WisBar News: Duty to defend properly terminated upon payout of policy limits, appeals court says :

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  • Duty to defend properly terminated upon payout of policy limits, appeals court says 

    Pay-and-walk” provision discharged insurance company’s duty to defend insured defendants once insurance company decided to pay plaintiff the policy limit amount.

    Joe Forward

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    Duty to defend properly terminated upon 
payout of policy limits, appeals court saysApril 5, 2011 – An insurance policy’s “pay-and-walk” provision clearly informed the insured party that insurance company’s duty to defend terminated upon payout of policy limits, the District I Wisconsin Court of Appeals recently held.

    In Young v. Welytok, 2009AP3015 (April 5, 2011), the appeals court ruled that American Standard Insurance Company (American Standard) was properly released from a lawsuit against insured’s Daniel and Jill Welytok after paying the plaintiff a policy limit of $100,000.

    Plaintiff Leonard Young threatened a lawsuit against the Welytoks and American Standard for injuries Young sustained when his motorcycle collided with a vehicle the Welytoks’ teenage daughter was driving. The Welytoks’ insurance policy with American Standard had a bodily injury liability limit of $100,000 per person.

    Young demanded a damages amount that exceeded the policy limit. Ultimately, American Standard settled with Young for the $100,000 policy limit in exchange for a release of further liability against American Standard.

    In 2008, Young filed suit against the Welytoks for recovery of additional sums beyond the $100,000 he received from American Standard. American Standard intervened for a declaration that its $100,000 payment released it from further duty to defend the Welytoks.

    The Milwaukee Circuit Court granted summary judgment to American Standard. On appeal, the appeals court affirmed, concluding that a pay and walk provision allowed American Standard to terminate any further duty to defend the Welytoks by paying the policy limit.

    Pay and walk 

    The Welytoks, both licensed attorneys appearing pro se, argued that American Standard violated its duty to defend by paying Young the policy limit. But the appeals court concluded the Welytoks were bound by contractual language in the insurance policy.

    The appeals court – in an opinion written by Judge Patricia Curley – explained that under Novak v. American Family Mutual Ins. Co., 183 Wis. 2d 133, 515 N.W.2d 504 (Ct. App. 1994), language that discharges the insurer’s duty to defend upon offering or paying a policy’s liability limit, referred to as a pay and walk provision, is valid but must be conspicuous.

    The court concluded that the pay and walk provision in the Welytok’s policy, which was bold and capitalized, “would not confuse the reasonable person in the insured’s position.”

    The Welytok’s tried to distinguish Novak on the ground that Young’s damages were in dispute before American Standard settled with Young, and failed to properly investigate Young’s claim.

    They also argued that American Standard was expressly prohibited from factoring in litigation costs in a decision to settle, and did not have their approval to settle from the Welytoks.

    The appeals court rejected these arguments, concluding that regardless of Young’s exact damages amount, American Standard’s true motivations for settling or lack of communication about the settlement, the policy’s contractual language clearly determined the insurance company was discharged from a further duty to defend when it paid the policy limit.

    Finally, the appeals court rejected the Welytoks’ argument that certain trial court comments evinced “purport[ed] to overrule decades of jurisprudence establishing certain reasonable duties an insurance company owes its insured, including a duty of good faith.”

    The trial court stated the Welytok’s contracted with American Standard for $100,000 and American Standard had no additional duty of good faith beyond paying that amount.

    “The trial court did not purport to do away with American Standard’s duty of good faith,” Judge Curley wrote. “[T]he trial court was simply explaining that once American Standard paid Young the liability limit of the Welytoks’ policy, it no longer had a duty to defend the Wolytoks. …”

    By Joe Forward, Legal Writer, State Bar of Wisconsin