United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 11-1967
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Gulf Underwriters Insurance Company, *
*
Plaintiff - Appellee, *
* Appeal from the United States
v. * District Court for the
* District of Minnesota.
Lowell P. Burris; Joyce P. Burris, *
*
Defendants - Appellants, *
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Submitted: December 15, 2011
Filed: March 27, 2012
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Before LOKEN, BRIGHT, and SHEPHERD, Circuit Judges.
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LOKEN, Circuit Judge.
Lowell Burris was seriously injured in August 2001 when he fell from a ladder
manufactured in Wisconsin by Versa Products, Inc. (“Versa”), and purchased from
Menard, Inc. (“Menard”). In March 2003, when Burris’s attorney allegedly wrote
Versa asserting a product liability claim, Versa and an affiliate were named insureds
and Menard was an additional insured under a “claims made” Commercial General
Liability insurance policy issued in Wisconsin by Gulf Underwriters Insurance
Company (“Gulf”). The policy included a $50,000 “Self-Insured Retention”
endorsement (the “SIR”).
In August 2007, Burris and his wife commenced a product liability action
against Menard, Versa, and Versa’s affiliate in Minnesota state court. After Menard
removed the action to federal court, which has diversity jurisdiction, Gulf commenced
this action seeking a judgment declaring “that the policy issued by Gulf to [the named
insureds] does not afford coverage to them or Menard, Inc. for any claim made by
[Burris] under the terms of the Gulf Policy.” The district court granted Gulf’s motion
for a summary declaratory judgment on the ground that Versa’s dissolution after
expiration of the policy meant that the insured “cannot meet its obligations under the
SIR,” a material breach that terminates Gulf’s obligations under the policy. Burris
appeals. We review de novo the district court’s interpretation of the insurance policy
under governing Wisconsin law. See Rural Mut. Ins. Co. v. Welsh, 633 N.W.2d 633,
635-36 (Wis. App. 2001). We reverse and remand with directions to dismiss Gulf’s
declaratory judgment action with prejudice.
I.
As this is a diversity action, we interpret Gulf’s Commercial General Liability
policy in accordance with Wisconsin law. The Wisconsin courts apply well-known
principles of contract interpretation in resolving insurance coverage disputes. Words
and phrases in insurance policies are subject to the rules of construction that apply to
contracts generally. An unambiguous policy will be construed according to its plain
meaning. But if the policy language is ambiguous, that is, susceptible to more than
one reasonable construction, ambiguities will be construed in favor of the insured.
See, e.g., Frost ex rel. Anderson v. Whitbeck, 654 N.W.2d 225, 229-30 (Wis. 2002).
Unlike Gulf’s briefs and the district court’s Opinion and Order, which quoted
only excerpts, we begin by quoting the entire SIR endorsement because, in our view,
that is all one needs to decide the issue raised on appeal:
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This endorsement forms a part of the policy to which it is attached. Please read it carefully.
SELF-INSURED RETENTION
(WITH AGGREGATE SELF-INSURED RETENTION)
DEFENSE COSTS CONTRIBUTING TO RETENTION LIMIT
In consideration of the premium charged, it is hereby agreed that such coverage as is
afforded by this policy shall be excess of a $50,000 Self-Insured Retention each
“occurrence.” It is also agreed that all expenses and costs under the Supplementary
Payments section stated in the Coverage Form (Section 1) shall contribute to the exhaustion
of the $50,000 Self-Insured Retention Limit and all such expenss and costs shall be entirely
borne by the insured.
All the terms of this policy including, but not limited to, those with respect to notice of
“claim” or “suit” and the Company’s right to investigate, negotiate, defend and settle any
“claim” apply irrespective of the application of the Self-Insured Retention.
The Company may, but is not obligated to, pay all or part of the Self-Insured Retention to
effect settlement of any “claim,” “suit” or expense. Upon notification of the action taken,
the insured shall promptly reimburse the Company for such Self-Insured Retention amount
paid by the Company. Failure of the insured to pay such Self-Insured Retention amount
within ten (10) days after receipt of a written request for such payment shall subject the
policy to cancellation in accordance with the terms and conditions relating to non-payment
of premium.
This endorsement does not in any way relieve the insured of his responsibility to report any
incident that might give rise to a “claim” as stated elsewhere in this policy.
The Self-Insured Retention obligation to this contract shall be considered to be an executory
contract under all circumstances and payments on this obligation shall be paid by the
insured. Failure to make the payment entitles the insurer to terminate the contractual
obligation between the parties as a failure to the Self-Insured Retention endorsement is a
material breach as to the entire contract. In the event of a bankruptcy filing, the contract is
deemed executory as under 11 U.S.C. 365, and the payments of the Self-Insured Retention
shall be made on a monthly basis and treated as an administrative expense under 11 U.S.C.
507(a)(1).
The Self-Insured Retention amount applies under Bodily Injury Liability, Property Damage
Liability, Personal Injury Liability and Advertising Injury Liability Coverage combined to
all damages because of “bodily injury,” “property damage,” “personal injury” and
“advertising injury” as the result of any one “occurrence” or offense regardless of the
number of persons or organizations who sustain damages because of that “occurrence” or
offense.
*$250,000 Annual Aggregate. However, in the event of cancellation of this policy, the
aggregate Self-Insured Retention is not subject to pro-rata or short rate reduction of the
stated Annual Aggregate.
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Gulf asserted, and the district court ruled, that the policy provides no coverage
for the claim asserted by Burris solely because the SIR expressly provides that Versa’s
inability to comply with its SIR obligations “is a material breach as to the entire
contract” that terminates Gulf’s obligations under the policy. But that assertion is
squarely contrary to another term of the SIR, which provides: “All the terms of this
policy . . . apply irrespective of the application of the Self-Insured Retention.”
Beyond question, “the terms of this policy” include its coverage provisions. Thus,
while the amount of coverage set forth in the policy declarations is affected by the
amount of Self-Insured Retention, the coverage of third-party liability claims
continues to be defined exclusively by the provisions of the policy’s Commercial
General Liability Coverage Form. In other words, as one would expect, the policy’s
drafters did not intend the self-insured endorsement to affect Gulf’s obligations under
the policy to third party claimants. Under Wisconsin law, “Where the endorsement
expressly provides that it is subject to all terms, limitations, and conditions of the
policy, it does not abrogate or nullify any provision of the policy unless it is so stated
in the endorsement.” Inter-Ins. Exch. of Chi. Motor Club v. Westchester Fire Ins. Co.,
130 N.W.2d 185, 188 (Wis. 1964).
If confirmation of this interpretation is needed, we readily find it in the third
paragraph of the SIR, which Gulf deceptively omitted from the SIR excerpts quoted
in its briefs to the district court and to this court. That paragraph provides in part:
“Failure of the insured to pay such Self-Insured Retention amount within ten (10) days
after receipt of a written request for such payment shall subject the policy to
cancellation in accordance with the terms and conditions relating to non-payment of
premium.” By contrast, the fifth paragraph, on which Gulf relies, provides: “The
Self-Insured Retention obligation [is] an executory contract . . . and payments on this
obligation shall be paid by the insured. Failure to make the payment entitles the
insurer to terminate the contractual obligation between the parties as a failure to the
Self-Insured Retention endorsement is a material breach as to the entire contract.”
(Emphases added.) Note this provision does not refer to cancellation of the policy nor
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to the cancellation terms of the policy, all of which require ten or thirty days notice
of cancellation. In other words, the “termination” referred to in the fifth paragraph is
not a “cancellation” of the policy. And without cancellation of the policy, Gulf’s
contention that existing third party claimants are deprived of coverage is unsound. At
a minimum, these inconsistent termination/cancellation provisions within the SIR
itself create an ambiguity that must be resolved in favor of the insured. See Donhower
v. Marquez, 674 N.W.2d 906, 913 (Wis. App. 2003).1
Citing only a general principle, Gulf asserted, and the district court recited, that
the SIR is an “executory contract.” We fail to see how that is even relevant to this
coverage issue. But in any event, as Gulf and its attorneys must have known, every
court in the country to consider a related issue has ruled “that insurance policies for
which the policy periods have expired and the premium has been paid are not
executory contracts, despite continuing obligations on the part of the insured.” In re
Vanderveer Estates Holding, LLC, 328 B.R. 18, 26 (Bankr. E.D.N.Y. 2005), and cases
cited; accord In re Liquidation of Inter-Am. Ins. Co. of Ill., 768 N.E.2d 182, 191 (Ill.
App. 2002). These cases confirm that the paragraph in the SIR calling it an
“executory contract” was an attempt (likely futile) to improve Gulf’s position in
asserting claims for the pre-petition obligations of bankrupt insureds.
Another error in granting summary judgment was that Gulf submitted no
admissible evidence supporting its assertion that Versa had breached the SIR -- no
evidence Versa ever failed to make an SIR payment Gulf demanded; no evidence the
$250,000 aggregate SIR limit had not been exceeded; no evidence Versa had no assets
other than an inadmissible “friend-of-the-court” letter from a Milwaukee attorney
claiming that he formerly represented Versa; no evidence Wisconsin law does not
require dissolving corporations to preserve assets to satisfy the claims of creditors, cf.
1
We agree with the district court that, if an endorsement and a policy provision
unambiguously and unavoidably conflict, the endorsement normally prevails. See
Stubbe v. Guidant Mut. Ins. Co., 651 N.W.2d 318, 324 (Wis. App. 2002).
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Minn. Stat. § 302A.7291; and no evidence that Versa and its principals will refuse to
make any post-dissolution SIR payments that may be required to preserve the policy’s
coverage protections. On this record, summary judgment for Gulf was factually
unwarranted.
II.
The remaining question is what remains of this lawsuit. Gulf urges us to affirm
on the basis of its other asserted coverage defenses. Instead, we will direct that its
declaratory judgment action be dismissed with prejudice. “Relief under 28 U.S.C.
§ 2201, the Federal Declaratory Judgment Act, is discretionary, and an important
factor in exercising that discretion is whether the declaratory judgment plaintiff has
another, more appropriate remedy.” Glover v. State Farm Fire & Cas. Co., 984 F.2d
259, 261 (8th Cir. 1993). On this issue, Gulf failed to disclose to the district court
highly relevant Wisconsin statutes and judicial decisions from around the country.
Nearly a century ago, the Wisconsin Legislature enacted statutes authorizing
direct actions against insurers. These statutes overruled decisions under prior law
such as Glatz v. Kroeger Bros., 183 N.W. 683, 685 (Wis. 1921), where the court
enforced a policy provision making an insurer liable only to the insured and only after
the insured sustained a loss by paying a third party’s judgment. As amended over the
years, these statutes presently provide:
633.22 Required provisions of liability insurance policies.
Every liability insurance policy shall provide that the bankruptcy
or insolvency of the insured shall not diminish any liability of the
insurer to 3rd parties and that if execution against the insured is
returned unsatisfied, an action may be maintained against the
insurer to the extent that the liability is covered by the policy.
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632.24 Direct action against insurer.
Any bond or policy of insurance covering liability to others for
negligence makes the insurer liable, up to the amounts stated in
the bond or policy, to the persons entitled to recover against the
insured . . . for injury to persons or property, irrespective of
whether the liability is presently established or is contingent and
to become fixed or certain by final judgment against the insured.
Wis. Stat. §§ 632.22, 632.24.2 Under these direct action statutes, an injured party may
join the liability insurer in a negligence action and recover for a covered loss even if
the insured is insolvent or has been given an absolute release. See Decade’s Monthly
Fund v. Whyte & Hirschboeck, 495 N.W.2d 335, 338-39 (Wis. 1993); Rauch v. Amer.
Fam. Ins. Co., 340 N.W.2d 478, 482-83 (Wis. 1983). Alternatively, the injured party
may sue the insurer after recovering a judgment against the insured, if execution
against the insured is returned unsatisfied for any reason. See Stone v. Inter-State
Exch., 229 N.W. 26, 28 (Wis. 1930). These remedial statutes are “intended to
facilitate recovery by injured parties.” Kranzush v. Badger State Mut. Cas. Co., 307
N.W.2d 256, 266 (Wis. 1981). However, they do not expand the insurance contract
by overruling the principle “that any defense under the policy that relieves the insurer
from liability as against the assured also relieves it from liability as against injured
persons.” Hunt v. Dollar, 271 N.W. 405, 409 (Wis. 1937).
Wisconsin is not the only State to authorize direct actions against liability
insurers or to mandate policy provisions that protect third party claimants in the event
of the insured’s insolvency. Our research revealed that every court to consider the
issue in a State that has enacted such statutes has rejected Gulf’s interpretation of its
SIR as a matter either of public policy or of policy interpretation. In Albany Ins. Co.
v. Bengal Marine, Inc., 857 F.2d 250, 255 (5th Cir. 1988), the Fifth Circuit concluded
2
As mandated by § 633.22, paragraph 1 of Section IV of the policy provided:
“Bankruptcy or insolvency of the insured . . . will not relieve us of our obligations
under this Coverage Part.”
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that, “through the direct action statute, Louisiana has afforded claimants a direct cause
of action against insurers precisely so that claimants can collect despite the insolvency
of the insured.” Other courts have held that statutes mandating insolvency policy
provisions “prevent insurers from using the insured’s bankrupt condition and resulting
inability to make actual payment to satisfy a judgment or any portion thereof as
grounds to avoid payment on a policy.” Home Ins. Co. of Ill. v. Hooper, 691 N.E.2d
65, 69-70 (Ill. App. 1998); accord Gulf Underwriters Ins. Co. v. McClain Ind., Inc.,
No. 273768, 2009 WL 3021134 (Mich. App. Aug. 5, 2008), rev’w denied, 765
N.W.2d 16 (Mich. 2009); In re Vanderveer Estates, 328 B.R. at 23-24. And courts in
States lacking direct action statutes or a statute mandating insolvency provisions have
nonetheless held that a self-insured retention provision, even if unambiguous, violates
the public policy “to prevent insurance companies from avoiding their obligations
when an insolvent insured cannot make an expenditure towards discharging liability.”
Rosciti v. Ins. Co. of Pa., 659 F.3d 92, 98 (1st Cir. 2011); accord In re Texscan Corp.,
976 F.2d 1269, 1273 (9th Cir. 1992). But cf. Pak-Mor Mfg. Co. v. Royal Surplus
Lines Ins. Co., No. SA-05-CA-135-RF, 2005 WL 3487723, at *6 (W.D. Tex. 2005)
(enforcing an unambiguous self-insured retention provision in the insured’s
bankruptcy proceeding because Texas has no such statutes).
Wisconsin’s public policy as articulated by the Supreme Court of Wisconsin is
consistent with these decisions. See Decade’s Monthly, 495 N.W.2d at 339 (§ 632.22
was enacted “specifically to protect third parties in the event of an insured party’s
bankruptcy”); accord Engebretson v. Humana Ins. Co., No. 03-C-0553, 2006 WL
2871824, at *9 (E.D. Wis. Oct. 6, 2006). Thus, if the SIR unambiguously provided
that non-compliance by the insured voided coverage of existing claims, we would
conclude the SIR is void as a matter of public policy under Wisconsin law.
Gulf also failed to disclose to the district court or to this court that enactment
of these direct action statutes initially prompted the Supreme Court of Wisconsin to
prohibit declaratory judgment actions by insurers raising coverage issues prior to the
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determination of the insured’s liability to a third party. New Amsterdam Cas. Co. v.
Simpson, 300 N.W. 367, 369 (Wis. 1941); see Allstate Ins. Co. v. Charneski, 286 F.2d
238, 244 (7th Cir. 1960) (applying that rule in a diversity action governed by
Wisconsin law). Rather, the Court has instructed, “the proper procedure for an
insurance company to follow when coverage is disputed is to request a bifurcated trial
on the issues of coverage and liability.” Newhouse v. Citizens Sec. Mut. Ins. Co., 501
N.W.2d 1, 6 (Wis. 1993). More recently, the Supreme Court of Wisconsin has
declared that “the joinder or intervention of all concerned parties followed by
bifurcation of the coverage and liability issues . . . is the preferred procedure to
determine insurance coverage,” but “coverage may be determined by . . . a separate
declaratory judgment action” when, as here, the insurer was not joined in the
underlying action. Fire Ins. Exchange v. Basten, 549 N.W.2d 690, 696 (Wis. 1996).
Given the number of deceptive misstatements and non-disclosures in Gulf’s
presentation of the SIR issue to the district and to this court, and the existence of a
“preferred procedure to determine insurance coverage” under Wisconsin law, we
conclude that we should exercise our discretion to deny Gulf a declaratory judgment
resolving other coverage issues that might have been suitable for declaratory relief in
other circumstances. Instead, the underlying action should proceed. If Gulf does not
intervene and if Burris recovers a liability judgment against Versa, and if execution
is returned unsatisfied, Burris may sue Gulf directly under Wis. Stat. §§ 632.22 and
632.24. Gulf may then assert its coverage defenses (other than Versa’s non-
compliance with the SIR). If there is coverage, Gulf will be liable to Burris for any
amount above $50,000 within the policy limits, but Gulf may not be ordered to “drop
down” and pay Versa’s self-insured portion of the judgment. See Rosciti, 659 F.3d
at 100; Albany, 857 F.2d at 256; Hooper, 691 N.E.2d at 70. As Versa’s self-insured
obligation expressly included defense costs, there may be a question whether Burris
would be obligated to reimburse Gulf for any defense costs Gulf incurs, as the court
ordered in McClain Industries, 2008 WL 3021134, at *4. We express no view on that
question.
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III.
The judgment of the district court is reversed and the case is remanded with
directions to dismiss Gulf’s declaratory judgment action with prejudice. The district
court is invited but not directed to issue an order to show cause why Gulf and/or its
attorneys should not be ordered to reimburse Burris and his wife for their reasonable
attorney’s fees and costs in defending this declaratory judgment action. See Chambers
v. NASCO, Inc., 501 U.S. 32, 45-46 (1991); 28 U.S.C. § 1927.
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