By org jforward wisbar Joe Forward, Legal Writer, State Bar of Wisconsin
June 29, 2010 – In a 21-year-old case with questions of first impression, the Wisconsin Supreme Court recently held (4-3) that an excess insurer has a duty to defend the insured where the excess policy’s “follow form” provision creates a duty to defend.
In Johnson Controls Inc. v. London Market, 2010 WI 52 (June 24, 2010), the supreme court settled a long-running dispute concerning insurance company London Market’s obligation to defend and indemnify Johnson Controls for environmental clean-up costs.
London Market argued that it is “contrary to the role of an excess insurer and the purpose of excess insurance to provide a duty to defend.” Even if the duty arose, London Market argued, “it was conditioned upon exhaustion of the underlying insurer’s policy limits.”
However, the supreme court disagreed. The court recognized that London Market’s policy was silent on the duty to defend, but imposed the duty based on a “follow form” provision.
London Market issued an umbrella excess commercial general liability (CGL) policy to Johnson Controls for the three-year period 1974-76. The excess policy was the top layer of coverage that included primary and umbrella policies with other insurers.
In the mid-1980s, Johnson Controls was identified as a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), a federal law that allows the Environmental Protection Agency (EPA) to order PRPs to pay for environmental clean-up costs and seek reimbursement from actual polluters later.
Johnson Control’s insurers, including London Market, refused to defend or indemnify costs, arguing that CGL policies did not extend to a PRP’s environmental remediation costs under CERCLA. The circuit court agreed, following City of Edgerton v. General Casualty Co. of Wisconsin, 184 Wis. 2d 750, 517 N.W.2d 463 (1996). Johnson Controls appealed. The appeals court confirmed, stating that it was obligated to follow Edgerton.
However, in 2003, the supreme court reviewed the case and overturned Edgerton, holding that PRP remediation costs are considered damages covered under CGL policies, “provided other policy exclusions do not apply.” See Johnson Controls v. Employers Ins. of Wausau (Johnson Controls III), 264 Wis. 2d 60, 665 N.W.2d 257 (2003). The court also concluded that a PRP letter triggers an insurance company’s duty to defend.
The supreme court remanded the case to the circuit court to determine if specific exclusions in the policies precluded coverage or a duty to defend. Johnson Controls settled with other insurers, including Travelers Insurance, the insurer underlying London Market’s policy.
In 2007, London Market moved for partial summary judgment, arguing that its policy was an indemnity-only excess umbrella insurance policy that contained no promise of defense. That is, the policy expressly imposed an obligation to indemnify but was silent on a duty to defend.
But the Milwaukee County Circuit Court concluded that London Market’s follow form provision incorporated the duty to defend from the underlying Travelers Insurance policy. It also held that the duty to defend was not “conditioned on exhaustion” of the underlying policy.
London Market appealed. The appeals court certified two issues to the supreme court, explaining that “both issues are matters of first impression in Wisconsin and both would have broad implications for the business community and the insurance industry.” Five excess insurers involved in the case intervened.
Is there a duty to defend?
The first question posed to the supreme court was whether a follow form provision in the London Market policy imposed a duty to defend.
The follow form provision stated that London Market’s policy was “subject to the same terms, definitions, exclusions and conditions” as the underlying Travelers Insurance policy, “except as otherwise provided.”
The supreme court – in an opinion written by Justice Ann Walsh Bradley – determined that the follow form provision in the London Market policy imposed a duty to defend because the policy “did not expressly disclaim the duty to defend” imposed by the underlying policy.
Due to the nature of the follow form provision, “London Market cannot rely on the absence of a provision as ‘otherwise providing’ that there would be no duty to defend,” the court wrote. The court also concluded that extrinsic evidence was not helpful in the determination.
When is the duty to defend triggered?
London Market argued that an excess carrier’s duty to defend is not triggered until an underlying insurer’s “liability” is exhausted. In other words, an underlying insurer must defend until its liability limits are exhausted as a matter of law, the London Market argued.
But the supreme court rejected the argument that primary policies must always be exhausted to trigger an excess insurer’s duty to defend. Despite a general rule that a primary insurer has the duty to defend, the insurance policy language controls, the court explained.
A provision within the Travelers Insurance policy – which the London Market policy follows unless otherwise provided – determines that if a primary insurer refuses to defend, Travelers Insurance will step in to do so. Thus, London Market follows this provision, the court explained, unless otherwise provided in the London Market policy.
A “liability provision” within the London Market policy expressly stated that “liability” does not attach until underlying insurers pay the full amount of their liability. As the supreme court explained, “it is unclear whether the term ‘liability’ includes the duty to defend.”
The court held that “liability” as used within the context of the London Market policy refers to indemnification only, not a duty to defend, which is a separate duty.
Thus, the London Market policy does not expressly require an underlying insurer to exhaust liability limits in order to trigger its duty to defend, the court found.
The court affirmed the circuit court and remanded for further proceedings.
Justice Annette Kingsland Ziegler dissented, arguing that “the majority undermines the plain language of the London Market policy, which promises only indemnification.” Justices Patience Drake Roggensack and Michael J. Gableman joined the dissent.
In addition, the dissent explained that “even if one were to assume, arguendo, that the London Market policy did incorporate a duty to defend from an underlying policy, such a duty could not arise until all primary policies were exhausted.”
Christopher Johnson of Beck, Chaet, Bamberger & Polsky S.C., Milwaukee, Patrick Walsh of Hinkhouse Williams Walsh LLP, Chicago, and Susan Tyndall of CMT Legal Group Ltd., Waukesha, represented London Market.
William Cannon, Mark Thomsen, Allan Foeckler, and Brett Eckstein of Cannon & Dunphy, S.C., Brookfield, represented Johnson Controls.