Wisconsin Legal Update
Subrogation; Made Whole Doctrine
Muller v. Society Ins.
2008 WI 50, --- N.W.2d ----, 2008 WL 2221771 (2008)
An insured sustained a fire loss of $697,981.58 as the result of the alleged negligence of an electrical contractor. The fire insurer, Society Insurance, paid first-party policy limits of $407,378.88. Society and its insured cooperated in litigation against the tortfeasor to the point of an initial mediation, after which they negotiated and entered separate settlements with the tortfeasor, the insured first followed by the insurer. The insured settled its claim against the tortfeasor for $120,000 and Society settled its subrogation claim against the tortfeasor for $190,000, for a total payment by the tortfeasor of $310,000 from its $1,000,000 liability policy limit. The insured then sought to compel Society to disgorge a portion of its settlement (in a stipulated amount of $59,725.60) on the basis that it had not been made whole by its settlement with the tortfeasor. The Supreme Court held that the “made whole” doctrine did not apply in this case because (a) Society had fully discharged its first-party obligation to its insured under its policy (i.e. paid its first-party policy limits), (b) the tortfeasor had adequate liability limits to respond to the claims of both the insured and Society so there was no limited pool of funds over which the insured and Society were competing, and (c) the insured was given the first opportunity to settle with the tortfeasor before Society consummated its own settlement.
Of note, the court seemed to place weight on the fact that the insured here settled with the tortfeasor without entering into an indemnification agreement to protect the tortfeasor from Society’s subrogation claim. Such agreements had earlier been approved in Schulte v. Frazin, 176 Wis.2d 622, 500 N.W.2d 305 (Wis. 1993), as a de facto means of creating a limited pool of funds to set the stage for a Rimes hearing. It appears that the Schulte procedures, which might have been used by the insured to cut off Society’s subrogation rights, were not strictly followed here.
Of further note, the court observed in regard to the use of such Schulte-style indemnification agreements:
To date this court has set no conditions on an insured’s agreement to a settlement that effectively extinguishes the rights of the subrogee insurer. This means that to date we have not explicitly addressed a situation where an insured has voluntarily signed an indemnification agreement with the tortfeasor without being made whole, even though there were ample funds available to satisfy the claim. This contingency is disturbing because it could permit the tortfeasor to escape full liability while it extinguished the contractual rights of the subrogee without the subrogee’s consent, or, possibly, even the subrogee’s knowledge.
2008 WI 50, ¶75 (Emphasis supplied.)
Thus, it appears that the court has left the door open to a further re-examination of the equities underlying the manner in which the made whole doctrine has been applied in the past.
Torts; Joint & Several Liability; Concerted Action; §895.045(2), Wis. Stats.
Richards v. Badger Mutual Insurance Co.
2008 WI 52, ___ N.W.2d ___, 2008 WL 2245858 (2008)
Section 895.045(2), Wis. Stats., codifies the common law “concerted action” theory of liability. Under that theory, three elements are necessary to prove “concerted action”: (1) an agreement among the parties, either explicit or implicit, to act in accordance with a common scheme or plan, (2) mutual, tortious acts committed in furtherance of the common scheme or plan, and (3) that the tortious act(s) committed in furtherance of the common scheme or plan must be the one(s) that cause injury or damage. Under the common law theory of “concerted action,” each defendant involved in concerted action that causes damage assumes the liability of the other similarly situated defendants, making them all equally liable to the plaintiff. §895.045(2) specifies that such persons are jointly and severally liable.
The “concerted action” theory of liability does not apply in all cases involving joint tortfeasors. Parallel actions or independent actions that are negligent and combine to result in damage do not constitute “concerted action.”
Before §895.045(2), Wis. Stats., comes into play, a person must be found causally negligent and liable to the plaintiff under §895.045(1), Wis. Stats. Then, if the elements for application of §895.045(2), Wis. Stats., are proved, those involved in concerted action that harmed the plaintiff may be held jointly and severally liable to the plaintiff even if their respective share of the total causal negligence is less than 51%.
In this case, two underage defendants obtained beer with assistance from an adult co-worker of one of them. The co-worker had no further involvement. Later that night, the two drank some of the beer at a party and then left together in a car driven by one of them. The driver ran a stop sign and collided with the plaintiff’s husband, who was killed. The surviving spouse settled with the driver and brought suit against the passenger claiming that he was jointly and severally liable under §895.045(2). The passenger joined the co-worker. On a stipulated set of facts, the court held that the act of procuring the beer was tortious conduct involving concerted action but that such concerted action did not cause any injury. Both the passenger and his co-worker were providers of alcohol to the minor driver and, therefore liable in tort for violation of §125.07(1)(a)1, Wis. Stats. The subsequent act of consuming the beer was also tortious but was, at best, parallel action by the two underaged participants. The decision to drive while intoxicated, which ultimately resulted in the wrongful death, was that of the driver. The latter did not involve concerted action with the other defendants. Accordingly, the liability of the passenger was limited to the percentage of causal negligence attributable to him, since the amount was less than 51%. He was not jointly and severally liable to the plaintiff.
CGL Policy; Advertising Injury; Trademark & Copyright Infringement
Acuity v. Bagadia
2008 WI 62, 750 N.W.2d 817
Advertising injury coverage for “infringement of title” under a CGL policy encompassed a claim for trademark infringement. Advertising activity of the insured contributed materially to the insured’s infringement of the copyright and trademarks of others, which was previously established in separate litigation.
Note: The advertising injury language of the ISO CGL policy has changed substantially over the years and a case with facts similar to this may result in a different coverage outcome if the applicable CGL language is different.
Personal Liability Coverage; Duty to Defend
Liebovich v. Minnesota Insurance Co.
2008 WI 75, ___ N.W.2d ___
A special “private client group” homeowners liability policy provided coverage broad enough to include allegations against the insured in a law suit by his neighbors seeking damages and injunctive relief arising out of the insured’s violation of setback requirements in the construction of his lake home. Ambiguities in the policy were construed in favor of the insured. The intentional act exclusion was found inapplicable because of the lack of any allegation that the insured intended to injure his neighbors. Accordingly, the insurer’s rejection of the tender of defense and refusal to defend constituted a breach of the insurance contract.
Note: This case turns on an interpretation of a specialized and unusual insurance policy, which contains language that is different from the standard CGL or personal homeowner’s liability policies.
Economic Loss Doctrine; Misrepresentation; Residential & Non-commercial Real Estate Transactions; Fraud In the Inducement Exception
Below v. Norton
2008 WI 77, ___ N.W.2d ___
The economic loss doctrine bars tort claims for intentional misrepresentation in residential and non-commercial real estate transactions. Where the seller allegedly failed to disclose the existence of a broken sewer line to the buyer, the buyer’s damages, inadequate value, were economic in nature. The buyer had adequate remedies available in the form of claims for breach of contract and violation of §100.18, Wis.Stats. (prohibiting false, deceptive or misleading statements) or §709.02, Stats. (requiring disclosure of known defects in the premises). The fraud in the inducement exception to the economic loss doctrine did not apply because the alleged misrepresentation was not extraneous to the transaction. It related to the condition of the premises, which was the subject of the transaction.
Wisconsin Home Improvement Practices Act; Liability for Violation; Damages and Multiple Damages; Actual Attorney Fees
Stuart v. Weisflog’s Showroom Gallery, Inc. (Stuart I)
2008 WI 22, ___ N.W.2d ___
Where a design/build contractor was alleged to have made misrepresentations to customers in violation of the Wisconsin Home Improvement Practices Act (HIPA), found in Wis.Adm.Code Ch. ATCP 110, and to have defectively constructed a home addition, causing actual damages of $95,000, the court held:
(1) The statute of limitations for claims brought under the Wisconsin Home Improvement Practices Act (HIPA) and for double damages under §100.25(5), Wis. Stats., is six years under §893.93(1)(b), Wis. Stats., and is governed by the discovery rule.
(2) The entire damage award should be doubled Under §100.25(5), Wis. Stats., even though HIPA violations contribute to only a part of the total claimed damages.
(3) The trial court erred in asking the jury to apportion the damages between HIPA and non-HIPA claims.
(4) The actual attorney fees recoverable under Ch. ATCP 110 should be calculated on the entire amount of the damage award.
(5) The economic loss doctrine does not bar the plaintiffs’ HIPA and non-HIPA claims because, under the predominant purpose test, the architectural services contract in this case was at the core of the transaction.
(6) A corporate employee who is personally guilty of HIPA violations may be held personally liable for resulting damages.
CGL Coverage; General Contractor; Design & Construction Defects; Occurrence; Accident; Your Work Exclusion
Stuart v. Weisflog’s Showroom Gallery, Inc. (Stuart II)
2008 WI 86, ___ N.W.2d ___
A CGL policy issued to a design/build contractor did not cover liability arising out of (a) misrepresentations made by the contractor in securing the contract for the project or (b) defects in the contractor’s work. The contractor’s misrepresentations about his knowledge and professional skill were not “accidents,” as required to qualify as a covered “occurrence” under the policy. Defects in the construction were excluded by the “your work” exclusion in the policy. The fact that some of the defective work was performed by subcontractors did not trigger the subcontractor exception to the “your work” exclusion because the subcontractors were not negligent in the performance of their work. They accurately followed the defective design and material specifications of the general contractor.
Homeowners Liability Coverage; Occurrence; Accident; Intentional Act; Self Defense; Wrongful Death; Duty to Defend
Estate of Sustache v. American Family Mutual Ins. Co.
2008 WI 87, ___ N.W.2d ___
A complaint alleging that the defendant committed a “battery without provocation…intentionally causing bodily harm to [the] plaintiff without plaintiff’s consent” did not allege an event that a reasonable person would consider an “accident.” For that reason, the event was not a covered “occurrence” under the defendant’s homeowners policy and the insurer had no duty to defend the claim. Since the coverage issue was resolved by reference to the insuring agreement, only, it was not necessary for the court to construe or apply the policy’s intentional injury exclusion.
The “four-corners rule” for determining the insurer’s duty to defend did not come into play in this case. Here the insurer fully discharged its duty to defend by (a) providing a defense to the insured under a reservation of rights, (b) seeking a bifurcation and stay of proceedings on the merits and (c) asking for a declaratory ruling on the coverage issues and its duty to defend before the case on the merits was allowed to proceed.
Negligence; Duty to Warn; Sexual Assault
Hornback v. Archdiocese of Milwaukee
2008 WI 98, ___ N.W.2d ___
Sexual abuse victims of a former employee of the Diocese of Madison sued the diocese based on the alleged failure of the diocese to warn unknown and unspecified future employers and victims of the former employee’s tendencies to sexually abuse children. The alleged assaults occurred after the former employee left Madison and went to work for another diocese in another state. Noting that (a) the Diocese of Madison had no way to know in advance where or to whom to address any warnings and (b) there was no special relationship between the diocese and the victims that would otherwise create a duty, the court held that the Diocese of Madison did not have a duty to warn such unforeseeable and unknowable future employers or victims. The court recognized that to impose such a duty on a former employer would create an impossible burden. The court also determined that even if such a duty existed, public policy would preclude the imposition of liability because to do so would enter a field where there is no sensible or just stopping point. A statute of limitations issue was not reached by the Supreme Court because of its decision on the merits of the claim.
In addition, an equally divided Supreme Court affirmed a court of appeals decision dismissing similar claims against the Archdiocese of Milwaukee. The court of appeals had affirmed a dismissal of the claims by the trial court on statute of limitations grounds. Hornback v. Archdiocese of Milwaukee, No.2006AP291, unpublished slip op. (Wis.Ct.App. Nov. 28, 2006). On the merits, the claims against the Archdiocese differed from those against the Diocese of Madison in that it was alleged that the Archdiocese had made certain representations to victims in its locale to the effect that it would send the former employee to counseling and that he would never have contact with children again.
Homeowners Liability Coverage; Sexual Assault; Intentional Act Exclusion; Severability Provision; Reasonable Expectations
J.G. v. Wangard
2008 WI 99, ___ N.W.2d ___
A homeowners liability policy that excluded coverage for “any damages arising out of an act intended by any covered person to cause personal injury” did not cover the liability of one named insured (the wife) who was alleged to have negligently failed to prevent the sexual assault of the minor plaintiffs by another named insured (the husband). The unambiguous language of the policy excluded coverage for all damages for which any insured was liable arising out of the alleged sexual assaults. The existence of a severability clause applying the policy language to each insured independently made no difference, given the wording of the policy. No reasonable insured would expect the policy to cover any damages for any insured arising out of the sexual assault of a minor by any insured.