Johnson Controls: Wisconsin Supreme Court Reads Duty To Defend Into Excess Policy
July, 2010
In a 4-3 decision, the Wisconsin Supreme Court ruled that a duty to defend could be read into an excess liability policy with its own insuring language promising only to indemnify the insured for covered amounts in excess of underlying limits. Johnson Controls, Inc. v. London Market, 2010 WL 2520941 (Wis. June 24, 2010).
Facts
During the 1970s, Johnson Controls contracted with various insurers for a layered program of primary, umbrella, and umbrella excess commercial general liability (CGL) policies, including an umbrella excess policy issued by London Market, effective December 31, 1973, to December 31, 1976. The London Market excess umbrella policy sat atop three successive policies issued by Travelers.
In the mid-1980s, Johnson Controls started receiving notification that it had been identified as a potentially responsible party (PRP) in connection with environmental contamination at various sites across the country. As a PRP, Johnson Controls could be required to contribute to the environmental restoration and remediation costs at these sites. Johnson Controls asserts that it notified its insurers, seeking defense and indemnification. The insurers refused to provide defense or indemnification, asserting that their CGL policies did not cover environmental restoration and remediation costs imposed under the Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA).
In 1989, Johnson Controls sued its various primary, umbrella, and excess insurers, seeking a declaratory judgment that its insurers were obligated to provide defense and indemnification under the terms of the insurance policies. Before the circuit court determined the insurers' obligations, the Wisconsin Supreme Court decided City of Edgerton v. General Casualty Co. of Wisconsin, 517 N.W.2d 463 (Wis. 1994), holding that environmental response costs under CERCLA constitute "equitable relief" rather than legal damages and that a CGL insurer has no duty to indemnify the insured for these expenses, and that receipt of a PRP letter or comparable letter from a state agency did not constitute a "suit," and therefore a CGL insurer's duty to defend was not triggered by the receipt of a PRP letter. The circuit court applied Edgerton and granted summary judgment in favor of the insurers. It determined that there was no duty to defend or indemnify Johnson Controls under any of the CGL policies. The court of appeals affirmed in an unpublished decision, noting that "as long as City of Edgerton remains the law in this state" Johnson Controls could not prevail.
In 2003, the Wisconsion Supreme Court overruled Edgerton, concluding that an insured's costs for "restoring and remediating damaged property are covered damages under applicable CGL policies, provided that other policy exclusions do not apply" and that PRP letters constitute “the functional equivalent of a suit" because a PRP letter "marks the beginning of adversarial administrative legal proceedings that seek to impose liability upon an insured." Therefore, the receipt of such a letter triggers the insurer's duty to defend.
On remand, the circuit court was instructed to determine whether other exclusions in the policies might apply and to determine the liability of the various insurers. Johnson Controls subsequently settled with several insurers, including Travelers, the insurer underlying the 1973-1976 London Market policy. In January 2007, London Market moved for partial summary judgment, contending that its policy was an indemnity-only excess umbrella insurance policy that contained no promise of defense. The circuit court concluded that London Market's follow form provision incorporated the duty to defend found in the Travelers policies. Further, it concluded that "[n]othing in the policy suggests [London Market's] duty to defend is conditioned on exhaustion of the [underlying Travelers] policy" and that "given the failure of Travelers to provide a defense, [London Market] at a minimum has an obligation to drop down and provide a defense.
The court of appeals certified two questions to the Wisconsin Supreme Court, noting that both were matters of first impression in Wisconsin and both would have broad implications for the business community and the insurance industry:
(1) Should a duty to defend be imported from an underlying umbrella insurance policy into an excess umbrella liability policy by language in the excess policy stating that it is subject to the same terms, definitions, exclusions and conditions as the underlying policy "except as otherwise provided"?
(2) Is the excess liability carrier's duty to defend primary in nature, such that it may be
triggered even if the excess policy expressly requires exhaustion of the underlying policy as a precondition to liability and the underlying policy has not been exhausted?
Analysis
The Wisconsin Supreme Court granted certification and ruled in favor of Johnson Controls on both issues. The Court acknowledged that the London Market policy did not contain a "duty to defend" provision, but pointed out that it did contain a provision stating that the excess policy followed form to underlying Travelers' policies. The Court found the excess London Market policy incorporated the underlying Travelers policies, including the duty to defend provisions.
The Court noted that the London Market policy language stated that the policy followed form to the Travelers policies, "...except as regards the premium, the amount and Limits of Liability and except as otherwise provided herein..." London Market argued that the phrase "...except as otherwise provided herein..." refers to the London Market insuring language which limits any obligation to indemnity only. The Court found this argument to be "circular" stating that while the London Market insuring agreement does not promise a defense, the follow form provision incorporates the terms, definitions, exclusions, and conditions of the Travelers policies and one of those terms is Travelers' duty to defend. The Court found its way around the phrase in the London insuring language "...except as otherwise provided..." by stating that the London Market policy did not have a provision which showed that the policy does not incorporate the duty to defend.
The Court rejected London Market's argument that the relatively small premium charged by London Market in comparison to the premium charged by Travelers is evidence that the parties did not contract for a duty to defend. The Court deemed that argument to be based upon extrinsic evidence which the Court deemed was not helpful in its analysis of the actual policy language.
As to when the duty to defend is triggered, the Court rejected London Market's argument that an excess carrier's duty can only be triggered upon exhaustion of underlying limits. Acknowledging that a primary carrier generally has the primary duty to defend, the Court examined the language of the policies before it and found that the Travelers and London Market policies were silent as to when the duty to defend begins. The Court acknowledged that no “liability” is triggered under the London Market policy until such time as underlying limits are exhausted. However, the Court interpreted the term “liability” to be synonymous with “indemnity” under the London Market policy and noted that the duty to defend is separate and distinct from the duty to indemnify.
The Court focused upon the language in the “Other Insurance” provision in the Travelers policy which the Court held was incorporated into the London Market policy and required the London Market policy to respond as though such other insurance were unavailable because Travelers had denied any liability under its policies. Thus, the Court held that London Market was required to assume the defense of Johnson Controls when Travelers refused to do so.
The Court did state that a duty to defend is not always triggered under an excess policy, even if the primary or underlying carrier refuses to defend. The Court stated that its decision was based upon the language of the policy before it.
The dissent expressed the view that the majority undermined the plain language of the London Market policy by creating a duty to defend that is not found in the London Market contract. According to the dissent, the majority conveniently picked and chose terms of the Travelers' separate underlying policy to craft a duty to defend. The dissent went on to state that even if one assumes, arguendo, that the London Market policy did incorporate a duty to defend, such a duty could not arise until all underlying policies were exhausted.
The dissent believes that the majority's decision is contrary to long standing principles of insurance law, including the general rule that excess policies do not include a duty to defend. The dissenters pointed out that the majority ignored the "Other Insurance" clause in the London Market policy which explicitly limits the policy to excess coverage, which is antithetical to dropping down to provide a primary defense. They also read the London Market policy as containing no promise to drop down in the event of a denial of coverage by Travelers. Further, the dissent points out that the majority opinion fails to cite any Wisconsin case in which a court required an excess insurer to provide a defense before the underlying policy limits were exhausted.
Learning Point:
As the dissent correctly notes, the majority's conclusion increases the likelihood of nonperformance by primary insurers or underlying insurers as it shifts costs to excess insurers. While judicially creating a duty to defend may benefit certain parties in this case, it will adversely affect the future cost of excess coverage.
Back to CM Report of Recent Decisions (2010v2) 2010 Volume 2 Table of Contents
