Recent Wisconsin Case Highlights the Necessity of Bifurcating Coverage and Liability Questions for Wisconsin Insurers
A Milwaukee County Circuit Court’s recent $39 million bad faith ruling should send insurance litigators a clear message: resist the road less-traveled. When coverage is contested in Wisconsin, the preferred procedure for an insurer is to defend the insured under a reservation of rights, request bifurcation, and move to stay the liability proceedings until coverage questions are resolved.1 In Wosinski v. Advance Cast Stone Co., the insurer failed to request bifurcation and a coverage determination prior to trial. The Circuit Court responded unkindly to such deviation. In a post-trial oral ruling, the Circuit Court strapped the insurer with the entire $39 million judgment – roughly $29 million beyond its policy limits.2
The Wosinski plaintiffs had filed a personal injury and wrongful death action against Advance Cast Stone (“ACS”), after the plaintiffs were injured by a concrete panel manufactured and installed by ACS. At the time of the accident, ACS was insured by Liberty Insurance Co. (“Liberty”). The plaintiffs alleged 1) ACS negligently manufactured and installed the panel; and 2) ACS intentionally concealed or misrepresented a defect in the concrete slab that fell. By virtue of Wisconsin’s statute of repose, the only way the plaintiffs could have recovered from ACS was by proving concealment and misrepresentation, and those acts were likely excluded under the Liberty policies.
Liberty employed counsel to defend ACS under a reservation of rights. ACS pointed to Liberty’s failure to seek declaratory judgment, despite moving to enlarge the time to do so, as evidence that Liberty did not otherwise honor its duty to defend. According to Liberty, ACS’s counsel directly contacted Liberty’s counsel to request that Liberty wait until after ACS’s summary judgment motion was considered to seek declaratory judgment. As Liberty explained, ACS’s request – and Liberty’s acquiesce to that request – were eminently reasonable. In order for the policy exclusions to apply, Liberty’s coverage motion would have necessarily involved assertions of fact tending to prove that ACS intentionally misrepresented defects in the concrete panel. Liberty claimed a coverage motion so heavily predicated on ACS’s intentional acts therefore would have “hamper[ed] ACS’s chances of obtaining summary judgment on the merits,” and its decision to delay such a motion was in good faith.3 The Circuit Court determined that a material fact existed as to whether ACS concealed or intentionally misrepresented the defective condition of the panel, and ultimately denied summary judgment. As Liberty has contended, based on the summary judgment ruling, Liberty made a reasonable strategic decision against filing coverage and bifurcation motions, because under the alleged facts, coverage and liability issues were inextricably linked.
On the eve of trial, the plaintiffs, rather than Liberty, requested bifurcation. The Circuit Court granted that request, concluding that there was “no reason for coverage counsel [for Liberty] to actively participate in the trial” if the interests of Liberty and ACS were so incongruous.4
The jury ultimately returned a verdict against ACS for over $39 million. Following the trial, the Circuit Court ruled that Liberty had breached its duty to defend and/or duty of good faith to ACS. The Court reasoned that by failing to seek bifurcation, and by intending to participate in the trial on the merits, Liberty had effectively engaged in an adversarial plan to subvert ACS’s defense. As a result of that breach, Liberty was found to have waived its right to a jury trial on coverage issues, including policy limits.5Ultimately, the Court ruled Liberty was liable for the entire $39 million-plus judgment, despite ACS maintaining only $10 million in total coverage through Liberty.
Liberty appealed the Circuit Court’s ruling, and the case is currently pending.6 In its briefing, Liberty argued that whether it could have acted more aggressively by bifurcating the litigation is beside the point; after all, “Liberty never affirmatively asserted that ACS was in fact guilty of any intentional wrongdoing.”7 Instead, Liberty simply chose to reserve its coverage defenses in the event the plaintiffs succeeded in proving such conduct. Liberty determined that its approach was therefore entirely reasonable and appropriate under the circumstances.
ACS’s appellate argument paints a different picture. ACS posited that Liberty had strategically decided to allege at trial that ACS expected or intended injury to occur, which would have triggered the applicable policy exclusions and would have exposed ACS to punitive damages. Although Liberty paid $2 million of ACS’s attorneys’ fees under a duty to defend, ACS maintained that payment alone did not satisfy Liberty’s duty. This is because, as ACS pointed out, if Liberty had been allowed to demonstrate at trial that intentional act exclusions applied, Liberty would not have paid “a single dollar of the $10 million in policy limits, essentially paying one-fifth of their exposure…If hiring counsel was the only requirement of the ‘duty to defend’, it would be called the ‘duty to hire a lawyer’ (and it is not).”8
For its part, Liberty claimed on appeal that if it had bifurcated the proceeding, “Liberty would have been forced to go on the offensive, and prove that ACS intentionally misrepresented the defects and/or deficiencies in the subject panel,” which would have “proven Plaintiffs’ case for them.”9 Stressing that bifurcation was necessary because of this potential conflict, ACS responded that “[i]f Liberty was not interested in asserting its coverage defenses at trial - since allegations of intentional harm used to prove the ‘intended or expected’ exclusion obviously negatively impact the insured in this type of case - ACS is uncertain as to what Liberty would have been doing at the merits trial.”10
Regardless of how the Court of Appeals ultimately rules, Wosinski exemplifies the considerable risks of veering from the preferred path for contesting coverage. To be sure, every coverage dispute warrants individualized assessment, and although the path is preferred, rather than compulsory, Wosinski reminds Wisconsin insurers that it remains the surest approach when contesting coverage to safeguard an insurer’s rights under its policies.