Anderson v. Wisconsin Lawyers Mutual Insurance Company: An Excellent Result for Insurers, Insureds, and Claimants
A serious problem once existed. Wisconsin lawyers either could not find legal malpractice insurance, or when it could be found, it was too expensive to buy. This was bad for insurers, lawyers, and potential claimants.
The problem was the standard occurrence form of insurance. It was a poor fit for insuring the risk of legal malpractice liability.1 Fortunately, a solution was developed: claims-made-and-reported insurance. It was a good fit for insuring the risk of legal malpractice liability. Insurers willing to write legal malpractice insurance, once scarce, became abundant. Insurance, once prohibitively expensive, became affordable. This coverage had worked well for decades without challenges to its basic structure. It had become the gold standard for legal malpractice insurance, not only in Wisconsin but across the United States.2
Then along came Anderson v. Wisconsin Lawyers Mutual Insurance Company.3 The Andersons made a claim against their lawyer. However, their claim was not covered by their lawyer's claims-made and- reported policy because their claim was not reported to Wisconsin Lawyers Mutual Insurance Company (WILMIC) during the policy period. The Andersons argued that Wis. Stat. §§ 631.81(1) and 632.26, known as Wisconsin's Notice-Prejudice Statutes, prohibited the "and reported" part of claims-made-and-reported insurance. If accepted, this argument would have spelled the end to this form of insurance.
All too often in this writer's opinion, courts focus on the impact a case will have on the particular litigant and lose sight of the big picture. That did not happen in Anderson. The Wisconsin Supreme Court recognized that claims-made-and-reported insurance is good for insurance companies, lawyers, and persons making claims against lawyers. The court recognized that the infrequent—and wholly avoidable—absence of coverage for a particular claimant is outweighed by making insurance coverage readily available and affordable for the protection of lawyers and their claimants.
The purpose of this Article—probably no longer a surprise—is not so much to provide a detailed legal analysis of the Anderson holding,4 as it is to explain why the result is good for insurers, insureds, and claimants alike. However, a little background analysis never hurts.
Occurrence policies provide coverage for liability resulting from accidents, acts, errors, or omissions that occur during the policy period. The premium pays for coverage for liability resulting from the occurrence. Generally, coverage is extended regardless of when a claim resulting from the covered occurrence may ultimately be brought against the insured or reported to the insurer. However, occurrence policies universally include a condition precedent which invalidates the coverage promised if the insured fails to provide the insurer with notice of a claim within the time specified in the policy. Historically, absent waiver or estoppel, breach of this condition precedent was a complete defense to the occurrence coverage bought and paid for by the insured without regard to whether or not the insurer suffered any prejudice.5
This general rule was applied to a motor vehicle liability policy in the 1930 case of Bachhuber v. Boosalis, resulting in coverage being invalidated under the policy.6 Shortly thereafter, the Wisconsin Legislature enacted Wis. Stat. § 204.33, the original Notice-Prejudice Statute, which provided in material part: "Failure to give such notice shall not bar liability under such policy of insurance, agreement of indemnity, or bond ... if the insurer was not prejudiced or damaged by such failure, but the burden of proof to so show shall be upon the person claiming such liability."7 Between 1931 and 1979, this statute only applied to motor vehicle liability policies.8 Motor vehicle policies are occurrence policies. Therefore, between 1931 and 1979, the case law defining the "prejudice" required by the statute was applied only with respect to occurrence policies. Each case applied the statute to a situation in which it was undisputed that a covered occurrence existed, and the sole question was whether that coverage should be "invalidated" because the insured breached the policy's notice of claim condition precedent.
Importantly, occurrence insurers could hardly claim prejudice from late notice alone, because they were required to provide the occurrence coverage that the policy promised to provide and that the policyholder paid to obtain. Therefore, prejudice required something more than just late notice. Prejudice required that the insurer show that "a serious impairment of the insurer's ability to investigate, evaluate or settle a claim, to determine coverage, or present an effective defense, result[ed] from the unexcused failure of the insured to provide timely notice."9
In 1979, the Notice-Prejudice Statute discussed above was expanded to apply to all liability insurance policies, no longer just motor vehicle liability insurance policies. This new statute, Wis. Stat. § 632.26, provides in material part:
(1)(b) That failure to give any notice required by the policy within the time specified does not invalidate a claim made by the insured if the insured shows that it was not reasonably possible to give the notice within the prescribed time and that notice was given as soon as reasonably possible.
(2) Failure to give notice as required by the policy as modified by sub. (1)(b) does not bar liability under the policy if the insurer was not prejudiced by the failure, but the risk of nonpersuasion is upon the person claiming there was no prejudice.10
In a similar fashion, Wis. Stat. § 631.81(1) provides:
Provided notice or proof of loss is furnished as soon as reasonably possible and within one year after the time it was required by the policy, failure to furnish such notice or proof within the time required by the policy does not invalidate or reduce a claim unless the insurer is prejudiced thereby and it was reasonably possible to meet the time limit.11
Neither of these statutes specifies that they apply only to a particular type of liability insurance, such as motor vehicle liability policies. Both only set forth the circumstances in which liability coverage extended by a policy may be invalidated because the insured breached the policy's notice of claim condition precedent.
Then-Chief Justice Abrahamson wrote the lead opinion in Anderson and Justice Ziegler wrote the concurring opinion, which actually is the majority opinion because it was joined by three other justices. These dual opinions evidence a disagreement among the members of the court regarding fundamental rules of statutory construction. This disagreement is an interesting subject, but is beyond the scope of this Article. What is important is that both opinions reached the same conclusions. Both recognized the fundamental difference between occurrence and claims-made-and-reported forms of liability insurance. Both recognized the different roles the notice of claim requirement plays for each form of insurance. Enforcement of the notice condition precedent in occurrence policies forfeits coverage bought and paid for, while that coverage was never bought or paid for in claims-made-and-reported policies. In fact, it is these very differences that make legal malpractice claims-made-and-reported policies work and occurrence policies in the legal malpractice context unworkable.
The policyholder does not pay a premium to cover claims first made or first reported outside the policy period. Coverage for these claims was never extended such that it could be invalidated. Therefore, neither of the Notice-Prejudice Statutes applies. Stated differently, compelling claims made- and-reported insurers to cover claims first made or first reported outside the policy period does prejudice these insurers because it compels them to provide coverage they did not contemplate and for which they did not receive a premium.
Claims-made-and-reported coverage was developed to solve a serious problem. Limiting coverage to claims first made and reported was not an accident. It is what made insurers willing to underwrite the risk and it is what made the premium for underwriting that risk affordable. This is why claims-made-and reported legal malpractice insurance has become the standard type of coverage. By breaking the risk of loss insured into smaller, more precise pieces, multiple insurers have been enabled to underwrite the coverage at affordable premiums.
This is good for insurers. It enables insurers writing claims-made-and-reported legal malpractice insurance to know that their policies will be enforced as written.
It is good for lawyers. It makes malpractice insurance available from multiple insurers at affordable premiums.
Finally, it is good for potential claimants, because it is makes it more likely that the at-fault lawyer will have legal malpractice liability coverage available to pay a claim.
Of course, there is a trade off. There always is. On occasion, coverage for a claim may not be extended because the claim was not reported during the policy period. That said, this has not proven to be a significant problem in the 35-year history of claims made- and-reported legal malpractice insurance. Further, the policyholders are all lawyers—i.e., people who should be sophisticated and who are trained in the law. Similarly, legal malpractice claimants typically are represented by lawyers who also can report the claim to the at-fault lawyer's insurer. Finally, providing notice of a claim is a simple, inexpensive act.
The Andersons made their claim against Attorney Aul in late December. The policy period for Aul's policy did not end until the following April. Prior to April, WILMIC sent Aul an application for the next policy that expressly solicited any unreported claims and reminded Aul to report unreported claims before the existing policy expired. The claim was still not reported.
Typically, ample time to report a claim will exist. Indeed, as in Anderson, months of time will often be available for the claim to be reported. Late notice may occasionally result in the absence of coverage, but this is no harsher than an absence of occurrence coverage when a car accident takes place a few days or weeks after an occurrence policy has expired. A line between coverage and no coverage must always be drawn. No matter where this line is drawn, on occasion some claims will fall just outside of it. The salient point is that the line drawn by claims-made and- reported policies has enabled legal malpractice insurance to be readily available and affordable to attorneys. Claims-made-and-reported coverage works well, and has worked well for decades. The Wisconsin Supreme Court's unanimous recognition that this form of insurance is fully enforceable in Wisconsin is good for all concerned.
Claude Covelli has been trying lawsuits, primarily to juries, in Wisconsin state and federal courts since 1973. He also frequently represents clients before federal and state appellate courts. He has argued appeals before the Wisconsin Court of Appeals, Wisconsin Supreme Court, United States Court of Appeals for the Seventh Circuit, and the United States Supreme Court.
Claude often defends insurance companies and their insureds in personal injury, insurance coverage, bad faith, legal malpractice, and product liability lawsuits. He also represents individuals injured in accidents and parties involved in commercial and business lawsuits. Claude has testified as an expert witness in legal malpractice and insurance bad faith cases.
1 See Ronald E. Mallen & Jeffrey M. Smith, Legal Malpractice, § 38.13, at 94-95 (2014).
2 Id., § 38.14, at 100-101.
3 2015 WI 19, 361 Wis. 2d 63, 862 N.W.2d 304.
4 For a detailed discussion of the facts and circumstances of the Anderson case before it was decided by the Wisconsin Supreme Court, including its procedural history, see Pamela J. Tillman, Are Claims-Made Policies Worth Issuing in Wisconsin from an Insurer's Standpoint?, Wis. Civil Trial J., Vol. 12, No. 3, at 32 (Winter 2014).
5 See RTE Corp. v. Maryland Cas. Co., 74 Wis. 2d 614, 630-31, 247 N.W.2d 171 (1976); Gerrard Realty Corp. v. American States Ins. Co., 89 Wis. 2d 130, 140-41, 277 N.W.2d 863 (1979).
6 200 Wis. 574, 575, 229 N.W. 117 (1930).
7 See Britz v. American Ins. Co., 2 Wis. 2d 192, 201, 86 N.W.2d 18 (1957).
8 Id. at 201-02; RTE Corp., 74 Wis. 2d at 631.
9 Phoenix Contractors, Inc. v. Affiliated Capital Corp., 2004 WI App 103, ¶ 21, 273 Wis. 2d 736, 681 N.W.2d 310.
10 Wis. Stat. § 632.26 (emphasis added).
11 Wis. Stat. § 631.81(1) (emphasis added).