Bootstrapping upon its decision in Marks v. Houston Casualty Co., 2016 WI 53, the Wisconsin Supreme Court in Water Well Solutions Service Group Inc. v. Consolidated Insurance Co., 2016 WI 54, affirmed summary judgment in favor of the insurer. The Supreme Court concluded, based upon a four-corners analysis, that the policy’s “your product” exclusion barred coverage entirely for the underlying lawsuit. The Supreme Court further rejected the insured’s invitation to recognize an exception to the four-corners rule to allow courts to examine extrinsic evidence when an insurer bases its coverage position on an exclusion.
As background, Waukesha Water Utility contracted with Water Well Solutions Service Group Inc.’s to remove an existing pump from a well and install a new pump. After Water Well completed its work, the new pump unthreaded from a pipe column and fell nearly two thousand feet to the bottom of the well. Argonaut Insurance Company, as the subrogee insurer of Waukesha, sued Water Well, alleging negligent installation of the pump. Water Well tendered coverage to Consolidated Insurance Company pursuant to a CGL policy issued to Water Well. Consolidated denied coverage, relying, in pertinent part, on the “your product” exclusion. Water Well settled the Argonaut lawsuit and subsequently initiated this action, alleging Consolidated breached its duty to defend. The circuit court granted summary judgment in favor of Consolidated. The Court of Appeals affirmed.
On appeal, the Supreme Court began by outlining the following three-step process to be used by Wisconsin courts in analyzing an insurer’s duty to defend: (1) determine whether the policy language grants initial coverage for the allegations of the complaint, (2) consider whether any policy exclusions apply, and then (3) evaluate whether an exception to an applicable exclusion applies. The Supreme Court reasoned here that there was no coverage available for Water Well, as there was no damage alleged to have occurred to anything other than the pump provided by Water Well, i.e., Water Well’s own product. The Supreme Court specifically rejected any exception to the four-corners rule and expressly overruled Berg v. Fall, 138 Wis. 2d 115, 405 N.W.2d 701 (Ct. App. 1987), to the extent it suggests a court may look beyond the four corners of the complaint in determining an insurer’s duty to defend.
Additionally, the Supreme Court reminded insurers that if they have questions about whether they have a duty to defend their insureds against lawsuits, they have three options: (1) request a bifurcated trial on the issue of coverage and move to stay all proceedings on liability until a coverage determination is reached, (2) enter into a “nonwaiver agreement” with the insured that requires the insurer to defend the insured yet allows the insurer to contest coverage at a later time, and (3) defend the insured and simultaneously seek a declaratory judgment on coverage. The Supreme Court also cautioned insurers that if they outright decline coverage and not elect any of the three options above, they open themselves up “to a myriad of adverse consequences” if they are ultimately found to have been incorrect in their coverage determinations. Those consequences include liability for “all costs naturally flowing from the breach” of their duty to defend, which may include the amount of a judgment or settlement, costs and attorney’s fees incurred by the insured in defending against the tort lawsuit, other loss naturally resulting from the breach, and a first-party bad faith action.
Taken together, Water Well and Marks clarify a bedrock issue for liability carriers doing business in Wisconsin – what they may consider when evaluating their duty to defend. A brightline rule may seem desirable because of its predictability. But while the result in Water Well favored the insurer, the harsh nature of a strict four-corners rule generally tends to favor insureds by preventing insurers from being able to promptly resolve questions left open by the complaint, thereby ensuring more often than not that the insureds receive a defense, even though extrinsic evidence could show the application of an exclusion. In the end, both insurers and insureds should be careful what they wish for.