Supreme Court of Wisconsin: Insurer breached duty to defend and lost contribution rights by ending defense after settling partial claim within policy limits

The Supreme Court of Wisconsin recently addressed the consequences of an insurer partially settling the underlying plaintiff’s claim for less than its full limit of liability and withdrawing its defense of the insured. The insured had general liability coverage with a $500,000 self-insured retention (“SIR”) and was also entitled to coverage through the plaintiff’s auto policy issued by Millers First Insurance Company (“MFIC”), which had a liability limit of $100,000 and stated that the duty to defend “ends when our limit of liability for this coverage has been exhausted.” The plaintiff and insured did not settle but the plaintiff settled with MFIC for $40,000 and agreed to discharge one-sixth of the insured’s ultimate liability. In the trial court, MFIC was granted summary judgment that the duty to defend terminated and the liability action subsequently resulted in a jury verdict of nearly $345,000 against the insured. On appeal, the insured argued that MFIC had a continuing duty to defend because it settled for less than its limit of liability. The Supreme Court agreed and found that MFIC’s settlement without payment of the full policy limit did not extinguish the defense obligation. The Court also found that MFIC could not rely on the trial court ruling that the defense terminated, noting “[w]hen an insurer relies on a lower court ruling that it has no duty to defend, it takes the risk that the ruling will be reversed on appeal.” According to the Court, MFIC should have requested that the issues of coverage and liability be bifurcated and moved to stay any proceedings on liability until the coverage issue was resolved. On the issue of damages, the Court held that MFIC must pay the amount of costs and attorney fees incurred by the insured after MFIC withdrew the defense and that the breach of the duty to defend precluded application of equitable contribution. The court’s opinion also addresses whether an SIR is “other insurance.” A copy of the court’s opinion in Burgraff v. Menard, Inc., 2016 WI 11 (Feb. 24, 2016) can be found here.