Wisconsin Holds a Defaulting Insurer Strictly Liable for the Unproven Negligence of its Non-Defaulting Insured

WDC Journal Edition: Winter 2009
By: Pamela J. Tillman, Meissner Tierney Fisher & Nichols S.C


The law on default judgments in Wisconsin has typically been viewed as rather harsh on a defendant’s ability to obtain relief from a default judgment.[1] For insurers that are named as defendants under Wisconsin’s direct action statute, the effects of a default judgment in Wisconsin courts have become even more severe. Namely, when an insurer fails to timely file an answer or responsive pleading, Wisconsin law now provides that the insurer’s failure to answer not only establishes automatic coverage under the alleged insurance policy or policies, but also admits its insured’s negligence and that the negligence was a cause of the injured plaintiff’s damages, even though the insured denied those exact allegations in its own answer. This article discusses a 2008 decision from the Wisconsin Supreme Court that further reinforces what is an unreasonable and unjustified outcome for insurers under Wisconsin law. It also discusses some lessons to be learned if you represent an insurer caught in this challenging and tenuous position.

Estate of Otto: Strict Liability of the Insurer

In Estate of Otto v. Physicians Insurance Company of Wisconsin,[2] the plaintiff filed an amended complaint alleging medical negligence directly against two physicians, the health clinic where the physicians worked and the physicians’ insurance carrier, Physicians Insurance Company of Wisconsin, Inc. (“PIC”). The amended complaint alleged that PIC’s insureds, the two co-defendant physicians, “were negligent causing damages to the plaintiff” and that PIC was “directly liable to Plaintiff in an amount to be proven at trial.”[3] The physicians and the clinic filed answers denying that they were negligent and that PIC was liable for any damages. PIC did not timely answer the amended complaint (a fact not discovered until over eight months later during the course of discovery).[4] Upon a motion by the plaintiff, the circuit court struck PIC’s late answer and entered default judgment against it.[5] While not disputing that the default judgment estopped PIC from asserting its coverage defenses under the policy, PIC disputed whether it also had the added effect of automatically rendering it liable for the plaintiff’s damages.[6] The circuit court held that the default rendered PIC liable. The circuit court then ordered the co-defendant insureds dismissed from the lawsuit upon a stipulation between the plaintiff and the insureds, with the order further providing that no finding would be made as to whether the physicians were negligent or had exhibited unprofessional conduct.[7]

The sole issue on appeal was whether the timely answer of PIC’s co-defendant insureds that denied the liability of all defendants inured to PIC’s benefit so as to preclude, as a matter of law, a default judgment against PIC for the plaintiff’s damages, notwithstanding PIC’s acknowledged default. The Wisconsin Supreme Court affirmed the circuit court’s ruling, finding that the physicians’ and the clinic’s answers did not inure to PIC’s benefit.[8] Turning first to Wisconsin’s direct action statute, Wisconsin Statutes § 632.24, the Court, in refuting PIC’s argument that its liability was derivative of its insureds’ liability, determined that the statute renders the insurer “directly liable” to the plaintiff for the conduct of its insureds, pointing to language in the statute that expressly provides that an insurer may be liable “irrespective of whether the liability is presently established or contingent and to become fixed or certain by final judgment against the insured.”[9] In other words, although the statute may provide for an insurer’s liability being derivative of its insured’s conduct, an insurer’s liability is not necessarily dependent on its insured’s liability.[10]

The court also found it important that the direct action statute allows injured plaintiffs to proceed directly against insurers alone, without having to name the insured as a named party, so long as the plaintiff has an actionable cause of action against the insured at the time his action is commenced.[11] This fact, according to the court, is exemplified by Kujawa v. American Indemnity Company[12] in which this court held that Kujawa, an accident victim, could proceed with a properly commenced action against a defendant insurer even though recovery against the tortfeasor insured was barred under the statute of limitations that expired sometime after the action against the insurer was commenced but before the time of judgment.[13] Based upon this, the Court in Estate of Otto concluded that when such an action is brought directly against the insurer and the insured is not a party to the action, the insurer must have the ability to admit or deny the plaintiff’s allegations as the insurer sees fit.[14] Furthermore, it was the plaintiff’s allegations in the present action “for medical negligence directly against PIC” that were deemed admitted by virtue of its failure to timely answer.[15]

The Court, however, recognized that this did not end the analysis because “[t]he direct action statute does not speak to the question whether the timely answer of an insured denying liability may inure to the benefit of a defaulting insurance company so as to preclude a judgment by default against it for the plaintiff’s damages.”[16] Thus, acknowledging the direct action statute did not provide the explicit authority that PIC’s default must constitute an admission of negligence, it turned to the other statutory authority for further guidance, including the law in Wisconsin on default judgment.

The Court determined that the language in Wisconsin Statutes § 806.02, Wisconsin’s default judgment statute, did not provide support for PIC’s position that it could rely on the insureds’ answers by taking advantage of their denials of negligence. In fact, two provisions of § 806.02, which were of particular importance, provide that: (1) a default judgment may be rendered . . . if no issue of law or fact has been joined and if the time for joining issue has expired; and (2) after filing the complaint and an affidavit that the defendant is in default for failure to join issue, the plaintiff may move for judgment according to the demand of the complaint.[17] The Court found that nowhere do these provisions suggest that there are certain circumstances in which one defendant may join issue on behalf of another.[18] Even further, neither of these provisions allowed for some form of “conditional” default based upon an answer being timely filed by a co-defendant.[19] Turning to Wisconsin Statutes § 802.02, which governs pleadings, the Court determined that subsection (4) establishes that “averments in a plaintiff’s complaint are deemed to be admitted when not denied in a defendant’s responsive pleading.”[20] If further noted that there are no exceptions indicating that this general rule does not apply “when the averment is denied in the separate responsive pleading of a co-defendant.”[21] As a result, the Estate of Otto Court found no basis to reverse the default judgment entered against PIC for what it deemed to be PIC’s claimed exemption from the general rules of default judgments and pleadings.

The Court rejected PIC’s suggestion that the consequence of its default in the present case is “merely an admission of unconditional coverage.”[22] Yet, is PIC’s position really so unreasonable given that an insurer’s role in litigation is strictly limited to being the provider of liability or indemnity coverage to the insured, having absolutely nothing to do with the actual conduct of the insured? In other words, just because the plaintiff made allegations of medical negligence arguably against PIC, does that inexorably justify the conclusion reached by the majority? The dissent in Estate of Otto, authored by Justice Roggensack and joined by Justices Prosser and Ziegler, didn’t think so.

The Dissent: Let the Legislative History Repeat Itself

The dissent takes the majority to task in several respects for what it considers the majority’s failure and inability to explain how the direct action statute sets the stage for the insurer’s liability without there being a stipulation or other proof that the insureds were negligent and that their negligence caused the plaintiff’s damages.[23] In an opinion that focuses more on the actual wording and intent of the direct action statute, the dissent begins and ends its analysis with the only mechanism that could theoretically serve as a basis for PIC’s potential liability to the plaintiff and ultimately concludes that the statute, and the 60 years of legislative history, cannot support holding PIC strictly liable.[24]

The dissent’s criticisms focus not on what the majority looked to, but, more accurately, what it failed to examine in reaching its holding. According to the dissent, the majority’s first failure was to disregard the plain meaning of the direct action statute, Wisconsin Statutes § 632.24, which in its current form provides that,

Any bond or policy of insurance covering liability to others for negligence makes the insurer liable, up to the amounts stated in the bond or policy, to persons entitled to recover against the insured for the death of any person or for injury to persons or property, irrespective of whether the liability is presently established or is contingent and to become fixed or certain by final judgment against the insured.[25]

Based upon this, § 632.24 does not make any insurer directly liable to all who choose to bring suit against an insurer, but rather provides only “conditional liability” upon an insurer to those who are entitled to recover against the insured caused by the insured’s negligence.[26] In other words, a default judgment does not automatically render the insurer liable to the plaintiff by virtue of the allegations pled in the complaint because the direct action statute conditions recovery only to those whose injuries were in fact caused by an insured’s negligence. This intent is supported by the legislative history behind the direct action statute going back to its enactment in 1925. Specifically, the legislative history not only puts the current statute into context, but it also confirms that even the original intent of the direct action statute in 1925 was to maintain the necessary connection between an insured’s conduct and the direct liability of the insurer.[27]

As the dissent recognizes, the direct action statute does not create strict liability upon the insurer. The statute still requires that “the liability to which the insurer is exposed is predicated upon the liability of the insured.[28] It further explains that “[u]nder this section [632.24] the claimant has a right of action against the insurer only to the extent that he has the same right of action against the insured for his negligence.[29] Case law discussed by the dissent further supports this construction. Citing precedent in which the court dissociated the direct action statute from automatic recovery statutes, the dissent reasons that the majority overlooked the fact that “the [direct action] statute[] fall[s] far short of creating the no-fault compensatory scheme embodied in the worker’s compensation statutes. . . . The claimant is not locked into a legislatively driven bargain whereby his recovery, though smaller, is not contingent upon his success in a lawsuit.”[30] Consequently, the statutory conditions of the direct action statute tie the liability of the insurer to the insured’s conduct only to the extent that a claimant is “entitled” to recover against the insured before liability can be imposed upon the insurer – something that cannot be achieved solely through a default judgment against the insurer (whose insured answered and expressly denied negligence).

The majority correctly notes that “[t]here can be no recovery against the insurer unless the insured’s conduct giving rise to the liability is proven,” but then proceeds to ignore this statement by holding PIC liable without any proof whatsoever.[31] Trying to circumvent this apparent inconsistency by selectively citing to Loy v. Bunderson[32] does no good because the Court in Loy determined that an insurer is only concerned with the nature of the insured’s conduct and its consequences because, despite the fact that a third party can sue an insurer directly without first recovering a judgment against the insured, naming an insurer directly “does not enlarge the coverage afforded by such a policy or determine the insurer’s liability thereunder.”[33]

The dissent also rightfully takes issue with the majority’s statement that under the direct action statute “the insurer’s liability is not necessarily dependent upon the insured’s liability” – the rationale behind the statement apparently being that a defaulting insurer can be held liable irrespective of the actual liability of the insured. However, even as noted in Kujawa, a case relied upon the majority to support this statement, the Court explained that:

[I]t is quite impossible to read in the [direct action] statutes an intent to create liability on the part of the insurance carrier completely dissociated from the liability of the insured. . . . There is nothing in it to negative the idea that the insurer is not liable unless the assured is, or that any defense under the policy that relieves the insurer from liability against the assured also relieves it from liability as against injured persons.[34]

As explicitly concluded in Kujawa, the direct action statute “does not create liability against the insurer.” Thus, according to the dissent, a claimant is still statutorily obligated to prove the conduct of the insured is negligent and a cause of the alleged damages in order to successfully maintain a direct action against an insurer.[35] The dissent harshly criticizes the majority for ignoring the strong language of Kujawa and the “consistent theme” espoused by the direct action statute and supporting cases.[36]

Moreover, there are cases in which an insurer has utilized the answers and other averments pled by its insured when the insurer has not similarly asserted them.[37] In Haugen v. Wittkopf, the plaintiff contended that the insurer could not “benefit” from the assumption of risk defense asserted by its host insured, a defense lacking from the insurer’s own pleadings. The dissent highlighted the factual similarities in Haugen to PIC’s lack of denial as to its insureds’ alleged medical negligence to the extent that the real parties in interest who could assert or benefit from the defense - the insureds in both instances – had properly done so.[38] As in Haugen, the insureds’ alleged conduct was denied by them directly, a fact that should inure to the benefit of PIC because it remained unproven in the case. This too lends support to the contention that a timely answer by the co-defendant insureds denying their liability to the plaintiff could preclude a default judgment against PIC on these same issues.

The fact that an insurer, whose only tie to the underlying dispute is through the issuance of a policy to the alleged tortfeasor, can unwittingly admit to the negligent and causal liability of its insured – all facts denied by the insured itself – goes against the rationale of “60 years of [legislative] precedent.”[39] Without justifying the basis for doing so, the majority disconnects PIC’s liability from the insureds’ conduct in contravention of the legislative directive that underlies Wisconsin’s direct action statute. As stated by the court in Wiechman, “[i]t is quite impossible to read into the statutes an intent to create liability on the part of the insurance carrier completely dissociated from the liability of the insured.”[40] Yet, that is exactly what the court in Estate of Otto has effectively done.

Lessons to be Learned from Estate of Otto

The holding in Estate of Otto is clearly an unfortunate and significant impediment for an insurer faced with these circumstances.[41] Nevertheless, there are lessons we can, and should, take away from this case.

First of all, if you represent an insurer confronted with a potential default judgment, determine whether the insurer is even subject to the direct action statute. Only those policies of insurance delivered or issued for delivery in Wisconsin are subject to the application of Wisconsin Statutes § 632.24.[42] Conversely stated, despite the fact an accident, injury or other negligent act involving an insured occurs in Wisconsin, an out-of-state insurer that solely issued or delivered a policy outside of Wisconsin cannot properly be added as a named defendant under the direct action statute. Consequently, not only may there be the primary argument that the circuit court does not have personal jurisdiction over the insurer, even despite its failure to timely answer, such a defense may provide a “meritorious basis” for defeating a default judgment or other relief as provided under Wisconsin Statutes § 801.15(2)(a).[43]

Another preliminary consideration for an insurer, or any other defendant facing a default judgment, should be the time frame within the litigation when the untimely answer is discovered. In other words, a plaintiff who discovers an untimely answer well after discovery has commenced (assuming the defendant has appeared in the litigation and participated in discovery) can hardly be equated with a plaintiff who seeks a default judgment immediately following the running of the prescribed answer deadline. The dissent in Estate of Otto alluded to the “troubling” circumstances under which the circuit court granted default after almost a year of litigation in which PIC fully participated, but ultimately left the issue unaddressed because the insurer failed to raise it on appeal.[44] However, a plaintiff that waits (intentionally or due to a failure to discover the default) for a period of time before it moves for default may have a difficult time demonstrating why it suddenly would be prejudiced by an enlargement of time for a defendant to file an answer, especially when the litigation has progressed well beyond the preliminary stages.

Lastly, even if a circuit court enters default judgment against an insurer client, do not freely acquiesce or consent to a dismissal of the other defendants to the action without filing an objection or requesting a deferral or stay of the dismissal pending an appeal of the default judgment. The court in Estate of Otto justified its reasoning for its inability to remand the case, relief that was requested by PIC, on the grounds that no additional defendants remained and that PIC did not allege error with respect to the circuit court’s dismissal of the co-defendants.[45] Therefore, to the extent practicable, request that the defendants remain parties pending the outcome of any appeal, a denial of which may serve as an additional basis for appeal.


Is an insurer being treated fairly when it finds itself in the untenable, and hopefully unlikely, position of missing an answer deadline and subsequently having a default judgment entered against it? After all, the legislative history of Wisconsin’s direct action statute shows that the statute was not intended to grant an injured claimant any greater rights of recovery against an insurer than the claimant would have against the insured for the insured’s negligence. The majority has enlarged the liability of insurers beyond that contemplated by the direct action statute. As a result, the Wisconsin Supreme Court’s decision in Estate of Otto makes it all the more difficult to be an insurer litigating in Wisconsin courts.

[1] See, e.g., “$1.26 billion default judgment entered against Pepsi,” Wis. Law Journal (Oct. 29, 2009), regarding an order for default judgment entered by a Jefferson County Circuit Court judge against Pepsi on September 30, 2009.

[2] 2008 WI 78, 311 Wis. 2d 84, 751 N.W.2d 805.

[3] Id. ¶ 18.

[4] Id. ¶¶ 22, 126 n.3.

[5] Id. ¶ 23.

[6] Id. ¶ 9.

[7] These non-findings were likely made in order to ensure that no mandatory reporting to the National Practitioner Data Bank was triggered and/or no other disciplinary action would be taken by the Medical Examining Board against any of the health care provider defendants. See Health Care Quality Improvement Act of 1986 (42 U.S.C. § 11101, et seq.).

[8] 2008 WI 78, ¶¶ 31, 121.

[9] Id. ¶ 34.

[10] Id. ¶ 35.

[11] Id. ¶ 36.

[12] 245 Wis. 361, 14 N.W.2d 31 (1944).

[13] 2008 WI 78, ¶ 39.

[14] Id. ¶ 40.

[15] Id. ¶ 41. As an aside, one has to wonder how allegations of medical negligence can be admitted by a defendant insurer who indisputably could not have participated in the alleged medical errors or omissions. The absurdity of the majority’s reliance on the allegations of medical negligence directly against PIC in support of making PIC strictly liable is best seen through the consideration of a hypothetical allegation in which a complaint alleges, wrongly, that an insurer also insured or otherwise issued a non-existent policy with unlimited coverage limits. Does a defaulting insurer become liable by virtue of a non-existent policy? What if the complaint inaccurately pled that an insurer issued policies to all defendants rather than just one? An insurer is arguably at the mercy of the plaintiff, or its counsel, for the manner and scope of allegations pled no matter what the accuracy or truth of those allegations may be.

[16] 2008 WI 78, ¶ 43.

[17] Id. ¶ 45 (emphasis added).

[18] Id. ¶ 48.

[19] Id. ¶ 50.

[20] Id. ¶ 51.

[21] Id. ¶ 52.

[22] Id. ¶ 58.

[23] Id. ¶ 133.

[24] The dissent accurately points out that an insurer can only be liable to the plaintiffs through two mechanisms: (1) the insurance contract between the insurer and insured; and (2) a combination of the contract and the direct action statute. Because the insureds themselves denied negligence and, thus, are not “legally obligated to pay anything,” the insurance contract cannot subject PIC to the liability for plaintiff’s damages.

[25] 2008 WI 78, ¶ 137 (emphasis in original).

[26] Id.

[27] Id.

[28] Id. ¶ 147 (quoting Kranzush v. Badger State Mut. Cas. Co., 102 Wis. 2d 56, 75, 307 N.W.2d 256 (1981)).

[29] Id.

[30] Id. ¶ 146.

[31] Id. ¶ 154.

[32] 107 Wis. 2d 400, 320 N.W.2d 175 (1982).

[33] 2008 WI 78, ¶ 157.

[34] Id. ¶ 149 (emphasis added).

[35] Id.

[36] Id. ¶ 152.

[37] Haugen v. Wittkopf, 242 Wis. 276, 7 N.W.2d 886 (1943).

[38] 2008 WI 78, ¶ 168.

[39] Id. ¶ 171.

[40] Id.

[41] In light of the fact that the direct action statute permits a plaintiff to name an insurer directly without naming the insured tortfeasor in the action, the arguments raised by the dissent would not have the same impact if raised in a default scenario where only the insurer is named in the action.

[42] Kenison v. Wellington Ins. Co.¸ 218 Wis. 2d 700, 708-09, 582 N.W.2d 69 (Ct. App. 1998).

[43] See Johns v. County of Oneida, 201Wis. 2d 600, 609, 549 N.W.2d 269 (Ct. App. 1996) (court relied on defendant’s assertion of meritorious defense in affirming trial court’s denial of plaintiff’s default judgment motion).

[44] 2008 WI 78, ¶ 126 n.3.

[45] Id. ¶ 102.