Johnson Controls, Inc. v. London Market
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2010 WI 52 SUPREME COURT CASE NO.: COMPLETE TITLE: OF WISCONSIN 2007AP1868 Johnson Controls, Inc., Plaintiff-Respondent, v. London Market, Defendant-Appellant, AIU Insurance Company, American Home Assurance Company, Granite State Insurance Company, Landmark Insurance Company and National Union Fire Insurance Company of Pittsburgh, PA, Defendants-Intervenors, Allstate Insurance Company, Allianz Underwriters Insurance Company, Affiliated FM Insurance Company, American Employers' Insurance Company, American Motorists Insurance Company, Associated International Insurance Company, Central National Insurance Company of Omaha, Employers Mutual Casualty Company, Employers Reinsurance Corporation, Federal Insurance Company, Highlands Insurance Company, Industrial Indemnity Company, International Surplus Lines Insurance Company, International Insurance Company, Westport Insurance Corporation, Stonewall Insurance Company, TIG Insurance Company, Transamerica Premier Insurance Company, United National Insurance Company and Westchester Fire Insurance Company, Defendants. ON CERTIFICATION FROM THE COURT OF APPEALS OPINION FILED: SUBMITTED ON BRIEFS: ORAL ARGUMENT: SOURCE OF APPEAL: COURT: COUNTY: JUDGE: JUSTICES: CONCURRED: DISSENTED: NOT PARTICIPATING: June 24, 2010 February 23, 2010 Circuit Milwaukee Patricia D. McMahon ZIEGLER, J., dissents (opinion filed). ROGGENSACK and GABLEMAN, JJ., join the dissent. ATTORNEYS: For the defendant-appellant there were briefs by Christopher J. Johnson and Beck, Chaet, Bamberger & Polsky, S.C., Milwaukee; Patrick T. Walsh and Hinkhouse Williams Walsh LLP, Chicago, Ill.; and Susan R. Tyndall and CMT Legal Group, LTD., Waukesha, and oral argument by Susan R. Tyndall. For the plaintiff-respondent there were briefs by William M. Cannon, Mark L. Thomsen, Allan M. Foeckler, Brett A. Eckstein, and Cannon & Dunphy, S.C., Brookfield, and oral argument by Mark L. Thomsen. For Berleman Margaret Chicago, the defendants-intervenors there was a brief by Anne Kearney and Appellate Consulting Group, Milwaukee, and J. Orbon, Ilene M. Korey, and Clausen Miller P.C., Ill., and oral argument by Anne Berleman Kearney. An amicus curiae brief was filed by Lynn R. Laufenberg and the Laufenberg Law Group, S.C., Milwaukee, on behalf of the Wisconsin Association for Justice. An amicus curiae brief was filed by Erin O Connor O Connor Law Offices, LLC, Fox Point, on behalf of Metropolitan Milwaukee Association of Commerce. and the An amicus curiae brief was filed by Thomas R. Schrimpf and Hinshaw & Culbertson LLP, Milwaukee, and Laura A. Foggan and Wiley Rein LLP, Washington, D.C., on behalf of Complex Insurance Claims Litigation Association, American Insurance Association, and Wisconsin Insurance Alliance. 2 2010 WI 52 NOTICE This opinion is subject to further editing and modification. The final version will appear in the bound volume of the official reports. No. 2007AP1868 (L.C. No. 1989CV16174) STATE OF WISCONSIN : IN SUPREME COURT Johnson Controls, Inc., Plaintiff-Respondent, v. London Market, Defendant-Appellant, AIU Insurance Company, American Home Assurance Company, Granite State Insurance Company, Landmark Insurance Company and National Union Fire Insurance Company of Pittsburgh, PA, Defendants-Intervenors, Allstate Insurance Company, Allianz Underwriters Insurance Company, Affiliated FM Insurance Company, American Employers' Insurance Company, American Motorists Insurance Company, Associated International Insurance Company, Central National Insurance Company of Omaha, Employers Mutual Casualty Company, Employers Reinsurance Corporation, Federal Insurance Company, Highlands Insurance Company, Industrial Indemnity Company, International Surplus Lines Insurance Company, International Insurance Company, Westport Insurance Corporation, Stonewall Insurance Company, TIG Insurance Company, Transamerica Premier Insurance Company, United National Insurance Company and Westchester Fire Insurance Company, Defendants. FILED JUN 24, 2010 David R. Schanker Clerk of Supreme Court APPEAL from an order of the circuit court for Milwaukee County, Patricia D. McMahon, Judge. Affirmed and cause remanded. ¶1 ANN WALSH BRADLEY, J. This case is before the court on certification from the court of appeals1 pursuant to Wis. Stat. § (Rule) 809.61 (2007-08).2 We are asked to determine whether London Market had a duty to defend Johnson Controls. If it did, we then must determine when, if at all, that duty was triggered. ¶2 London Market contends that it had no duty to defend Johnson Controls because its insurance policy is an indemnityonly excess umbrella policy that does not promise a defense. Further, it asserts that the duty to defend set forth in the underlying Travelers insurance policies is not incorporated into the London Market excess policy. ¶3 In the alternative, London Market asserts that even if it had a duty to defend under the policy, that duty was never triggered because it is conditioned upon exhaustion of the 1 London Market filed for partial summary judgment. The circuit court for Milwaukee County, Patricia D. McMahon, Judge, denied London Market's motion. The court of appeals granted leave to appeal and ultimately certified the case to this court. 2 All subsequent references to the Wisconsin Statutes are to the 2007-08 version unless otherwise indicated. 2 No. 2007AP1868 underlying insurer's policy limits, and those limits were never exhausted. Further, London Market contends that Wisconsin law did not require it to drop down and defend Johnson Controls when the underlying insurer refused to defend. ¶4 Based on the language of the policies, we conclude that London Market had a duty to defend. Although its excess umbrella policy does not have a duty to defend provision, it does contain a follow form provision that incorporates the duty to defend found in the underlying Travelers policies. ¶5 We further determine that its duty to defend was not conditioned upon policies. exhaustion Rather, under of the the terms of underlying the "other Travelers insurance" provision, London Market's duty to defend was triggered when the underlying policy." insurer "denie[d] primary liability under its Accordingly, we affirm the circuit court and remand for further proceedings. I ¶6 Johnson Controls is a manufacturing company based in Milwaukee, Wisconsin. During the 1970s, it contracted with various insurers for a layered program of primary, umbrella, and umbrella This excess appeal issued to commercial specifically Johnson general involves Controls by liability the London (CGL) umbrella Market, policies. excess policy effective from December 31, 1973, to December 31, 1976 (the 1973-1976 London Market policy). atop three The London Market excess umbrella policy sat successive policies Company (Travelers). 3 issued by Travelers Indemnity No. ¶7 is 2007AP1868 Before delving into the specific issues presented, it helpful to provide some historical background case, which has been ongoing for over 21 years. about this In the mid- 1980s, Johnson Controls started to receive notification that it had been identified as a potentially responsible party (PRP) in connection across with the required environmental country.3 to contribute As a to contamination PRP, the Johnson at various Controls environmental sites could restoration be and remediation costs at these sites. ¶8 Johnson Controls asserts that it insurers, seeking defense and indemnification.4 notified its The insurers refused to provide defense or indemnification, justifying their refusal on the ground that their CGL policies did not cover environmental the restoration Comprehensive and remediation Environmental costs Response, imposed under Compensation, and suit its Liability Act (CERCLA).5 ¶9 In 1989, Johnson Controls filed various primary, umbrella, and excess insurers. against It sought a declaratory judgment that its insurers were obligated to provide 3 Some of the sites were lead smelting plants where Johnson Controls delivered lead acid batteries for recycling. Others were contaminated landfills. Johnson Controls v. Employers Ins. Wausau (Johnson Controls III), 2003 WI 108, ¶7, 264 Wis. 2d 60, 665 N.W.2d 257. 4 Id., ¶10. Whether and when notification was tendered to each of its insurers are fact questions that have not been resolved by the circuit court. 5 Id. 4 No. 2007AP1868 defense and indemnification under the terms of the insurance policies. London Market, like many of the other insurers, answered and filed a motion for partial summary judgment. ¶10 Before the circuit court made a determination on the insurers' obligations, this court decided City of Edgerton v. General Casualty Co. N.W.2d 463 (1994). of Wisconsin, 184 Wis. 2d 750, 517 In that case, this court determined that environmental response costs under CERCLA constitute "equitable relief" rather than legal damages and that a CGL insurer has no duty to indemnify the insured for these expenses. 784. Id. at 782, Further, this court determined that the receipt of a PRP letter or constitute comparable a "suit," letter and from therefore a state a CGL agency insurer's did duty defend was not triggered by the receipt of a PRP letter. not to Id. at 771. ¶11 granted The circuit court applied the holding of Edgerton and summary judgment in favor of the insurers. It determined that there was no duty to defend or indemnify Johnson Controls under any of the CGL policies. The court of appeals affirmed in an unpublished decision, noting that "as long as City of Edgerton remains the law in this state" Johnson Controls could not prevail. Johnson Controls v. Employers Ins. of Wausau (Johnson Controls I), Nos. 95-179, 95-2591, unpublished slip op. at 4 (Wis. Ct. App., Oct. 13, 1998). ¶12 The court of appeals remanded to the circuit court for factual determinations of whether all the sites fit within the rule outlined above. On remand, the circuit court determined 5 No. 2007AP1868 that there was no coverage under any of the policies for any of the contaminated sites. ¶13 Johnson Controls again appealed. In 2002, the court of appeals determined that none of the circuit court's findings of fact was erroneous. It concluded: "Although Johnson Controls argues that Edgerton was decided wrongly, we are obligated to follow its dictates." Wausau (Johnson Johnson Controls v. Employers Ins. of Controls II), 2002 WI App 30, ¶5, 250 Wis. 2d 319, 640 N.W.2d 205 (Ct. App. 2001). ¶14 In 2003, this court reviewed the Johnson Controls II decision and reversed. Overruling Edgerton, the court concluded that an insured's costs for "restoring and remediating damaged property, whether the costs are based on remediation efforts by a third party (including the government) or are incurred directly by the insured, are covered damages under applicable CGL policies, provided apply." Johnson Controls III), that Controls 2003 WI other v. policy Employers 108, ¶¶4-5, exclusions Ins. 264 Wausau do not (Johnson Wis. 2d 60, 665 N.W.2d 257. ¶15 It also concluded that Edgerton's discussion of the insurer's duty to defend in the context of CERCLA letters was "unworkable." Id., ¶4. The court determined that PRP letters constitute "the functional equivalent of a suit" because a PRP letter "marks the beginning of adversarial administrative legal proceedings that Id., ¶¶5, 120. seek to impose liability upon an insured." Therefore, the receipt of such a letter triggers the insurer's duty to defend. Id., ¶120. 6 No. ¶16 would 2007AP1868 Finally, the court stated that "[a]lthough this court like to end this action after more than 13 years of litigation, we must remand the cause for further proceedings[.]" Id., ¶123. The circuit court was whether other exclusions in the instructed policies Johnson Controls asserts that determine might apply determine the liability of the various insurers. ¶17 to on and to Id. remand, its case management strategy was to first seek judgments against those defendant insurers that had a duty to defend in addition to a duty to indemnify. In 2005, Johnson Controls filed a motion for declaratory judgment against Employers Insurance of Wausau, one of its primary insurers, asserting that it had breached its duty to defend and seeking reimbursement for remediation and defense costs in excess of $150 million. claims with Employers. another of its Johnson Controls settled its Then, it filed a similar motion against insurers. In entered settlement agreement the with interim, several Johnson insurers, Controls including Travelers, the insurer underlying the 1973-1976 London Market policy. ¶18 Controls At some planned point, to file it a became similar judgment against London Market. moved for partial summary apparent motion that for Johnson declaratory In January 2007, London Market judgment. It contended that its policy was an indemnity-only excess umbrella insurance policy that contained no promise of defense. ¶19 In its motion in support of partial summary judgment, London Market stated: "In order to resolve this issue so that 7 No. 2007AP1868 the parties can address the real coverage questions whether the London policy indemnifies [Johnson Controls] for any of the [] pollution sites London Market Insurers move this Court for a ruling, as a matter of law, that London Market Insurers' excess umbrella liability policy does not contain a duty to defend." In the alternative, London Market sought a declaration that "if the Court believes the London policy does have a duty to defend, the duty would not ripen unless and until the underlying policies have been exhausted." ¶20 The circuit court concluded that London Market's follow form provision incorporated the duty to defend found in the Travelers policies. Further, it concluded that "[n]othing in [London the policy suggests Market's] duty to defend is conditioned on exhaustion of the [underlying Travelers] policy." "[G]iven the failure of Travelers to provide a defense, [London Market] at a minimum has an obligation to drop down and provide a defense. their To hold otherwise would encourage insurers to breach independent duties to defend whenever an underlying insurer refuses to defend and leave insureds without a defense for which they paid. I think that is contrary to public policy expressed in appellate decisions in the state." ¶21 The court of appeals certified two questions to this court: First, should a duty to defend be imported from an underlying umbrella insurance policy into an excess umbrella liability policy by language in the excess policy stating that it is subject to the same terms, definitions, exclusions and conditions as the 8 No. underlying policy provided"? . . . "except as 2007AP1868 otherwise Second, is the excess liability carrier's duty to defend primary in nature, such that it may be triggered even if the excess policy expressly requires exhaustion of the underlying policy as a precondition to liability and the underlying policy has not been exhausted? The court of appeals explained that both issues were matters of first impression implications in the for Wisconsin and business both community would and have the broad insurance industry. ¶22 After we granted certification, five excess insurers involved in the litigation at the circuit court filed a motion to intervene under Wis. Stat. § 809.13, stating that the issues before the court could affect not only London Market but their excess policies as well. motion to intervene. We granted the defendant insurers' However, we clarified that the order granting this motion "did not alter or expand the issues to be decided summary by this court, judgment which relate regarding to the circuit plaintiff-respondent, court's Johnson Controls, Inc., and defendant-appellant, London Market[.]"6 II ¶23 court This case requires us to determine whether the circuit erred in summary judgment. denying London Market's motion for partial We review the circuit court's denial of a motion for partial summary judgment independently, but using the 6 We do not determine here whether the defendantsintervenors' policies contain duties to defend, and if so, when (if at all) those duties were triggered. 9 No. 2007AP1868 same methodology as employed by the circuit court. Radke v. Fireman's Fund Ins. Co., 217 Wis. 2d 39, 42-43, 577 N.W.2d 366 (Ct. App. 1998). no genuine Summary judgment is appropriate when there is issue of material fact and the entitled to judgment as a matter of law. moving party is Id.; see also Wis. Stat. § 802.08(2). ¶24 Here, the parties dispute whether London Market had a duty to defend Johnson Controls under the terms of an insurance policy. If it did, the parties contest when, if at all, that duty was triggered. The construction of an insurance policy presents of a question law, reviewed independently determination rendered by the circuit court. of the Plastics Eng'g Co. v. Liberty Mut. Ins. Co., 2009 WI 13, ¶27, 315 Wis. 2d 556, 759 N.W.2d 613. ¶25 An insurance policy is a contract for insurance. Policy language is construed as it would be understood by a reasonable person in the position of the insured. Whitbeck, 2002 WI 129, ¶20, 257 Wis. 2d 80, 654 Frost v. N.W.2d 225; Kremers-Urban Co. v. Am. Employers Ins. Co., 119 Wis. 2d 722, 735, 351 N.W.2d 156 (1984). Provisions in an insurance policy should not be read in isolation, but rather should be read in the context of the policy as a whole. Badger Mut. Ins. Co. v. Schmitz, 2002 WI 98, ¶61, 255 Wis. 2d 61, 647 N.W.2d 223. It is sometimes necessary to look beyond a single clause or sentence to capture the essence of an insurance agreement. Folkman v. Quamme, 2003 WI 116, ¶21, 264 Wis. 2d 617, 665 N.W.2d 857. 10 No. ¶26 the 2007AP1868 When the policy's language is unambiguous, we enforce contract as written, without resorting to the rules of construction or principles from case law. Plastics Eng'g Co., 315 policy Wis. 2d 556, ¶27. However, if the language is susceptible to more than one reasonable interpretation, it is ambiguous. write Id. its "[B]ecause the insurer is in a position to insurance chooses so long as contracts the with language the exact conforms to language statutory it and administrative law ambiguity in that language is construed in favor of an insured seeking coverage." Froedtert Mem'l Lutheran Hosp. v. Nat'l States Ins., 2009 WI 33, ¶43, 317 Wis. 2d 54, 765 N.W.2d 251. III. Duty to Defend ¶27 contains We a determine duty to first whether defend. London London Market Market's asserts policy that its umbrella excess policy was an indemnity-only policy that did not promise a defense. ¶28 Contracts for insurance typically impose two main duties the duty to indemnify the insured against damages or losses, and the duty to defend against claims for damages. duty to indemnify and contractual obligations. the duty to defend are Radke, 217 Wis. 2d at 44. The separate A policy may provide one without providing the other. ¶29 When a contract imposes a duty to defend, however, that duty is broader than the duty to indemnify. Id. The duty to defend arises when there is arguable, as opposed to actual, coverage under the policy. Id. 11 It is the nature of the claim No. 2007AP1868 alleged against the insured which triggers the duty to defend even though the suit may be groundless, false, or fraudulent. Sustache v. Am. Family Mut. Ins. Co., 2007 WI App 144, ¶10, 303 Wis. 2d 714, 735 N.W.2d 186. ¶30 In support of its assertion that its policy does not provide a duty to defend, London Market advances that it is contrary to the role of an excess insurer and the purpose of excess insurance to provide a duty to defend. generalized statements about the role and Such reliance on purpose of excess coverage misses the mark. ¶31 Instead, "[t]he duty to defend an insured is based on the language in the insurance contract." Southeast Wis. Prof'l Baseball Park Dist. v. Mitsubishi Heavy Indust. Am. Inc., 2007 WI App 185, ¶41, 304 Wis. 2d 637, 738 N.W.2d 87; see also Novak v. Am. Family Mut. Ins. Co., N.W.2d 504 (Ct. App. 1994). 183 Wis. 2d 133, 137, 515 In practice, most primary policies do contain a contractual duty to defend, and some umbrella and excess policies do as well. To determine whether an insurer has a duty to defend, we examine the language of the policy. ¶32 London Market asserts that it promised indemnification only, and that it did not promise to defend. insuring agreement, which states that London It points to its Market agrees, "subject to the limitations, terms and conditions hereinafter mentioned, Assured to shall indemnify be the obligated Assured to liabilities: 12 pay for by all sums reason which of" the certain No. 2007AP1868 Underwriters hereby agree, subject to the limitations, terms and conditions hereinafter mentioned, to indemnify the Assured for all sums which the Assured shall be obligated to pay by reason of the liability . . . for . . . Property Damage . . . arising out of the hazards covered by and as defined in the underlying [Travelers policies]. London Market's insuring agreement promises indemnification but is silent regarding defense. ¶33 London insuring Market is agreement read obligation to defend. correct in that the isolation does language not of the impose an However, this insuring agreement does not exist in isolation. A. Follow Form Policy ¶34 Rather, the excess umbrella policy issued by London Market is a "follow form" policy, meaning that the policy is relatively brief and incorporates many of the provisions of an underlying policy in this case, the excess umbrella policies issued by mentioned" Travelers.7 in the London One of Market the conditions policy is the "hereinafter follow form provision: This Policy is subject to the same terms, definitions, exclusions and conditions (except as regards the premium, the amount and Limits of Liability and except as otherwise provided herein) as are contained in or 7 "An excess policy may be written in two forms: as a standalone policy or as a policy that 'follows form.' . . . A standalone excess policy is an independent insuring agreement. In contrast, a follows form excess policy incorporates by reference the terms of the underlying policy and is designed to match the coverage provided by the underlying policy." 23 Eric Mills Holmes, Holmes' Appleman on Insurance 2d § 145.1 (interim vol. 2003); see also 2 Arnold P. Anderson, Wisconsin Insurance Law § 11.16 (5th ed. 2004). 13 No. 2007AP1868 as may be added to the Underlying [Travelers policies] prior to the happening of an occurrence for which claim is made hereunder. Thus, to determine the terms, definitions, exclusions, and conditions of the London Market policy, it is necessary to turn to the Travelers policies.8 ¶35 policies Among contain other a provisions, duty to defend the underlying as well as Travelers a duty to indemnify: Liability. The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages . . . , and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such injury or damage . . . , but the company shall not be obligated to pay any claim or judgment or to defend any suit filed after the applicable limit of the company's liability has been exhausted by payments of judgments or settlements. (Emphasis added.) ¶36 To determine whether Travelers' duty to defend is incorporated into London Market's policy, we must examine the language of London Market's follow form provision. that the policy "is subject to the same terms, It states definitions, exclusions and conditions (except as regards the premium, the 8 The dissent is critical of our reliance on terms in the Travelers policies. Dissent, ¶¶91, 94, 96. This criticism ignores the fact that the London Market policy specifically directs the insured and the court to refer to the Travelers policies when determining the "terms, definitions, exclusions and conditions" of coverage. Due to the nature of the follow form provision, the scope of London Market's contractual obligations cannot be understood without reference to the Travelers policies. 14 No. 2007AP1868 amount and Limits of Liability and except as otherwise provided herein) as are contained in" the underlying Travelers policies. ¶37 London Market's follow form provision does not expressly disclaim the duty to defend found in the Travelers policies. Rather, it explicitly sets forth three ways in which the London Market policy differs from the underlying Travelers policies: (1) the premium; (2) the amount and Limits of Liability; and (3) "except as otherwise provided herein." ¶38 No argument difference. is made about the first two areas of The parties focus on the third area of difference, "except as otherwise provided herein." B. "Except as Otherwise Provided Herein" ¶39 London Market asserts that its policy does "otherwise provide" that there is no duty to defend. It contends that by omitting a promise to defend from the insuring agreement, it "otherwise provided" that there would be no duty to defend. ¶40 This argument is circular. As discussed above, the insuring agreement that London Market relies upon refers the insured to the follow form provision and to the terms of the underlying Travelers policies. Although London Market's insuring agreement does not promise a defense, the follow form provision incorporates the terms, definitions, exclusions, and conditions of the Travelers policies. One of those terms is Travelers' duty to defend, a duty that the London Market policy does not disclaim. ¶41 The phrase "except as otherwise provided herein" suggests that to "otherwise provide," there must be a provision. 15 No. 2007AP1868 London Market can point to nothing except the void in its own agreement an agreement which by its own terms is incomplete and incorporates those provisions in the Travelers policies that are not excepted. Due to the nature of the follow form provision, London cannot Market rely on the absence of a provision as "otherwise providing" that there would be no duty to defend. ¶42 Given that Travelers imposes a duty to defend and London Market's silence regarding that duty, a reasonable person in the position of the insured would interpret London Market's policy as incorporating Travelers policies. the duty to defend found in the Although it is not certain whether London Market intended to provide a duty to defend when it drafted the policy, we do not construe insurance policies based on what we believe the intentions of the insurer may have been. Wis. 2d 80, ¶20. Frost, 257 Accordingly, we refuse to rewrite insurance contracts by filling in gaps left in the draftsmanship.9 Rather, we look to the policy language itself, as it would be understood by a reasonable insured. ¶43 Even if we were to determine that it was unclear whether the follow form's duty to defend was incorporated into 9 An insurance company that uses a follow form policy must be cautious because it may inadvertently bind itself to unintended obligations. We have previously stated, "too often the insurance companies come to the courts asking that the courts supply the lacunae in their contract. Certainly, when the dispute concerns legal rights and obligations as between insurance companies, it is not too much to ask that they make specific provisions, either in their contracts or by treaties of understanding between themselves." Loy v. Bunderson, 107 Wis. 2d 400, 431, 320 N.W.2d 175 (1982). 16 No. the London Market policy, given London 2007AP1868 Market's silence regarding defense, we would conclude that the policy language should be construed to incorporate the duty to defend. It is axiomatic that policy language which is unclear and susceptible to more than one reasonable interpretation is ambiguous and is construed in Wis. 2d 556, favor ¶27. of coverage. Plastics In interpreting the Eng'g policy Co., language, 315 we conclude that London Market had a duty to defend. ¶44 Our interpretation is supported by case law. In another case addressing an excess insurer's contractual duty to defend, the Second Circuit Court of Appeals examined an excess policy containing a follow form provision. See Home Ins. Co. v. Am. Home Prods. Corp., 902 F.2d 1111 (2d Cir. 1990). Similar to London Market's policy, the policy in Home stated that it was "subject to the same warranties, terms and conditions [as the underlying policy] (except as otherwise provided herein)[.]" ¶45 In that case, the underlying policy covered payments for defense costs. However, Home's policy expressly excluded "all expenses and Costs" and further defined costs to include "legal expenses." Id. at 1113. Given Home's express exclusion of defense costs, the Second Circuit stated that the underlying policy "conflict[ed] with the 17 subject Home policy No. which . . . excludes from payment covered by the underlying policy.10 ¶46 those expenses 2007AP1868 and costs" Id. at 1114. Here, unlike in Home, there is no conflict between the Travelers policies and the London Market policy with respect to the duty to defend. As discussed above, the Travelers policies provide a duty to defend, and there is nothing in the London Market policy that "otherwise provides" that there will be no defense. IV. Parties' Arguments Extrinsic to the Policy Language ¶47 Having examined the language of the relevant policies and determined that London Market has a contractual duty to defend, we turn to address two additional arguments advanced by the parties in support of their respective positions regarding whether London Market's policy incorporates Travelers' duty to defend. Both arguments rely on evidence that is extrinsic to the language of the policy. We address each argument in turn. A. Subsequent Policies Expressly Exclude Any Duty to Defend ¶48 Johnson Controls asserts that evidence that London Market's 1973-1976 policy contains a duty to defend is found by the fact that four subsequent and otherwise identical policies issued by London Market expressly excluded any duty to defend. 10 See also American Motorists Ins. Co. v. Trane Co., 544 F. Supp. 669, 698-99 (W.D. Wis. 1982) (holding that under Wisconsin law, a follow form provision in St. Paul Fire and Marine Insurance Company's policy did not incorporate the primary's duty to defend because the very next provision stated that St. Paul "at its own option, may, but is not required to, participate in the . . . defense of any claim"). 18 No. 2007AP1868 One policy stated that London Market "shall have the right but not the duty to assume . . . the defense of any suit[.]" Another policy provided that London Market "shall not be called upon to assume charge We not of the settlement or defense of any reliance on the claim[.]" ¶49 do find Johnson Controls' subsequent policies to be helpful for two reasons. First, we do not believe that London Market's subsequent modification of its standard insuring agreement sheds light on the language of the 1973-1976 agreement. The question is what the language of the 1973-1976 contract does provide, not what the language could provide or what is provided for in a contract executed by the parties years later. ¶50 Second, even if subsequent policies were relevant in determining what the language of the 1973-1976 policy provides, it is unclear conclude, as what conclusion Johnson Controls we would suggests, reach. that We the could express disclaimer demonstrates that London Market knew how to disclaim the duty to defend but did not intend to do so in the 1973-1976 policy. We could also conclude, as suggested by London Market, that the fact that Johnson Controls continued to purchase excess coverage that expressly disclaimed the duty to defend indicates that Johnson Controls never expected defense from its excess insurer. B. Premium Charged ¶51 premium We turn next to London Market's arguments about the it charged for the umbrella 19 excess policy. London No. 2007AP1868 Market contrasts the relatively small premium it charged with the larger premium Johnson Controls coverage provided by Travelers.11 paid for the umbrella London Market asserts that the relatively low premium paid for its excess policy is evidence that the parties did not contract for London Market to provide a defense. It contends that this argument is borne out by Oelhafen v. Tower Ins. Co., 171 Wis. 2d 532, 539, 492 N.W.2d 321 (Ct. App. 1992), which explained that "the intent of umbrella policies to serve a different function from primary policies with excess clauses is reflected in the rate structure of the two types of policies." ¶52 reasons. London Market's argument is unpersuasive for two First, contract interpretation should be based on the language of the policy rather than a court's conjecture about extrinsic information. Second, even if we considered the relative size of the two premiums in our analysis, we would not be persuaded that the lower premium evinces an absence of the duty to defend. There are additional reasons apart from defense costs that an umbrella excess policy might be less expensive than a primary policy or an umbrella policy. ¶53 In Davis appeals explained v. that based upon statistics. Allied Processors, insurance companies Inc., the calculate court of premiums 214 Wis. 2d 294, 300, 571 N.W.2d 692 11 The premium for the London Market excess policy was $20,000, in comparison to $195,000 and $273,500 for two of the three underlying umbrella policies. The record does not reflect the premium for the third underlying policy. 20 No. (Ct. App. 1997). 2007AP1868 Excess policies may be less expensive because most judgments and settlements will be within the limits of the primary policy, leaving no exposure for the excess policy. Id. Excess coverage is normally not reached except in the case of a catastrophic loss: [I]t was far more likely that payment would be required for compensatory damages under the underlying policy than would be required for a compensatory loss of over [the limits of the underlying policy] through the umbrella policy. Because the risk was diminished for the umbrella policy, it could and did charge a smaller premium. Id. ¶54 We conclude that the extrinsic evidence offered by both parties is not helpful in our determination of whether the 1973-1976 London Market policy contains a duty to defend. Rather, for the reasons mentioned above, we conclude that London Market's policy incorporates the duty to defend provided in the underlying umbrella policies issued by Travelers. V. When the Duty to Defend Is Triggered ¶55 Having determined that London Market's policy incorporates the duty to defend found in the Travelers policies, we turn to address if and when that duty was triggered under these facts. Both London Market and the excess intervenors appear to assert that as a matter of law, an excess carrier's 21 No. 2007AP1868 duty to defend may not be triggered until the limits of the underlying Travelers policies have been exhausted.12 ¶56 In its brief, London Market explains: Wisconsin law is clear. An excess insurer is just that. It is not a co-primary insurer, responsible for providing a defense from dollar one. That obligation falls solely on the primary insurer. . . . This court should reaffirm Wisconsin law, holding that an excess insurer is not required to provide a defense where the primary is required to do so. London Market further asserts that the provisions of its policy are consistent with this general rule. ¶57 We agree that a primary primary duty to defend a claim. insurer generally has the "An excess insurer usually is not required to contribute to the defense of the insured so long as the primary insurer is required to defend." 2 Arnold P. Anderson, Wisconsin Insurance Law § 11.33 (5th ed. 2004); see also Southeast Wis. Prof'l Baseball Park Dist., 304 Wis. 2d 637, ¶64. "True excess coverage attaches when a single insured has two policies that cover the same loss but only one policy is 12 The unusual facts of this case complicate the exhaustion issue here. It is undisputed that the underlying policies were not exhausted during the 1980s and 1990s because Travelers, like all of the insurers, refused to indemnify Johnson Controls for its environmental response expenses. After 2003, when this court determined that these types of expenses could be covered under the insurance policies, Johnson Controls settled its breach of contract claims with several of its insurers, including Travelers. It is unclear whether these settlements are relevant to an inquiry about whether the limits of the underlying policies were exhausted. In any event, the settlement agreements are not in the record. 22 No. written with the expectation that the primary 2007AP1868 insurer will conduct all investigations, negotiations, and defense of claims until its limits are exhausted." ¶58 law Id., § 11.17. However, this does not establish an immutable rule of requiring exhaustion of all primary policies excess insurer's duty to defend can be triggered. before an Rather, it depends on the language of the policies. ¶59 policy Wisconsin case law instructs that the language of the should be our initial focus. After focusing on the policy language, we turn to examine Wisconsin cases that have held that an excess insurer's duty to defend may be triggered prior to the exhaustion of the primary policy. A. Policy Language ¶60 the As stated above, the London Market policy incorporates provisions provided. of the Travelers policies unless otherwise The Travelers policies explain when Travelers' duties to indemnify and to defend end upon exhaustion of Travelers' limits of liability: [Travelers] shall not be obligated to pay any claim or judgment or to defend any suit filed after the applicable limit of the company's liability has been exhausted by payments of judgments or settlements. ¶61 Market's According duty exhaustion of to its to the defend limits follow would of also form be liability. provision, terminated Although London upon the the above language determines when Travelers and London Market's duties to indemnify and defend end, this language is silent regarding the question of when the duty to defend begins. 23 No. 2007AP1868 B. Other Insurance Provision ¶62 However, a separate provision in the Travelers policies, the "other insurance" provision, sheds light on the inquiry. This provision explains that if another insurer denies primary liability, Travelers will respond as though the other insurance were not available.13 It provides: [I]f the insurer affording other insurance to the named insured denies primary liability under its policy, [Travelers] will respond under this policy as though such other insurance were not available. (Emphasis added.) A reasonable person in the position of the insured would interpret this provision as promising that, where the excess insurer has a contractual duty to defend, it will 13 London Market's policy also has an other insurance provision. However, it does not address how London Market will respond when the underlying insurance is not "available" because the underlying insurer denies liability and refuses to defend. It states as follows: If other valid and collectible insurance with any other Insurer is available to [Johnson Controls] covering a loss also covered by this Policy, other than insurance that is specifically stated to be in excess of this Policy, the insurance afforded by this Policy shall be in excess of and shall not contribute with such other insurance. This provision explains that London Market's policy is excess over "other valid and collectible insurance" that is "available" to Johnson Controls. There is no conflict between London Market's other insurance provision and Traveler's promise to "respond under this policy as though such other insurance were not available." 24 No. 2007AP1868 step in and provide a defense in the event that the primary insurer refuses to do so.14 ¶63 "other Under the follow form provision, the language of the insurance" provision is incorporated into Market policy "unless otherwise provided herein." Market would be required to "respond under the London Thus, London [its] policy as though such other insurance were not available" in the event that the underlying insurer "denies primary liability under its policy" unless the London Market policy otherwise provides. ¶64 We examine next whether the London Market policy does indeed otherwise provide. Our focus is directed to the meaning of the word "liability." C. Interpreting the Term "Liability" ¶65 London Market asserts that under the limits of liability provision in its policy, its duty to defend did not 14 Travelers' other insurance provision also explains that, in the event of the primary insurer's refusal to defend and Travelers responding as though the primary policy were not available, Travelers would be subrogated to the rights of the insured against its primary insurer: "Thereafter, [Travelers] shall be subrogated to all rights of the insured to such other insurance and the insured shall do all things necessary to enforce such rights." This policy language appears to recognize that although Travelers would provide a defense, the insured might have a breach of contract or bad faith claim against its primary insurer. If so, Travelers could be subrogated to those claims. The Travelers policies go on to explain that "[i]n the event of any payment under this policy, [Travelers] shall be subrogated to all the insured's rights of recovery therefor . . . and the insured shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights." 25 No. 2007AP1868 "attach" until the limits of the underlying Travelers policies were exhausted. The limits of liability provision states that "liability shall attach" to London Market only after Travelers has paid or has been held liable to pay its limits: It is expressly agreed that liability shall attach to the Underwriters only after the Underlying Umbrella Insurers have paid or have been held liable to pay the full amount of their respective net loss liability[.] ¶66 The limits of liability provision discusses when London Market's "liability" begins after Traveler's has paid or has been held liable to pay the full amount of its net loss liability. However, it does not expressly state when the duty to defend begins. In isolation, it is unclear whether the term "liability" encompasses the duty to defend. ¶67 Although the London Market policy provides that "liability" does not attach until the underlying policies have been exhausted, it does not define the term "liability." An examination of the term "liability" as it is used in the context of the London Market policy indicates, however, that "liability" refers to indemnification for injuries or property for which Johnson Controls is held liable. It does not refer to the duty to defend. ¶68 For instance, London Market's coverage section provides that it promises "to indemnify the Assured for all sums for which the Assured shall be obligated to pay by reason of the liability" for damages on account of personal injuries, property damage, or advertising liability. synonymous with indemnification. 26 In this context, liability is No. ¶69 The term interchangeably throughout "liability" with London appears "indemnification" Market's policy. The 2007AP1868 to be used in other places "non cumulation of liability" provision equates liability with payment for personal injury or property damage: [I]n the event that personal injury or property damage arising out of an occurrence covered hereunder is continuing at the time of the termination of this Policy [London Market] will continue to protect the Assured for liability in respect of such personal injury or property damage without payment of additional premium. Further, its "notice of occurrence" provision discusses injuries and damage for which the insured will be held liable: Whenever the Assured has information from which they may reasonably conclude that an occurrence covered hereunder involves injuries or damage which, in the event that the Assured shall be held liable, is likely to involve this Policy, notice shall be sent . . . . ¶70 It therefore appears that the exhaustion provision's discussion of when "liability" attaches means that London Market will not damage policies indemnify until have the Johnson Controls indemnification been exhausted. indemnification are separate duties. for limits injury of However, or the property underlying defense and Radke, 217 Wis. 2d at 44. Even if London Market's duty to indemnify does not attach until exhaustion of the underlying policies, that does not mean that 27 No. its duty to defend requires exhaustion to attach.15 2007AP1868 An insurer can have a duty to defend even under circumstances when there will ultimately be no indemnification under the policy. ¶71 See id. London Market makes one additional argument in support of its assertion that its duty to defend was not triggered until exhaustion of the Travelers policies. It shifts from examining the language of its own policy to focusing on the language of the Travelers policies. It points to the paragraph in the Travelers policies that imposes both the duty to indemnify and the duty to defend and explains that the first word in that paragraph is "liability": Liability. The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages . . . , and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such injury or damage[.] ¶72 Thus, London Market contends, the term "liability" encompasses both defense and indemnification obligations. oral argument, counsel for London Market explained: At "[I]f the term 'liability' is dependent upon what the Travelers policy says, it is clear that Travelers considers both the duty to defend and the liability. . . . Under duty that to indemnify as analysis, . . . then 15 part the duty of to See Gen. Accident Ins. Co. Am. v. Safety Nat. Cas. Corp., 825 F. Supp. 705, 709 (E.D. Penn. 1993) (interpreting a nearly identical exhaustion provision about when "liability shall attach" and concluding that "[i]t says nothing . . . about the nature of [the excess insurer's] duty to defend."). 28 No. 2007AP1868 defend and the duty to indemnify cannot attach until such time as there is exhaustion." ¶73 London foundation. Market's In argument examining the rests language on of an the infirm Travelers policies, it is far from "clear that Travelers considers both the duty to liability." definition defend The and term section of duty to indemnify "liability" is not the the Travelers set as part of forth in the Although not policies. specifically defined, it appears in many places throughout the policies. In most places, the term "liability" is used to refer to the obligation to indemnify, and defense is treated as a separate obligation.16 ¶74 Given a lack of definition and the disparate use of the term "liability" in the Travelers policies, it is not at all clear that the Travelers policies intend that "liability" 16 For instance, the supplemental payments section treats costs for indemnification separately from defense costs. It provides that the company will pay, "in addition to the applicable limit of liability . . . all expenses incurred by the company, and all costs taxed against the insured in any suit defended by the company." Further, Travelers' limits of liability section discusses costs incurred for bodily injury and property damage not those costs incurred in defending: "The limits of liability . . . is the combined total limit of the company's liability for all damages, including damages for care and loss of services, because of bodily injury and property damage . . . ." We recognize that Travelers' Limits of Liability section is supplanted by London Market's Limits of Liability section under the express terms of the follow form provision. We discuss it here only as an example of how the term "liability" is used throughout the policies. 29 No. be defined to include the duty to defend. 2007AP1868 Even if it were clear, however, such usage would conflict with the usage of the term "liability" in London Market's own policy. There, the term "liability" is consistently used to mean indemnification. As we previously explained, if there is a conflict between the London Market policy and the Travelers London Market policy control. ¶75 indemnify We is conclude that conditioned policies, the terms of the duty to See supra, ¶¶44-46 & n.10. although upon London Market's exhaustion of the underlying Travelers policies, its duty to defend is not so conditioned. Rather, under the "other insurance" provision, London Market was required to "respond under [its] policy as though such other insurance were not available" because primary liability under its policy." Travelers "denie[d] Thus, London Market was required to assume the defense. D. Supportive Case Law ¶76 Contrary to the assertion of London Market, this conclusion does not fly in the face of an overarching rule of law requiring exhaustion of all primary policies before the duty to defend can be triggered. Quite the contrary. Wisconsin case law recognizes that an excess insurer's duty to defend may under certain circumstances be triggered prior to the exhaustion of the primary policy. ¶77 In Teigen v. Jelco Wis., Inc., 124 Wis. 2d 1, 367 N.W.2d 806 (1985), for example, this court approved a settlement agreement between a primary insurer brought suit against the insured. 30 and the plaintiff who The settlement agreement was No. for less than the limits of the primary policy. 2007AP1868 It released all claims against the primary and the insured, but it left the excess carrier potentially liable.17 argued that the primary Although the excess insurer wrongfully attempted to avoid its responsibility to defend the suit until it fully paid its policy limits, the court rejected that argument. Id. at 9-10. Thus, it concluded that the excess carrier was required to defend the suit, regardless of the fact that the underlying primary policy had not been fully exhausted. ¶78 Co. v. American Teigen is not alone. Trane Co., Motorists' 544 F. excess In American Motorists Insurance Supp. policy 669, 692 promised (W.D. to Wis. defend 1982), against suits for losses covered by the American Motorists policy but not covered by the underlying policy. Id. at 692. The federal district court applied Wisconsin law to the policy and concluded that the excess insurer with a contractual duty to defend was required to do so in the event that the primary insurer refused to defend:18 17 Importantly, the settlement agreement provided the excess carrier would not be responsible for paying any damages below the primary's limits of liability, $500,000. Thus, the excess insurer could only be held liable for damages exceeding $500,000, and could not be held liable for the difference between the primary's $500,000 limit of liability and the amount of settlement, $390,000. 18 There, the insured tendered the defense to all four layers of insurers. The complaint alleged facts sufficient to impose on the primary insurer a duty to defend. Am. Motorists Ins. Co., 544 F. Supp. at 685. Nevertheless the primary insurer denied coverage and refused to defend against the lawsuit. 31 No. 2007AP1868 If the underlying insurer has refused to defend, asserting that there is no coverage under the substantive provisions of the underlying policy, the excess insurer will have a duty to defend, provided there is coverage under the excess policy and the claim falls within the policy limits of the excess insurer. Id. Additionally, the court concluded that a complaint which alleges damages in excess of the limits of the underlying policy triggers an excess insurer's duty to defend, even underlying insurer undertakes the defense as well. ¶79 Eleven years later, the Wisconsin Sanco, Ltd. v. Wisconsin Insurance the Id. court revisited the holdings of American Motorists. if of appeals In Azco Hennes Security Fund, 177 Wis. 2d 563, 502 N.W.2d 887 (Ct. App. 1993), a suit was filed against the insured, limits on Azco's Azco, primary seeking damages insurance in policy. insurer defended against the lawsuit. excess of the Azco's primary Additionally, Azco also hired a second attorney who was instrumental in ensuring that the case settled within the primary policy limits. Azco then sent the bills for the second attorney to its excess insurer, asserting that Motorists.19 to defend it was required to pay them under American The excess insurer refused, asserting that its duty had not been triggered even though the complaint against Azco alleged damages in excess of the primary policy's limits. 19 The excess policy stated that it would defend the insured against any suit regarding "occurrences covered under this policy, but not covered under the underlying insurance." Azco Hennes-Sanco, Ltd. v. Wisconsin Ins. Sec. Fund, 177 Wis. 2d 563, 566, 502 N.W.2d 887 (Ct. App. 1993). 32 No. ¶80 2007AP1868 The court of appeals noted that it was not bound to follow a federal district court's opinion on Wisconsin law. at 568. Id. It rejected the conclusion in American Motorists that alleged damages in excess of the primary policy's limits were sufficient to trigger an excess insurer's duty to defend. ¶81 Id. However, it did not disturb the other conclusion in American Motorists that an excess insurer with a contractual duty to defend might be obligated to assume the defense if the primary insurer refused to do so. The Azco court stated that the American Motorists case "is distinguishable on its facts. In American Motorists the primary insurer refused to defend, whereas in this case defense in the action." Azco's primary insurer undertook its Id. ¶82 of American Motorists was also cited in a recent decision the Wisconsin Professional court Baseball of appeals, Park District App 304 Heavy N.W.2d 87. In that case, the primary insurer refused to defend circuit separate occasions. provided a defense. ¶83 court 185, Mitzubishi America, the WI v. Wisconsin Industries despite 2007 Southeast ordering Id., ¶13. it to Wis. 2d 637, defend on 738 three As a result, an excess carrier Id., ¶8. In a footnote, the court of appeals cited American Motorists and explained: "If the underlying insurer has refused to defend, substantive asserting that provisions of there the is no underlying coverage policy, under the the excess insurer will have a duty to defend, provided there is coverage under the excess policy and the claim falls within the policy 33 No. limits of the excess insurer." Id., ¶8, n.4. 2007AP1868 Given that the primary had breached its primary duty to defend, however, the court required it to reimburse defense costs it incurred. ¶84 The United the excess insurer for the Id., ¶¶61-64. States Court of Appeals for the Tenth Circuit also relied on American Motorists when it addressed a situation strikingly similar to the facts of this case. Hocker v. 1991). New Hampshire Ins. Co., 922 F.2d 1476 (10th See Cir. There, an umbrella insurer asserted that its duty to defend was never triggered because the primary policy limits had not been exhausted. Id. at 1481. The court rejected the argument, concluding that the language of the umbrella policy promised to defend suits "not covered, as warranted" and established that the umbrella insurer must drop down and defend upon the primary insurers' wrongful refusal to do so. Id. at 1482. ¶85 The court explained that "as written," the umbrella policy "explicitly addresses the possibility that the primary insurer will wrongfully deny coverage for occurrences that it had warranted would be covered by its primary policy." Id. In those circumstances, "[t]he excess carrier must then drop down and provide a defense." Id. The court further clarified that had the umbrella insurer fulfilled this obligation, it would be able to maintain a subrogation claim against the primary insurer to recoup the legal expenses incurred. ¶86 Id. at 1483, n.6. Some courts appear to have recognized a general rule that an insured that has purchased layers of coverage including 34 No. layers of a contractual duty to defend should 2007AP1868 not be left without a "prompt and proper defense[.]" New Hampshire Indem. Co., Inc., Inc. v. (Wash. 2003). Budget Rent-a-Car Systems, 64 P.3d 1239 For example, the Washington Supreme Court stated: "[I]f a primary insurer fails to assume the defense, for any reason, the secondary insurer which has a duty to defend should provide the defense[.]" §§ 11.26, 11.33; Id. at 1243; see also Anderson, supra, Grossman v. Am. Family Mut. Ins. Co., 461 N.W.2d 489 (Minn. App., 1990). We need not and do not adopt a general rule to case, language of the resolve this policies provides however, that given London that the Market was required to assume the defense.20 20 The dissent miscasts and inflates the scope of our analysis. The fundamental error of the dissent is its failure to recognize that our analysis is driven by policy language not generalizable concepts about the role of excess insurance and the duties of excess insurers. Focusing on concepts rather than policy language, the dissent makes a series of predictions about the effect that this opinion will have on all excess insurance policies, regardless of policy language. As a result of this error, the dissent speaks in broad terms. For example, the dissent forecasts that "after today, the excess insurer becomes a surety for the performance of the underlying umbrella and the primary insurer's obligations[.]" Dissent, ¶104. "Even if an insurance policy . . . fails to mention even one word about defending, the majority opinion imposes an unqualified obligation to defend." Id., ¶103. "[T]he majority creates an obligation for the excess insurer to defend as soon as a primary insurer fails to follow through with its obligation to defend." Id., ¶89. Our decision will have no such transformative effect on Wisconsin law because our analysis is driven by the specific policy language at issue in this case. A different result is contingent upon different policy language. 35 No. 2007AP1868 VI ¶87 In sum, based on the language of the policies, we conclude that London Market had a duty to defend. Although its excess umbrella policy does not have a duty to defend provision, it does contain a follow form provision that incorporates the duty to defend found in the underlying Travelers policies. ¶88 We further determine that its duty to defend was not conditioned policies. upon exhaustion Rather, under the of terms the of underlying the "other Travelers insurance" provision, London Market's duty to defend was triggered when the underlying policy." insurer "denie[d] primary liability under its Accordingly, we affirm the circuit court and remand for further proceedings. By the Court. The order of the circuit court is affirmed, and the cause is remanded. 36 No. ¶89 ANNETTE KINGSLAND ZIEGLER, J. 2007AP1868.akz (dissenting). I dissent because the majority opinion creates a duty to defend for London Market that insurance. In doing, language the of so indemnification. terms from London is not the found in majority Market the contract undermines policy, which the of plain promises only The majority conveniently picks and chooses another company's separate, order to craft a duty to defend. underlying policy in Moreover, even if one were to assume, arguendo, that the London Market policy did incorporate a duty to defend from an underlying policy, such a duty could not arise until all primary policies were exhausted. This is so because the London Market policy is an excess policy wherein London Market's obligation is conditioned upon the exhaustion of all underlying policies. By ignoring the clear language of the excess policy, the majority creates an obligation for the excess insurer to defend as soon as a primary insurer fails to follow through with its obligation to defend. Because the majority opinion transforms the excess insurer into a primary insurer by imposing a contravention duty of to the defend terms on of the the excess London insurer, Market in insurance policy, I must respectfully dissent. A. The majority decision is contrary to longstanding principles of insurance law ¶90 True excess coverage "exists as a part of layered coverage created by specific design and is intended to come into play only when the limits of underlying primary coverage are exhausted." 14 Lee R. Russ & 1 Thomas F. Segalla, Couch on No. Insurance § 200:39 (3d ed. 2007). 2007AP1868.akz As a general rule, an excess insurer is not required to defend until the primary insurer's policy limits are exhausted, even when the claim exceeds the primary insurer's refuses to policy defend. limits Id., or when the §§ 200:41-43. primary While insurer insurers and insureds are free to contract around these general rules, here, the parties did not do so. ¶91 The majority weaves together separate and distinct policies from different insurers to reach a particular outcome. In the same breath, the majority also concludes that the London Market policy's language is ambiguous. Essentially, the majority concludes that the policy is ambiguous because it does not specifically pen every conceivable limitation or exclusion. In so doing, the majority effectively imposes a requirement that insurance policies list all possible limitations and exclusions regardless of relevance to avoid ambiguity. the first time concludes that silence on The majority for an issue creates from the duty to mandates that an ambiguity and, thus, a duty. ¶92 The indemnify. duty Neither to defend common is law separate nor insurer always defend its insured. statute Novak v. Am. Family Mut. Ins. Co., 183 Wis. 2d 133, 137, 515 N.W.2d 504 (Ct. App. 1994); 14 Russ & Segalla, supra, § 200:5 ("An insurer does not have a duty to defend."). principles defend if The and there majority creates new is no decision contractual upsets contractual never before been required or recognized. 2 obligation these to longstanding obligations that have No. 2007AP1868.akz B. The London Market policy does not provide a duty to defend ¶93 The London indemnification and Market does not insured, Johnson Controls. policy provide is a a duty policy to of defend its Absent an express promise to defend, no reasonable insured would expect an excess insurance policy to provide a duty to defend, especially in light of the general rule that excess policies do not include a duty to defend. To the contrary, with respect to primary insurance policies, the standard industry practice is to provide a defense along with indemnification. Compare Gross v. Lloyd's of London Ins. Co., 121 Wis. 2d 78, 84, 358 N.W.2d 266 (1984) (noting that primary insurance policies "impose two duties on the insurer with respect to the insured the duty to indemnify and the duty to defend") with §§ 11.16-.18 2 Arnold (5th ed. P. Anderson, 2004) (noting Wisconsin that Insurance specific Law excess insurance and true excess insurance generally do not contain a duty to defend). Here, consistent with industry practice, London Market's policy is an excess policy that does not provide a duty to defend. ¶94 The majority cannot find a duty to defend within the terms of the London Market policy itself; therefore, it resorts to importing that duty from the Travelers policy by way of the London Market policy's "follow form" provision. In so doing, the majority rewrites the insurance policy in order to impose on London Market a duty for which it did not contract, that neither it nor its insured contemplated, and for which it was not paid. 3 No. ¶95 2007AP1868.akz The majority determines that the duty to defend was triggered, not upon the exhaustion of the underlying policies, but rather, upon the liability. Majority acknowledges that underlying op., "it is insurer's ¶¶4-5. not The certain denial majority whether of primary nonetheless London Market intended to provide a duty to defend when it drafted the policy" but nevertheless concludes that the proper, and only, inquiry is not what the policy says, but rather, how the policy language could be understood by the insured. Majority op., ¶42. Because "[a]n insurance policy is construed to give effect to the intent of the parties as expressed in the language of the policy," Folkman v. Quamme, 2003 WI 116, ¶12, 264 Wis. 2d 617, 665 N.W.2d 857, I turn to the policy language at issue. ¶96 The pertinent parts of the London Market policy's insuring agreement are as follows: INSURING AGREEMENTS 1. COVERAGE [London Market] hereby agree[s], subject to the limitations, terms and conditions hereinafter mentioned, to indemnify [Johnson Controls] for all sums, which [Johnson Controls] shall be obligated to pay . . . . . . . . CONDITIONS . . . . 2. MAINTENANCE OF UNDERLYING UMBRELLA INSURANCE This policy is subject to the same terms, definitions, exclusions and conditions (except as regards the premium, the amount and Limits of Liability and except 4 No. 2007AP1868.akz as otherwise provided herein) as are contained in [the underlying Travelers policy] . . . . (Emphasis added.) The part of Travelers policy that the majority incorporates into London Market's policy in order to create a duty to defend, reads as follows: Liability. The company . . . shall have the right and duty to defend any suit against [Johnson Controls] seeking damages on account of [a covered incident]. . . . (Emphasis added.) The majority must cut and paste that duty from the Travelers policy to the London Market policy in order to find a duty to defend. ¶97 The plain language of the London Market policy, however, shows that no duty to defend is incorporated because the duty to defend does not in any way modify or affect the duty to indemnify.1 Simply stated, the London Market policy: (1) promises to indemnify its insured; (2) subjects that promise of indemnification to various conditions; and (3) points to the Travelers policy for additional "terms, definitions, exclusions and conditions" to which the duty to indemnify is subject. 1 The London Market undertook "to indemnify [Johnson Controls] for all sums which [Johnson Controls] shall be obligated to pay by reason of liability [] imposed upon [Johnson Controls] by law . . . for damages on account of: (i) Personal Injuries[;] (ii) Property Damage[;] (iii) Advertising Liability caused by or arising out of each occurrence . . . ." London Market's own insuring language set forth the extent of its obligations on the policy and while it agreed to follow the terms of the underlying policies it did so "except as otherwise provided herein." By the majority imposing a duty to defend on London Market, it fails to give effect to the contractual provisions of the policy. Here, the excess policy terms explicitly preclude liability until after the underlying insurers "have paid or have been held liable to pay the full amount of their [limits]." 5 No. 2007AP1868.akz follow form provision, however, does not incorporate the entire Travelers policy by reference. ¶98 policy's The majority follow form opinion employs provision policy's obligation to defend. to the London incorporate the Market Travelers Instead of determining that the follow form addressed the level of underlying coverage and the type of claims that were covered so that the London Market policy remained truly an excess umbrella policy, the majority creates a duty to defend. contrary to the language In so doing, the majority operates of the insurance general rule for excess liability policies. contract and the 2 Anderson, supra, § 11.16. ¶99 Instead of acknowledging this plain reading of London Market's insurance policy, the majority sidesteps this point and incorporates a portion of the Travelers policy's insurance" clause into the London Market policy. "other The majority claims that under this clause "London Market would be required to 'respond under [its] policy as though such other insurance were not available' in the event that the underlying insurer 'denies primary liability under its policy' unless the London Market policy otherwise provides." Majority op., ¶63. ¶100 In order to accomplish this additional rewriting of the contract, the majority ignores the "other insurance" clause already present in the London Market policy. The London Market policy's "other insurance" clause explicitly limits the policy to excess coverage, which is antithetical to dropping down to provide a primary defense. See infra Part C. 6 Therefore, the No. 2007AP1868.akz London Market policy does provide terms other than the "other insurance" clause Travelers policy's incorporated in into the Travelers "other London policy. insurance" Market's As policy, the cannot clause such, be under the even majority's logic.2 ¶101 Particularly troublesome here is that the plaintiff seeks to recover defense costs for an action commenced 25 years ago. an Notwithstanding this, the majority has chosen to transform excess Under the insurance policy into majority's logic, when a a primary insurance primary insurer policy. fails to defend, even if this occurs as soon as a lawsuit is commenced, an excess insurer must provide a defense to the insured. ¶102 The majority also concludes that any consideration of the cost of the premiums is "not helpful" in reaching its conclusion and states that "contract interpretation should be based on the language of the policy rather conjecture about extrinsic information." 52. than a court's Majority op., ¶¶54, In this case, the relatively low cost of the premiums could at least inform some part of the analysis as to the expectations of the parties in obtaining excess coverage, especially in light of the fact that the duty to defend does not appear anywhere in 2 The majority designs its definition of liability by concluding that liability is not otherwise provided in the London Market policy. As a result, once again, the majority picks and chooses which terms in which policy meet the outcome that it desires. 7 No. 2007AP1868.akz the London Market policy.3 See 2 Anderson, supra, § 11.16 ("An insurer a typically charges lower premium for specific or following-form excess insurance based on the decreased risk of a judgment or settlement within higher layers of coverage, as well as the absence of a duty to defend the insured.") (emphasis added). ¶103 In the end, the consumers of excess insurance policies will be the ones who pay for the majority's decision. No longer will an excess insurance carrier be able to charge only $20,000 for a $10 million policy of indemnity coverage as an excess policy. Under the holding of the majority opinion, a duty to defend can begin at the inception of the lawsuit because its holding causes the excess insurer to become the primary insurer whenever the primary insurer does not perform. Even if an insurance policy, such as the London Market policy here, fails to mention even one word about defending, the majority opinion imposes an unqualified obligation to defend. according policy to the majority, specifically that requires the that London the It matters not, Market insurance underlying insurance remain in full force and effect before any liability may arise for London Market. 3 With respect to the underlying policy, Travelers was paid yearly premiums of $195,000 and $273,500 to provide $7 million of umbrella coverage, including both indemnification and defense. In comparison, London Market was paid a yearly premium of $20,000 to provide $10 million of coverage excess to the Travelers policy for indemnification. The majority would have you believe that the $20,000 premium compensates London Market for not only the $10 million of indemnification, but also for providing a legal defense against all claims from day one. 8 No. 2007AP1868.akz ¶104 Thus, after today, the excess insurer becomes a surety for the performance of the underlying umbrella and the primary insurer's obligations, even if the primary insurer has breached its duty to defend. C. Even assuming, arguendo, that a duty to defend exists, the policy first requires exhaustion of the primary policy ¶105 Even if one were to conclude that the London Market policy incorporates a duty to defend from the Travelers policy, I must dissent because the London Market policy is an excess policy to the Travelers policy exhaustion of the Travelers policy. and is conditioned upon As previously stated, an "'excess insurer is not obligated to defend until the primary [policy] limits are exhausted.'" Azco Hennes-Sanco, Ltd. v. Wis. Ins. Sec. Fund, 177 Wis. 2d 563, 568, 502 N.W.2d 887 (Ct. App. 1993)(citation omitted).4 London Market's policy makes clear, in at least two places that any duty it has to Johnson 4 See also 2 Arnold P. Anderson, Wisconsin Insurance Law § 11.14 (5th ed. 2004) ("Excess or secondary insurance coverage attaches only after a predetermined amount of primary coverage is exhausted."); 1 Allen D. Windt, Insurance Claims & Disputes § 4.11 (5th ed. 2007) ("Most courts have held that an excess insurer that has a duty to defend is not obligated to provide a defense if the primary insurer is so obligated."); 14 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 200:43 (3d ed. 2007) ("As a general rule, a true excess insurer's duty to defend is not automatically triggered when the primary insurer denies coverage."). 9 No. 2007AP1868.akz Controls is conditioned upon the exhaustion of the Travelers policy.5 ¶106 The London Market policy clearly defines itself as an excess policy. The pertinent language at "Conditions" reads as follows: 5. OTHER INSURANCE If other valid and collectible insurance with any other Insurer is available to [Johnson Controls] covering a loss also covered by this Policy, other than insurance that is specifically stated to be in excess of this Policy, the insurance afforded by this Policy shall be in excess of and shall not contribute with such other insurance. (Emphasis added.) This clause solidifies London Market's place in the hierarchy of insurance policies below all policies that specifically state they are in excess to London Market's policy and above all other policies. ¶107 Furthermore, Umbrella Liability" the London expressly Market conditions policy its at "Excess performance on exhaustion of the Travelers policy limits: 2. LIMIT OF LIABILITY-UNDERLYING LIMITS It is expressly agreed that liability shall attach to [London Market] only after [Travelers] ha[s] paid or 5 The Travelers policy is not the only policy that underlies the London Market policy. However, the Travelers policy did not condition either its duty to defend or its duty to indemnify on the exhaustion of policies that underlie the Travelers policy, as the London Market policy did. Instead, the Travelers policy provided that Travelers would "defend any suit against the insured seeking damages on account of [a covered] injury" and would share indemnification costs with the underlying insurance policies on one of two pro rata bases, depending on the language in the other insurance contract. For simplicity's sake, this dissent treats the Travelers policy as if it were primary. 10 No. 2007AP1868.akz ha[s] been held liable to pay the full amount of [its] respective ultimate net loss liability . . . . "[U]ltimate net loss" is the $7 million underlying limits in the Travelers policy. ¶108 While it is true that the policy issued by London Market is a follow form insurance policy, its duties arise only after liability reaches a certain "excess" monetary level. See Allmerica Fin. Corp. v. Certain Underwriters at Lloyd's, London, 871 N.E.2d 418, 426 (Mass. 2007) ("Follow form language thus allows an insured to have coverage for the same set of potential losses (and with the same set of exceptions) in each layer of the insurance program. The language does not, however, bind the various insurers to a form of joint liability should coverage at a prior layer fail. The layer of risk each insurer covers is defined and distinct."); see also 2 Anderson, supra, § 11.18 ("'An excess policy covering the same risks that are covered by the underlying policy is known as a "following form" policy.'") (quoting Coleman Co., Inc. v. California Union Ins. Co., 960 F.2d 1529, 1530 n.1 (10th Cir. 1992)). ¶109 The "limits of majority's liability" interpretation (or exhaustion) of London provision Market's is somewhat confusing. Majority op., ¶¶65-75. The majority concedes that the limits of provides does not exhausted." liability attach until Id., ¶67. provision the underlying that policies "'liability' have been However, the majority concludes that this provision is limited to the duty to indemnify and not the duty to defend. The majority inconsistently concludes that when it comes to indemnification, "liability" does not attach until 11 No. the underlying policy is exhausted, that but 2007AP1868.akz "liability" attaches before exhaustion when it comes to the duty to defend. Its rationale is inconsistent and cannot be reconciled. ¶110 Specifically, the London Market excess umbrella policy states: "[L]iabilities shall attach to [London Market] only after the Underlying Umbrella Insurers have paid or have been held liable to pay" their policy limits. majority's creativity, any assumed duty Thus, despite the to defend under the excess umbrella policy cannot arise when the coverage under the excess umbrella policy is yet to be invoked. ¶111 Simply stated, the majority wishes to have its cake and eat it too. On the one hand, the majority concludes that the London Market policy does not define the term "liability" and so it imports Travelers policy's definition in its rewriting of the contract to create that duty to defend. Thus, even if liability includes the duty to defend, as the majority would redefine it, such duty can reasonably attach only after Travelers has paid or been liable to pay the full amount of its ultimate net loss liability, that is, $7 million. This disparity magnifies the majority's overreaching when it comes to creating the duty to defend, because in point of fact, even if it can be said that there is a duty to defend, that duty can attach only after Travelers has exhausted its policy limits. ¶112 The majority's reasoning errs in its conclusion that once Travelers refuses to defend Johnson Controls, London Market is required to drop down to fill Travelers' shoes and provide a defense. It requires that London Market's duty to defend is in 12 No. full force and effect. defend is triggered, 2007AP1868.akz At the same time, Travelers' duty to that is, from the tendered the defense to its insurers. day Johnson Controls If the majority indeed believes that Travelers' duty to defend was fully incorporated into London Market's policy and is not subject to the exhaustion requirement, the logical conclusion is that London Market's duty to defend is triggered on day one and converts an excess insurer into a primary insurer when it comes to the duty to defend. This conclusion misreads both the insurance policy's provisions and misstates Wisconsin law. ¶113 London Market's policy contains no promise down in the event of denial of defense by Travelers. to drop As just noted, London Market's policy attaches, at most, only after the Travelers policy is exhausted. ¶114 The majority states that there is no absolute rule of law that an excess insurer's duty to defend is never triggered until the underlying policy limits are exhausted. Of course this is true, since insurers and insureds can contract so that an excess insurer's duty to defend is triggered prior to the exhaustion parties did of the not underlying so contract policy here. limits. However, Moreover, the the majority opinion lacks any Wisconsin case in which a court required an excess insurer to provide a defense before the underlying policy limits were exhausted. ¶115 For example, the majority reads Teigen v. Jelco of Wisconsin, Inc., 124 Wis. 2d 1, 367 N.W.2d 806 (1985), as requiring a defense by the excess insurer before exhaustion of 13 No. primary insurance. 2007AP1868.akz This reading of Teigen is far from complete. In Teigen, the insured plaintiff had executed a Loy6 release, in which the plaintiff accepted defendant's released primary insurer's the defendant and a settlement policy his sum limits, primary less but insurer than in for the exchange the full amount of the policy limits and for any amount above the limits of the excess insurer, specifically reserving a cause of action against the excess insurer. Id. The court held that the excess insurer had a duty to defend after the release was executed. Id. at 11-12. ¶116 While the plaintiff in Teigen was not paid the primary insurer's full policy limits, those limits were exhausted because the insured received the full protection of the primary policy for which he had bargained. Id. at 8 ("The trial court correctly concluded that [the primary insurer] has exhausted its liability by virtue of the Loy release. The effect of the settlement is that [the primary insurer] has discharged in toto its obligation to its insured.")(emphasis added). ¶117 Loy and Teigen highlight, rather than abrogate, the necessity of exhausting a primary insurer's policy limits before an excess insurer can be required to provide a defense. a Loy release settlement insurer's defend. that below duty to exhausts those a limits defend if primary does the insurer's not insurer trigger had Absent limits, an a excess contracted to See Azco, 177 Wis. 2d at 567 (holding that an excess insurer had no duty to defend a claim that settled within the 6 Loy v. Bunderson, 107 Wis. 2d 400, 320 N.W.2d 175 (1982). 14 No. 2007AP1868.akz primary insurer's limits, even where the original claim brought exceeded the primary insurer's limits). ¶118 The majority also cites American Motorists Insurance Co. v. Trane Co., 544 F. Supp. 669, 692 (W.D. Wis. 1982), for the proposition that "[i]f the underlying insurer has refused to defend . . . , the excess insurer will have a duty to defend . . . ." 177 However, this reasoning was explicitly rejected in Azco. Wis. 2d at 568 ("Azco . . . argues that nonetheless follow the district court's reasoning. we should We decline to do so . . . ."). ¶119 The Azco court went further than rejecting Trane; it endorsed and adopted the view of a majority of jurisdictions, which hold that an excess insurer has no obligation to defend its insured until the primary insurer's limits are exhausted, absent express policy language otherwise. 15 Id. at 568 (citing No. 2007AP1868.akz Firemen's Fund Ins. Co. v. Rairigh, 475 A.2d 509, 518 (Md. Ct. Spec. App. 1984) cert. denied, 482 A.2d 501 (1984)).7 ¶120 Finally, Southeast Wisconsin the majority Professional relies Baseball on a footnote in Park District v. Mitsubishi Heavy Industries America, Inc., 2007 WI App 185, ¶8 n.4, 304 Wis. 2d 637, 738 N.W.2d 87, which says that an excess insurer must drop down and defend when a primary insurer fails to do so. Reliance on this footnote is likewise misplaced. First, the question of whether an excess insurer was required to defend was not before the court. Second, the footnote cites to the opinion of the federal district court in Trane and ignored 7 The Azco court went on to cite numerous other sources demonstrating the majority rule. Azco Hennes-Sanco, Ltd. v. Wis. Ins. Sec. Fund, 177 Wis. 2d 563, 569, 571 72 & nn.3 4, 502 N.W.2d 887 (Ct. App. 1993) (citing Signal Cos. v. Harbor Ins. Co., 612 P.2d 889 (Cal. 1980); Southgate State Bank & Trust Co. v. United Pac. Ins. Co., 588 P.2d 486 (Kan. Ct. App. 1979); James M. Fredericks, Comments, Excess Insurer's Duty to Defend After Primary Insurer Settles Within Policy Limits: Wisconsin After Loy and Teigen, 70 Marq. L. Rev. 285, 294-95 (1987); American Concept Ins. Co. v. Certain Underwriters at Lloyds of London, 467 N.W.2d 480 (S.D. 1991); Am. Sur. Co. v. State Farm Mut. Auto. Ins. Co., 142 N.W.2d 304 (Minn. 1966); Hartford Accident & Indem. Co. v. Cont'l Nat'l Am. Ins. Cos., 861 F.2d 1184 (9th Cir. 1988); P.L. Kanter Agency, Inc. v. Cont'l Cas. Co., 541 F.2d 519 (6th Cir. 1976); West Am. Ins. Co. v. Allstate Ins. Co., 295 F.2d 513 (10th Cir. 1961); Colo. Farm Bureau Mut. Ins. Co. v. N. Am. Reinsurance Corp., 802 P.2d 1196 (Colo. Ct. App. 1990); Occidental Fire & Cas. Co. v. Underwriters at Lloyd's, London, 311 N.E.2d 330 (Ill. App. Ct. 1974); Mission Nat'l Ins. Co. v. Duke Transp. Co., Inc., 792 F.2d 550 (5th Cir. 1986); Radar v. Duke Transp. Inc., 492 So.2d 532 (La. Ct. App. 1986)). 16 No. Azco's rejection of that opinion.8 2007AP1868.akz Also, in Trane, unlike the case now before this court, the excess insurer elected to defend and later sought reimbursement from the primary insurer. CONCLUSION ¶121 An insurance policy is a contract. law or statutory duty to defend. There is no common There is a duty to operate in good faith; a violation of that duty is a tort, not a breach of contract.9 Here, London Market's excess policy does not provide a duty to defend. Furthermore, even if one were to assume, arguendo, that there is a duty to defend, it cannot be invoked until the primary policy is exhausted because of the London Market policy language. ¶122 In sum, the majority's conclusion increases the likelihood of nonperformance by primary insurers or underlying insurers as it shifts costs to excess insurance providers. ¶123 London Market issued an excess liability policy that did not include policyholder. a contractual undertaking to defend the Judicially creating a duty to defend under this excess umbrella policy may benefit certain parties in the case at issue, but it adversely affects the future costs of excess 8 The court of appeals is not permitted to overrule its own holdings, which the footnote in Southeast tacitly does. See Cook v. Cook, 208 Wis. 2d 166, 189-90, 560 N.W.2d 246 (1997) ("[O]nly the supreme court, the highest court in the state, has the power to overrule, modify or withdraw language from a published opinion of the court of appeals."). Thus, footnote 4 from Southeast has no precedential value. 9 Under the majority's logic, what happens to a bad faith claim now? Does the excess carrier become the injured party with respect to that cause of action? 17 No. 2007AP1868.akz coverage and ignores fundamental principles of insurance law, which underlie our system of justice. ¶124 For the foregoing reasons I dissent. ¶125 I am authorized to state that Justices PATIENCE DRAKE ROGGENSACK and MICHAEL J. GABLEMAN join this dissent. 18 No. 1 2007AP1868.akz
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