In Marks v. Houston Casualty Company, the Wisconsin Supreme Court reached a decision upholding the application of a business enterprise exclusion in a professional liability policy. Importantly, the decision clarifies Wisconsin law such that an insurer may rely upon policy exclusions in denying coverage outright.
The coverage dispute arose out of six lawsuits filed against David Marks for his involvement in various enterprises across different industries. The lawsuits generally alleged Marks, as an officer or director of numerous entities (including Titan Global Holdings, Inc.), committed several actionable wrongs, i.e., fraud, breach of contract, negligent misrepresentation, and breach of fiduciary duty. Houston Casualty Company issued a professional liability to Marks for his services in performance of his duties as the trustee of two trusts, Irrevocably Children’s Trust and Irrevocable Children’ Trust No. 2.
In July 2009, Marks provided notice of the six underlying lawsuits to Houston General. In October 2009, Marks filed suit against Houston General, a breach of Houston General’s duty to defend. In November 2009, Houston General informed Marks it had no obligations under the policy to defend or indemnify him since the underlying lawsuits did not arise out of Marks’ services for the two trusts and since the business enterprise exclusion barred coverage. Notably, in January 2010, in one of the underlying actions, certain counterclaims were filed that mentioned Marks’ relationship with the covered trusts. None of the other underlying pleadings otherwise referenced Marks’ relationship with the trusts. Upon cross-motions for summary judgment, the circuit court ruled in favor of Houston General. That decision was later affirmed by the Court of Appeals.
On appeal before the Wisconsin Supreme Court, the relevant questions were whether the business enterprise exclusion barred coverage and whether an insurer could rely on exclusions to unilaterally disclaim coverage. As for the business enterprise exclusion, the Supreme Court determined the exclusion unambiguously precluded coverage for Marks’ activities as an officer or director of any business enterprise not named in the declarations. As a result, since the only entities mentioned on the declarations page were the two trusts, there could be no coverage. Indeed, none of the pleadings, except certain counterclaims in one underlying action, mentioned the two trusts. Instead, Marks was alleged to be the officer or director of numerous other entities that allegedly committed wrongdoings. While the Supreme Court did acknowledge that the two trusts owned a controlling interest in Titan, that mere causal relationship was not enough to invalidate the application of the business enterprise exclusion.
The Supreme Court also clarified a portion of Wisconsin law that was confounding and unfair to insurers. As a last ditch effort to secure coverage, Marks pointed to Wisconsin precedent that an insurer which unilaterally disclaims coverage would be estopped from relying in coverage litigation on policy exclusions or limiting language to refute an alleged breach of the duty to defend. After reviewing the cited precedent, the Supreme Court realized that certain appellate courts had been committing a major error in applying the offending line of cases. The earlier precedent stated an insurer cannot rely on exclusions if it had breached the duty to defend. That proposition was then misread to apply the estoppel doctrine in situations where the duty to defend had not been breached. The Supreme Court characterized that rule as nonsensical. As a result, the Supreme Court overruled the unsound precedent and announced exclusions may be properly considered when an insurer outright disclaims coverage.
Insurers issuing policies in Wisconsin can now breathe a sigh of relief since this decision clarified an aspect of Wisconsin insurance law that appeared to not only be patently unfair but unsound in practice.