Duty to Defend: Johnson Controls' Attempt to Turn Excess Insurance into Primary Insurance

On April 2, 2012, Johnson Controls and certain of its excess insurers filed simultaneous motions for summary judgment on the duty to defend issue in the Milwaukee County circuit court. The outcome of these motions will be of great interest to insurers since Johnson Controls is seeking to fundamentally change the role and function of excess insurance.

Excess Insurance Generally

Excess insurance is an integral part of an insured's comprehensive risk management program. Traditionally, excess insurance sits atop an umbrella and primary policy and covers liability over and above the primary policy's limits. See Fireman's Fund Ins. Co. v. Md. Cas. Co., 65 Cal. App. 4th 1279, 1304 (1998).

An excess policy may be written in two forms: as a stand-alone policy or as a policy that “follows form.” Newmont USA Ltd. v. Am. Home Assur. Co., 795 F. Supp. 2d 1150, 1168 (E.D. Wash. 2011). A stand-alone policy is an independent insuring agreement with its own coverage terms and conditions. By contrast, a follow form excess policy incorporates by reference the terms of the underlying policy. Follow form policies prevent unnecessary repetition in excess policies and “ensure more uniform coverage and facilitate spreading risks among insurers.” Rummel v. St. Paul Surplus Lines Ins. Co., 945 P.2d 985, 989 (N.M. 1997).

Most primary policies contain a contractual duty to defend that obligates the insurer to take over the defense of any lawsuit brought by a third party against the insured on a claim that falls within the policy's coverage. See Fireman's Fund Ins. Co., 65 Cal. App. 4th at 1304. Some excess policies provide indemnification only and no duty to defend. See, e.g., Cotter Corp. v. Am. Empire Surplus Lines Ins. Co., 90 P.3d 814, 831 (Colo. 2004) (“[t]he excess policies plainly disclaim any duty to defend”). Where an excess liability carrier contractually agrees to provide a defense, the general rule is that the excess liability carrier is not obligated to participate in the defense until the primary policy limits are exhausted. 14 Couch on Ins. ' 200:41 (3d ed. 2011).

Because only exhaustion triggers an excess insurer's duty to defend, an excess insurer's duty to defend generally is not triggered when an underlying insurer refuses to defend the insured. See, e.g., Ticor Title Ins. Co. v. Emp'rs Ins. of Wausau, 40 Cal. App. 4th 1699, 1709 (1995). Requiring exhaustion of underlying policies before an excess insurer's duty to defend is triggered serves the interests of both insured and insurer:

The majority rule is supported by the reasonable expectations of the insured and its insurance carriers. Excess insurers are able to provide relatively inexpensive insurance with high policy limits because they require the insured to contract for underlying primary insurance with another carrier. The primary carrier generally provides a much lower amount of coverage, but must insure against what is likely to be a greater number of claims and must provide a defense.

Keck, Mahin & Cate, Grant Cook v. Nat'l Union Fire Ins. Co. of Pittsburgh, 20 S.W.3d 692, 700 (Tex. 2000).

Johnson Controls IV

In Johnson Controls, Inc. v. London Market, 784 N.W.2d 579 (2010) (Johnson Controls IV), the Wisconsin Supreme Court held that, based on the specific policy language at issue, an excess liability policy incorporated a duty to defend, and that the duty to defend was not conditioned upon exhaustion of the primary policy. The Wisconsin Supreme Court stated that its analysis was “driven by policy language ' not generalizable concepts about the role of excess insurance and the duties of excess insurers.” Id. at 596 n.20. According to the dissent, “[t]he majority decision [wa]s contrary to longstanding principles of insurance law,” and improperly “transform[ed] the excess insurer into a primary insurer by imposing a duty to defend on the excess insurer” in violation of the plain language of the indemnification-only policy. Id.

Background

Johnson Controls, a manufacturing company based in Milwaukee, acquired a company that made car batteries and other products for automotive interiors. During the 1970s, Johnson Controls contracted with various insurers for a layered insurance program of primary, umbrella, and umbrella excess commercial general liability (“CGL”) policies. London Market issued an umbrella excess policy to Johnson Controls effective from Dec. 31, 1973 to Dec. 31, 1976. The London Market excess umbrella policy sat atop three successive policies issued by Travelers Indemnity Company (“Travelers”).

In the mid-1980s, Johnson Controls started to receive notification that it had been identified as a potentially responsible party (“PRP”) in connection with environmental contamination at various sites throughout the country, including at lead smelting plants where Johnson Controls' predecessor had delivered lead acid batteries for recycling and at contaminated landfills. As a PRP, Johnson Controls could be required to contribute to the environmental restoration and remediation costs at these sites under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). In 1989, after certain insurers refused to provide defense or indemnification, Johnson Controls filed suit against its various primary, umbrella and excess insurers.

In 1994, during the pendency of the coverage suit, the Wisconsin Supreme Court decided City of Edgerton v. General Casualty Co. of Wisconsin, 184 Wis.2d 750 (1994). In that case, the Wisconsin Supreme Court determined that environmental response costs under CERCLA constitute “equitable relief” rather than legal damages and that a CGL insurer has no duty to defend or indemnify the insured for these expenses. The Wisconsin Supreme Court also found that environmental restoration and remediation costs were not “damages” recoverable under CGL policies and that PRP notices did not constitute a “suit” that would trigger a duty to defend.

Applying the holding of Edgerton, the circuit court granted summary judgment in favor of the insurers, finding that there was no duty to defend or indemnify Johnson Controls under any CGL policies. Johnson Controls appealed the decision to the Wisconsin Supreme Court, which in 2003 overruled itself in what is now known as Johnson Controls III. See Johnson Controls v. Emp'rs Ins. of Wausau, 665 N.W.2d 257 (2003). The court reasoned that CERCLA, unlike other environmental regulations such as the Resource Conservation and Recovery Act, imposes liability for past environmental damage instead of regulating present environmental risks. Therefore, “damages,” for purposes of CGL policy coverage, include environmental cleanup costs under CERCLA, and PRP notices are the functional equivalent of a “suit.” The case was remanded to the circuit court for further proceedings.

In 2007, London Market moved for partial summary judgment on the duty to defend. London Market asserted that its policy was an indemnity-only excess umbrella insurance policy that contained no promise of defense. The circuit court denied London Market's summary judgment motion. On certification from the court of appeals, the Wisconsin Supreme Court was asked to determine whether London Market had a duty to defend Johnson Controls, and if so, when that duty was triggered.

Duty to Defend

The first question addressed by the Wisconsin Supreme Court was whether London Market's policy contains a duty to defend. London Market asserted that its umbrella excess policy was an indemnity-only policy. Indeed, London Market's insuring agreement promises indemnification only, and does not promise to defend.

However, the London Market policy contained the following follow form provision:

This Policy is subject to the same terms, definitions, exclusions and conditions (except as regards the premium, the amount and Limits of Liability and except as otherwise provided herein) as are contained in or as may be added to the Underlying [Travelers policies] prior to the happening of an occurrence for which claim is made hereunder. (Emphasis added).

The Wisconsin Supreme Court held that the London Market policy provided a duty to defend because: 1) the underlying Travelers policies contained a duty to defend as well as a duty to indemnify; and 2) there was no provision in the London Market policy explicitly stating that there would be no duty to defend. See Johnson Controls IV, 784 N.W.2d at 586-90.

In a strong dissenting opinion, which two other justices joined, Justice Annette Kingsland Ziegler stated that the majority was rewriting the low-premium London Market policy “to impose on London Market a duty for which it did not contract, that neither it nor its insured contemplated, and for which it was not paid.” Id. at 598. As the dissent explained, the London Market policy: “(1) promises to indemnify its insured; (2) subjects that promise of indemnification to various conditions; and (3) points to the Travelers policy for additional 'terms, definitions, exclusions and conditions' to which the duty to indemnify is subject.” Id. at 599.

When the Duty to Defend Is Triggered

Having determined that London Market's policy incorporates the duty to defend found in the Travelers policies, the Wisconsin Supreme Court then concluded that London Market's duty to defend may be triggered prior to the exhaustion of the primary policy.

The Wisconsin Supreme Court agreed with London Market that a primary insurer generally has the primary duty to defend a claim. However, the Wisconsin Supreme Court held that this does not establish an immutable rule of law requiring exhaustion of all primary policies before an excess insurer's duty to defend can be triggered. Rather, the Wisconsin Supreme Court held that the language of the policy should be the initial focus. Johnson Controls IV, 784 N.W. 2d at 591.

Noting that the London Market policy incorporates the provisions of the Travelers policies unless otherwise provided, the Wisconsin Supreme Court focused on the following “other insurance” provision in the underlying Travelers policies:

[I]f the insurer affording other insurance to the named insured denies primary liability under its policy, [Travelers] will respond under this policy as though such other insurance were not available. (Emphasis added).

The Wisconsin Supreme Court interpreted this clause to provide that London Market would be required to defend if the underlying insurer denies primary liability under its policy. The Wisconsin Supreme Court reached this conclusion even though, by the explicit terms of its policy, London Market has no obligation to indemnify Johnson Controls until the indemnification limits of the underlying policies have been exhausted. Id. at 592-94.

In her dissenting opinion, Justice Ziegler stated that “[t]he majority inconsistently concludes that when it comes to indemnification, 'liability' does not attach until the underlying policy is exhausted, but that 'liability' attaches before exhaustion when it comes to the duty to defend.” Id. at 602. The dissent also noted that the majority opinion “lack[ed] any Wisconsin case in which a court required an excess insurer to provide a defense before the underlying policy limits were exhausted,” and that, under the “majority rule,” an excess insurer has no obligation to defend its insured until the primary insurer's limits are exhausted, absent express policy language otherwise. Id. at 603, 604 n.7. Finally, the dissent stated that, contrary to basic insurance principles, “[u]nder the holding of the majority opinion, a duty to defend can begin at the inception of the lawsuit because its holding causes the excess insurer to become the primary insurer whenever the primary insurer does not perform.” Id. at 600.

Johnson Controls' Attempt to Expand

Johnson Controls IV Beyond Its Holdings

In Johnson Controls IV, the majority stated that its “decision will have no [ ] transformative effect on Wisconsin law because [its] analysis is driven by the specific policy language at issue.” Id. at 596 n.20. Nonetheless, Johnson Controls is relying on Johnson Controls IV to try to greatly expand excess insurers' obligations as illustrated by two issues currently being briefed by Johnson Controls and its excess insurers in their simultaneous motions for summary judgment on the duty to defend.

Excess Policies Limiting Any Duty to Defend to Only Those Circumstances Where No Underlying Insurance Provides Coverage: The majority in Johnson Controls IV made clear that its decision rested solely on the language of the London Market policy at issue and that it was not determining whether other excess insurers' policies incorporated duties to defend, and if so, when (if at all) those duties were triggered. Nonetheless, Johnson Controls is now trying to leverage Johnson Controls IV to impose a duty to defend obligation under other excess policies with vastly different policy language in violation of Wisconsin law.

For example, several of Johnson Controls' excess policies follow form to policies which provide that a duty to defend is only owed for occurrences covered by the excess policies, but “not covered” under the underlying insurance or under any other collectible insurance. Unlike in Johnson Controls IV, the duty to defend under these policies turns on whether a claim is “not covered” by the underlying policies' terms, not on whether an underlying insurer accepts or rejects a tender of defense.

According to Johnson Controls, because certain of its insurers initially denied coverage under their policies, Johnson Controls' claims were “not covered.” However, the majority rule, including in Wisconsin, is that “not covered by underlying insurance” does not refer to an underlying insurer's refusal to defend. See, e.g., Azco Hennes Sanco, Ltd. v. Wis. Ins. Sec. Fund, 502 N.W.2d 887, 888-90 (Wis. App. 1993) (“not covered” by underlying insurance refers to whether or not the terms of an underlying policy apply to an occurrence); Republic Western Ins. Co. v. Fireman's Fund Ins. Co., 241 F. Supp. 2d 1090, 1098 (N.D. Cal. 2003) (umbrella insurer had no duty to defend where primary insurer refused finding that “'providing coverage' does not mean being willing either to pay or to defend; [i]t means only that the primary insurer should have provided coverage, regardless of what it chose to do.”); U.S. Fire Ins. Co. v. Coleman, 754 S.W.2d 941, 945 (Mo. App. 1988) (holding umbrella insurer had no duty to “drop down” and defend if the “occurrence” is “covered” under the terms of the scheduled primary policy and finding it irrelevant whether the primary carrier never actually defended).

In addition, as the excess carriers point out, Johnson Controls has taken the position that its claims are covered by the underlying policies. Moreover, underlying insurers have agreed to defend Johnson Controls, or have actually paid defense costs. Johnson Controls plainly is seeking to expand Johnson Controls IV well beyond the policy language at issue in that case.

Whether the Duty to Defend Was Triggered By Johnson Controls' Claims: In Johnson Controls IV, the Wisconsin Supreme Court ruled that London Market's duty to defend “was not conditioned upon exhaustion of the underlying Travelers policies,” but “[r]ather, under the terms of the 'other insurance' provision [incorporated from the underlying Travelers policies], London Market's duty to defend was triggered when the underlying insurer 'denie[d] primary liability under its policy.'” Johnson Controls IV, 784 N.W.2d at 597. The Wisconsin Supreme Court remanded the action to the circuit court “for further proceedings,” including “[w]hether and when notification was tendered to each of its insurers.” Id. at 587, 583 n.4.

In its summary judgment papers, Johnson Controls contends that mere notice of a claim directed to an excess insurer is sufficient to trigger an excess insurer's duty to defend. In an argument typical of its summary judgment briefing, Johnson Controls states that “[i]t is undisputed that notice was furnished to [the excess insurer] of the PRP letters. This triggered [the excess insurer]'s duty to defend.” This exceptionally dangerous proposition implies that, upon receiving notice of a claim against an insured, all excess insurers immediately have a duty to defend even without a demand for a defense.

As set forth by London Market and certain of the other excess insurers, Johnson Controls' position is untenable. In the context of a primary insurer with a clear and immediate duty to defend, an argument perhaps can be made that mere notification of a claim tenders a defense. But this argument is completely inapplicable with respect to high-level umbrella or excess carriers, particularly here since the notifications at issue were provided 20 years or so before the Wisconsin Supreme Court determined that defense obligations under the London Market excess policy could be triggered before exhaustion of underlying policies.

In their summary judgment briefs, certain excess insurers state that Johnson Controls' notices neither requested a defense nor stated the refusal of underlying insurers to defend. If this in fact is the case, it is very unfair for Johnson Controls to contend that the excess carriers breached the duty to defend decades earlier, and as a consequence thereof, should now be estopped from litigating coverage defenses.

Conclusion

Johnson Controls IV was a departure from the majority rule that an excess insurer has no duty to defend before underlying insurance is exhausted. Some comfort can nevertheless be found in the Wisconsin Supreme Court's clear intent to limit its decision to the policy language at issue.

Johnson Controls' attempt now to aggressively expand Johnson Controls IV to impose a duty to defend under excess policies containing different policy language is inappropriate. In addition, Johnson Controls' position that excess insurers have a duty to defend upon mere notice of a claim ' without even a demand for a defense ' is both unfair and unprecedented.

It is hoped, in resolving the competing summary judgment motions in Johnson Controls, the circuit court will refuse Johnson Controls' invitation to expand Johnson Controls IV beyond the scope of reason.

Chet A. Kronenberg, a member of this newsletter's Board of Editors, is a litigation partner in the Los Angeles office of Simpson Thacher & Bartlett LLP. Sarah E. Luppen and Colin H. Rolfs are associates in the firm's Los Angeles office.

In 1989, Milwaukee-based manufacturer Johnson Controls, Inc. initiated an insurance coverage action against 36 insurance companies seeking defense and coverage for potential environmental liability at various sites located around the country. This suit, which is still ongoing today, has generated a number of significant (and controversial) coverage opinions.

Most recently, in 2010, the Supreme Court of Wisconsin held that an indemnity-only umbrella excess liability policy contained a duty to defend by virtue of “follow form” policy language in the excess liability policy. The Wisconsin Supreme Court further held that the excess carrier's duty to defend was not conditioned upon exhaustion of the primary policy or any of the underlying layers of coverage. These rulings are contrary to the law in other states, and arguably convert low-premium, excess liability policies into primary policies when that clearly was not the parties' intention when the policies incepted.

Worse, Johnson Controls is now trying to leverage the Wisconsin Supreme Court's 2010 decision to obtain a ruling that Johnson Controls' other excess carriers ' with different policy language than that at issue in the 2010 decision ' also breached the duty to defend. Moreover, Johnson Controls is taking the position that an excess carrier must provide a defense as soon as the excess carrier has notice of a claim even in the absence of a demand for a defense or knowledge that an underlying carrier has refused to defend.

On April 2, 2012, Johnson Controls and certain of its excess insurers filed simultaneous motions for summary judgment on the duty to defend issue in the Milwaukee County circuit court. The outcome of these motions will be of great interest to insurers since Johnson Controls is seeking to fundamentally change the role and function of excess insurance.

Excess Insurance Generally

Excess insurance is an integral part of an insured's comprehensive risk management program. Traditionally, excess insurance sits atop an umbrella and primary policy and covers liability over and above the primary policy's limits. See Fireman's Fund Ins. Co. v. Md. Cas. Co. , 65 Cal. App. 4th 1279, 1304 (1998).

An excess policy may be written in two forms: as a stand-alone policy or as a policy that “follows form.” Newmont USA Ltd. v. Am. Home Assur. Co. , 795 F. Supp. 2d 1150, 1168 (E.D. Wash. 2011). A stand-alone policy is an independent insuring agreement with its own coverage terms and conditions. By contrast, a follow form excess policy incorporates by reference the terms of the underlying policy. Follow form policies prevent unnecessary repetition in excess policies and “ensure more uniform coverage and facilitate spreading risks among insurers.” Rummel v. St. Paul Surplus Lines Ins. Co. , 945 P.2d 985, 989 (N.M. 1997).

Most primary policies contain a contractual duty to defend that obligates the insurer to take over the defense of any lawsuit brought by a third party against the insured on a claim that falls within the policy's coverage. See Fireman's Fund Ins. Co. , 65 Cal. App. 4th at 1304. Some excess policies provide indemnification only and no duty to defend. See, e.g., Cotter Corp. v. Am. Empire Surplus Lines Ins. Co. , 90 P.3d 814, 831 (Colo. 2004) (“[t]he excess policies plainly disclaim any duty to defend”). Where an excess liability carrier contractually agrees to provide a defense, the general rule is that the excess liability carrier is not obligated to participate in the defense until the primary policy limits are exhausted. 14 Couch on Ins. ' 200:41 (3d ed. 2011).

Because only exhaustion triggers an excess insurer's duty to defend, an excess insurer's duty to defend generally is not triggered when an underlying insurer refuses to defend the insured. See, e.g., Ticor Title Ins. Co. v. Emp'rs Ins. of Wausau , 40 Cal. App. 4th 1699, 1709 (1995). Requiring exhaustion of underlying policies before an excess insurer's duty to defend is triggered serves the interests of both insured and insurer:

The majority rule is supported by the reasonable expectations of the insured and its insurance carriers. Excess insurers are able to provide relatively inexpensive insurance with high policy limits because they require the insured to contract for underlying primary insurance with another carrier. The primary carrier generally provides a much lower amount of coverage, but must insure against what is likely to be a greater number of claims and must provide a defense.

Keck, Mahin & Cate, Grant Cook v. Nat'l Union Fire Ins. Co. of Pittsburgh , 20 S.W.3d 692, 700 (Tex. 2000).

Johnson Controls IV

In Johnson Controls, Inc. v. London Market , 784 N.W.2d 579 (2010) ( Johnson Controls IV ), the Wisconsin Supreme Court held that, based on the specific policy language at issue, an excess liability policy incorporated a duty to defend, and that the duty to defend was not conditioned upon exhaustion of the primary policy. The Wisconsin Supreme Court stated that its analysis was “driven by policy language ' not generalizable concepts about the role of excess insurance and the duties of excess insurers.” Id. at 596 n.20. According to the dissent, “[t]he majority decision [wa]s contrary to longstanding principles of insurance law,” and improperly “transform[ed] the excess insurer into a primary insurer by imposing a duty to defend on the excess insurer” in violation of the plain language of the indemnification-only policy. Id.

Background

Johnson Controls, a manufacturing company based in Milwaukee, acquired a company that made car batteries and other products for automotive interiors. During the 1970s, Johnson Controls contracted with various insurers for a layered insurance program of primary, umbrella, and umbrella excess commercial general liability (“CGL”) policies. London Market issued an umbrella excess policy to Johnson Controls effective from Dec. 31, 1973 to Dec. 31, 1976. The London Market excess umbrella policy sat atop three successive policies issued by Travelers Indemnity Company (“Travelers”).

In the mid-1980s, Johnson Controls started to receive notification that it had been identified as a potentially responsible party (“PRP”) in connection with environmental contamination at various sites throughout the country, including at lead smelting plants where Johnson Controls' predecessor had delivered lead acid batteries for recycling and at contaminated landfills. As a PRP, Johnson Controls could be required to contribute to the environmental restoration and remediation costs at these sites under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). In 1989, after certain insurers refused to provide defense or indemnification, Johnson Controls filed suit against its various primary, umbrella and excess insurers.

In 1994, during the pendency of the coverage suit, the Wisconsin Supreme Court decided City of Edgerton v. General Casualty Co. of Wisconsin , 184 Wis.2d 750 (1994). In that case, the Wisconsin Supreme Court determined that environmental response costs under CERCLA constitute “equitable relief” rather than legal damages and that a CGL insurer has no duty to defend or indemnify the insured for these expenses. The Wisconsin Supreme Court also found that environmental restoration and remediation costs were not “damages” recoverable under CGL policies and that PRP notices did not constitute a “suit” that would trigger a duty to defend.

Applying the holding of Edgerton, the circuit court granted summary judgment in favor of the insurers, finding that there was no duty to defend or indemnify Johnson Controls under any CGL policies. Johnson Controls appealed the decision to the Wisconsin Supreme Court, which in 2003 overruled itself in what is now known as Johnson Controls III. See Johnson Controls v. Emp'rs Ins. of Wausau , 665 N.W.2d 257 (2003). The court reasoned that CERCLA, unlike other environmental regulations such as the Resource Conservation and Recovery Act, imposes liability for past environmental damage instead of regulating present environmental risks. Therefore, “damages,” for purposes of CGL policy coverage, include environmental cleanup costs under CERCLA, and PRP notices are the functional equivalent of a “suit.” The case was remanded to the circuit court for further proceedings.

In 2007, London Market moved for partial summary judgment on the duty to defend. London Market asserted that its policy was an indemnity-only excess umbrella insurance policy that contained no promise of defense. The circuit court denied London Market's summary judgment motion. On certification from the court of appeals, the Wisconsin Supreme Court was asked to determine whether London Market had a duty to defend Johnson Controls, and if so, when that duty was triggered.

Duty to Defend

The first question addressed by the Wisconsin Supreme Court was whether London Market's policy contains a duty to defend. London Market asserted that its umbrella excess policy was an indemnity-only policy. Indeed, London Market's insuring agreement promises indemnification only, and does not promise to defend.

However, the London Market policy contained the following follow form provision:

This Policy is subject to the same terms, definitions, exclusions and conditions (except as regards the premium, the amount and Limits of Liability and except as otherwise provided herein) as are contained in or as may be added to the Underlying [Travelers policies] prior to the happening of an occurrence for which claim is made hereunder. (Emphasis added).

The Wisconsin Supreme Court held that the London Market policy provided a duty to defend because: 1) the underlying Travelers policies contained a duty to defend as well as a duty to indemnify; and 2) there was no provision in the London Market policy explicitly stating that there would be no duty to defend. See Johnson Controls IV, 784 N.W.2d at 586-90.

In a strong dissenting opinion, which two other justices joined, Justice Annette Kingsland Ziegler stated that the majority was rewriting the low-premium London Market policy “to impose on London Market a duty for which it did not contract, that neither it nor its insured contemplated, and for which it was not paid.” Id. at 598. As the dissent explained, the London Market policy: “(1) promises to indemnify its insured; (2) subjects that promise of indemnification to various conditions; and (3) points to the Travelers policy for additional 'terms, definitions, exclusions and conditions' to which the duty to indemnify is subject.” Id. at 599.

When the Duty to Defend Is Triggered

Having determined that London Market's policy incorporates the duty to defend found in the Travelers policies, the Wisconsin Supreme Court then concluded that London Market's duty to defend may be triggered prior to the exhaustion of the primary policy.

The Wisconsin Supreme Court agreed with London Market that a primary insurer generally has the primary duty to defend a claim. However, the Wisconsin Supreme Court held that this does not establish an immutable rule of law requiring exhaustion of all primary policies before an excess insurer's duty to defend can be triggered. Rather, the Wisconsin Supreme Court held that the language of the policy should be the initial focus. Johnson Controls IV, 784 N.W. 2d at 591.

Noting that the London Market policy incorporates the provisions of the Travelers policies unless otherwise provided, the Wisconsin Supreme Court focused on the following “other insurance” provision in the underlying Travelers policies:

[I]f the insurer affording other insurance to the named insured denies primary liability under its policy, [Travelers] will respond under this policy as though such other insurance were not available. (Emphasis added).

The Wisconsin Supreme Court interpreted this clause to provide that London Market would be required to defend if the underlying insurer denies primary liability under its policy. The Wisconsin Supreme Court reached this conclusion even though, by the explicit terms of its policy, London Market has no obligation to indemnify Johnson Controls until the indemnification limits of the underlying policies have been exhausted. Id. at 592-94.

In her dissenting opinion, Justice Ziegler stated that “[t]he majority inconsistently concludes that when it comes to indemnification, 'liability' does not attach until the underlying policy is exhausted, but that 'liability' attaches before exhaustion when it comes to the duty to defend.” Id. at 602. The dissent also noted that the majority opinion “lack[ed] any Wisconsin case in which a court required an excess insurer to provide a defense before the underlying policy limits were exhausted,” and that, under the “majority rule,” an excess insurer has no obligation to defend its insured until the primary insurer's limits are exhausted, absent express policy language otherwise. Id. at 603, 604 n.7. Finally, the dissent stated that, contrary to basic insurance principles, “[u]nder the holding of the majority opinion, a duty to defend can begin at the inception of the lawsuit because its holding causes the excess insurer to become the primary insurer whenever the primary insurer does not perform.” Id. at 600.

Johnson Controls' Attempt to Expand

Johnson Controls IV Beyond Its Holdings

In Johnson Controls IV, the majority stated that its “decision will have no [ ] transformative effect on Wisconsin law because [its] analysis is driven by the specific policy language at issue.” Id. at 596 n.20. Nonetheless, Johnson Controls is relying on Johnson Controls IV to try to greatly expand excess insurers' obligations as illustrated by two issues currently being briefed by Johnson Controls and its excess insurers in their simultaneous motions for summary judgment on the duty to defend.

Excess Policies Limiting Any Duty to Defend to Only Those Circumstances Where No Underlying Insurance Provides Coverage: The majority in Johnson Controls IV made clear that its decision rested solely on the language of the London Market policy at issue and that it was not determining whether other excess insurers' policies incorporated duties to defend, and if so, when (if at all) those duties were triggered. Nonetheless, Johnson Controls is now trying to leverage Johnson Controls IV to impose a duty to defend obligation under other excess policies with vastly different policy language in violation of Wisconsin law.

For example, several of Johnson Controls' excess policies follow form to policies which provide that a duty to defend is only owed for occurrences covered by the excess policies, but “not covered” under the underlying insurance or under any other collectible insurance. Unlike in Johnson Controls IV, the duty to defend under these policies turns on whether a claim is “not covered” by the underlying policies' terms, not on whether an underlying insurer accepts or rejects a tender of defense.

According to Johnson Controls, because certain of its insurers initially denied coverage under their policies, Johnson Controls' claims were “not covered.” However, the majority rule, including in Wisconsin, is that “not covered by underlying insurance” does not refer to an underlying insurer's refusal to defend. See, e.g., Azco Hennes Sanco, Ltd. v. Wis. Ins. Sec. Fund , 502 N.W.2d 887, 888-90 (Wis. App. 1993) (“not covered” by underlying insurance refers to whether or not the terms of an underlying policy apply to an occurrence); Republic Western Ins. Co. v. Fireman's Fund Ins. Co. , 241 F. Supp. 2d 1090, 1098 (N.D. Cal. 2003) (umbrella insurer had no duty to defend where primary insurer refused finding that “'providing coverage' does not mean being willing either to pay or to defend; [i]t means only that the primary insurer should have provided coverage, regardless of what it chose to do.”); U.S. Fire Ins. Co. v. Coleman , 754 S.W.2d 941, 945 (Mo. App. 1988) (holding umbrella insurer had no duty to “drop down” and defend if the “occurrence” is “covered” under the terms of the scheduled primary policy and finding it irrelevant whether the primary carrier never actually defended).

In addition, as the excess carriers point out, Johnson Controls has taken the position that its claims are covered by the underlying policies. Moreover, underlying insurers have agreed to defend Johnson Controls, or have actually paid defense costs. Johnson Controls plainly is seeking to expand Johnson Controls IV well beyond the policy language at issue in that case.

Whether the Duty to Defend Was Triggered By Johnson Controls' Claims: In Johnson Controls IV, the Wisconsin Supreme Court ruled that London Market's duty to defend “was not conditioned upon exhaustion of the underlying Travelers policies,” but “[r]ather, under the terms of the 'other insurance' provision [incorporated from the underlying Travelers policies], London Market's duty to defend was triggered when the underlying insurer 'denie[d] primary liability under its policy.'” Johnson Controls IV, 784 N.W.2d at 597. The Wisconsin Supreme Court remanded the action to the circuit court “for further proceedings,” including “[w]hether and when notification was tendered to each of its insurers.” Id. at 587, 583 n.4.

In its summary judgment papers, Johnson Controls contends that mere notice of a claim directed to an excess insurer is sufficient to trigger an excess insurer's duty to defend. In an argument typical of its summary judgment briefing, Johnson Controls states that “[i]t is undisputed that notice was furnished to [the excess insurer] of the PRP letters. This triggered [the excess insurer]'s duty to defend.” This exceptionally dangerous proposition implies that, upon receiving notice of a claim against an insured, all excess insurers immediately have a duty to defend even without a demand for a defense.

As set forth by London Market and certain of the other excess insurers, Johnson Controls' position is untenable. In the context of a primary insurer with a clear and immediate duty to defend, an argument perhaps can be made that mere notification of a claim tenders a defense. But this argument is completely inapplicable with respect to high-level umbrella or excess carriers, particularly here since the notifications at issue were provided 20 years or so before the Wisconsin Supreme Court determined that defense obligations under the London Market excess policy could be triggered before exhaustion of underlying policies.

In their summary judgment briefs, certain excess insurers state that Johnson Controls' notices neither requested a defense nor stated the refusal of underlying insurers to defend. If this in fact is the case, it is very unfair for Johnson Controls to contend that the excess carriers breached the duty to defend decades earlier, and as a consequence thereof, should now be estopped from litigating coverage defenses.

Conclusion

Johnson Controls IV was a departure from the majority rule that an excess insurer has no duty to defend before underlying insurance is exhausted. Some comfort can nevertheless be found in the Wisconsin Supreme Court's clear intent to limit its decision to the policy language at issue.

Johnson Controls' attempt now to aggressively expand Johnson Controls IV to impose a duty to defend under excess policies containing different policy language is inappropriate. In addition, Johnson Controls' position that excess insurers have a duty to defend upon mere notice of a claim ' without even a demand for a defense ' is both unfair and unprecedented.

It is hoped, in resolving the competing summary judgment motions in Johnson Controls, the circuit court will refuse Johnson Controls' invitation to expand Johnson Controls IV beyond the scope of reason.

Chet A. Kronenberg, a member of this newsletter's Board of Editors, is a litigation partner in the Los Angeles office of Simpson Thacher & Bartlett LLP. Sarah E. Luppen and Colin H. Rolfs are associates in the firm's Los Angeles office.