Avoiding a Claim of Breach of Duty to Defend in a Coverage Dispute

The duty to defend arises when an insurer is served with a complaint that alleges facts that would constitute a covered claim. However, when an insured tenders a claim to the insurer, the insured and the insurer do not always agree as to whether a complaint alleges covered claims. Where the insurer disputes coverage, the insurer has several judicially preferred options available including: (1) defend under a reservation of rights (2) defend under a reservation of rights but seek a declaratory judgment on coverage (3) enter into a nonwaiver agreement under which the insurer defends the insured but the insured acknowledges that the insurer has the right to contest coverage, or (4) file a motion with the circuit court to bifurcate trial on coverage and liability and stay the proceedings on liability until coverage is determined.

With respect to the first three options, the insurer elects to defend the insured under a reservation of rights. In the event an insurer elects to proceed under the fourth option, a circuit court faced with a motion to bifurcate trial on coverage and liability can either grant the motion to bifurcate or deny such motion.

Potential Risk of Breach

Where the motion to bifurcate is granted, the circuit court stays liability proceedings and thus, the insurer is not required to defend the insured pending resolution of the coverage issue. However if a circuit court denies bifurcation or a stay of the liability case, and the insurer refuses to provide a defense on the merits before coverage is determined, the insurer is exposed to risk of breaching its duty to defend where coverage is later established.

In Choinsky v. Employers Ins. Co. of Wausau, 2020 WI 13, 390 Wis. 2d 209, 938 N.W.2d 548, the Supreme Court of Wisconsin addressed the fourth option when it was presented with the following issue: Whether an insurer breaches its duty to defend when it denies a tendered claim and then follows judicially preferred procedures for resolving a coverage dispute.

In Choinsky, the insured tendered a claim against its insurer, Employers. Employers initially denied coverage, yet filed a timely motion to intervene in the liability action to bifurcate liability and coverage issues. The merits litigation and coverage litigation concurrently ensued. Employers Insurance provided a full defense for its insured pending determination of the coverage action. The Supreme Court held that Employers’ actions did not constitute a breach of its duty to defend because it followed one of the Supreme Court’s judicially approved methods to obtain a judicial determination on coverage.

Protecting the Insured

The Supreme Court stated its goal is to protect an insured from having to simultaneously pay to defend itself in a liability trial while litigating coverage against it insurer. Thus, the Supreme Court strongly encouraged circuit courts to promptly decide motions to stay and for bifurcation, and grant a stay of merits litigation whenever appropriate and possible. Given the Supreme Court’s stated goal of protecting an insured from having to pay to defend itself in merits and coverage litigation, an insurer seeking a determination on the issue of coverage should pay for  the insured’s merits litigation from the date of tender to avoid a claim of breach of duty to defend. For if it is determined that the insurer breached a duty to defend in the merits litigation, the insurer will then become liable to pay for the insured’s attorney fees in defending the coverage litigation.

The Importance of Insurer Actions

A secondary issue facing the Supreme Court was whether the four corners rule of contract interpretation applies to a determination of a breach of the duty to defend. The Supreme Court held that the four-corners rule does not apply to the determination of a breach of duty to defend because breach is determined based on the insurer’s actions after receipt of tender.

This article is a publication of MWH Law Group LLP and is intended to provide general information regarding legal issues and developments to our clients and other friends. It should not be construed as legal advice or a legal opinion on any specific facts or situations. For further information on your own situation, we encourage you to contact the author of the article or any other member of the firm.

© MWH Law Group LLP 2021. All rights reserved.

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Vincent J. Vigil
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150 N. Michigan Ave., Suite 2800, Chicago, IL 60601
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