The Wisconsin Supreme Court held last week in Steadfast Ins. Co. v. Greenwich Ins. Co. that two insurers must contribute proportionally to the defense of an additional insured under their comprehensive liability policies.
In 2008, torrential rainstorms battered the Milwaukee area for two days. The downpour overwhelmed the city’s sewer system, causing significant flooding in homes throughout the region. Out of those floods sprang several lawsuits against the Milwaukee Metropolitan Sewerage District (“MMSD”) for negligent inspection, maintenance, repair, and operation of Milwaukee’s sewage system.
MMSD was an additional insured under liability policies covering two other water service providers responsible for the city’s sewer systems. The first policy was issued by Greenwich Insurance Company for United Water Services Milwaukee, LLC, and the second was issued by Steadfast Insurance Company for Veolia Water Milwaukee, LLC. After learning of the lawsuits, MMSD tendered its defense of the sewage suits to both insurers. Steadfast accepted the defense; but Greenwich refused, claiming that its policy was excess to Steadfast’s based on an “other insurance” clause in Greenwich’s policy.
Eventually, the suits settled. But by then, MMSD had incurred $1.55 million in defense costs. Steadfast reimbursed MMSD for those costs and then sued Greenwich in subrogation to recover the defense costs it paid to MMSD, as well as Steadfast’s attorneys’ fees.
On Steadfast’s motion for summary judgment, the trial court held that Greenwich’s policy was not excess to Steadfast’s and that Greenwich had a duty to defend the sewage suits. The trial court also held that Steadfast was entitled to full indemnification for the costs of MMSD’s defense, as well as Steadfast’s attorneys’ fees. The Wisconsin Court of Appeals affirmed on the same grounds, noting that Greenwich was not entitled to equitable allocation of defense costs since it had breached its duty to defend MMSD.
On appeal, the Wisconsin Supreme Court partially reversed, however the court affirmed the lower courts’ holdings that Greenwich’s policy was not excess to Steadfast’s. The court reasoned that “other insurance” clauses only apply when the policies are concurrent with each other. Since the policies here relied on the negligence of two different entities—United Water for Greenwich’s policy and Veolia for Steadfast’s—the court reasoned they were not concurrent; thus, Greenwich was obligated to defend alongside Steadfast.
Yet the court reversed the lower courts’ rulings that Steadfast was entitled to indemnification for the entire defense cost. Instead, the court reasoned that Steadfast, whose policy limits reached $30 million, was liable for 3/5ths of the defense costs, whereas Greenwich, whose policy covered $20 million, was liable for 2/5ths. Indeed, to hold that Steadfast was entitled to indemnification for the entire defense would have relieved Steadfast of its “contractual obligation for defense costs, without recognition of the windfall” Steadfast would receive if its coverage was indemnified entirely.
Finally, the court affirmed the lower courts’ holding that Steadfast was entitled to attorneys’ fees, reasoning that “by virtue of its express subrogation rights, Steadfast [stood] in MMSD’s shoes” and was thus entitled to the “payment of defense costs just as MMSD could have recovered were it to have brought this lawsuit.”
This decision exemplifies that policyholders should be aware of their rights as additional insureds and, when multiple policies are at issue, pay close attention to the entities to whom coverage is owed under each policy. As was the case in the Steadfast decision, where multiple insurers owe coverage to different insureds, “other insurance” does not become an issue and insurers should not be permitted to diminish or altogether avoid providing coverage on such a basis. The decision also provides a cautionary warning to insurers who might seek to unilaterally avoid their duty to defend without a judicial determination, since doing so may leave insurers “responsible for all damages that naturally flow” from their breach.