Patrick Nolan, Brandon Gutschow and Joe Poehlmann

1. 2016 Wisconsin
Insurance Law Update
Quarles & Brady LLP
February 8, 2017
Joint Meeting of the local Milwaukee, Wisconsin Chapters of
RIMS, the Risk Management Society
- and -
CPCU, Chartered Property Casualty Underwriters Society

2. 2016 Wisconsin
Insurance Law Update
Quarles & Brady LLP
• Patrick Nolan
• Brandon Gutschow
• Joe Poehlmann
2

3. Overview of Key Insurance Decisions
• Duty to Defend
• Integrated Products or Systems
• Other Applicable Insurance
• Sexual Assault
• Volitional Acts
• First-Party Property Coverage
• Life Insurance
• Advertising Injury Coverage
• Major Decisions from Other Jurisdictions
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4. Duty to Defend
• Marks v. Houston Casualty Co., 2016 WI 53, 369 Wis.2d 547,
881 N.W.2d 309.
• Water Well Solutions Service Group, Inc. v. Consolidated Ins.
Co., 2016 WI 54, 369 Wis.2d 607, 881 N.W.2d 285.
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5. Duty to Defend
• Marks v. Houston Casualty Co., 2016 WI 53, 369 Wis.2d 547, 881 N.W.2d 309.
• Background:
• Trusts having ownership interests in various entities caused the trustee to serve on the boards
of these entities. When some of these entities were sued, the trustee was included as a
defendant due to his board positions. The trustee sought insurance coverage under his E&O
policy related to this capacity as a trustee. The policy contained an exclusion barring coverage
for "liability arising out of the Insured's services and/or capacity as . . . an officer, director,
partner trustee or employee of a business enterprise not named in the Declarations . . ."
• The insured argued, among other things, that the exclusion did not apply because exclusions
should not be considered for purposes of determining whether the duty to defend was
triggered
• Issue: In assessing the duty to defend, should courts consider policy exclusions?
• Outcome: Yes; the duty to defend is to be assessed by comparing the complaint to the
entire policy, not just the coverage grant. This rule is no different when the insurer
refuses to defend (as opposed to defending under a reservation of rights while
contesting defense and coverage) and to the extent prior case law suggested otherwise,
it was overruled.
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6. Duty to Defend
• Water Well Solutions Service Group, Inc. v. Consolidated Ins. Co., 2016 WI 54, 369
Wis.2d 607, 881 N.W.2d 285.
• Background:
• Insured contractor was hired to replace a pump in a municipal well. The new pump came
unthreaded and fell to the bottom of the well, allegedly because of the insured's negligent
installation.
• CGL insurer denied coverage under the Your Work and Your Product exclusions.
• The insured argued that extraneous facts existed to show that damages extended beyond the
damage to the pump, challenging the "four corners" rule that the duty to defend is based
solely on the allegations in the four corners of the complaint.
• Issue: May a party offer extrinsic evidence to trigger the duty to defend?
• Majority: No; Wisconsin remains committed to a strict four corners rule, which generally
favors policyholders and promotes more efficient duty to defend decisions
• Dissent: Yes; Wisconsin should join the national trend of recognizing an exception to the
four-corners rule where known facts offer clarity to an incomplete or ambiguous
complaint
• Going forward, policyholders should take proactive steps to get known facts that trigger
coverage into the complaint (e.g., motion for a more definite statement)
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7. Integrated Products
• Wisconsin Pharmacal Company LLC v. Nebraska Cultures of California, Inc.
et al, 2016 WI 72, 367 Wis. 2d 221, 876 N.W.2d 72.
• Haley v. Kolbe & Kolbe Millwork Co., Inc.,
2016 WL 4487807 (W.D. Wis., August 25, 2016).
• Land O’Lakes, Inc. v. Ratajczak,
Case No. 14-C-4388 (E.D. Wis., August 24, 2016).
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8. Integrated Products
• Wisconsin Pharmacal Company LLC v. Nebraska Cultures of California, Inc. et al, 2016
WI 72, 367 Wis. 2d 221, 876 N.W.2d 72.
• Background:
• Contract between a pharmacy wholesaler (Wisconsin Pharmacal) and a drug manufacturer
(NMS) for the manufacture of a dietary supplement product required a necessary ingredient
for the supplement from another party (Jeneil). After manufacturing and selling the finished
supplement, it was soon discovered that the supplement contained the wrong ingredient from
Jeneil, could not be used, and had to be destroyed.
• Pharmacal sued Nebraska Cultures, Jeneil, and their respective general liability insurers,
seeking coverage under standard commercial general liability policies; the policies covered
“property damage” caused by an “occurrence,” (defined as an “accident”).
• Issue: Does the inclusion of a defective component of an integrated product represent
property damage caused by an occurrence?
• Appellate court holding: No; there was no property damage caused by an occurrence.
Applying the economic loss doctrine, if a component renders an integrated system or
product useless, a claimant cannot recover in tort for such damages. Tort damages
under the doctrine are only allowed for damage a defective component causes to
"other" property.
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9. Integrated Products
• Wisconsin Pharmacal Company LLC v. Nebraska Cultures of California, Inc. et al, 2016
WI 72, 367 Wis. 2d 221, 876 N.W.2d 72.
Jeneil
Nebraska
Cultures
Wisconsin
Pharmacal
9

10. Integrated Products
• Haley v. Kolbe & Kolbe Millwork Co., Inc., 2016 WL 4487807 (W.D. Wis., August 25,
2016).
• Background:
• Allegedly defective replacement windows that leaked and caused water damage to adjacent
building walls. Class action suit brought against window manufacturer challenging quality of
windows.
• Issue: Are the windows to be considered part of an integrated system (the house) and,
therefore, outside of coverage under Pharmacal?
• Holding: Yes; the windows were part of the integrated system and therefore damage to
other surrounding property was not property damage within the meaning of the general
liability policy.
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11. Integrated Products
• Land O’Lakes, Inc. v. Ratajczak, Case No. 14-C-4388 (E.D. Wis., August 24, 2016).
• Background:
• Purchasers of whey protein product sue producers, who in turn sues supplier of one
component claimed to be adulterated.
• Issue: Was there property damage when an adulterated ingredient mixed into the
integrated whey protein product, rendering it less useful or effective?
• Holding: No; under Phramacal, no property damage occurred when one part of the
integrated system caused the entire system to be less effective.
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12. Impact of Other Applicable Insurance
• Burgraff v. Menard, Inc.,
2016 WI 11, 367 Wis.2d 50, 875 N.W.2d 596.
• Dufour v. Progressive Classic Ins. Co.,
2016 WI 69, 370 Wis.2d 313, 881 N.W.2d 678.
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13. Other Insurance
• Burgraff v. Menard, Inc., 2016 WI 11, 367 Wis.2d 50, 875 N.W.2d 596.
• Background:
• Customer injured while Menard’s lumber yard employee was using forklift to load materials
into customer’s trailer.
• Auto insurer for plaintiff insured had to defend and indemnify defendant for plaintiff's own
personal injury claims while defendant's employee was loading lumber into truck.
• Defendant had its own liability insurance, but preferred not to pursue that coverage because it
was subject to a $500,000 self-insured retention (SIR).
• Plaintiff's insurance provided that if "other applicable liability insurance" existed, covering a
loss, its share of any liability would be limited to the proportion its policy limits bore to the
total limits of liability under all applicable insurance.
Customer’s coverage Menard’s coverage
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14. • Burgraff v. Menard, Inc., 2016 WI 11, 367 Wis.2d 50, 875 N.W.2d 596.
• Issues: how will the two carriers with coverage pay for the loss?
• 1 - Does a defendant's self-insured retention qualify as "other applicable liability
insurance" under the other insurance clause in a policy, such that the insurer was
only required to pay a pro rata portion of defendant's liability?
• 2 - Was one insurer’s duty to defend extinguished after settling its proportionate
share?
• Appellate court holding:
• 1 - Yes; a self-insured retention clause constitutes other applicable insurance when
it is applicable to the covered loss.
• 2 – No; the duty existed up until the policy limits were reached.
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15. Other Insurance (Subrogation)
• Dufour v. Progressive Classic Ins. Co., 2016 WI 69, 370 Wis.2d 313, 881 N.W.2d 678.
• Background:
• Insured sustained injuries in a motorcycle accident; damages totaled over $200K.
Tortfeasor's liability limit was $100K and insured's underinsured policy limit was
$100K, both of which were paid.
• Plaintiff's insurer received subrogated funds from the tortfeasor's insurer for
property damage it paid plaintiff under a separate policy its insured held. Plaintiff
demanded his insurer pay him these funds, and the insurer refused.
• Issue: Is a plaintiff's insurer entitled to retain subrogated funds received from a
tortfeasor's insurer after all policy limits have been hit, despite its insured not
being fully compensated for all damages?
• Appellate court holding: Yes; under the made whole doctrine, the equities
favored the insurer to allow it to retain these subrogated funds.
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16. Sexual Assault
• J.K.J. v. Polk County Sheriff’s Dept., Case No. 15-CV-428-WMC, 2016 WL 6956662
(W.D. Wis. Nov. 28, 2016)
• Doe v. County of Milwaukee, Case No. 14-CV-200-JPS, 2016 WL 7017375 (E.D. Wis.
Dec. 1, 2016)
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17. Sexual Assault
• J.K.J. v. Polk County Sheriff’s Dept., Case No. 15-CV-428-WMC, 2016 WL 6956662
(W.D. Wis. Nov. 28, 2016)
• Correctional officer at the Polk County Jail engaged in sexual contact with two
detainees, who filed lawsuit
• Correctional officer sought coverage under liability policy issued to Polk
County
• Policy provided coverage for personal injury caused by sexual molestation, but
only covered employees “while acting within the scope of their employment
or authority.”
• Court agreed with insurer that correctional officer was acting outside to scope
of his employment and therefore not entitled to coverage
• Courts should focus not on whether an employee’s position (i.e., one of
authority over inmates) facilitated sexual contact, but whether the employee
in some way intended for his/her conduct to serve the employer.
• Here, correctional officer admitted that sexual contact was purely for his own
gratification, which doomed coverage argument under the Court’s analysis.
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18. Sexual Assault
• Doe v. County of Milwaukee, Case No. 14-CV-200-JPS, 2016 WL 7017375
(E.D. Wis. Dec. 1, 2016)
• Same facts, same outcome (no coverage) but very different analysis
• Wisconsin law too conflicting to say for certain that the sexual contact
was outside scope of employment (i.e., jury could reasonably infer that
sexual contact stemmed from and made possible by employment)
• Nevertheless, no coverage for correctional officer because of “penal
statute exclusion” that eliminates coverage for personal injury arising
out of the intentional or knowing violation of a penal statute (e.g., Wis.
Stat. § 940.225, which bans sexual contact with detainees at
correctional facilities)
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19. Volitional Acts
• Jones v. Baecker, Case No. 15AP235, 2016 WL 7471577 (Wis. Ct. App. Dec. 28, 2016)
• Oddsen v. Henry, 2016 WI App 30, 368 Wis.2d 318, 878 N.W.2d 720
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20. Volitional Acts
• Jones v. Baecker, Case No. 15AP235, 2016 WL 7471577 (Wis. Ct. App. Dec.
28, 2016)
• Background:
• Landlord's comments to prospective tenants suggested he would not rent to them because of
their family status (i.e., too many people for the space) and/or their race, both of which could
violate state/federal law
• Landlord tendered prospective tenants' lawsuit to general liability insurer
• Insurer denied coverage because the policy only covers “occurrences” (i.e., accidents), and the
lawsuit alleged intentional discrimination by the landlord
• Trial court ordered insurer to defend because even if lawsuit alleged intentional discrimination,
it did not allege that the damage from that conduct (i.e., prospective tenants’ emotional
distress) was intentional
• Court of Appeals overruled the trial court, stating “The key takeaway is this:
volitional acts that produce a desired event are not 'accidents,' even if they
produce unexpected and unforeseen results and even if they are precipitated
by one or more negligent acts.”
• Dangerous precedent?
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21. Volitional Acts
• Oddsen v. Henry, 2016 WI App 30, 368 Wis.2d 318, 878 N.W.2d 720.
• Background:
• Action brought against young adult (Henry) for her alleged failure to render aid to friend
experiencing an overdose on drugs; overdose took place at Henry's mother's condominium
• Competing versions of events as to when Henry could/should have offered assistance
• Insurer of condominium (State Farm) intervened and sought declaration of no coverage. Trial
court agreed with State Farm that Henry's failure to assist was volitional and therefore not a
covered occurrence
• Issue: Did Henry lose coverage by acting intentionally/volitionally in failing to render aid?
• Competing versions of events required trial to decide
• Dissent: The lawsuit against Henry isn't even viable because Oddsen caused his own
death
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22. First-Party Property Coverage
• Fontana Builders, Inc. v. Assurance Co. of America,
2016 WI 52, 369 Wis. 2d 495, 882 N.W.2d 398.
• St. Croix Trading v. Regent Ins. Co.,
2016 WI App 49, 370 Wis.2d 248, 882 N.W.2d 487.
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23. Scope of Builder's Risk Insurance
• Fontana Builders, Inc. v. Assurance Co. of America, 2016 WI 52, 369 Wis. 2d 495, 882
N.W.2d 398.
• Background:
• Fire destroys nearly-completed residential property; homeowner was occupying home, but
construction continued up to date of fire.
• The issuer of the builder’s risk policy, argued its coverage had terminated prior to the fire when
the occupant purchased a homeowner’s policy from another insurer. Assurance relied on a
provision of the builder’s risk policy stating coverage terminates “when permanent property
insurance applies.”
• Issue: Did coverage under the builder's risk policy terminate when the
occupant/prospective purchaser obtained coverage for the property under a
homeowner's policy?
• Appellate court holding: No; coverage persists under a builder’s risk policy for damage to
a home under construction, even though the home was also covered by a homeowner’s
policy issued to the occupant/prospective purchaser.
• Reasonable to expect that coverage would persist under the builder's risk policy while
construction continued.
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24. Property Damage Appraisal
• St. Croix Trading v. Regent Ins. Co., 2016 WI App 49, 370 Wis.2d 248, 882 N.W.2d
487.
• Background:
• Appraisal panel contracted to assess the value of property damage caused by extreme winds.
• Panel performed this task, and then proceeded to determine which losses were covered by the
applicable insurance policy.
• Issue: Did the appraisal panel exceed its contractually assigned task, rendering the
coverage determination invalid?
• Appellate court holding: Yes; the appraisal panel was contractually limited to
determining value of damaged property, such that it was not permitted to make
coverage determinations.
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25. Life Insurance - Validity of Stranger-Originated Policies
• Sun Life Assurance Co. of Canada v. U.S. Bank Nat'l Ass'n, 839 F.3d 654 (7th Cir. 2016)
(panel: Bauer, Posner, and Esterbrook) (appealed from W.D. Wis., J. Conley presiding)
• Background:
• U.S. Bank purchased a bundle of life insurance policies on behalf of another investor.
• One of the policies was issued by Sun Life Assurance Company of Canada on the life of wealthy
octogenarian Charles Margolin with a value of $6 million.
• Sun Life received $2.5 million in premiums before Margolin died.
• U.S. Bank sought to enforce the policy.
• Sun Life refused to pay until it "investigated the policy's validity"
• U.S. Bank sued for breach of contract and bad faith
• Issue:
• Under common law, it is illegal to own a life insurance unless the policyholder has an insurable
interest in the life (e.g. spouses, children, etc.). Equals a pure gambling contract.
• Wis. Stat. § 895.055 voids illegal gambling contracts
• Wis. Stat. § 631.07(4) allows courts to order the proceeds of life insurance policies to someone
other than the policy designee who is equitably entitled to it
• Can U.S. Bank enforce an illegal gambling contract?
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26. Life Insurance - Validity of Stranger-Originated Policies
• Sun Life Assurance Co. of Canada v. U.S. Bank Nat'l Ass'n, 839 F.3d 654 (7th Cir. 2016)
(panel: Bauer, Posner, and Esterbrook) (appealed from W.D. Wis., J. Conley presiding)
• Answer:
• Wis. Stat. § 631.07(4) controls; Sun Life must pay on policy
• Rejected argument that § 631.07(4) legalized gambling
• Wis. Const., Article IV, section 24 forbids the legislature from legalizing gambling
• Wis. Stat. § 631.07(4) did not legalize insuring the life of a stranger; it only changed the
remedy
• Denial was in bad faith because Sun Life had no reasonable basis for delaying payment
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27. No Coverage for Forged USDA Assignment
Guarantee Agreements
• Citizens Bank Holding Inc. v. Atlantic Specialty Insurance Co., Case No, 15-cv-00782
(E.D. Wis. Nov. 16, 2016) (Magistrate Judge Jones presiding) (appeal pending)
• Background
• Citizens Bank purchased $15 million in USDA guaranteed loans as part of a loan pool
administered by Pennant Management Inc.
• Program designed to encourage lending to rural businesses by creating a secondary
market
• Approved lender makes loan, USDA issues guarantee, lender sells guaranteed portion of
loan to an investor
• Guaranteed portion of loan is assigned by a USDA Assignment Guarantee Agreement
• The USDA Assignment Guarantee Agreements were forged
• Massive scheme perpetrated by First Farmers Financial LLC lost banks nationwide over
$175 million
• Atlantic Specialty Insurance Company issued Bankers Blanket Bond, which covered:
• losses resulting directly from forgeries on Letters of Credit (Insuring Agreement D)
• losses resulting directly from good faith reliance on corporate or personal guarantees or
Certificated Securities (Insuring Agreement E)
• Atlantic denied coverage
27

28. No Coverage for Forged USDA Assignment
Guarantee Agreements
• Citizens Bank Holding Inc. v. Atlantic Specialty Insurance Co., Case No, 15-cv-00782
(E.D. Wis. Nov. 16, 2016) (Magistrate Judge Jones presiding)
• Issues:
• Are the USDA Assignment Guarantee Agreements Letters of Credit, corporate or personal
Guarantees, or Certificated Securities?
• Did the loss result directly from the forgery?
• Did Citizens follow sound business practices?
• Answer:
• The forged USDA Assignment Guarantee Agreements are guarantees and cannot qualify under
another definition
• They are not corporate or personal guarantees
• No coverage
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29. Copyright Infringement
• Design Basics LLC v. Fox Cities Construction Corp, 2016 WL 5485185 (E.D. Wis. Feb. 9,
2016)
• Advertising injury coverage for copyright infringement claims.
• Insured home builder, allegedly infringed on the various copyrighted home
drawings. Copyright owner sent a cease and desist letter to the insured; later sued
to recover the profits that the insured had obtained from building homes with the
copyrighted materials.
• On coverage, three policy provisions were addressed: (1) trigger of advertising
injury coverage; (2) a “prior publication” exclusion; and (3) the “known loss”
doctrine.
• Whether claimed injuries of lost profits from homes built using the copyrighted
materials directly related to the advertising (insured had to take the additional step
of building the infringing homes after advertising them). Court: at least a portion of
the injuries were caused by the advertising, thus triggering coverage.
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30. Copyright Infringement
• Design Basics LLC v. Fox Cities Construction Corp, 2016 WL 5485185 (E.D. Wis. Feb. 9,
2016)
• Court applied an exclusion and known loss doctrine to bar coverage:
• "Prior publication” exclusion: No coverage for copyrighted materials first published
before policy period.
• Copyrighted materials were first advertised and published years before the policy
period but were also published during the policy period.
• Later publication did not circumvent exclusion, reasoning that to hold otherwise
would render the exclusion illusory.
• “Known loss” doctrine precluded coverage.
• Court: Insured knew about potential liability/loss before purchasing the policy, in
part by receiving the copyright owner's cease and desist letter.
• Court: known loss doctrine applies in cases where there is knowledge of actual and
potential liability. An insured’s knowledge of potential liability connotes knowledge
of a risk to be insured against and is sufficient to warrant application of the known
loss doctrine.
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31. Other Jurisdictions
• Cincinnati Ins. Co. v. H.D. Smith, LLC, 829 F.3d 771 (7th Cir. 2016) (from C.D. Ill.)
• Cincinnati required to defend drug manufacturers in suit by State of West Virginia for
facilitating painkiller addiction epidemic by over-distributing prescription drugs.
• Seventh Circuit found the suit to be for damages due to bodily injury as defined by the
policy, not just for economic damages to the State, which had been the basis for the
district court's dismissal.
• In re: Viking Pump Inc. and Warren Pumps LLC Insurance Appeals, 27 N.Y.3d 244 (Ct.
App. N.Y. 2016).
• Held that under New York law, the existence of non-cumulation and prior insurance
provisions in excess insurance policies mandated use of all sums allocation method, and
insureds were required to vertically exhaust all triggered primary and umbrella excess
layers before tapping into any of the additional excess policies.
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32. Other Jurisdictions
• Sebo v. American Home Assurance Co., SC14-897, 2016 WL 7013859 (Fla. 2016).
• Florida court of appeals adopted a proximate cause analysis for finding an occurrence
where a loss is caused by a combination of covered and excluded events, such that the
primary cause of a loss must be covered for the loss to be covered.
• This reversed the state's doctrine that when there are multiple causes of loss and at
least one is covered, the entire loss is covered (concurrent causation).
• Travelers Indem. Co. v. Portal Healthcare Solutions LLC, 644 Fed. Appx. 245 (4th Cir.
2016) (unpublished).
• Held that posting confidential medical records online potentially constitutes a
"publication" of confidential customer information where the information was publicly
available but not disseminated, thus coverage for electronic publication of private
material applied.
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33. © 2017 Quarles & Brady LLP -
This document provides
information of a general
nature. None of the
information contained herein
is intended as legal advice or
opinion relative to specific
matters, facts, situations or
issues. Additional facts and
information or future
developments may affect the
subjects addressed in this
document. You should consult
with a lawyer about your
particular circumstances
before acting on any of this
information because it may
not be applicable to you or
your situation.
Questions?
Patrick Nolan
(414) 277-5465
Patrick.Nolan@quarles.com
Brandon Gutschow
(414) 277-5745
Brandon.gutschow@quarles.com
Joe Poehlmann
(414) 277-5763
Joseph.poehlmann@quarles.com