Claim Preclusion Bars Indemnification Action, Supreme Court Rules

By Joe Forward, Legal Writer, State Bar of Wisconsin

July 23, 2012 – Several parties settled federal claims based on a 2006 explosion that killed two people in Door County. Recently, the Wisconsin Supreme Court ruled that claim preclusion bars an insurance company from seeking indemnification for damages paid in the settlement.

After one company installed a propane gas pipeline to the Cedar Grove Resort in Door County, the Wisconsin Public Service Corporation (WPSC), which provides electricity to Wisconsin residents, engaged New Berlin-based Arby Construction Inc. to install underground electrical lines to the resort. During excavation, Arby struck the unmarked gas pipeline. The resulting leak caused a massive explosion, killing two people and injuring several others.

The victims and the estates of those killed brought a tort suit in federal court, naming Arby Construction and WPSC as defendants. The suit also named WPSC’s insurer, Associated Electric & Gas Insurance Services Limited (AEGIS) as a defendant. Ultimately, the case settled.

AEGIS (and WPSC) filed a state action against Arby Construction for indemnification of damages paid to settle the federal claims. The circuit court dismissed AEGIS’s claim based on claim preclusion. Specifically, the circuit court ruled that the federal dismissal order from the U.S. District Court for the Eastern District of Wisconsin disposed of AEGIS’s indemnification claim.

The court of appeals affirmed, concluding that AEGIS asserted Arby’s duty to indemnify as an affirmative defense in the federal case. The affirmative defense was the same as a cross-claim, it ruled, and the indemnification AEGIS now seeks in state court is barred by claim preclusion.

In AEGIS v. Arby Construction Inc., 2012 WI 87 (July 11, 2012), a state supreme court majority affirmed on the same grounds, concluding that AEGIS’s affirmative defense was substantively similar to a cross-claim for purposes of claim preclusion. Thus, the claims are barred.

The federal court’s dismissal order read in part, “[t]his lawsuit, together with any and all claims set forth in the pleadings … is dismissed on the merits, with prejudice.” The order expressly dismissed WPSC’s indemnification claim “without prejudice,” but not AEGIS’s claim.

“Because, like the court of appeals, we determine that the substance of the ‘affirmative defense’ in AEGIS’s answers was a cross-claim against Arby, we determine that the dismissal with prejudice and on the merits … has claim preclusive effect,” Justice David Prosser wrote.

The majority (five justices) rejected AEGIS’s argument that it did not assert a “claim” for indemnification. That is, AEGIS argued that an affirmative defense is different, and the elements required for barring claims under claim preclusion – identity of claims and parties that are the same in a previous action – were not met. But the majority disagreed.

“If we were to give claim preclusive effect only to claims that were formally-perfect in prior litigation, we would be re-injecting a focus on formalism into modern civil procedure that has been soundly rejected and is at odds with the entire tenor of the modern law,” Prosser wrote.

In a concurrence/dissent, Chief Justice Shirley Abrahamson (joined by Justice Ann Walsh Bradley) agreed that parties can’t relitigate the merits of a claim. But she disagreed that claim preclusion applies if the parties’ “intent and understandings” allowed AEGIS’s state claim.

“[A]t this stage in the present case, I am unable to determine from the record before the court whether AEGIS is, in fact, attempting to re-litigate or rekindle its claims, or if the parties instead left the claim to be resolved in a subsequent action,” the chief justice wrote.

In a footnote, Chief Justice Abrahamson clarified that “the present case affects only cross-claims and other claims that are permissive, as opposed to compulsory.”