Insurer Not Estopped from Relying on Exclusion in Unilaterally Disclaiming Duty to Defend; Business Enterprise Exclusion Bars Coverage

Applying Wisconsin law, the Court of Appeals of Wisconsin has held that an insurer is not estopped from relying on a policy exclusion to justify its refusal to defend in subsequent coverage litigation. Marks v. Bedford Underwriters, Ltd., No. 2013AP2756, 2015 WL 2114317 (Wis. Ct. App. May 7, 2015). The court held that prior appellate decisions precluding an insurer from relying on exclusions in litigating the duty to defend after the insurer had declined to defend conflicted with controlling authority. The court then held that the insurer correctly declined coverage based on the policy’s business enterprise exclusion.

The insured was a trustee of two trusts, which allegedly invested and took a majority stock position in a holding company where the insured was a board member. The insured’s errors and omissions policy provided that the “Named Insured’s Profession” was “[s]olely in the performance of services as the trustee of the [two trusts], for a fee.” The policy barred coverage for “liability arising out of the Insured’s services and/or capacity as . . . an officer, director, partner, trustee, or employee of a business enterprise not named in the Declarations or a charitable organization or pension, welfare, profit sharing, mutual or investment fund or trust.”  After being sued six times in five states for his actions related to the holding company, the insured tendered the underlying claims to the insurer, which denied coverage.

In the coverage litigation that followed, the court held that, because none of the six underlying complaints indicated that the insured was being sued in his capacity as trustee of either of the two trusts named in the policy and because he was sued in his capacity as an officer, director, partner, trustee, or employee of some entity other than the two trusts, the policy’s aforementioned exclusion barred coverage. Relying on Professional Office Buildings, Inc. v. Royal Indemnity Co., 427 N.W.2d 427 (Wis. Ct. App. 1988), the court rejected the insured’s argument that the insurer could not look to exclusions or limiting language when unilaterally determining its duty to defend. According to the court, to the extent that it had modified Professional Office Buildings through three holdings cited by the insured—Grube v. Daun, 496 N.W.2d 106 (Wis. Ct. App. 1992), Kenefick v. Hitchcock, 522 N.W.2d 261 (Wis. Ct. App. 1994), and Radke v. Fireman’s Fund Insurance Co., 577 N.W.2d 366 (Wis. Ct. App. 1998)—it “lacked the authority to do so[.]”

The court also rejected the insured’s argument that the policy should be construed as providing coverage because the exclusion at issue purportedly rendered coverage illusory. According to the insured, the exclusion should have been read as barring “liability arising out of the Insured’s services and/or capacity as . . . trustee . . . of a trust,” rendering the policy illusory given that two trusts were named on the policy’s declarations page. The court rejected the insured’s reading of the exclusion as unreasonable, construing the exclusion as applying to “trust[s]” other than those specified in the declarations.