On May 2, 2017, the Wisconsin Court of Appeals outlined why an insurance carrier that fails to defend an insured without first seeking a judicial determination of no coverage does so at its own peril. See Country World Media Group, Inc. v. Erie Ins. Co., 2016 WI App. 1343. Wisconsin insurance carriers should take note of this decision before deciding to unilaterally deny any insured’s tender of defense.
In this case, Country World Media Group (hereinafter “Media”) filed suit against Country World Production (hereinafter “CWP”) and its carrier, Erie Insurance (hereinafter “Erie”), among others, alleging breach of contract and negligence in allowing “television show tapes, cookbooks and videos” that were being stored on the premises leased by CWP to be discarded. Country World at ¶6. During all relevant times, CWP had a commercial general liability (CGL) insurance policy through Erie. CWP informed Erie of Media’s lawsuit and asked Erie to provide a defense. In response, Erie informed CWP that it would not provide coverage for Media’s claims and that CWP could hire its own lawyer at its own expense which CWP did.
Thereafter, Erie answered Media’s complaint on its own behalf only and asserted a cross-claim/counterclaim for declaratory judgment alleging that its policy did not give rise to a duty to defend or indemnify CWP. Specifically, Erie alleged that Media’s complaint alleged a loss of “electronic data” which the Erie policy expressly excluded from its definition of the term “property damage”. CWP opposed Erie’s motion and moved for a declaratory judgment arguing that Erie had a duty to defend CWP and breached that duty by refusing to provide a defense. Id. ¶9.
While this coverage dispute was being litigated, Media settled with CWP and Media’s claim against CWP was dismissed. Thereafter, the trial court concluded that Erie’s policy did not give rise to a duty to defend CWP against Media’s claims because the policy “was clearly written to exclude claims for property damage related to electronic data.” Id. at ¶10. The court thus dismissed Erie from the case and CWP appealed that decision to the Wisconsin Court of Appeals.
On appeal, the court first noted that “[w]e enforce unambiguous policy language as it is written, but we construe ambiguous policy language against the insurer and in favor or coverage”. Id. at ¶12 citing Marnholtz v. Church Mut. Ins. Co., 2012 WI App 53. The court then pointed out that “[a] party aggrieved by an insurer’s breach of the duty to defend may recover all damages that naturally flow from the breach, including the amount of the judgment or settlement against the insured and the costs and attorney’s fees the insured incurred in defending the suit.” Id. at ¶13 citing Newhouse v. Citizens Sec. Mut. Ins. Co., 176 Wis.2d 501 (1993). Next, the court noted that “[a]n insurer has a duty to defend its insured if the allegations contained with the four corners of the complaint would, if proved, result in a covered loss.” Id. at ¶14 citing Fireman’s Fund Ins. Co. v. Bradley Corp., 2003 WI 33. Finally, the court stated that if the policy “provides coverage for at least one of the claims in the underlying suit, the insurer has a duty to defend its insured on all of the claims alleged in the entire suit.” Id. at ¶15 citing Water Wells Sol. Serv. Grp. v. Consolidated Ins. Co., 2016 WI 54.
In applying the law to the facts at issue, the court found that Erie’s policy provided for an initial grant of coverage for “property damage” which was defined as “physical injury to or loss of use of tangible property” which does not include “electronic data”. Id. at ¶18. Erie argued that “television shows, master copies, and field footage” that were stored on the discarded tapes qualified as “electronic data” and thus were not within the definition of property damage. Id. at ¶19. Conversely, CWP argues that the definition of “electronic data” in the Erie policy was “ambiguous” and thus “the definition should be construed against Erie and in favor of coverage.” Id. at ¶20.
Ultimately, the court of appeals held that they did not need to resolve the parties’ dispute over whether the contents of the discarded tapes constituted electronic data under the Erie policy. Rather, the court noted that Media’s complaint alleged damages “equal to the value of the property which will be determined at the time of trial.” Id. at ¶21. Therefore, the court held that “[c]ontrued liberally, these allegations assert an entitlement to damages for both the loss of the intangible data contained on the tapes and the loss of the tapes themselves.” Id. Since the loss of the physical tapes constituted “property damage” and are, therefore, covered under the Erie policy, Erie had a duty to defend CWP “on all the claims alleged in the entire suit”. Id. By failing to provide a defense, the court thus held that Erie breached it duty to defend and remanded the case back to circuit court to “enter a declaratory judgment in CWP’s favor on the duty-to defend issue and to determine the damages CWP is entitled to recover as a result of Erie’s breach.” Id. at ¶33.
Once again, this decision reminds every insurance carrier in Wisconsin the importance of following the preferred procedures outlined by Wisconsin courts whenever a coverage dispute is unresolved and suit is filed against an insured. Specially, an insurer may “intervene in the underlying lawsuit and request a bifurcated trial on coverage issues and additionally move to stay any proceedings on the insured’s liability until coverage is resolved.” See Newhouse v. Citizens Sec. Mut. Ins. Co., 176 Wis.2d 501 (1993). Another option is to “agree to defend and enter into a non-waiver agreement with the insured acknowledging the insurer’s right to contest coverage or unilaterally send a reservation of rights letter reserving the right to contest coverage.” Grube v. Daun, 173 Wis.2d 30 (Wis. Ct. App. 1992). In other words, hire one counsel to represent the carrier on the coverage issue and another counsel to represent the insured on the merits of the case while the coverage issues is being resolved. An insurance carrier in Wisconsin that fails to follow these procedures opens itself up to the possibility of payment down the road for all damages that flow from the breach, loss of control of the underlying action against its insured, and a potential waiver of the ability to challenge coverage at a later date.
If you have any questions regarding this article or coverage issues in general, please contact Douglas Lehrer at [email protected].