By Joe Forward, Legal Writer, State Bar of Wisconsin

Aug. 30, 2010 – In Maxwell v. Community Insurance Corp., 2009AP2176 (Aug. 25, 2010), the appeals court reversed a circuit court ruling that insurance policy coverage clauses cannot be defeated by waiver or estoppel even when the insurer does not reserve rights to deny coverage.

That is, the court held that “when an insurer forgoes a reservation of rights and exclusively controls the defense of a lawsuit, obtaining a result to the detriment and prejudice of the insured, it is barred from denying coverage.”

In 2007, Dawn Maxwell sued the Hartford Union High School District (District) for breach of an employment contract after the district terminated her position for budgetary reasons. The District carried a public entity liability policy with Community Insurance Corporation (CIC).

Aegis, which administered the policy, provided a defense using a lawyer of their choosing. The circuit court found that the District was liable under the contract. After the court’s ruling but before assessment of $103,824 in damages, Aegis’s litigation manager told the District that the CIC policy specifically excluded coverage for amounts due under employment contracts.

The District filed a third-party complaint against CIC, seeking a declaratory judgment that CIC’s representation of the District barred it from asserting coverage defenses.

In determining that CIC’s conduct “could not create coverage where none would otherwise exist,” the circuit court relied on the Wisconsin Supreme Court ruling in Shannon v. Shannon, 150 Wis. 2d 434, 442 N.W.2d 25 (1989). Shannon establishes the general rule that “coverage cannot be created by the doctrines of estoppel or waiver.”

But the appeals court held that where an insurer “agrees to defend the insured without a reservation of rights, retain[s] counsel, and actively defends the insured through to a final judgment detrimental to the insured,” the insurer cannot later decline to provide coverage.

The court relied primarily on the reasoning of Pouwels v. Cheese Makers Mutual Casualty Co., 255 Wis. 101, 37 N.W.2d 869 (1949), and Koehring Company v. American Mutual Liability Insurance Co., 564 F. Supp. 303 (E.D. Wis. 1983), both cases in which the insured exercised dominion and control over litigation then rejected coverage.

Insurers that wish to contest coverage, the court noted, must reserve that right by agreement, before “assuming dominion and control over a lawsuit … with knowledge of facts indicating noncoverage.” The court remanded the case for proceedings consistent with its opinion