In an opinion authored by Chief Judge Lisa Neubauer and joined by Judge Brian Hagedorn (both Wisconsin Supreme Court candidates), the Court of Appeals District II held in Choinsky v. Germantown School District (2018AP116) that insurers did not breach their duty to defend when they did not immediately accept the defense of their insured. Furthermore, the insurers did not owe unpaid fees beyond what was agreed upon between the insurers and the attorneys.
The underlying issue in this case involved a group of retired teachers who filed a lawsuit against their school district for breach of contract following the enactment of 2011 Act 10. The district tendered its defense to its insurers, Employers Insurance Company of Wausau and Wausau Business Insurance Company.
The insurers determined there was no coverage and, according to the coverage dispute procedure recommended by Wisconsin courts, moved to 1) intervene, 2) bifurcate the coverage issue from the underlying merits of the case, and 3) stay the merits case until the resolution of the coverage issue. The court agreed to bifurcate the issues but denied the motion to stay, citing the need for urgency in resolving the underlying employee benefits issue. The insurers agreed to meanwhile provide defense to the district on the merits case – including retroactive fees – until the court decided the coverage issue.
Before the court decided on the insurers’ motion to intervene, the school district moved to dismiss the teachers’ merits case. There was relatively little other activity on the merits case between when the district filed its motion to dismiss and when the court issued its decision to bifurcate but not stay the merits case.
Attorney Fees in Establishing Coverage
The district contended that, because the insurers did not immediately accept its defense and instead waited until the court decision on the bifurcation and stay, the insurers owed the district attorney fees for the coverage dispute. Elliot v. Donahue required an insurer to pay attorney fees for establishing coverage when the insurers denied defense to an insured and moved to bifurcate but not stay the merits proceedings. In the instant case, the appeals court ruled that Elliot did not apply here because the insurers timely and properly followed the court-approved coverage issue procedures. Even though there was no stay granted, the insurer properly filed the motion to stay and timely decided to defend the district when the stay was denied. The court furthermore ruled that waiting to defend until the circuit court decided on the coverage dispute was not a breach of the insurers’ duty to defend.
Unpaid Fees on the Merits Case
The district also contended that the insurers failed to reimburse the district fully for attorney fees in the merits case. The insurers had made deductions to invoices, citing the attorneys’ violations of guidelines the attorneys and insurers had agreed upon when they worked together in previous cases. The attorneys did not dispute the insurers’ deductions. The district claimed reimbursing them for the deducted amount instead of the full invoice amount was a breach of contract and requested reimbursement of $50,000 in unpaid fees. The court rejected the district’s argument, stating that there was no evidence the unpaid fees were reasonable and owing, since the attorneys and insurers had agreed upon them.