Page 68 - Reservation of Rights - Special Edition

Reservation of rights letters should still be sent to the insured where the insurer assumes the duty to defend, even though they are no longer a prerequisite to denying coverage. Id
Waiver/Estoppel
When an insurer chooses to defend its insured, it must provide effective defense, and it must not put its own inter- ests ahead of the insureds. In Jacob v. West Bend Mut. Ins. Co., 553 N.W.2d 800, 805, the insurer was found to have properly discharged its duty to its insured by sending a letter to the insured advising that it denied coverage and reserved its right to defend on that basis, and authorized the insured to select its own defense counsel whose fees the insurer would pay. An insurer’s reservation of rights and providing of a defense does not give rise to an estoppel claim against it. Maxwell v. Hartford Union High School Dist., 814 N.W.2d 484, 494 (2012).
Reimbursement by Insured
Wisconsin has not directly addressed the issue of whether an insurance company can seek reimbursement of defense costs from the insured when it is later determined that the policy provided no coverage.
In Mowry v. Badger State Mut. Cas. Co., the Wisconsin Supreme Court stated that in a case where the issues of cov- erage and liability have been bifurcated, the insurer could settle the claim against the insured under a reservation of rights agreement. If coverage is found not to exist under the policy, the insurer could then seek to recover the indemnity payment made on behalf of the insured.
The reasoning of the court suggests that the insurer could also seek to recover defense cost paid on behalf of the in- sured, at least in a case where the issues of coverage and li- ability are bifurcated. However, recoupment of defense costs would probably not be available to the insurer in a case in which it elects to defend the insured under a reservation of rights, rather than seeking bifurcation.
Conflicts of Interest and Independent Counsel
In Fireman’s Fund Ins. Co. v. Waste Mgmt. of Wis., an insurer brought a declaratory judgment action against the insured based on a purported conflict of interest in the law firm’s representation of the insured. The court held that where the insurer defended under a reservation of rights, the insurer did not also reserve an exclusive right to select counsel, the insured had a continued duty to finance the independent counsel selected by its insured and accepted by the insurer, and the insurer had a duty to pay the law firm with the purported conflict of interest its reasonable fees for services performed during the time the law firm represented the insured. Fireman’s Fund Ins. Co. v. Waste Mgmt. of Wis., 777 F.2d 366 (7th Cir. 1985).
Fireman’s Fund was a Federal case and is therefore not binding on Wisconsin state courts, which have never directly addressed the issue of independent defense counsel in the context of defense under a reservation of rights. In Allstate Ins. Co. v. Charneski, 114 N.W.2d 489 (Wis. 1962), the Wis- consin Supreme Court endorsed the bifurcation of coverage and liability issues to avoid any potential conflict of interest in the insurance company undertaking the insured’s defense.
In Jacob v. West Bend Mut. Ins. Co., 553 N.W.2d 800, 805 (Wis. Ct. App. 1996), the Wisconsin Court of Appeals sug- gested that there were two options available to an insurance company that wished to dispute coverage while properly discharging its duties to the insured: (1) request a bifurcated trial on the issues of coverage and liability, or a declara-
tory judgment on the coverage issue – see also, Wis. Stat. § 803.04(2)(b); or (2) advise the insured that it would under- take the insured’s liability defense under a reservation of rights, and authorize the insured to retain its own defense counsel whose fees would be paid by the insurer.
2018 ReseRvation of Rights - special edition
64