Presentation to the Wisconsin State Bar on March 22, 2019.

1. 2018 Insurance Coverage
Case Law Year in Review
2019 Insurance Law Series – Wisconsin State Bar
March 22, 2019
Jeff Davis
Pat Nolan
Alex Shortridge
Joe Poehlmann

2. Overview
•Supreme Court rulings concerning:
•When negligent supervision leads to an intentional tort
•Application of notice requirements for UIM coverage
•Number of occurrences in a forest fire that destroys
multiple structures
•Rights of a non-breaching carrier against breaching
carrier where both are obligated to defend
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3. Overview
•Court of Appeals sets up an interesting 2019, deciding a
number of issues to be reviewed by the Supreme Court:
• Whether the duty to defend in a D&O policy is triggered
where officer/shareholder is sued in capacity as shareholder
but not as an officer
• Availability of theft loss coverage under various policies
• Whether "knowing violation of rights of another" exclusion
requires proof of intent to avoid coverage
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4. Talley v. Mustafa, 2018 WI 47
• Shop owner sued for negligence in supervising or hiring an employee who assaulted a customer
• Long thought to be a covered risk in WI based on Doyle, which held that a CGL policy covered
employers against this type of claim
• The Supreme Court at least partially overruled Doyle, holding that there was no occurrence
(defined as "accident") since the assault was clearly intentional and a barebones allegation that
"an employer should have trained an employee not to intentionally punch a customer in the
face" was not covered.
• Rejected argument that shop owner's alleged negligence in supervising could supply the
needed "occurrence" element
• Court noted the complaint's failure to sufficiently plead that aspect of the claim, so
hopefully this narrows the ruling's effect
• Where does Wisconsin stand now on coverage for negligent supervision leading to an
intentional tort?
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5. Steadfast Ins. Co. v. Greenwich Ins. Co., 2019 WI 6
• Arose out of the "great flood" of 2008. Metropolitan Milwaukee
Sewage District (MMSD) MMSD faced multiple lawsuits based on
an alleged failure to properly operate and maintain a sewer
system that led to backups.
• MMSD was an additional insured under two policies issued by
Greenwich and Steadfast to two different contractors that had
operated and maintained the system at two different times.
• MMSD tendered defense to Greenwich and Steadfast. Steadfast
agreed to defend; Greenwich refused.
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6. Steadfast Ins. Co. v. Greenwich Ins. Co. (continued)
• Steadfast sued Greenwich on a subrogation theory, claiming it
stepped into MMSD’s shoes and was entitled to full reimbursement of the
defense costs.
• Greenwich argued that its "other insurance" clause made it excess over
Steadfast, so it had no coverage or defense obligation.
• Supreme Court rejected the "other insurance" argument, finding
Greenwich in breach. However, it did not award the full defense costs on
Steadfast, but instead allocated costs on a "pro rata by limits" theory.
Court also affirmed award of attorneys fees for establishing the breach,
consistent with prior case law
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7. Shugarts v. Mohr, 2018 WI 27
•Timeline:
• October 2010 - Mohr hits Shugarts’ squad car, severely injuring Shugarts
• January 2012 - Mohr’s insurer (Progressive) denies coverage, claiming that
Mohr acted intentionally
• June 2013 - Shugarts sues Mohr and Progressive; Progressive offers $10k
settlement and provides declarations page showing $50k limit
• October 2014 - Progressive offers $50k limit
• October 2014 - Shugarts notifies his insurer (Allstate) of underinsured
motorist (UIM) claim
• Was UIM notice late?
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8. Shugarts v. Mohr (continued)
•Trial court and Court of Appeals agreed with Allstate that
Shugarts forfeited coverage by not providing timely notice
•Supreme Court reversed, holding duty to give notice first
arose when Progressive tendered its limits:
• UIM section required notice of “claim,” not of “accident” or
“loss”
• Under exhaustion provision, no UIM claim existed until
Progressive tendered its limits
•Broader application?
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9. SECURA Ins. v. Lyme St. Croix Forest Co., LLC, 2018 WI 103.
•Forest fire spread from a lumber company's operations to
other properties over three days, burning 7,500 acres in
NW Wisconsin
•Lumber company had CGL policy with a $2 million
aggregate and $500,000 per occurrence limit
•Supreme Court addressed whether, under these facts, the
fire was a single occurrence or multiple occurrences.
• If the latter, then $2 million in coverage would be available for
the losses
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10. Lyme-St. Croix Forest Co. (continued)
•The Court framed the issue as whether there was a new
occurrence each time the fire crossed a property line
causing damage to new property
• Court of Appeals: each new item of property damage
constituted new occurrence
• Supreme Court reverses
• "Cause theory" applies "where a single, uninterrupted cause results
in all of the injuries or damages" there is a single occurrence.
• Focus is on "cause" and "result" and whether they are closely linked
in "time" and "space" to equal one event.
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11. Lyme-St. Croix Forest Co. (continued)
Case Name "Cause" "Effect" Time Space Number of
occurrences
Welter v.
Singer (1985)
Car-bicyclist
collision
Multiple discreet
bodily injuries
Minutes Single location Single
Plenco v.
Liberty Mutual
(2009)
Sale of
asbestos
containing
products
Multiple individual
injuries / deaths from
asbestos exposure
Over 20 years Multiple locations Multiple
Wilson Mutual
v. Falk (2014)
Manure
spreading
Contamination of
multiple water wells
5 months Multiple locations Multiple
Secura v. Lyme
St. Croix Forest
Co. (2018)
Forest fire Multiple instances of
real and personal
property damage
3 days Single (albeit large)
location
Single
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12. West Bend Mutual v. Ixthus Medical Supply, 2019 WI 19
• Abbott Labs manufactured blood glucose strips for international and
domestic markets. Only the ones for domestic markets were eligible for
Medicare reimbursement. Several of Abbott's wholesalers, including
Ixthus, allegedly sold the international ones domestically, causing Abbott
to pay fraudulent reimbursement claims. Abbott sued under New York law
on 13 theories of fraud and trademark violations.
• Ixthus sought coverage from West Bend, who denied any duty to defend
(1) because there was no "advertisement" and no causation and (2) based
on the "Knowing Violation of Rights of Another" exclusion, which bars
coverage for injury "caused by or at the direction of the insured with
knowledge..."
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13. West Bend (continued)
• The Wisconsin Supreme Court found that West Bend owed a duty to defend
• The Court affirmed the Court of Appeals ruling that the mere trade design could supply the required
“advertising” made in course of a covered offense.
• Rejected arguments that Ixthus was a distribution defendant, not an advertising defendant and that
Ixthus's acts did not cause the advertising injury: Ixthus need not be “the first, last or only entity”
alleged to advertise in order to be engaged in covered advertising activity… Further, ‘advertising
injury need not be the sole cause of harm…’”
• Affirmed that the knowing violation exclusion does not bar defense of claims where intent is not a
required element:
• The knowing violation exclusion will preclude coverage at the duty-to-defend stage only when every claim alleged in the
complaint requires the plaintiff to prove the insured acted with knowledge that its actions “would violate the rights of
another and would inflict ‘personal and advertising injury.”’ If the complaint alleges any claims that can be proven
without such a showing, the insurer will be required to provide a defense.
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14. Leicht Transfer & Storage Co. v. Pallet Cent. Enterprises, Inc.,
2018 WI App 35.
•Policyholder suffered a $500K financial loss after a vendor
fraudulently charged it for shipping pallets that
policyholder never ordered or received
• Vendor sent fraudulent invoices to policyholder with a delivery
receipt containing forged signature of policyholder employee
• Policyholder paid vendor's fraudulent invoices based on the
signature
• Policyholder first passed charges to its customer, then
reimbursed customer after discovering the fraud
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15. Leicht Transfer (continued)
• Leicht searches for coverage...
• Crime policy's forgery coverage. Court of Appeals: coverage applies
narrowly to fraudulent checks, draft and promissory notes, and did not
include doctored invoices as a defined "forged instrument"
• CGL policy. Court of Appeals: money reimbursed to its customers
wasn't "physical injury" to "tangible property"
• Cargo handling policy. Court of Appeals: the pallets at issue, upon
which the fraud was based, were never actually accepted for
transportation, thus defeating coverage
• Granted review by Supreme Court
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16. Leicht Transfer (continued)
• Coverage Gap Problem:
• Typical crime policy provide coverage for theft by employees
• Typical crime policy does not cover theft losses perpetrated by
contractors or vendors
• Risk Management Solutions?
• Ensure vendor has a fidelity bond which lists your company as payee
• Obtain "agency coverage" or an "agents coverage endorsement" under
your crime policy, naming vendor as insured/employee
• Enact better internal controls
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17. Estate of Rivera v. West Bend Mutual Ins., 2018 WI App 14.
• Rivera, while working for temporary employer (Alpine), is fatally
injured while riding in vehicle owned by Alpine
• Rivera's estate did not make a worker's compensation claim;
instead, it brought a tort claim against Alpine
• Issue: Section 102.29(6)(b)(1) bars an injured temporary
employee from filing a tort action against the borrowing
employer if the employee "makes a claim" for worker's
compensation benefits.
• Does this preclude a tort action against that employer all together, even
if no WC claim made?
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18. Estate of Rivera (continued)
• Court of appeals: No
• So long as a WC claim was never made, the injured employee may file a
tort action against the temporary employer
• WC is exclusive remedy for employee against actual employer (such
as the temp. agency), but not the borrowing employer
• Legislature and Governor: Wait!
• Immediately amended Section 102.29(6)(b)(1) to bar temporary
employees from bringing tort actions against the borrowing employer
• Now bars tort claims of temporary employee who "has the right to
make a claim" for workers comp benefits – even if not made
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19. Blesener v. Linton, 2018 WI App 21 (unpublished).
• Duty to defend
• Homeowner completes Real Estate Condition Report (RECR) as part of
home sale in which he was alleged to have intentionally omitted known
structural defects to buyer
• Sued by buyers alleging knowledge of defects by seller which allegedly
existed since construction, for which the seller only selected the architect
and builder
• Seller tenders to Liberty Mutual, claiming that the covered "occurrence"
was not the alleged misrepresentation but instead the water damage
resulting from defective construction
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20. Blesener (continued)
• Key question: whether complaint alleges liability for an "accident" that
would qualify as a covered occurrence, or purely for the misrepresentation
• 2007 case (United Cooperative) found initial coverage where insured alleged to
have misrepresented property was also alleged to have contributed to that
property defect in the first place
• Court of appeals agreed with Liberty Mutual that the claims were based on
the misrepresentation, which was not an accident, and found no coverage
• Misrepresentations in a RECR are volitional acts, not accidents (Everson, 2005)
• Because seller wasn't involved in the construction, the only allegations he could
point to for coverage were his misrepresentations...which are not "accidents"
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21. Grigg v. Arrowcast, Inc., 2018 WI App 17
• Stock purchase agreement leads to suspicion of fraud and a
complaint against a shareholder (and executive) involved in the
transaction
• Complaint sues the shareholder "in his capacity as a shareholder
but not as an officer and director" where the underlying
complaint against the executive nevertheless included allegations
faulting his conduct as an executive
• Coverage sought under D&O policy as a "claim" alleging a
"wrongful act" defined as acts "committed by an Insured Person
in their capacity as such."
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22. Grigg v. Arrowcast (continued)
•Hudson had a duty to defend a business executive sued
"in his capacity as a shareholder but not as an officer and
director" where the complaint included allegations based
on his conduct as an executive.
•"The duty to defend is determined using the four-corners
rule"
•"[T]he duty-to-defend analysis turns on the facts pled, not
the plaintiff's theory of liability...."
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23. Coverage for Losses Caused by Phishing
• Second and Sixth Circuits both found for policyholders, ruling coverage
under computer fraud policies where email-based theft schemes caused
losses.
• Second Circuit (Medidata Solutions v. Federal Ins.): Federal must cover a $4.8 M loss
suffered when the insured was tricked into wiring money overseas when the
fraudster posed as insured's president in emails.
• Sixth Circuit (American Tooling Center v. Travelers): Travelers must cover over
$800,000 the insured lost when fraudsters posing as a vendor used fraudulent
emails to trick the company into wiring money to a sham account.
• Both panels rejected insurers' argument that the policies were designed to
only cover direct hacking into policyholders' computers.
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24. KeySpan v. Munich Re, 96 N.E.3d 209 (N.Y. 2018)
• In long tail continuous injury cases involving multiple years, issues arise as to the amount of
coverage for a particular claim when there is coverage in some of the years but not others—the
issue in such cases is whether the insured is entitled to full coverage (or "all sums" per the policy
language) under any triggered policy or only some pro rata share. Courts are split.
• Within pro rata jurisdictions there is a further split on whether the periods encompassing the
insured's share of the loss includes periods where insurance was not "available"on the market,
e.g., post 1986 due to asbestos and absolute pollution exclusions.
• In March, 2018 New York's highest court ruled that New York would not recognize an
"unavailability exception" which will have the effect of placing an extremely large proportion of
long tail losses on the policyholder.
• Three months later New Jersey's highest court went the other way. Continental Ins. Co. v.
Honeywell, 188 A.3d 297 (N.J. 2018).
• Fortunately, this is not an issue in Wisconsin, which is an "all sums" state.
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25. Kimmelman v. Wayne Ins. Grp. (Ohio)
• National first impression: whether Bitcoin constitutes covered
property under a homeowner's policy
• Policyholder lost $16,000 in BitCoin; submitted claim as stolen property
• Wayne Ins. considered it "money," which the policy limited to $200
• Ohio trial judge: $16,000 in BitCoin stolen from insured's online
account is covered property because the IRS treats BitCoin as
"virtual currency," which is treated as property rather than
money for federal tax purposes
• Prediction: this could lead to insurers introducing policy language
curtailing coverage for bitcoin losses.
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26. Ohio Northern University v. Charles Construction (Ohio Supreme Court)
• General contractor's (Charles Construction) liability policy included
products-completed operations-hazard (PCOH) coverage, with
subcontractor exception to "your work" exclusion
• "This exclusion does not apply if the damaged work or the work out of
which the damage arises was performed on your behalf by a
subcontractor"
• Nevertheless, Court ruled no coverage (due to no "occurrence") for $6
million of damage caused by subcontractors' faulty work
• Now what?
• Ohio is distinct minority, but be wary!
• Endorsements available to modify definition of "occurrence"
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27. Berry Plastics Corp. v. IL Nat. Ins. Co. (7th Cir.)
•Berry provided faulty components that damaged
customer's products and caused customer to lose sales
•Customer won $7.2M judgment against Berry, $6.5M of
which was for customer's projected lost profits over next
10 years
•Question: Do liability policies cover economic losses (e.g.,
lost profits) caused by property damage?
•Court: Yes, but policyholder must prove causation, which
Berry failed to do
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28. © 2019 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?
Jeff Davis
(414) 277-5317
Jeffrey.davis@quarles.com
Pat Nolan
(414) 277-5465
Patrick.Nolan@quarles.com
Joe Poehlmann
(414) 277-5763
Joseph.Poehlmann@quarles.com
Alex Shortridge
(414) 277-5443
Alexandra.Shortridge@quarles.com
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