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Vol. 10 - Issue 1

January 11, 2021


Choinsky v. Employers Insurance Co. (Wisconsin Supreme Court)

Resolving Coverage Disputes Before Litigating The Underlying Action 


It is quite a common refrain from courts: if the question of coverage is disputed, a party should file a declaratory judgment action.  But that can often-times be easier said than done.  For various reasons, courts may put up roadblocks to achieving that -- especially when the underlying action is on-going. 

For example, courts may conclude that the coverage issue is not ripe, since it remains to be seen if the insured will be found liable.  Or, if the insurer is not providing a defense, a court may not be favorably disposed to requiring the insured to defend itself in both the underlying action as well as the coverage action.  Sometimes the coverage action is scuttled because there are questions about the same facts being determined in two forums.  And, even when a declaratory judgment action can proceed, it may not be resolved in time to get the answers needed to address coverage in the underlying action.  In general, when a coverage issue cannot be resolved before the underlying action, an insurer may find itself being required to respond to a settlement demand within limits, but not know – despite its efforts -- if coverage is owed for it.  This can be a significant challenge for insurers.

In Choinsky v. Employers Insurance Co., No. 2018AP116 (Wis. Sup. Ct. Feb. 13, 2020), the Wisconsin Supreme Court offered a solution to this vexing issue.  It is likely not without some challenges.  And insureds may find reasons why it is an unfavorable solution.  [I’ve often noted that insureds want to know what’s covered, until an insurer makes an effort to find out.]  But even if not perfect, the method set out by Wisconsin’s big cheese court is at least a defined solution to a problem that could use a few.  With many states lacking a method for resolving this problem, Choinsky has the potential to be influential on other judges nationally.       
At issue in Choinsky was coverage for Germantown School District, for a class action by retired employees, challenging the school district’s decision to discontinue group long-term care insurance for current employees, which caused the retired employees to lose their long-term care insurance.

The school district tendered the suit to its insurer, Employers Insurance Company of Wausau.  Employers denied coverage for a defense on the basis that the suit alleged deliberate acts and the policies only covered the insured for negligent acts.

Employers asked the school district whether it agreed with this coverage determination and would withdraw its tender.  If not, Employers stated that it would file a motion in the underlying case to obtain a coverage determination.  The school district would not withdraw the tender.  As promised, Employers filed a motion to intervene in the suit and requested that the court (1) bifurcate the liability and coverage issues and (2) stay the liability lawsuit until coverage could be resolved.

Three weeks later the court held a hearing on the motion.  However, it was not until three months later that the court issued a decision – granting Employers’s motion to intervene and bifurcate, but denying the motion to stay the liability proceedings.     

Here’s where it gets a little complex procedurally.  A week later the insurer filed a separate coverage action seeking a determination that it had no duty to defend or indemnify the school district.  The insurer filed a motion for summary judgment in the coverage case.  It also advised the school district that, because the motion to stay the liability case was denied, the insurer would defend the school district in that action and pay its defense costs retroactive to the date of tender. 

The insurer could not get the coverage issue resolved on summary judgment and the coverage action went to a jury trial.  The jury concluded that the school district decision makers acted negligently.  Based on that, the court concluded that the insurer had a duty to defend.  The school district filed a motion, after the verdict, seeking attorney’s fees.  The insurer appealed. The appeals court dismissed the appeal because the trial court had not yet determined if the insurer owed any additional attorney’s fees. 

Meanwhile, the underlying action was still going on.  That also went to a jury trial and the jury found for the school district. 

Back to attorney’s fees.  The court in the coverage action held that “because the Insurer followed a judicially preferred approach to the coverage dispute, it did not breach its duty to defend; therefore, the School District was not entitled to recover any attorney fees it expended in establishing coverage.”  The school district appealed and the court of appeals affirmed.  The school district sought review by the supreme court and here we are.
The Wisconsin Supreme Court affirmed.  In doing so, it concluded that the insurer did not breach the duty to defend. This has much to do with the fact that the insurer was not (or will not be) saddled with defense costs to both defend the underling action and a coverage action. 

The supreme court noted that when insurers and insureds do not agree whether a defense is owed, the insurer has four options.  If it follows any one, it is not at risk of breaching its duty to defend.  The four options are as follows: (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; and (4) File a motion with the circuit court requesting a bifurcated trial on coverage and liability and a stay of the proceedings on liability until coverage is determined.

When it comes to the fourth option, which is what was employed in Choinsky, if the circuit court stays the liability proceedings, the insurer need not defend, but the insured also does not incur attorney fees litigating liability until a coverage determination is made by the circuit court.

The problem in Choinsky was that the court in the underlying action granted the insurer’s right to intervene to address coverage, but denied the stay motion.  This resulted in the insured needing to defend itself for a period of time on both liability and coverage.

The Wisconsin Supreme Court offered this solution: “We remedy that problem by clarifying the bifurcation/stay procedure :if a circuit court denies bifurcation or a stay of the liability case, in order to protect itself from being found in breach of its duty to defend, the insurer must defend its insured under a reservation of rights so that the insured does not have to pay to defend itself on liability and coverage at the same time.  Additionally, the insurer must reimburse its insured for reasonable attorney fees expended on a liability defense, retroactive to the date of tender.”

As I said, I’m sure people can find fault with the method set out in Choinsky.  But given the significant problem of needing to resolve coverage issues before underlying litigation, it is at least one for courts to consider.


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