Wisconsin Supreme Court Holds That Insurer’s Breach of Duty to Defend Does Not Expose It to Pay Another Insurer’s Pro Rata Share of Defense Costs

(September 2019) - In Steadfast Ins. Co. v. Greenwich Ins. Co., 2019 WI 6, the Wisconsin Supreme Court reduced the recovery obtained by an insurer that defended its insured from another insurer that breached its duty to defend – requiring the plaintiff insurer to pay its pro rata share of the risk.

The case involved the $1,550,000 defense of the Milwaukee Metropolitan Sewerage District (MMSD), as to claims of property damage caused when raw sewage flooded more than 8,000 in June 2008. The policies each provided coverage to MMSD as an additional insured as to the negligence of each policy’s named insured.

The Wisconsin Supreme Court held that both insurers were “primary and successive insurers in regard to MMSD, their common additional insured.” Id. at ¶¶ 3, 25-28. The court explained that the coverage was considered “successive” because each policy covered a different risk. The defending policy covered the risk that its named insured, United Water, was negligent, thus exposing MMSD to money damages. In contrast, the non-defending insurer, bore the risk that its named insured, Veolia, was negligent, thus exposing MMSD to money damages for losses caused by Veolia. Id. at ¶¶ 23-24

Absent a concurrent risk, the other insurance clauses were inapplicable. Id. at ¶¶ 25-26. Yet, both policies actually owed a defense of the whole claim. Id. at ¶ 28. When Greenwich denied, it did so at its own risk, and breached its duty of defense. Id. at ¶¶ 29-30, citing Marks v. Houston Cas. Co., 2016 WI 53, at ¶41.

The court also held that the defending insurer could not obtain a “windfall” putting it in a better position than its insured. MMSD was only repaid its actual litigation costs. Steadfast owed a part of those litigation costs and was not entitled to fully avoid its obligations. The court then apportioned the obligation to pay the defense costs between the two insurers based on their relative policy limits or pro rata shares, while affirming an award of Steadfast’s attorneys’ fees in the coverage case, including the appeal. Id. at ¶52.