Wisconsin Federal District Court Chides Insurers for Inaction, Deems Insurers Estopped from Asserting Their Right To Defend

Posted by

In Haley v. Kolbe & Kolbe Millwork Co., Inc., No. 14-cv-99-bbc, 2015 U.S. Dist. LEXIS 42584 (W.D. Wis. Apr. 1, 2015) the U.S. District Court for the Western District of Wisconsin granted summary judgment in favor of the insured, Kolbe & Kolbe Millwork Co. (Kolbe), holding that Fireman’s Fund Insurance Company and United States Fire Insurance Company (collectively the “insurers”) were estopped from having the right to select counsel to represent Kolbe in a class action lawsuit alleging the sale of defective windows.

The dispute regarding the right to choose counsel arose from Kolbe’s decision to hire an attorney from Foley & Lardner LLP in response to the underlying lawsuit filed against Kolbe on February 13, 2014. Kolbe tendered its defense and forwarded the complaint to the insurers on February 14, 2014. During a February 24, 2014 call, the insurers stated that they did not object to the attorney hired by Kolbe. However, the insurers retained coverage counsel to investigate the claim on March 3, 2014. Kolbe then invited the insurers to respond to its selection of counsel, but the insurers did not respond for three-and-a-half months.

In June 2014, the insurers finally sent Kolbe a letter stating that it could choose from two law firms to undertake its defense. Kolbe demurred because, in part, its counsel from Foley & Lardner had already, among other tasks, conducted interviews, reviewed numerous documents, retained an expert, inspected the plaintiffs’ homes, answered the complaint, issued discovery to the plaintiff, and began preparing discovery responses. In August 2014, the insurers retained one of the two previously identified firms to defend the insured. Kolbe, however, rejected that overture and decided to stick with the Foley & Lardner attorney it initially hired. Kolbe and the insurers subsequently filed cross-motions for summary judgment on this issue.

While the district court recognized that insurers generally have the right to choose counsel for their insureds, even when their insureds are being defended under a reservation of rights, the district court held that these particular insurers were estopped from doing so due to their inaction. The court stressed that it took four months for the insurers to inform Kolbe that they rejected Foley & Lardner as counsel. Additionally, the court cited to numerous decisions from other jurisdictions that have applied estoppel to similar situations.

The insurers argued that the requirements of estoppel were not met in this case. The district court disagreed, stating that estoppel applies when a party’s inaction induces reliance by another party and prejudices the relying party, which it asserted had occurred here. The district court reasoned that Kolbe was prejudiced by the insurers’ inaction since forcing a change of the attorney who had already invested significant time in the case could jeopardize the defense and cause significant delays without knowing that the court would grant extensions to allow new counsel to familiarize itself with the case. Additionally, the court viewed the insurers’ four month delay on behalf of the insurers unfavorably and considered the reasons for delay disingenuous. Therefore, the district court concluded that Kolbe was free to choose its own counsel.