Wisconsin Top Court Limits “Knowing Violation” Exclusion By Looking Beyond Facts Alleged in Complaint

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In a decision that could expand the scope of the duty to defend, the Wisconsin Supreme Court recently held that a “knowing violation of the rights of another” exclusion did not apply even though the facts alleged suggested that it should. The court looked beyond the four corners of the complaint, which alleged willful and intentional conduct, and held that the insurer owed a duty to defend because some causes of action asserted in the complaint could potentially be satisfied by non-intentional conduct. 

In West Bend Mut. Ins. Co. v. Ixthus Medical Supply, Inc., an insurer brought a declaratory judgment action to determine that it had no duty to defend or indemnify a medical supply company in a lawsuit related to the insured’s sale of blood glucose test strips to a customer. The insured’s customer alleged that the insured willfully and fraudulently misrepresented that the strips were intended for use in the United States and that the strips contained the labeling and numbering required for reimbursement from Medicare, Medicaid, and private health insurance. The insured’s customer incurred losses when it learned that the strips were intended for international markets and lacked the proper labeling and numbering for reimbursement. 

The trial court in the declaratory judgment action held that coverage for “personal and advertising injury liability” was excluded by the applicable commercial general liability policy’s “knowing violation of the rights of another” exclusion. The Wisconsin Court of Appeals reversed, holding that the exclusion did not apply and that the insured owed a duty to defend. In affirming the court of appeal’s decision, the Wisconsin Supreme Court held that the exclusion did not apply because several of the causes of action, including trademark dilution under the Lanham Act and under New York General Business Law Section 360-1, could be proven without a showing that the insured acted with the knowledge that its actions “would violate the rights of another and would inflict ‘personal and advertising injury.’” The court ruled that despite the complaint generally asserting that the insured acted wrongfully and with knowledge that it was defrauding the customer, it was possible that a factfinder could determine that some of the causes of action could be proven without establishing that the insured knowingly violated the customer’s rights. Therefore, the court held a duty to defend was triggered.

This ruling is significant because the Wisconsin Supreme Court indicated that the key consideration when evaluating whether an exclusion applies is determining what elements are necessary to prove the cause of action asserted against the insured, not the facts actually alleged in the complaint. This decision restricts an insurer’s ability to rely upon exclusions that involve evaluating the intent of an insured’s acts to disclaim coverage, such as the “knowing violation of the rights of another” exclusion, when causes of action are asserted that could be proven with both intentional and unintentional conduct. Insurers should be aware of this decision’s implications on the duty to defend analysis under Wisconsin law. Furthermore, insurers must consider other states’ law on this issue and whether other courts may be influenced by the Wisconsin Supreme Court’s decision to look beyond the facts alleged in the four corners of the complaint and consider other facts that might form the basis for liability when determining the applicability of policy exclusions.