Preview:

COURT OF APPEALS
DECISION
                                                                    DATED AND RELEASED
                                                                                                                           NOTICE
                                                                    June 5, 1997
                                                                    A  party  may  file  with  the  Supreme  Court  a      This opinion is subject to further editing. If
                                                                    petition  to  review  an  adverse  decision  by  the   published, the official version will appear in
                                                                    Court of Appeals.   See § 808.10 and RULE 809.62,      the bound volume of the Official Reports.
STATS.
No.                                                                 96-2625
STATE OF WISCONSIN                                                  IN COURT OF APPEALS
DISTRICT IV
WAYNE K. HERMANSON AND SANDRA HERMANSON,
PLAINTIFFS-APPELLANTS,
V.
HORACE MANN INSURANCE COMPANY,
DEFENDANT-RESPONDENT.
APPEAL from a judgment of the circuit court for La Crosse County:
DENNIS G. MONTABON, Judge.  Reversed and cause remanded.
Before Eich, C.J., Dykman, P.J., and Vergeront, J.




NO. 96-2625
EICH, C.J.   In this “insurer bad-faith”1 case we are asked to hold that
an insurer may properly decline to defend an action against its insured on the basis
of its knowledge of “extraneous information” that does not appear within the four
corners  of  the  complaint  in  the  action.    We  conclude  that  Grieb  v.  Citizens
Casualty Co., 33 Wis.2d 552, 148 N.W.2d 103 (1967), and Professional Office
Buildings, Inc. v. Royal Indemnity Co., 145 Wis.2d 573, 427 N.W.2d 427 (Ct.
App.  1988),  preclude  such  a  holding.    We  therefore  reverse  the  trial  court’s
judgment dismissing the action.
The facts are not in dispute.   Wayne Hermanson,2 a La Crosse police
officer, was injured in an altercation with a young man named Wayne Reuter, and
Reuter was convicted of felony battery to a peace officer.   Hermanson sued Reuter
for damages, claiming that his injuries resulted from Reuter’s negligence, among
other things.   Reuter tendered the defense of Hermanson’s action to Horace Mann
Insurance Company as an insured under his father’s homeowner’s policy.   While
investigating Reuter’s claim, Horace Mann learned of Reuter’s conviction and
refused  the  tender  on  the  basis  of  a  policy provision  excluding  coverage  for
intentionally caused injuries and for acts “constitut[ing] a violation of any criminal
law.”
1 The tort of bad faith results from a breach of the insurer’s fiduciary duty arising out of
the relationship established by the insurance contract.   Anderson v. Continental Ins. Co., 85
Wis.2d 675, 688-89, 271 N.W.2d 368, 375 (1978).   Specifically, when an insurer unreasonably
and in bad faith declines to pay an insured’s claim, it is subject to liability in tort.  Id. at 689, 271
N.W.2d at 375.   To establish bad faith, a plaintiff must demonstrate “the absence of a reasonable
basis for denying benefits” and the insurer’s “knowledge or reckless disregard of the lack of a
reasonable basis for denying the claim.”  Id. at 691, 271 N.W.2d at 376.
2 Hermanson’s wife, Sandra, is also a plaintiff in the action.
2




NO. 96-2625
Reuter and Hermanson eventually settled the lawsuit, and Reuter
assigned to Hermanson any possible  “bad-faith” claim he had against Horace
Mann for breach of its duty to defend him in the underlying lawsuit.   Hermanson
then brought this action, seeking to hold Horace Mann liable for his damages,
claiming  that it  had  unreasonably denied coverage  and refused to defend the
action.    The  trial  court  granted  summary  judgment  dismissing  Hermanson’s
complaint, concluding that Horace Mann’s independent knowledge of Reuter’s
battery conviction was sufficient to trigger the exclusionary clause, which barred
coverage as a matter of law.
Summary judgment  is  appropriate  in  cases  in  which  there  is  no
genuine issue of material fact and the moving party has established entitlement to
judgment as a matter of law.   Germanotta v. National Indem. Co., 119 Wis.2d
293, 296, 349 N.W.2d 733, 735 (Ct. App. 1984).   Because no material facts are in
dispute in this case, we consider the legal issue—whether Horace Mann had a duty
to defend Reuter against Hermanson’s action—de novo.   Benjamin v. Dohm, 189
Wis.2d 352, 359, 525 N.W.2d 371, 373-74 (Ct. App. 1994).
We have held that the duty to defend an insured is “dependent solely
on the allegations of the complaint.”   Professional Office Bldgs., 145 Wis.2d at
581-82, 427 N.W.2d at 430.   Amplifying upon that proposition, we said:
Because  the  duty  to  defend  is  not  based  on  extrinsic
evidence, but is, as the supreme court has said, triggered by
the  allegations  contained  within  the  four  corners  of  the
complaint, it follows that the existence of the duty depends
solely upon the nature of the claim being asserted against
the insured and has nothing to do with the merits of the
claim.
Kenefick v. Hitchcock,  187 Wis.2d  218,  232,  522 N.W.2d  261,  266  (Ct. App.
1994) (quotations and quoted sources omitted).   The rule is unequivocal:            “If there
3




NO. 96-2625
are allegations in the complaint which, if proven, would be covered by the policy,
the insurer has a duty to defend.”   Grube v. Daun, 173 Wis.2d 30, 72, 496 N.W.2d
106, 122 (Ct. App. 1992).   And in considering the complaint we resolve all doubts
in favor of the insured.   Sola Basic Indus., Inc. v. United States Fidelity & Guar.
Co., 90 Wis.2d 641, 646-47, 280 N.W.2d 211, 214 (1979).
The parties agree that Hermanson’s original complaint alleged that
Reuter negligently caused Hermanson’s injuries.3   While Horace Mann points to
its policy terms, which expressly exclude coverage for liability resulting from the
insured’s criminal or intentional acts, at this stage of the inquiry we are required to
ignore “both the merits of the claim and any exclusionary or limiting terms and
conditions of the policies.”   Kenefick, 187 Wis.2d at 232,  522 N.W.2d at 266.
Based on allegations of Reuter’s negligence in Hermanson’s complaint, we cannot
say that Horace Mann had no duty to defend the action at least up to the point at
which its policy defenses to coverage were resolved.
Horace Mann, acknowledging the rule that the duty to defend is
determined by the four corners of the complaint, suggests that the supreme court’s
statement in Grieb, 33 Wis.2d at 558, 148 N.W.2d at 106, that “[t]here are at least
four exceptions to the general rule determining the extent of the insurer’s duty to
defend,” signals the existence of the  “exception” for which it argues here: that
when the insurer has extrinsic or independent knowledge of an event or situation
triggering a policy exclusion, no such duty exists.    But the Grieb court never
discussed  any  such                                                                               “exceptions.”    All  it  said  was:   “There  are  at  least  four
3 Hermanson’s original complaint in the underlying action does not appear in the record.
His complaint in the instant action states that “[a]mong the causes of action[] contained in the
[original] complaint was [one] sounding in negligence against Wayne Reuter.”
4




NO. 96-2625
exceptions to the general rule determining the extent of  the insurer’s duty to
defend and generally the insurer who declines to defend does so at his peril.   These
and allied problems are extensively covered in Anno. Liability Insurer—Duty to
Defend, 50 A.L.R.2d 458.”   Id.4
Horace Mann argues that despite the lack of any finite discussion of
the point in Grieb, the supreme court intended to recognize the existence of the
“exception” for which it argues in this case.    It points to a federal trial court
decision, American Motorists Ins. Co. v. Trane Co., 544 F. Supp. 669 (W.D. Wis.
1982), aff’d, 718 F.2d 842 (7th Cir. 1983), as supporting the view that it may rely
on evidence extrinsic to the underlying complaint to determine whether it has a
duty to defend an action.   In that case the court, while noting that the quoted
language in Grieb was dictum because “none of the exceptions referred to in the
opinion was the basis for that decision,” went on to say that, in its opinion, “Grieb
suggests that under Wisconsin law an insurer may consider known or readily
ascertainable facts when deciding whether to defend an insured.”   Id. at 677-78.
The court thus concluded that  “[i]n Wisconsin  ... the court may consider facts
known at the appropriate time by the insurer when determining whether the insurer
has breached its duty to defend.”   Id. at 678.
4   The cited annotation sets forth what it terms “special situations” that “are not covered
directly by the general rule” of a insurer’s duty to defend.  They arise when: (1) there is a conflict
between allegations in the complaint and extrinsic facts known to or ascertainable by the insurer;
(2) the complaint contains ambiguous or incomplete allegations; (3) the complaint alleges some
facts that represent a covered risk and others that do not; and (4) the complaint states conclusions
rather than alleging facts.   C.T. Drechsler, Annotation, Allegations in Third Person’s Action
Against Insured as Determining Liability Insurer’s Duty to Defend, 50 A.L.R.2d 458, 464 (1958).
As we discuss below, courts are split as to whether the first situation still requires the insurer to
base its defense on the allegations in the complaint or whether it can rely on other facts to
determine its duty; in the other three situations, resolving doubts in the insured’s favor, the
insurer must still defend if the complaint contains any allegation that would bring the case within
the terms of the policy coverage.  Id. at 464-65.
5




NO. 96-2625
We can only state here, as we did in Professional Office Buildings,
that despite our own agreement with the district court’s reasoning in American
Motorists—reasoning  we  described  as                                                               “persuasive”—we  consider  ourselves
bound  by  the  supreme  court’s  ruling  in  Grieb,  and  similar  cases,  that                     “the
[insurer’s] duty to defend is dependent solely on the allegations of the complaint.”
Professional Office Bldgs., 145 Wis.2d at 580-81, 427 N.W.2d at 430.
Horace Mann, recognizing our lack of enthusiasm for a blanket four-
corners-of-the-complaint rule for determining the insurer’s duty to defend—a rule
that  does  not  recognize  even  uncontested  extraneous  facts  that  would  deny
coverage as a matter of law—asks us to carve out a “narrow exception” to the
Grieb/Professional Office Buildings rule in this case, and it points to decisions in
at least two other states that have done so.5   As the supreme court recently stated,
however, the Wisconsin Court of Appeals is a “unitary court” and, as such, lacks
the power to overrule, modify or withdraw language from a published opinion.
Cook v. Cook, 208 Wis.2d 166, 189-90, 560 N.W.2d 246, 256 (1997).6
5 Courts in Minnesota and Washington have held that an insurer has no duty to defend
when “facts outside the complaint are such that any liability resulting from the cause of action
would be excluded from coverage.”   Denike v. Western Nat’l Mut. Ins. Co., 473 N.W.2d 370,
373 (Minn. Ct. App. 1991); see also E-Z Loader Boat Trailers, Inc. v. Travelers Indem. Co.,
726 P.2d 439, 444 (Wash. 1986).   In the other cases Horace Mann cites as reaching a similar
conclusion, the insurer—unlike Horace Mann in this case—litigated coverage before declining to
defend the insured.   Such a procedure, as we discuss below, has been recognized as a means of
avoiding the very predicament in which Horace Mann finds itself here.
6 Horace Mann also states that if we do not recognize an extrinsic-facts exception to the
four-corners rule, “insurers will be forced to clog the already overcrowded court system with
declaratory judgment lawsuits, or to delay pending litigation with motions ... in order to resolve
nonexistent coverage issues.”   We disagree.   In discussing the duty to defend in Grube v. Daun,
173 Wis.2d 30, 75-76, 496 N.W.2d 106, 123-24 (Ct. App. 1992), we said that
the policy of judicial economy is a reason behind requiring
insurers  either  to  provide  a  defense  immediately  or  to  use
alternate methods to reduce the costs of providing a defense until
the coverage issue is decided.   If insurers have a duty to defend
(continued)
6




NO. 96-2625
Finally, Horace Mann argues the merits of its position: that it cannot
be held to have acted in bad faith in refusing the tender of Reuter’s defense
because the policy precluded coverage by reason of Reuter’s intentional criminal
acts.    Hermanson responds that because Horace Mann did not follow  “proper
steps” in obtaining a judicial declaration of coverage prior to refusing to defend
Reuter, it is estopped from now challenging coverage.
The  supreme  court has held that,  in  cases  in which  coverage  is
disputed,  “the proper  procedure for an insurance company to follow  … is to
request a bifurcated trial on the issues of coverage and liability and move to stay
any proceedings on liability until the issue of coverage is resolved.” Newhouse v.
Citizens Sec. Mut. Ins. Co.,  176 Wis.2d  824,  836,  501 N.W.2d  1,  6  (1993).
“When  this  procedure  is  followed,  the  insurance  company  runs  no  risk  of
breaching its duty to defend.”   Id.   But when the case proceeds without a prior
determination of coverage, “the insurer who declines to defend does so at [its]
peril.” Grieb,  33 Wis.2d at  558,  148 N.W.2d at  106.    And where, as here, an
insurer  improperly  refuses  to  defend,  it  will  be  held  to  have  waived  any
subsequent challenge to coverage.   Professional Office Bldgs., 145 Wis.2d at 585,
427 N.W.2d at 431.
We thus conclude that, under Professional Office Buildings, Grieb,
and similar cases, Horace Mann must be held to have breached its duty to defend
Reuter in the underlying action and is now estopped from denying coverage for
Hermanson’s injuries.   We therefore reverse the summary judgment dismissing
from the time the suit is initiated, then these insurers will be
inclined to settle; thus, the strain on the courts is reduced.
7




NO. 96-2625
Hermanson’s  action  and  remand  to  the  trial  court  for  further  proceedings
consistent with this opinion.7
By the Court.—Judgment reversed and cause remanded.
Not recommended for publication in the official reports.
7 As Hermanson notes in his brief, the trial court never determined what damages, if any,
he may be entitled to recover from Horace Mann, and that issue is not before us.
8




NO. 96-2625
9

Download 11414.pdf

Wisconsin Law