Old Republic Insurance v. Liberty Mutual Fire Insurance
Docket: Case No. 14-C-165
Court: District Court, E.D. Wisconsin; September 30, 2015; Federal District Court
An insurance coverage and liability dispute involves a multi-vehicle accident on Interstate 80/94, where Mark Harmon, driving a tractor leased from Ryder Truck Rental Inc., collided with another semi-truck, causing further impacts. The case includes cross-motions for summary judgment by Plaintiffs Old Republic Insurance Company and Ryder Truck Rental Inc., against Defendant Liberty Mutual Fire Insurance Company, with jurisdiction established under 28 U.S.C. 1332 due to diversity of citizenship and an amount in controversy exceeding $75,000.
Summary judgment is deemed appropriate when there are no genuine disputes over material facts, and the movant is entitled to judgment as a matter of law, with evidence viewed favorably for the nonmoving party. In this dispute, the Truck Lease and Service Agreement specifies that Ryder is responsible for liability insurance coverage, which must be primary and include both Ryder and Expedited as insured parties. Ryder is designated the sole entity to handle accident investigations and claims.
The insurance policies in question include an Old Republic policy covering the tractor with a $1 million liability limit, and a Liberty policy under which Expedited was the named insured at the time of the accident. Both Ryder and Expedited, along with Harmon, are recognized as insureds under the Old Republic policy for claims related to the incident. Expedited had listed Liberty as its primary insurer in regulatory filings from February 2004 to February 2010.
The Liberty policy mandates that insured parties must promptly notify Liberty of any lawsuits against them and adhere to specific obligations to maintain coverage. These obligations include not incurring expenses or making payments without Liberty's consent and immediately forwarding all legal documents related to claims or suits. On August 14, 2008, Expedited employee Dan Kepple notified Liberty of an accident, with records indicating the tractor involved was covered by Ryder, not Liberty. Liberty sought to verify the coverage through the lease agreement between Ryder and Expedited and began investigating the accident by requesting damage photographs and medical records.
Liberty's claims diary entries noted ongoing communications with Expedited regarding the coverage and indicated an understanding that Ryder was responsible for liability insurance. By September 15, 2008, Liberty concluded that Ryder was liable for the accident and decided to close the claim, documenting it for records.
Subsequently, lawsuits were filed against Harmon and Ryder by Martinez and against Harmon and Expedited by Johnson in 2010, which were later removed to federal court. Liberty was not informed of these lawsuits until April 4, 2012, for the Martinez case, and it could not determine when it first learned of the Johnson lawsuit. Old Republic acknowledged it was the primary insurer for the defendants in both lawsuits and handled their defense without any financial contribution from Liberty. The Johnson case was settled for $290,000 in September 2011, which impacted the available limits for the Martinez lawsuit.
At the time of the Johnson settlement, defense counsel's file included evidence of severe injuries sustained by Johnson, such as significant head and face lacerations, permanent nerve and muscle damage to the left cheek, and substantial past and future lost wages totaling at least $55,516.19. Additional costs included past medical bills of no less than $39,281.89, along with claims for future income loss, exacerbation of a pre-existing lower back condition (20% impairment rating), and psychological trauma post-accident, notably a fear of driving. Attorneys Ehrhardt and Britton, drawing on their combined 40 years of experience in insurance and personal injury defense, deemed the $290,000 settlement for Johnson's bodily injury to be an excellent outcome. Concurrently, Ryder/Old Republic settled property damage claims related to the accident for $81,792.26, leaving them with remaining policy limits of $628,207.74. Liberty had no prior notice of the Johnson lawsuit and did not contribute to its settlement.
Before the Martinez lawsuit was initiated, Ehrhardt evaluated the potential settlement value of Martinez's claim between $250,000 and $850,000, later adjusting it to between $325,000 and $450,000 after the suit was filed. The Martinez case underwent various procedural stages, including discovery disputes and a stipulation admitting liability. In August 2011, Martinez sought to expedite the trial. Following a court conference, a settlement conference was scheduled for February 2, 2012, with trial set for March 5, 2012. By late 2011, Martinez had undergone knee procedures, and two months prior to trial, Ryder requested to postpone the settlement conference and trial due to new medical records indicating Martinez's candidacy for cervical spine surgery. Martinez also sought an extension for discovery to accommodate additional treatments and expert testimony, with the case pending for 16 months at that point. Old Republic supported Martinez’s motion to strike the trial and extend dates, believing the court would approve the adjournment. On January 12, 2012, the court granted these motions. Patricia McDermott, the Ryder employee overseeing lawsuits from the accident, first noticed the Liberty policy in February 2012 and promptly informed Expedited to notify Liberty of the claims.
On April 4, 2012, Ed Duffy, an employee of Expedited, notified Liberty about the ongoing Martinez lawsuit, clarifying that another insurance company was defending the claim. Duffy inquired about any additional coverage from Liberty. The following day, he confirmed that Ryder had been defending the lawsuit and that their in-house counsel was seeking information on possible additional policies. Duffy indicated that he would send Liberty's policy copies to the plaintiff's counsel and would have his attorneys contact Liberty regarding any exposure to their policy.
On August 31, Matthew Rodliff from Liberty assigned the claim to Michael Greeley, noting that Ryder was seeking coverage from Liberty, possibly concurrent or excess. A letter on August 13 from Martinez’s counsel demanded $3.5 million to settle the claim. On September 6, Greeley reached out to McDermott for information regarding the claim, stating he needed to determine Liberty’s policy applicability. By September 7, Liberty learned that Ryder/Old Republic had already paid over $75,000 for property damage and $290,000 for bodily injury claims related to the accident. Liberty periodically requested updates from Ryder’s defense counsel, though responses were sometimes delayed.
Greeley sought copies of reports, documents, and Ryder's claims file, but McDermott did not provide the requested information, forwarding it instead to Ehrhardt. On September 21, McDermott indicated to her supervisor that Expedited likely had excess coverage through Liberty. A settlement conference for the Martinez lawsuit was set for December 4, 2012. McDermott informed Greeley that only $628,000 remained on Ryder’s limits for the Martinez lawsuit due to previous settlements and highlighted uncertainties regarding the lawsuit's value and the relationship of the accident to Martinez's claimed injuries. By September 24, Ryder/Old Republic confirmed that their policy provided primary coverage for lawsuits and indicated that Liberty’s policy was considered excess. During a September 24 conference, Ehrhardt expressed skepticism about Martinez's credibility regarding his injuries, noting surveillance evidence that suggested he was moving without limitation.
On October 11, Liberty concluded that its policy provided excess insurance coverage for the Martinez case, which was valued over $900,000. Greeley reviewed the lease agreement, noting Ryder was responsible for liability insurance with a $1 million limit, while the lease did not mention other or excess insurance. The liability coverage was under investigation, sent for analysis, and the driver involved was an employee of Expedited, cited for unsafe driving behavior. Greeley determined that Liberty's coverage was excess to that of Ryder/Old Republic.
In a November 5 status report, Ehrhardt presented two settlement scenarios estimating values between $100,000-$130,000 and $160,000-$185,000. He later agreed with Britton's valuation of the lawsuit at $200,000-$250,000 but recognized the potential for jury-awarded damages exceeding $1.5 million linked to the plaintiff's surgeries. Greeley provided his contact details to Ehrhardt for the upcoming settlement conference, where Ryder offered $80,000 in response to Martinez's demand for $3.5 million, following a magistrate’s suggestion to maintain the offer to avoid self-bidding.
On January 16, 2013, Liberty, through Greeley, sent a "hammer letter" to Ryder/Old Republic indicating the case's value could exceed their liability limits and urged them to settle. Greeley deemed this valuation "realistic." He continued to press for a resolution, inquiring again on March 12 and June 13 about settlement plans and mediation efforts. The trial was scheduled for January 13, 2014, with mediation set for November 19, 2013. Greeley indicated his availability for the mediation via telephone in an email sent on October 29, 2013.
Greeley communicated with McDermott, summarizing that McDermott had previously confirmed primary coverage for Mr. Martinez's injury claim, which had a remaining limit of $628,204.74. Greeley noted the plaintiff's serious injuries and the potential for a verdict exceeding coverage limits, criticizing McDermott's stagnant settlement offer of $80,000 as unreasonable given the alleged damages. He emphasized McDermott's fiduciary duty to Liberty Mutual, the excess carrier, urging him to resolve the case within available limits to avoid liability for any excess judgment.
On November 11, 2013, Greeley and Britton discussed upcoming mediation, where Britton indicated Ryder would offer the remaining primary coverage limits and assumed Martinez's demands would exceed $628,207.74. Later, Britton sought to review Liberty's policy for a potential argument regarding a pro-rata share of defense costs, which could provide leverage for a higher settlement. On the same day, Britton asserted Ryder/Old Republic's position that Liberty's policy was primary and required to share settlement and defense costs.
By November 18, Greeley noted Ryder's change in position, which claimed Liberty was co-primary for coverage. Greeley responded that Ryder's late change in stance undermined good faith negotiations, highlighting that Ryder had consistently maintained its policy was primary for five years and had managed its own defense without involving Liberty until 2012. He referenced the lease agreement indicating Ryder's $1,000,000 liability coverage as primary and contended that Ryder's position could lead to a bad faith lawsuit.
Changing coverage positions after five years is prejudicial to Liberty Mutual and its policyholders. Ryder failed to consult Liberty during the defense of a lawsuit and only informed Liberty of potential exposure in 2012. Ryder did not make a reasonable effort to settle, with their first and only offer being $80,000 at a mediation in December 2012. Liberty expects Ryder to negotiate in good faith during mediation and is prepared to pursue a bad faith action against Ryder if they prioritize their interests over those of Mr. Harmon and Expedited Freight.
On November 19, 2013, the day of mediation in the Martinez action, an agreement was reached where Ryder would attempt to settle and pay up to their remaining limits, while Liberty would contribute if necessary. Martinez's demand was $2.2 million, exceeding both insurers' policy limits. The mediation did not result in a settlement, but negotiations continued. Liberty valued the case at approximately $970,000 as of November 22. A December 9 agreement allowed both insurers to reserve rights on coverage issues while pursuing settlement.
Ryder demanded 50% of defense and settlement costs from Liberty, which was rejected. Throughout negotiations, Ryder’s counsel insisted Liberty had co-primary coverage, which Liberty disputed. Concerns were raised about the good faith of the defendants during negotiations, leading to threats of a bad faith claim. Liberty claimed it would have managed the defense proactively if given the chance, but no settlement demand below $2.2 million was made until the final mediation. The Martinez lawsuit ultimately settled in December 2013 for $1,050,000, negotiated by Liberty and Greeley, with Ryder/Old Republic contributing $628,207.74 and Liberty paying $421,792.26.
Liberty's claims file diary notes the Martinez settlement of $1,050,000 as favorable, with evidence in the defense counsel's file indicating viable claims for knee and back surgeries, medical expenses totaling $277,380.29, past wage loss of $192,000, future wage loss estimated between $300,000 to $400,000, and claims for permanent injury exacerbating a pre-existing condition. Liberty was unaware of any settlement opportunities within the limits of the Old Republic policy, as claims adjuster Greeley was not involved prior to notice and lacked full access to the claims file, hindering his ability to assess settlement options. Liberty determined liability was entirely against its insureds in both the Johnson and Martinez lawsuits. Greeley was also not informed that the Old Republic policy provided primary coverage, understanding instead that Ryder sought excess coverage, indicating Old Republic's coverage was primary. The parties agree that Wisconsin law governs the insurance matters, with the court applying interpretations from the Wisconsin Supreme Court or the state's appellate courts as necessary. The Plaintiffs are seeking summary judgment to declare Liberty as a co-primary insurer responsible for half of the settlement and defense costs, while Liberty’s cross-motion asserts it is not liable due to lack of timely notice that prejudiced its defense and investigation abilities. Liberty claims it is not liable for defense costs because notice was only tendered on November 15, 2013. The interpretation of the insurance policy is a legal question, with Liberty acknowledging that proper notice would have resulted in co-primary coverage for the lawsuits.
Liberty disputes the Plaintiffs' claims for defense costs related to the Johnson and Martinez lawsuits. In the Johnson case, the Wisconsin Supreme Court ruling in Towne Realty, Inc. v. Zurich Ins. Co. established that insurers are not liable for defense costs prior to receiving notice (tender) from the insured. Here, the Johnson lawsuit was filed in August 2010 and settled by September 2011, but Liberty was not informed until April 2012, after all defense costs had been incurred. Thus, Liberty is not liable for any defense costs associated with the Johnson lawsuit, warranting summary judgment in Liberty's favor.
For the Martinez lawsuit, it is clear that Expedited did not expect Liberty to defend the suit, as they informed Liberty on April 4, 2012, that another insurer was already handling it. A factual dispute exists regarding whether McDermott communicated that Ryder provided primary coverage. Liberty argues that it was not required to assume defense costs until November 15, 2013, but Towne Realty states that tender occurs when the insurer is notified of the lawsuit. Since Liberty learned of the Martinez lawsuit on April 4, 2012, its liability for defense costs commenced on that date. Summary judgment is granted for Plaintiffs concerning Liberty's liability for the Martinez lawsuit defense costs beginning April 4, 2012, though the specific dollar amount remains unresolved due to disputed costs and insufficient evidence from Plaintiffs regarding the amounts attributable to the Martinez action.
Liberty asserts it is not liable for 50% of the settlement amounts related to the Johnson and Martinez lawsuits due to receiving untimely notice, which it claims prejudiced its position. Under Wisconsin law, insurers are entitled to timely notice of claims, which is a prerequisite for their obligations to defend and indemnify. The burden lies with the insurer to demonstrate that notice was not provided in a timely manner, requiring evidence of the insured's non-compliance with notice requirements. Timely notice allows insurers to investigate claims while evidence is fresh. The duty to notify is activated upon service of a summons and complaint, with a reasonable timeframe for notice emphasized in policy provisions.
Case law indicates that delays in notice can be unreasonable as a matter of law, with examples of various timeframes deemed excessive, ranging from 3 to 36 months. In this case, Liberty did not receive notice of the lawsuits until 20 months after their filing, impacting its ability to investigate and participate in the defense. The Johnson lawsuit settled after discovery, with Ryder paying $290,000, while the Martinez case proceeded for 17 months before a settlement was reached. Liberty argues that the 20-month delay significantly affected the lawsuits and its involvement, asserting that it was prejudiced by not being notified timely. A factual dispute exists regarding the exact timing of notice to Liberty, which prevents resolution via summary judgment at this stage.
The liability policy issued to Expedited mandated immediate notification to Liberty of any claims or lawsuits, requiring copies of relevant legal documents. A delay of over 20 months in notifying Liberty constituted an unreasonable breach of the policy. Wisconsin law adheres to a "notice-prejudice" rule, meaning late notice does not absolve an insurer of its obligations under the policy unless the insurer suffers prejudice from the delay. Prejudice is defined as a serious impairment of the insurer's ability to investigate or defend a claim. Generally, whether an insurer has been prejudiced by late notice is a factual question, but courts can resolve it as a matter of law when facts are undisputed. The Wisconsin Supreme Court affirmed that insurers can limit liability through contract terms, and failure to receive timely notice hinders an insurer's ability to assess coverage and manage claims efficiently. Under Wisconsin law, if notice is received over a year late, a rebuttable presumption of prejudice arises, shifting the burden to the claimant to demonstrate no prejudice occurred. The claimant cannot solely rely on their defense effectiveness to rebut this presumption; they must provide direct and conclusive evidence. In this case, it was established that Liberty was substantially prejudiced by the late notification of the Johnson and Martinez lawsuits, with the situation worsened by Expedited and Ryder's assertion that Liberty's coverage was excess. The lawsuits were filed in August 2010, but Liberty was not informed until over 20 months later, after the Johnson lawsuit had already been resolved.
Liberty was not informed for 19 months that its coverage was considered co-primary in relation to Ryder's primary coverage. During this time, Expedited and Ryder were aware of the ongoing lawsuits, including the Johnson lawsuit, which was filed in state court and moved to federal court, ultimately settling without Liberty's involvement. Liberty did not have the opportunity to select defense counsel, influence litigation strategy, or review crucial documents, which led to its inability to assess claims before mediation. Wisconsin case law establishes that an insurer can be presumed prejudiced if not notified of a lawsuit until after resolution. In relevant cases, courts found that the burden of proof lies with the insured to show the insurer was not prejudiced by late notice; however, the undisputed facts indicate Liberty was indeed prejudiced. Consequently, the court granted summary judgment for Liberty, stating it has no obligation to cover defense costs or settlements related to the Johnson lawsuit, while denying the Plaintiffs' summary judgment request. Additionally, Liberty's lack of involvement in the Johnson lawsuit negatively impacted its ability to address the subsequent Martinez lawsuit, affecting the financial recoveries sought by the Plaintiffs, given previous settlements had already reduced Ryder’s available insurance limits.
The exclusion of Liberty from the Johnson lawsuit adversely impacted both the Johnson and Martinez actions. It limited the funds available from Ryder for the Martinez case and increased the recovery amount sought from Liberty. Liberty faced prejudice due to delayed notice, which deprived it of input in the Martinez defense, as it remained unaware of the case for over 20 months. During this period, critical actions such as discovery, motion filings, and expert arrangements occurred without Liberty's participation, causing it to miss significant settlement opportunities.
The Martinez court scheduled a settlement conference for February 2, 2012, and a jury trial for March 5, 2012, giving Ryder ample time to prepare. However, new medical conditions and surgeries emerged, worsening potential damages and settlement value. Ryder's decision to vacate the original conference and trial dates and seek extensions led to an increase in the claim's ultimate value. Initially estimated at between $325,000 and $450,000, the claim's value surged to a demand of $3.5 million after the continuance. Subsequent evaluations indicated a settlement value between $100,000 and $250,000, excluding new neck-related issues. Liberty's absence from defense efforts and the inability to contest extensions significantly prejudiced its position in the Martinez lawsuit.
Britton opined that if the jury attributed Martinez’s neck and back injuries to the accident, damages could exceed $1.5 million. Following a failed mediation in November 2013, Martinez threatened a bad faith claim against Liberty, increasing settlement pressure. Ultimately, the case settled for $1,050,000, which was close to Britton’s estimate and significantly higher than initial pre-surgery settlement figures. Complications arose from the late notice of Martinez's lawsuit and Ryder's last-minute assertion of a co-primary coverage position, which Liberty learned just one day before mediation. Previously, all parties had operated under the assumption that Ryder's coverage was primary and Liberty's was excess. This situation hindered Liberty's ability to investigate coverage and settle effectively. Martinez’s counsel further intensified the situation by alleging bad faith during settlement talks. Under pressure and with the obligation to protect its insured, Liberty had little choice but to agree to Ryder's proposal to reserve rights on the coverage issue and settle the case. Plaintiffs contend that they provided sufficient defense in both the Johnson and Martinez lawsuits, arguing that Liberty should not complain. However, it is Ryder's responsibility to prove that Liberty was not prejudiced by the late notice of the lawsuits. Wisconsin law generally disallows this approach to show lack of prejudice. In a relevant case, Phoenix Contractors, the insurer was prejudiced by a 14-month delay in claim notification, which deprived it of the chance to investigate and engage in defense activities. The court rejected the argument that Phoenix's defense sufficed, emphasizing that assumptions about parallel investigations and outcomes were unwarranted and concluded that the insurer’s ability to respond was significantly impaired. This precedent supports the notion that Liberty similarly faced prejudice in this case.
Liberty was prejudiced by receiving late notice of the Martinez lawsuit, which hindered its ability to investigate the claim and pursue settlement opportunities, as it had intended to do had it been notified in a timely manner. The court found that this late notice also affected Liberty's involvement in the earlier Johnson lawsuit. Consequently, Liberty is not liable for the settlements of the Johnson and Martinez lawsuits but is liable for the defense costs of the Martinez lawsuit starting April 4, 2012. The court granted the plaintiffs' motion for summary judgment concerning defense costs for the Martinez lawsuit, while denying it regarding the Johnson lawsuit and property damage claims. Liberty's motion for summary judgment was granted in relation to the Johnson lawsuit and settlements, but denied regarding the defense costs of the Martinez lawsuit and the property damage claim. There are ongoing disputes concerning specific material facts, including whether Liberty had no notice of property damage claims and whether significant medical treatment for Martinez occurred by late 2001. Additionally, the parties disagree on whether Liberty sought coverage analysis and the legitimacy of certain attorney fees paid by Old Republic for the defense in the lawsuits. The payment history submitted by Ryder reflects all related costs but may not exclusively pertain to the two lawsuits in question.
