Wisconsin Supreme Court Holds That Estoppel Bars an Insurer from Denying Coverage After an Adverse Judgment, When the Insurer Does Not Issue a Reservation of Rights Letter and Controls the Defense

Sep 16 2010

In Maxwell v. Hartford Union High Sch. Dist., the Wisconsin Court of Appeals held that an insurer was estopped from denying coverage to its insured after the circuit court determined the insured was liable, when the insurer failed to issue a reservation of rights letter and controlled the defense of the litigation. A school district (“District”) employee had sued the District for breach of contract. The District referred the matter to its insurer, which hired a single attorney to simultaneously represent it and the District. A reservation of rights letter was never issued. The circuit court found the District liable, and subsequently the insurer both hired an attorney to represent it separately from the District and denied coverage.

The circuit court agreed that there was no coverage, and the court of appeals reversed. The court of appeals recognized the general rule—previously applied in Wisconsin and relied on by the circuit court—that an insurer’s conduct cannot create coverage based on waiver or estoppel where coverage otherwise does not exist. The general rule is based on Shannon v. Shannon, 150 Wis.2d 434, 454-55, 442 N.W.2d 25 (1989) and on Utica Mut. Ins. Co. v. Klein & Son, Inc., 157 Wis.2d 552, 560-61, 460 N.W.2d 763 (Ct. App. 1990), both of which held that coverage under an insurance policy cannot be created by waiver or estoppel. However, the court of appeals distinguished Shannon and Utica, observing that, unlike the insurer in those cases, the insurer in Maxwell (a) did not issue a reservation of rights letter, (b) defended the matter to a judgment that was adverse to its insured, and then (c) declined coverage. In circumstances similar to those in Maxwell, the Wisconsin Supreme Court concluded in Pouwels v. Cheese Makers Mut. Cas. Co., 255 Wis. 101, 37 N.W.2d 869 (1949) that the insurer had waived its right to assert there was no coverage. Similarly, the United States District Court for the Eastern District of Wisconsin concluded in Koehring Company v. American Mut. Liability Ins. Co., 564 F. Supp. 303 (E.D. Wis. 1983) that an insurer should not be permitted to avoid liability where it claims to have the exclusive right to control the defense under the guise that the policy provides coverage, and then claim there is no coverage after an adverse court ruling.

While ordinarily waiver or estoppel cannot create coverage where none otherwise exists, the court of appeals concluded, in light of Pouwels and Koehring, that when an insurer “puts the insured at risk by assuming dominion or control over a lawsuit without a reservation of rights and with knowledge of facts indicating noncoverage, and then seeks to avoid coverage after a final judgment is entered against its insured,” estoppel may bar the insurer from denying coverage.



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