insurers that deny coverage and refuse to defend a claim without a judicial determination risk losing the right to enforce coverage limits or raise other defenses if a court later determines that coverage exists. But what standard should a court, and before that, an insurer, use to determine whether or not the insurer has a duty to defend a claim? Is the entire policy subject to a coverage analysis, or only the grant of coverage? How and when are insurers allowed to rely on policy exclusions to deny coverage? The Wisconsin Court of Appeals answered these questions and resolved a conflict among two conflicting lines of cases in Marks v. Bedford Underwriters and Houston Casualty.
In this case, a surplus lines insurer issued a professional errors & omissions policy to David Marks in order to insure him in his role as a trustee of two family trusts. The policy contained an exclusion, however, for any position he held as an officer or director of an entity that was not one of the family trusts. When Marks was sued in multiple cases as a director of Titan Corporation, a company in which he had invested the assets of the trusts, he sought coverage from Houston Casualty on the theory that, but for his investment decision as trustee (for which he had insurance), he would not have served as a Titan director (a position not covered by any insurance). Houston Casualty denied coverage and refused to defend the underlying cases. The circuit court, affirmed by the Court of Appeals, held the coverage exclusion for officer and director positions in other corporations precluded coverage and was unambiguous. Absent coverage, there was no duty to defend. The important legal issue decided was whether the insurer could rely on a policy exclusion to deny coverage without seeking a judicial determination first. The court ruled that it could.
The holding in Marks clarified the applicable legal standard in duty to defend cases. Marks argued that, because Houston Casualty denied coverage and refused to defend him without a judicial determination, Houston Casualty and the court could only look to the grant of coverage in the policy and not any of the exclusions. Houston Casualty argued, and the courts agreed, that an insurer making a coverage determination must read and apply the policy as a whole, and not simply bits and pieces that favor only the insured. In deciding the case, the Court of Appeals abandoned the case of Grube v. Daun, 173 Wis. 2d 30 (Ct. App. 1992), and its progeny, that held exclusions in a policy were not relevant to a duty to defend analysis.
The lesson for insurers that issue policies under Wisconsin law is that they may refuse to defend an insured and deny coverage in reliance on policy exclusions. But, the exclusion must be unambiguous. The insurer still bears the risk that a court might disagree and rule in favor of coverage if the insured seeks a coverage determination.