Late last week, in Johnson Controls, Inc. v. London Market, 2010 WI 52, the Wisconsin Supreme Court issued an opinion that warrants the attention of any insurer that has written or intends to write excess coverage in the state. In a 4-3 decision, the Court found that an excess carrier had a duty to defend despite the fact that its excess policy did not include language specifying a defense obligation. Instead, the Court held that the excess policy's follow form provision incorporated the obligations of the underlying policy, including the underlying policy's duty to defend.

In addition to concluding that the excess carrier had a duty to defend, the Court held that the duty was triggered when the underlying carrier "denied primary liability under its policy." In other words, the excess carrier had a duty to defend not simply when the underlying policy limits had exhausted, but instead as soon as the underlying carrier refused to defend.

Background
The insured, Johnson Controls, Inc., had a program of insurance in the 1970s that involved primary, umbrella and excess CGL policies. London Market issued Johnson Controls an excess policy for 1973 to 1976 that sat atop three successive umbrella policies issued by Travelers.

In the mid-1980s, Johnson Controls began to receive notice that it was a potentially responsible party at various environmentally contaminated sites throughout the country. It notified its insurers that it was seeking defense and indemnification and, after the insurers denied coverage, filed suit in 1989. Years of litigation ensued, leading eventually to the Wisconsin Supreme Court's decision in Johnson Controls II, 2003 WI 108, where the Court reversed City of Edgerton v. General Casualty Co. of Wisconsin, 184 Wis. 2d 750 (1994), and found that Johnson Controls' insurers had a duty to defend and indemnify the company. The Court remanded the case for further proceedings, at which time Johnson Controls settled with a number of carriers, including Travelers.

London Market did not settle. Instead, it filed a motion for partial summary judgment, contending that its policy only provided indemnity coverage, not defense. It further argued that, to the extent it did have a duty to defend, the duty would not ripen until the underlying Travelers' policies had exhausted.

The circuit court ruled against London Market on both points. On appeal, the court of appeals certified the case to the state supreme court.

The Majority Decision
The Court began where it typically does in an insurance coverage case: with the language of the policy. At the outset, it noted that the London Market policy "promises indemnification but is silent regarding defense." 2010 WI 52, ¶ 32. The Court quickly moved on, however, to the policy's "follow form" provision, which provided that the policy was "subject to the same terms, definitions, exclusions and conditions . . . as are contained in . . . the [underlying policies.]." According to the Court, because the underlying Travelers' policies contained a duty to defend, and the London Market policy did not expressly disclaim that duty to defend, London Market had a duty to defend as well.

After determining that the London Market policy incorporated the Travelers' policies' duty to defend, the Court then addressed whether that duty was triggered in this instance. The Court began by acknowledging that excess insurers do not typically have to defend at the same time the primary carrier is required to defend. It nonetheless explained that such a principle was not "an immutable rule of law requiring exhaustion of all primary policies before an excess insurer's duty to defend can be triggered." Id., ¶ 58.

To determine when the duty to defend was triggered, the Court turned back to the language of the London Market and Travelers policies. The Court found that the policies explained when the duty to defend ended, but were generally silent on when it began. The exception to this was the "other insurance" provision in the Travelers policies, which essentially stated that if the primary level carrier under Travelers' umbrella policies refused to step in and defend, then Travelers had to do so. According to the Court, nothing in the London Market follow form provision contradicted that, meaning that London Market, like Travelers, had to provide a defense if the underlying carrier did not. In short, the Court concluded that while "London Market's duty to indemnify is conditioned upon exhaustion of the underlying Travelers policies, its duty to defend is not so conditioned." Id. at ¶ 75.

The Court attempted to limit the scope of its decision to the specific language of the policies at issue, noting that its decision would not have the "transformative effect" predicted by the dissent because its "analysis is driven by the specific policy language at issue in this case" and a "different result is contingent upon different policy language." Id. at ¶ 86, n. 20.

The Dissent
In a dissent joined by two other justices, Justice Ziegler explained that, in her view, the majority was creating a duty to defend not found anywhere in London Market's excess policy itself. She further maintained that even if any such duty existed, it could not arise until all primary policies were exhausted. In essence, she found that the majority decision "transforms the excess carrier into a primary carrier." Id., ¶ 89.

Implications
There are at least two significant take-aways from the decision. First, an excess carrier should pay careful attention to how an underlying carrier is handling a matter, including whether it has agreed to provide a defense. It should also insist that the underlying carrier keep it informed of its coverage position and any changes made thereto. If the underlying carrier refuses to defend at any point, the excess carrier should review its policy language to see if it has a defense obligation, either under an explicit duty to defend provision or a follow form provision like London Market's. Second, the Court made clear that the policy language will control an excess carrier's duty to defend. Thus, an excess insurer that does not intend to provide defense coverage should make sure to say so expressly in its policy.

Whether the Court's ruling will remain as narrow as the majority predicts will only be known as future cases present themselves.