No drop-down duty when primary didn’t defend

A Wisconsin appeals court, applying Wisconsin law, reversed the circuit court’s opinion and held that Central National Insurance Company of Omaha and Westchester Fire Insurance Company (collectively “Central National”) had no duty to defend Johnson Controls, Inc. (“Johnson Controls”) for environmental contamination under multiple excess insurance policies.  The appellate court held that there was no duty to defend because Central National only provided a duty to defend if an occurrence was covered under the excess insurance policies, but not covered under the underlying insurance, which was impossible in the instant case because the primary and excess provided the same scope of coverage.

Johnson Controls was identified as a potentially responsible party (“PRP”) in connection with environmental contamination at numerous sites across the county.  As a PRP, Johnson Controls could have been required to contribute to the environmental restoration and remediation costs incurred at those sites under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”).  Thus, Johnson Controls notified its primary, umbrella, and excess insurers, and sought defense and indemnity under layered liability policies issued at various times between 1954 and 1985.  All of Johnson Controls’ insurers denied coverage for both defense and indemnity on the grounds that their policies did not cover costs imposed under CERCLA.  Coverage litigation ensued amongst Johnson Controls and its insurers.  The Wisconsin Supreme court ultimately concluded that an insured’s cost for “restoring and remediating damaged property, whether the costs are based on remediation efforts by a third party (including the government) or are incurred directly by the insured, are covered damages under applicable CGL policies, provided that other policy exclusions do not apply.”  The Wisconsin Supreme Court also concluded that PRP letters trigger a liability insurer’s defense obligation.  After the Wisconsin Supreme Court ruling, Johnson Controls resurrected previously dismissed claims against insurers and ultimately settled with many of its insurers.  The remaining parties filed cross-motions for summary judgment which the circuit court granted in favor of Johnson Controls.  The circuit court held, inter alia, that the duty to defend exists when coverage is “arguable,” and thus, Central National had a duty to defend because, according to the circuit court, it was unclear whether the claims were covered by the underlying policies.

On appeal, Johnson Controls conceded that Central National “agreed to provide a defense only for ‘occurrences covered under [Central National’s] policy, but not covered under the underlying insurances.’”  (Emphasis added by appellate court.)  The appellate court found that it was also undisputed that the scope of coverage for the environmental claims was the same in the primary policies as in the excess policies.  According to Wisconsin law, the duty to defend analysis was to be “driven by policy language—not generalizable concepts about the role of excess insurance and the duties of excess insurers.”  The appellate court held that “under the policy language it was logically impossible for an occurrence to be ‘covered’ under the Central National excess policies but ‘not covered’ under the primary policies—as would be required to trigger Central National’s duty to defend.”  The appellate court also found that “no reasonable insured would expect the Central National policy language to establish a duty upon Central National to drop down and provide a defense in the event the primary insurer refused to do so where it is undisputed the primary and excess policies provided identical coverage for the claimed loss.” Johnson Controls, Inc. v. Central National Ins. Co. of Omaha, No. 2014AP2050 (Wis. Ct.  App. Apr. 25, 2018).