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Steadfast Insurance Co. v. Greenwich Insurance Co.

Supreme Court of Wisconsin

January 25, 2019

Steadfast Insurance Company, Plaintiff-Respondent,
v.
Greenwich Insurance Company, Defendant-Appellant-Petitioner.

          Submitted on Briefs: oral argument: October 29, 2018

         REVIEW OF DECISION OF THE COURT OF APPEALS Reported at 380 Wis.2d 184, 908 N.W.2d 502');">908 N.W.2d 502 PDC No: 2018 WI.App. 11

          Circuit Court Milwaukee County L.C. No. 2013CV1685, Glenn H. Yamahiro Judge

          For the defendant-appellant-petitioner, there were briefs filed by Pamela J. Tillman, Esq., Michael J. Cohen, Esq., and Meissner Tierney Fisher & Nichols S.C., Milwaukee; with whom on the briefs were Thomas G. Drennan, Esq., and Dinsmore & Shohl LLP, Chicago, Illinois. There was an oral argument by Michael J. Cohen.

          For the plaintiff-respondent, there was a brief filed by Monte E. Weiss, Charles W. Kramer, and Weiss Law Office, S.C., Mequon. There was an oral argument by Monte Weiss.

          PATIENCE DRAKE ROGGENSACK, C.J.

         1 We review a decision of the court of appeals[1] affirming the circuit court's[2] grant of summary judgment to Steadfast Insurance Company (Steadfast) . Summary judgment granted Steadfast the right to recover from Greenwich Insurance Company (Greenwich) based on Steadfast's and Greenwich's relationships with Milwaukee Metropolitan Sewerage District (MMSD), who was sued for alleged negligent inspection, maintenance, repair, and operation of Milwaukee's sewerage system.

         ¶2 MMSD tendered its defense to both Steadfast and Greenwich. Steadfast accepted the tender; Greenwich did not, claiming that its policy was excess to Steadfast's based on its "other insurance" clause. Steadfast disagreed and sued Greenwich to recover the defense costs it paid to MMSD and the attorney fees incurred in suing Greenwich to reimburse it for those defense costs.

         ¶3 First, we conclude that Greenwich, who insured the risk that United Water Services Milwaukee, LLC (United Water) would negligently perform services for MMSD, thereby causing damage, and Steadfast, who for a different period of time insured the risk that Veolia Water Milwaukee, LLC (Veolia) would negligently perform services for MMSD, thereby causing damage, were both primary and successive insurers in regard to MMSD, their common additional insured.[3]

          4 Second, we conclude that Greenwich breached its contractual duty to defend MMSD. Third, we conclude that Steadfast's contractual subrogation claim against Greenwich was timely filed as it comes within the six-year statute of limitations for contract actions.

          ¶5 Fourth, we conclude Steadfast had a contractual duty to defend MMSD that was not abrogated by Greenwich's breach of its contractual duty to defend MMSD. Therefore, we apply a pro-rata allocation of defense costs Steadfast paid to MMSD based on Steadfast's and Greenwich's respective policy limits of $30 million and $20 million. Fifth, and finally, we conclude that Steadfast is entitled to recover attorney fees from Greenwich due to Steadfast's stepping into the shoes of MMSD through contractual subrogation to force Greenwich to pay defense costs.

          ¶6 Accordingly, we affirm the decision of the court of appeals in part and reverse it in part.

         I. BACKGROUND

          ¶7 This dispute arises out of historic rains that occurred in Milwaukee in June 2008. Those heavy rains overwhelmed MMSD's sewerage system, which resulted in raw sewage backing up into more than 8, 000 homes. Lawsuits were filed against United Water, Veolia and MMSD because of sewage backups, alleging negligence in the repair, maintenance, and operation of the sewerage system both before and during the heavy rains.[4]

          ¶8 Beginning in 1998, MMSD entered into Operating Agreements with private companies to operate and maintain its sewerage system. United Water provided operational services for many years. MMSD's Operating Agreement with United Water required United Water to maintain comprehensive liability insurance, naming MMSD as an additional insured. United Water contracted with Greenwich for liability insurance with the last contract of insurance beginning July 24, 2007 and ending July 24 2008; it named MMSD as an additional insured. The Greenwich policy limits were $20 million. United Water maintains that it last provided services under an Operating Agreement with MMSD on February 29, 2008.

          ¶9 Beginning on March 1, 2008, and continuing through the June 2008 heavy rains, MMSD contracted with Veolia to operate and maintain its sewerage system. Their Operating Agreement similarly required Veolia to maintain comprehensive liability insurance, naming MMSD as an additional insured. Steadfast provided the required insurance to Veolia, with policy limits of $30 million.

          ¶10 The Greenwich policy obligated it to defend any claim against its insureds, United Water and MMSD, as well as to provide indemnification:

With respect to the insurance afforded by this Policy, the Company shall defend any CLAIM against the INSURED seeking DAMAGES to which this insurance applies, even if any of the allegations are groundless, false or fraudulent. Defense counsel may be designated by the Company or designated by the INSURED ....

          ¶11 In a similar fashion, the Steadfast policy gave Steadfast "the right and duty to assume the adjustment, defense and settlement of any 'claim' to which this insurance applies." Steadfast's policy, which insured Veolia and MMSD, also contained a subrogation clause, which stated in relevant part:

In the event of any payment under this policy, we shall be subrogated to all an "insured's" rights of recovery against any person or organization. An "insured" shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights. An "insured" shall do nothing to prejudice such rights.

          ¶12 After MMSD tendered its defense to both Steadfast and Greenwich, it opted to hire its own counsel. The lawsuits were settled without MMSD paying plaintiffs' claimed damages. Steadfast participated in MMSD's defense by reimbursing MMSD for $1.55 million in defense costs. However, when MMSD tendered its defense to Greenwich and Steadfast, there was no way of knowing that settlement would be achieved without paying something toward claimed damages.

          ¶13 Greenwich, who had refused MMSD's tender, had sent MMSD a letter explaining that "we fail to see how [United Water] could be liable for causing a sewage backup in June 2008 when its services for MMSD terminated in February 2008." Greenwich further argued that "there is ample evidence that when [United Water] turned over operational responsibilities to Veolia and MMSD in February 2008, all systems, equipment, and machinery at the subject sewage overflow diversion chamber were functioning according to operational protocols."

          ¶14 One year later, MMSD renewed its tender to Greenwich. It informed Greenwich that United Water had been named as a defendant in lawsuits that resulted from the 2008 sewage backups. Greenwich responded five months later, acknowledging that "there may be a potential for coverage" and requesting "additional information in order to determine Greenwich's current coverage obligations." After receiving the requested information, including confirmation that MMSD had satisfied its $250, 000 self-insured retention amount, Greenwich continued to refuse the tender of MMSD's defense. Instead, it unilaterally determined based on its "other insurance" clause that its policy was excess to Steadfast's $30 million liability limit.

          ¶15 After the conclusion of the lawsuits that resulted from the sewage backups, Steadfast sued Greenwich to recover the $1.55 million in defense costs that it had paid to MMSD. The circuit court granted summary judgment in favor of Steadfast, awarding it the entire amount Steadfast paid MMSD, as well as $325, 000 in attorney fees that Steadfast incurred bringing this lawsuit.

          ¶16 The court of appeals affirmed. Steadfast Ins. Co. v. Greenwich Ins. Co., 2018 WI.App. 11, ¶4, 380 Wis.2d 184, 908 N.W.2d 502');">908 N.W.2d 502. The court of appeals based its decision on the following conclusions:

(1) Greenwich's policy provided primary, not excess, coverage for claims against MMSD; (2) MMSD has established that it met the $250, 000 risk retention amount by incurring $594, 302.23 in defense costs;
(3) Steadfast's equitable subrogation claim is timely because the six-year statute of limitations in Wis.Stat. § 893.43 applicable to contract claims applies to Steadfast's claim, which is premised on Greenwich's breach of the duty to defend MMSD; (4) under the facts of this case, because Greenwich breached its duty to defend MMSD, Greenwich is not equitably entitled to an allocation of MMSD's defense costs; and (5) under the facts of this case, Steadfast is equitably entitled to recover attorney fees in this lawsuit.

Id. We granted Greenwich's petition for review, and now affirm in part and reverse in part.

         II. DISCUSSION

         A. Standard of Review

          ¶17 We review summary judgment decisions independently, applying the same methodology as the circuit court and the court of appeals, while benefitting from their discussions. Dufour v. Progressive Classic Ins. Co., 2016 WI 59, ¶12, 370 Wis.2d 313, 881 N.W.2d 678.

          ¶18 We also review insurance contract clauses independently of decisions of the circuit court and court of appeals, while again benefitting from their discussions. Wadzinski v. Auto-Owners Ins. Co., 2012 WI 75, ¶10, 342 Wis.2d 311, 818 N.W.2d 819. Therefore, whether a party is entitled to attorney fees based on contractual subrogation is a question of law for our independent review. Estate of Kriefall v. Sizzler USA, 2012 WI 70, ¶16, 342 Wis.2d 29, 816 N.W.2d 853.

          ¶19 Determining which statute of limitations applies to contract issues involves a question of law that we also decide independently. Zastrow v. Journal Commc'ns, Inc., 2006 WI 72, ¶12, 291 Wis.2d 426, 718 N.W.2d 51. And finally, the proper measure of damages for an insurer's breach of a contractual duty to defend is likewise a question of law that we review independently. Newhouse v. Citizens Sec. Mut. Ins. Co., 176 Wis.2d 824, 837, 501 N.W.2d 1 (1993).

         B. Contract Interpretation

          ¶20 The issues in this case all stem from Greenwich's insurance contract with United Water and Steadfast's insurance contract with Veolia. Each policy listed MMSD as an additional insured. Therefore, the following general principles of contract interpretation guide our initial discussion. Wadzinski, 342 Wis.2d 311, ¶11.

          ¶21 Our general task in contract interpretation is to determine and carry out the parties' intentions. Preisler v. Gen. Cas. Ins. Co., 2014 WI 135, ¶18, 360 Wis.2d 129, 857 N.W.2d 136. The parties' intentions are presumed to be expressed in the language of the contract. Wadzinski, 342 Wis.2d 311, ¶11. Where the language of a contract is unambiguous and the parties' intentions can be ascertained from the face of the contract, we give effect to the words they employed. Estate of Kriefall, 342 Wis.2d 29, 521. However, if the policy terms are ambiguous, we construe the policy from the perspective of a reasonable insured. Wadzinski, 342 Wis.2d 311, ¶11.

         1. Risk and Loss

¶22 Greenwich and Steadfast issued comprehensive liability insurance policies, which their Operating Agreements with MMSD required. As a general matter, liability policies insure risks that are dependent on various circumstances that cause insureds to obtain insurance coverage. Couch on Insurance § 101:3 (3rd ed. 1999) . Stated otherwise, risk is the "type of liability the insurer agreed to provide coverage for under the terms of the policy." Id. There is a causal connection between risk and loss.[5] Id. That is, when the insured-for risk occurs, the insurer indemnifies for the resulting-loss (damages) in accord with the policy provisions. Id. Insurance policy clauses "may come into conflict" when two or more policies cover the same risk for the same period of time. Id., § 219:2.

          ¶23 In the context presented herein, Greenwich's policy insured the risk that United Water's conduct in managing the Milwaukee sewerage system during the policy period would be negligent, thereby causing damage to a third party.[6] As an "additional insured" under the Greenwich policy, MMSD's risk was that it would be responsible in money damages for a third party's damage caused by United Water's negligence.

          ¶24 Steadfast's policy insured the risk that Veolia would negligently manage the Milwaukee sewerage system during the policy period, causing damage to a third party.[7] As an "additional insured" of Steadfast, MMSD's risk was that it would be responsible in money damages for a third party's damage caused by Veolia's negligence. The plain language of both the Greenwich policy and the Steadfast policy obligated insurers to indemnify and defend their named insureds and MMSD against claims of damage caused by the negligence of their named insureds. To clarify further, while United Water was not providing services at the time of the flooding, it was alleged that its services during an earlier time when it was managing the MMSD system were a cause of the resulting damage.

          ¶25 "Other insurance" clauses may be raised in disputes between two insurance companies about whose policy is primary and therefore must pay first and whose policy is excess, also referred to as successive insurance, and pays subsequent to the primary payment. Plastics Eng'g Co. v. Liberty Mut. Ins. Co., 2009 WI 13, ¶48, 315 Wis.2d 556, 759 N.W.2d 613');">759 N.W.2d 613. To explain further, policies may be concurrent, i.e., cover the same time period and risk, or successive, i.e., cover different time periods and risks. However, "other insurance" clauses do not apply unless two policies are concurrent. Id. "The accepted meaning of 'other insurance' provisions does not include application to successive insurance policies." Id. If the "other insurance" clauses cannot be used to establish a primary and an excess insurer, then "neither insurer is given priority over the other and each contributes toward the loss pro rata." Oelhafen v. Tower Ins. Co., 171 Wis.2d 532, 536-37, 492 N.W.2d 321 (Ct. App. 1992) (citing Schoenecker v. Haines, 88 Wis.2d 665, 672, 277 N.W.2d 782 (1979)).

          ¶26 As we have explained, concurrent insurance is required before "other insurance" clauses are triggered. Two insurance policies cannot be concurrent unless they insured "the same risk, and the same interest, for the benefit of the same person, during the same period." Plastics Eng'g, 315 Wis.2d 556, ¶48 (quoting Douglas R. Richmond, Issues and Problems in "Other Insurance," Multiple Insurance, and Self-Insurance, 22 Pepp. L. Rev. 1373, 1376-82 (1995)).

          ¶ 27 The Greenwich and Steadfast policies were primary with regard to each company's respective insurance of United Water and Veolia. The policies were primary and successive in regard to insuring MMSD's risk of damage because each policy relied on the negligence of a different insured, whose alleged negligence occurred during a different period of time, i.e., while that primary insured was maintaining the sewerage system. Stated otherwise, Greenwich would owe MMSD only if the negligence of United Water caused damages for which MMSD was held responsible and Steadfast would owe MMSD only if the negligence of Veolia caused damages for which MMSD was held responsible. Accordingly, we do not interpret the terms of the "other insurance" clauses because under the undisputed facts as set out above, Greenwich's "other insurance" clause provided successive insurance to MMSD.

          ¶28 In addition, the duty to defend is broader than the duty to indemnify. Acuity v. Bagadia, 2008 WI 62, ¶52, 310 Wis.2d 197, 750 N.W.2d 817 (explaining that the duty to defend arises from allegations in the complaint, while the duty to indemnify is dependent on fully developed facts). Furthermore, when an insurance policy provides potential coverage for one claim alleged in a lawsuit, the insurer must defend the entire suit, even when the claims are groundless. Fireman's Fund Ins. Co. of Wis, v. Bradley Corp., 2003 WI 33, ¶21, 261 Wis.2d 4, 660 N.W.2d 666. Accordingly, two insurance policies that insure separate and distinct risks may nevertheless become implicated in the same lawsuit, causing the two insurers to defend the same loss in the form of their mutual insured's alleged liability for damages and defense costs.

         2. Greenwich Breached Its Duty To Defend

          ¶29 We have established a procedure for an insurance company to follow when it disputes coverage. Wis. Pharmacal Co., LLC v. Neb. Cultures of Cal., Inc., 2016 WI 14, ¶18, 367 Wis.2d 221, 876 N.W.2d 72 (explaining that an insurer may avoid breaching its duty to defend by requesting a bifurcated trial on the issues of coverage and liability, with liability determined after coverage has been established); Newhouse, 176 Wis.2d at 836 (stating that the insurer should request a bifurcated trial on the issues of coverage and liability when coverage is disputed) . An insurer who fails to follow this procedure risks breaching its duty to defend if its coverage determination was wrong. Id. at 837.

          ¶30 Alternatively, an insurer may choose to reject the insured's tender of defense based on its determination that the claim is not covered under the policy. However, it does so at its own risk. Marks v. Houston Cas. Co., 2016 WI 53, ¶41 n.21, 369 Wis.2d 547, 881 N.W.2d 309. If the insurer is wrong about its potential coverage obligation, it "is guilty of a breach of contract which renders it liable to the insured for all damages that naturally flow from the breach." Id. (citing Newhouse, 176 Wis.2d at 837) . Finally, as mentioned earlier, an insurer has a duty to defend the entire lawsuit "when an insurance policy provides [potential] coverage for even one claim made in a lawsuit." Fireman's Fund Ins. Co., 261 Wis.2d 4, ¶21.

          ¶31 In this case, Greenwich did not seek a judicial determination of its coverage obligations, nor did it pay any amount toward MMSD's defense costs. Instead, it chose to rely on its own unilateral determination that its policy was excess to Steadfast's. As we have explained, Greenwich's unilateral determination was erroneous; Greenwich's policy provided potential coverage for a claim made in lawsuits based on sewage backups. Therefore, Greenwich breached its duty to defend, and it is responsible for all damages that naturally flow from the breach. Marks, 369 Wis.2d 547, ¶41 n.21.

         3. Steadfast's Contractual Subrogation Claim

          ¶32 Steadfast asserts that it has a contractual subrogation claim against Greenwich due to its payment of $1.55 million in defense costs and Greenwich's failure to provide a defense. Greenwich asserts that if Steadfast has a claim, it sounds in contribution, not subrogation. Greenwich further asserts that the time has passed in which to bring a contribution claim.

          ¶33 Subrogation is the "substitution of one party for another whose debt the party pays, entitling the paying party to rights, remedies, or securities that would otherwise belong to the debtor." Dufour, 370 Wis.2d 313, ¶15. "The doctrine of subrogation enables an insurer that has paid an insured's loss ... to recoup that payment from the party responsible for the loss." Id. (citations omitted). The insurer "steps into the shoes" of its insured and pursues the legal rights or claims to ...


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