Sentry Ins. a Mut. Co. v. Regal Ware, Inc.

SENTRY INSURANCE A MUTUAL COMPANY, Intervener Plaintiff,

v.REGAL WARE, INC. Defendant.

10-cv-168-wmc

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF WISCONSIN

Dated: March 30, 2012

OPINION AND ORDER

Pursuant to the terms of its insurance policy, plaintiff Sentry Insurance a Mutual Company ("Sentry") undertook the legal defense for its insured, defendants Regal Ware, Inc. and SaladMaster, Inc., in the above-captioned lawsuit. The Sentry insurance policy covered only two of the six claims brought against the defendants, but Sentry paid for the entire cost of the defense until the two covered claims were dismissed. On an unjust enrichment theory, Sentry now seeks to recover the portion of its defense costs attributable to non-covered claims. The court will dismiss Sentry's claim without prejudice for the reasons explained below.

BACKGROUND

On November 23, 2010, the court granted Sentry's unopposed motion to intervene in the underlying lawsuit between Hy Cite, Inc. and defendants Regal Ware and SaladMaster. (Dkt. #69.) Sentry subsequently filed a complaint seeking a declaration (1) that Sentry had no obligation to defend its insureds against the claims asserted by Hy Cite, and (2) that if Sentry had an obligation to defend as to some claims,it was entitled to restitution of any amount paid to defend claims not covered by the Sentry insurance policy. (Dkt. #67-1.)

On June 8, 2011, in response to Sentry's motion for summary judgment, the court found that Sentry had a duty to defend claims III and IV of the lawsuit. (Dkt. #357.) The court did not, however, address whether Sentry was entitled to reimbursement of the portion of the defense costs attributable to claims outside the scope of the policy. The court suggested that Wisconsin law may give Sentry this right, but declined to decide the issue because Sentry had not made a formal demand for reimbursement at summary judgment, nor proposed a reasonable method for apportioning between covered and uncovered claims.

Sentry now brings a renewed motion for summary judgment, seeking reimbursement of the portion of its defense costs allocable to defense of claims I, II, V and VI. For the purposes of this motion, the parties agree that these claims are not covered under the Sentry insurance policy, and that Sentry paid for the cost of defending these claims through summary judgment in conjunction with its defense of covered claims III and IV.

OPINION

Under Wisconsin law, the elements of unjust enrichment are "(1) a benefit conferred upon the defendant by the plaintiff, (2) knowledge or appreciation of the benefit by the defendant, and (3) acceptance and retention by the defendant of such benefit under such circumstances that it would be inequitable for him or her to retain itwithout paying for its value." Ludyjan v. Continental Cas. Co., 308 Wis. 2d 398, 405 (Wis. Ct. App. 2008).

A. A Benefit Conferred Upon the Defendant by the Plaintiff

For purposes of unjust enrichment, one who aids another person by discharging an existing duty owed to that person has not conferred a "benefit." See Restatement (Third) of Restitution & Unjust Enrichment § 35(1) (allowing unjust enrichment if "one party to a contract demands from the other a performance that is not in fact due by the terms of their agreement''(emphasis added)). The parties' dispute centers on whether their insurance contract imposes a duty on Sentry to pay for the defense of Regal Ware's uncovered claims. If it does, Sentry has conferred no benefit and has no unjust enrichment claim.¹

Wisconsin common law currently imposes a broad "duty to defend" on insurers " obligat[ing] [them] to defend the entire action if just one theory of liability appears to fall within the coverage of the policies." School Dist. of Shorewood v. Wausau Ins. Co., 170 Wis. 2d 347, 366 (Wis. 1992) (emphasis added, adopting Illinois law), overruled on other grounds by Johnson Controls, Inc. v. Emp'rs Ins. of Wausau, 264 Wis. 2d 60, 88-91 (Wis. 2003). Consistent with Shorewood, Sentry concedes it had a duty to defend all of the claims against Regal Ware and Salad Master, but would have this court distinguish between a prospective duty to defend and a duty to pay for the defense of uncoveredclaims after the fact. In other words, Sentry asks this court to recognize an as-yet-unarticulated exception to current law on the duty to defend in Wisconsin, allowing reimbursement of uncovered claims after the duty to defend has been discharged.

As the Wisconsin Supreme Court has never considered whether to adopt such a rule, it falls to this court to determine what that court would decide. Am. Motorists Ins. Co. v. Trane Co., 544 F. Supp. 669, 689 (W.D. Wis. 1982) ("Where state law on a subject is silent, a federal court sitting in diversity can only use its best judgment to determine what the state supreme court would have held in the case."). Sentry's argument draws support from the fact that its proposed rule is the "general rule favored by most jurisdictions."² SL Indus., Inc. v. Am. Motorists Ins. Co., 128 N.J. 188, 215 (N.J. 1992). See also Buss v. Superior Court of Los Angeles Cnty, 16 Cal. 4th 35, 50-51 (Cal. 1997); E.E.O.C. v. S. Pub. Co., Inc., 894 F.2d 785, 791 (5th Cir. 1990) (Mississippi law); Jostens, Inc. v. CNA Ins./Cont'l Cas. Co., 403 N.W.2d 625, 631 (Minn. 1987), overruled on other grounds by N. States Power Co. v. Fidelity and Cas. Co. of N.Y., 523 N.W.2d 657 (Minn. 1994); Burlington Drug Co., Inc. v. Royal Globe Ins. Co., 616 F. Supp. 481, 483 (D.C. Vt. 1985) (Vermont law); Crist v. Ins. Co. of N. Am., 529 F. Supp. 601, 605 (D.C. Utah 1982) (Utah law); Timberline Equip. Co., Inc. v. St. Paul Fire & Marine Ins. Co., 281Or. 639, 645 (1978).³ A minority of states hold that the costs of defending uncovered claims in "mixed" cases cannot be recovered. See, e.g., Shoshone First Bank v. Pac. Empl. Ins. Co., 2 P.3d 510, 514 (Wyo. 2000); Bedoya v. Ill. Founders Ins. Co., 293 Ill. App. 3d 668, 674-75 (Ill. Ct. App. 1997), appeal denied by 177 Ill. 2d 567 (Ill. 1998).

The Seventh Circuit has interpreted Wisconsin law to favor reimbursement, albeit in dicta and with the caveat that reimbursement would only be appropriate for "defense costs that are readily apportionable between the covered and the uncovered claims." Lockwood Int'l v. Volm Bag Co., Inc., 273 F.3d 741, 743 (7th Cir. 2001) (emphasis original). In Lockwood, Judge Posner reasoned that because Wisconsin's broad "duty to defend" rule was created in recognition of the "difficulty of apportioning defense costs," an exception would be appropriate when apportionment is convenient. The court agrees with this reasoning in the abstract, though it is founded on unsupported assumptions about the policies animating Wisconsin's duty to defend rule. However logical the suggested approach, and the generally-adopted approach in other states, missing from Lockwood is evidence that the difficulty of apportioning defense costs was a reason, let alone the reason for the Wisconsin Supreme Court's decision.⁴

Lockwood cites a Wisconsin Court of Appeals case, Grube v. Daun 173 Wis. 2d 30 (Wis. Ct. App. 1992), for its "readily apportionable" theory, which in turn cites to a federal case from the Western District of Wisconsin, which cites cases from the Eighth and Ninth Circuits. Even if the court were to accept Grube as the definitive expression of Wisconsin policy, the case identifies several additional justifications for the broad duty to defend, such as the desire to ensure "that the insured will have a coherent, coordinated defense aimed at defeating all of the claims, rather than separate defenses that might work at cross purposes" and the awareness that "insurance contracts are contracts of adhesion, allowing the insured little choice in adding, eliminating or writing standard provisions, such as the insurer's duty to defend." Grube, 173 Wis. 2d at 73.

Moreover, when the Wisconsin Supreme Court adopted the broad duty to defend "mixed" claims, it borrowed from Illinois law. See School Dist. of Shorewood, 170 Wis. 2d at 366 (Wis. 1992) (citing Maneikis v. St. Paul Ins. Co. of Ill., 655 F.2d 818, 822 (7th Cir. 1981) (citing Md. Cas. Co. v. Peppers, 64 Ill. 2d 187 (Ill. 1976))). Illinois courts have steadfastly refused to create a right to reimbursement. See Bedoya, 293 Ill. App. 3d at 674-75; JG Indus., Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, 218 Ill. App. 3d 1061, 1068 (Ill. Ct. App. 1991) (rejecting reimbursement argument). Indeed, Illinois courts persist in doing so in the face of attempts by federal courts to assume a right of reimbursement into being. See Ins. Co. of N. Am. v. Forty-Eight Insulations, Inc., 633 F.2d 1212, 1224-25 (6th Cir. 1980) (interpreting lllinois law to create a right of reimbursement).

The nearest the Wisconsin Supreme Court has come to deciding this issue is dicta found in Mowry v. Badger State Mutual Casualty Company, 129 Wis. 2d 496, 528-29 (1986). That case touched on a related question: whether, when the insurer provides a defense pending resolution of a contested coverage dispute and coverage is subsequently found lacking, it may pursue reimbursement for the defense costs already expended. The Wisconsin Supreme Court endorsed a practice of resolving the issue of coverage before turning to questions of liability and damages in the underlying action. Id. But it also recognized that if coverage cannot be determined beforehand, an insurer has no right to reimbursement for the costs of defending if arguably-covered claims eventually turn out not to be covered. Id. at 528-29. ("[A]n insurer may be required to furnish a free defense to its insured prior to the determination of coverage."). The Mowry decision is not directly comparable to a "mixed" claim case, but it at least hints that Wisconsin generally disfavors reimbursement after the fact.

Similarly, the Wisconsin Court of Appeals has also yet to address the question directly but has come closer than Mowry. In ...