Feb. 26, 2016 – In a tangled case, the Wisconsin Supreme Court has ruled that a settlement did not extinguish an auto insurer’s duty to defend hardware store chain owner Menard Inc. in a lawsuit commenced against Menard by an injured customer.

In Burgraff v. Menard Inc., 2016 WI 11 (Feb. 24, 2016), four justices (two did not participate) agreed that Millers First Insurance Company breached its duty to defend Menard when it withdrew its defense before the policy limit was exhausted.

A customer, Kenneth Burgraff, sued Menard after he was injured at the store. A Menard employee was loading materials onto his trailer with a forklift when the injury occurred.

Millers First was Burgraff’s auto insurer. The auto policy said that First Millers would pay up to $100,000 for bodily injuries that an “insured” was liable to pay. Menard saw itself as an “insured” under Burgraff’s policy, and tendered its defense to Millers First.

This isn’t the first time Menard Inc. (Menard) has tendered its defense to the auto insurer of a customer who sued Menard after being injured at Menard.

In a previous case decided by the state supreme court, Menard won the argument that its employee was a “permissive driver” of the customer’s truck while loading materials onto it with a forklift. That’s probably why Millers First conceded the employee was a “permissive driver,” and it had a duty to defend Menards in Burgraff’s action.

The Policies

Under a commercial liability insurance policy, which covered liability in excess of other insurance, Menard had a “self-insured retention endorsement,” meaning Menard had to pay $500,000 in damages and defense costs before the excess policy kicked in.

The Miller First policy had an “other insurance” clause. It said Miller First would pay its share of a loss – “the proportion that our limit of liability bears to the total of all applicable limits” – when there was “other applicable liability insurance.”

On Millers First’s motion for partial summary judgment, the circuit court ruled that Menard’s self-insured retention endorsement was considered “other insurance.”

So Millers First’s share of any verdict or settlement would be one-sixth of the total $600,000 limit of the two policies, when combined together. Then Millers First reached a settlement agreement with Burgraff for $40,000, fully discharging Millers First and one-sixth of any liability that Menards might owe Burgraff in his lawsuit against Menard.

After the settlement, Millers First filed a motion for summary judgment, claiming it no longer had a duty to defend Menard. It said it fully satisfied its one-sixth share.

Menard appealed, arguing that the self-insured retention endorsement was not considered “other insurance” under the Millers First policy and Millers First had a duty to defend, since the settlement was for less than the $100,000 policy limit.

The appeals court ruled that the self-insured retention endorsement was “other insurance,” but that Millers First had a duty to continue defending Menard.

Supreme Court Affirms

The supreme court affirmed the court of appeals. First, it said the self-insurance retention was “other insurance” under the Millers First Policy. It noted that Menard paid a lower premium to retain the risk of the first $500,000 of liability coverage.

“In addition, Menard’s CNA insurance policy explicitly states that its excess coverage with CNA attaches only after Menard’s self-insured retention has been exhausted,” wrote Judge Ann Walsh Bradley. “Thus, Menard understood that it had an obligation as a primary insurer up to the limits of its $500,000 self-insured retention.”

The court also ruled that Millers First breached its duty to defend when it pulled the defense, rejecting the claim that the $40,000 settlement extinguished the duty.

“Although Millers First’s $40,000 payment may represent its maximum potential for Burgraff’s claim, the policy language does not limit the duty to defend based on maximum potential liability,” wrote Justice A.W. Bradley in the majority opinion, noting Millers First had a duty to defend “until it pays its full $100,000 policy limits.”

The court remanded the case to determine damages, noting that Millers First “must pay damages necessary to put the insured in the same position he would have been in had the insurance company fulfilled the insurance contract.” There was no allegation that Millers First acted in bad faith, which would allow Menard to seek punitive damages.

In order to make Menard whole, the court said Millers First must pay costs and attorney’s fees incurred after the breach, rejecting any claim it must pay the verdict.

Millers First argued that defense costs should be prorated, but Justice A.W. Bradley noted that the policy contained no prorate clause relating to defense costs.

A.W. Bradley, in the majority opinion, also concluded that there should be no equitable contribution of defense costs, contrary to the dissenting opinion, because equitable contribution does not apply when there has been a breach of the duty to defend.

Concurrence/Dissent

Chief Justice Patience Roggensack, joined by Justice Annette Ziegler, agreed with the lead opinion’s conclusion that Millers First had a duty to keep defending Menard and breached it. She also agreed that the Menard’s retention policy was “other insurance.”

But she said “Wisconsin has applied equitable contribution to other shared obligations and should apply it to defense costs between two primary insurers, Millers First and Menard.” She would have remanded for an equitable allocation to be determined.