The Wisconsin Supreme Court in Choinsky v. Employers Insurance Co. of Wausau, 390 Wis. 2d 209, 938 N.W.2d 548 (2020), held that an insurance company’s retroactive payment of its insured’s defense costs satisfied the insurer’s duty to defend, thereby insulating the insurer from liability.
Insurers in Wisconsin have several options available when the insurer has concluded that it owes no duty to defend. First, the insurer can defend under a reservation of rights. Second, the insurer can both defend under a reservation of rights, as well as seek a declaratory judgment on coverage. Third, the insurer can enter into a non-waiver agreement with its insured, whereby the insurer preserves its right to contest coverage, and finally, the insurer can file a motion to bifurcate liability and coverage issues and then stay the liability determination until coverage has been determined.
In Choinsky, the Court found that where the insurance company initially denied a tendered claim, but then filed a timely motion to bifurcate and stay the liability determination until coverage was decided, the insurer did not breach its duty to defend under those circumstances. If the trial court denied any part of the motion to bifurcate the coverage issue, with the result that the insured was then simultaneously defending the liability suit and litigating coverage against the insurer, that the insurance company was required to defend its insured in the liability portion of the lawsuit. With respect to the period of time in which no defense was provided leading up to the trial court’s determination, the insurance company was required to retroactively pay for the defense to the date of tender, under a reservation of rights, pending the trial court’s decision on coverage. Additionally, the Court found that the insurance company was entitled to a reasonable amount of time to negotiate a reasonable fee with the attorney that had been hired by the insured to defend the liability action after the Court denied the bifurcation motion. The mere fact that the insured was forced to pay for the cost of defending itself against the liability claim while pursuing coverage simultaneously during the insurer’s negotiation of a reasonable fee did not, by itself, establish a breach of the insurance company’s duty to defend, provided that the insurance company agreed to pay reasonable attorney’s fees incurred from the date of the tender.