Wisconsin’s Strict Exhaustion Requirement Burns Insurer

In Burgraff v. Menard, Inc., 2016 WI 11 (Wis. 2016), the Wisconsin Supreme Court affirmed a Court of Appeals decision that determined Millers First Insurance Company breached its continuing duty to defend Menard, Inc. Specifically, the issue was whether Millers First should have continued its defense of Menard even after it reached a settlement with the plaintiff, Kenneth Burgraff, for its proportionate share of the claim. This is an important decision which reiterates the strict requirements of complete exhaustion in order for an insurer’s duty to defend to be extinguished.

As background, Burgraff suffered injuries when a Menard employee using a forklift was loading materials onto Burgraff’s trailer. Burgraff subsequently brought suit against Menard for damages. Burgraff’s vehicle and trailer were insured under an automobile insurance policy with Millers First, which provided a $100,000 limit per person for bodily injury liability. The Millers First policy had an “other insurance” clause which set forth a proportionate sharing approach. Millers First agreed to defend Menard under its policy since it was a permissive user of Burgraff’s vehicle.

Menard also had an excess policy that included a self-insured retention endorsement, which stated that Menard was required to pay for damages and defense costs up to its $500,000 limit. On Millers First’s motion for partial summary judgment, the circuit court determined that Millers First’s share of any verdict or settlement would be one-sixth of the total $600,000 liability limits of the Millers First Policy and the Menard’s self-insured retention, taken together.

During mediation, Millers First settled Burgraff’s claim for $40,000 but Menard did not settle. Thereafter, Millers First moved for summary judgment against Menard on the basis that it did not have a continuing duty to defend since it satisfied its duty to pay one-sixth of any settlement or verdict. The circuit court granted the motion. After trial, the jury ultimately awarded $345,396.07 in damages.

On appeal, Menard insisted that the self-insured retention was not “other insurance” and that Millers First had a continuing duty to defend. The Court of Appeals affirmed the determination that self-insured retention was “other insurance,” but reversed the circuit court’s ruling that Millers First no longer had a duty to defend Menard. Cross-petitions were subsequently filed.

Before the Wisconsin Supreme Court, the same issues were contested. With respect to the duty to defend, Millers First argued that its limits of liability for this particular coverage was exhausted when it settled for $40,000 since that was the maximum proportional liability for Burgraff’s claims. Therefore, although the full $100,000 limit was not paid, the policy limit was effectively exhausted by the settlement payment. The Wisconsin Supreme Court disagreed, concluding that Millers First was required to provide a defense for Menard until it paid the full $100,000 limit of liability. Accordingly, Millers First was found to have breached its duty to defend when it withdraw from its defense of Burgraff.

Menard sought a review of the circuit court’s opinion that Menard’s $500,000 self-insured retention qualified as “other insurance.” After analyzing Wisconsin precedent, the court concluded that self-insured retention did constitute “other insurance. Notably, Menard’s self-insured retention acted like an insurance policy, not a deductible, since Menard was obligated to retain defense counsel.

With respect to damages in light Millers First’s breach of the duty to defend, Wisconsin law allows the aggrieved party to recover all damages naturally flowing from the breach. However, the Supreme Court determined that Millers First should not pay for the entire jury verdict because it would be a punitive measure not proper here since Millers First did not act in bad faith. Also, Menard could not show that jury verdict was a result of the breach since Menard chose its own counsel, and there was no assertion that a better result would have occurred had Millers First retained the attorney. Thus, Menard was not entitled to have Millers First pay the entire jury verdict because the verdict amount did not flow naturally from the breach. Instead of the full jury verdict, the Supreme Court determined that Millers First was required to pay damages in the amount of defense costs and attorney fees after its withdrawal. Also, contrary to the dissent’s insistence on applying the doctrine of equitable contribution, the court determined that Millers First was not entitled to a proration of its defense costs because the insurance policy did not provide for it.

This is another significant decision which reaffirms the strict requirement for exhaustion, and in turn, termination of an insurer’s duty to defend. Insurers should beware decisions such as this where only the payment of the full limit of the policy, in exchange for a release of one or more insureds, is found to satisfy the preconditions for terminating insurers’ duty to defend. Moreover, insurers should become acquainted with nuances surrounding the strict exhaustion requirement since it may be overcome by specific forms of settlement, like a Loy Release in Wisconsin, which allows a plaintiff to settle for less than the primary’s policy limits by giving the secondary or excess insurers credit for the full amount of the limits.