Court issues opinion impacting direct action against insurers, corporate officer liability

By Joe Forward, Legal Writer, State Bar of Wisconsin

July 26, 2011 – The Wisconsin Supreme Court recently overturned prior case law that interpreted Wisconsin’s direct action statute to require a liability insurance policy to be delivered or issued for delivery in the state for a party to sue an insurer directly.

In addition, the supreme court ruled in Casper v. American International South Ins. Co., 2011 WI 81 (July 19, 2011), that a corporate officer may be liable for non-intentional torts committed in the scope of his or her employment, depending on public policy considerations.

In 2003, the Casper family minivan was stopped at an intersection in Brown Deer when Mark Wearing’s truck struck it from behind going 40 miles per hour. All five passengers in the Casper minivan were injured, including the Caspers’ son, Michael, who was rendered a quadriplegic.

Wearing, co-employed at Bestway Systems Inc. (Bestway) and Transport Leasing/Contract Inc. (TLC) at the time of the accident, was under the influence of several prescription drugs when the accident occurred. The Caspers ultimately filed suit against multiple parties.

Direct action statute

TLC’s excess insurer, National Union Fire Ins. Co. of Pittsburgh (National Union), was a named defendant in the original complaint. However, National Union moved for summary judgment, arguing the claims were not permissible because the excess insurance policy covering TLC was not delivered or issued for delivery in Wisconsin as required by state statute.

Wis. Stat. section 632.24, known as the direct action statute, states that any insurance policy covering liability to others for negligence makes the insurer liable. Thus, it allows a party to sue the insurer directly when an insured is alleged to have been negligent.

But section 631.01(1) states, in pertinent part, that ch. 631 (Insurance Contract Generally) and ch. 632 (Insurance Contracts in Specific Lines) “apply to all insurance policies … delivered or issued for delivery in this state, on property ordinarily located in this state, on persons residing in this state when the policy or certificate is issued, or on business operations in this state.”

National Union argued that the direct action statute only applies if the insurance policy is delivered or issued for delivery in the state in addition to delivery or issuance on property located in the state, persons residing in the state, or on business operations in the state.

The circuit court relied on Kenison v. Wellington Ins. Co., 218 Wis. 2d 700, 582 N.W.2d 69 (Ct. App. 1998), in granting summary judgment to National Union, and the appeals court affirmed. The appeals court ruled in Kenison that section 631.01 limits the application of the direct action statute, section 632.24, to insurance policies delivered or issued for delivery in the state.

But supreme court – in opinion written by Justice David Prosser – unanimously reversed the appeals court and overruled Kenison, accepting the Caspers’ argument that the direct action statute does not require a policy to be delivered or issued for delivery in the state in order for a plaintiff to sue the allegedly negligent party’s insurer directly.

“We hold only that Wis. Stat. § 632.24 applies to any policy of insurance covering liability, irrespective of whether that policy was delivered or issued for delivery in Wisconsin, so long as the accident or injury occurs in this state,” Justice Prosser wrote.

Personal liability of a corporate officer

The Casper’s filed suit against Jeffrey Wenham, the chief operating officer for Bestway, claiming negligent supervision and hiring as well as a violation of the Federal Motor Carrier Safety Act.

Although Wenham was not involved in the hiring or supervision of Wearing, he approved the allegedly illegal tri-state trucking route Wearing took when the accident occurred.

Ultimately, the circuit court allowed just one claim to stand, pertaining to Wenham’s allegedly negligent approval of the illegal trucking route, which passed through three states, including Wisconsin, and allegedly violated trucking safety standards set by federal law.

Wenham argued that it was not foreseeable that Wearing would take powerful prescription drugs while driving, so finding him liable would be against public policy.

And even if he acted negligently, Wenham argued, a corporate officer cannot be held personally liable for negligence committed within the scope of his employment.

If personal liability for negligence is allowed, “every CEO and officer of a trucking company can now be subjected to personal liability for every vehicular accident based upon virtually any negligence theory of liability,” Wenham argued.

The supreme court unanimously declined to hold that corporate officers can never be held personally liable for negligent acts committed in the scope of employment, and noted that the business judgment rule, which allows some latitude for wrong decisions, only protects corporate officers and directors for negligent acts that impact shareholders, not third parties.

However, a supreme court majority (6-2) ruled that public policy considerations preclude liability in this case.

“[E]ven if Wenham approved the route driven by Wearing and even if such approval was negligent in light of federal safety regulations, the Caspers’ injury is simply too remote to make him personally liable as an individual,” Justice Prosser.

Justice Ann Walsh Bradley (joined by Chief Justice Shirley Abrahamson) dissented on this point, concluding that the “facts are not sufficiently developed at this stage to determine whether Wenman’s negligence was too remote from the cause of the accident to impose liability."