Amicus Curiae Brief — Employers Insurance Company of Wausau v. Johnson Controls, Inc.

CQ)

No. 03-1199

MOTION FILED

In The

Supreme Court of the Gnited States

¢

EMPLOYERS INSURANCE COMPANY OF WAUSAU,

Petitioner,

v.

JOHNSON CONTROLS, INC., et al.,

Respondents.

¢

On Petition For A Writ Of Certiorari

To The Supreme Court Of Wisconsin

¢

MOTION FOR LEAVE TO FILE AMICUS CURIAE

BRIEF AND AMICUS CURIAE BRIEF OF THE

COMPLEX INSURANCE CLAIMS LITIGATION

ASSOCIATION IN SUPPORT OF PETITIONER

¢

LAURA A. FOGGAN

(Counsel of Record)

ELIZABETH A. EASTWOOD

WILEY REIN & FIELDING LLP

1776 K Street, N.W.

Washington, D.C. 20006

(202) 719-7000

Attorneys for Amicus Curiae

Complex Insurance Claims

Litigation Association

COCKLE LAW BRIEF PRINTING CO. (800) 225-6964

OR CALL COLLECT (402) 342-2831

MOTION FOR LEAVE TO FILE AMICUS CURIAE

BRIEF IN SUPPORT OF PETITIONER

The Complex Insurance Claims Litigation Association

(“CICLA”) submits this motion for leave to file an amicus

curiae brief in support of Petitioner Employers Insurance

Company of Wausau (“Wausau”) pursuant to Supreme

Court Rule 37.2(b). CICLA’s amicus curiae brief presents

relevant information beyond the scope of the submissions

by the parties to this case and focuses on the potential

significance of this case to numerous others beyond Wau-

sau and the respondents. Through its participation,

CICLA seeks to provide “unique information or perspective

that can help the court.” Ryan v. Commodity Futures

Trading Comm’n, 125 F.3d 1062, 1063 (7th Cir. 1997); see

also Miller-Wohl Co. v. Comm’r of Labor and Indus., 694

F.2d 203, 204 (9th Cir. 1982) (“the classic role of amicus

curiae [is to] assist[] in a case of general public interest,

supplement[] the efforts of counsel, and draw[] the court’s

attention to law that escaped consideration”).

As required by Supreme Court Rule 37.2(a), CICLA

sought the consent of the parties to file this amicus curiae

brief. Wausau consented to the filing of CICLA’s amicus

curiae brief, as did respondents The Travelers Indemnity

Company and Transamerica Premier Insurance Company.’

This motion is necessary, however, because Respondent

Johnson Controls, Inc. (“JCI”) withheld its consent to the

submission of an amicus curiae brief by CICLA.

* The letters from counsel consenting to the filing of this amicus

curiae brief have been filed in the office of the Clerk.

2

CICLA is a trade association of major property and

casualty insurance carriers. CICLA is vitally interested in

this case because its members have underwritten and

continue to underwrite a substantial portion of the liability

insurance contracts in the State of Wisconsin and nation-

wide, and because many of its members’ liability insurance

‘contracts contain a “suit” provision similar or identical to

the one at issue herein. CICLA — and its predecessor the

Insurance Environmental Litigation Association — have

filed over 600 briefs amicus curiae in federal and state

courts nationwide. In addition, CICLA participated in this

case aS an amicus curiae before the Wisconsin Supreme

Court. CICLA therefore is uniquely situated to assess and

explain the potential ramifications of the Wisconsin Su-

preme Court’s decision for insurers throughout the country.”

As an association of insurers, CICLA brings special

expertise in, and knowledge of, disputes concerning the

meaning of the term “suit” in liability insurance contracts

and how judicial interpretations of the term affect insur-

ers. Further, as a result of its extensive experience as an

advocate for insurers in courts nationwide, CICLA is

uniquely qualified to offer a broader perspective than the

parties on the ramifications of the Wisconsin Supreme

? CICLA seeks to file this brief on behalf of CICLA member

companies Farmers Insurance Group, Royal & SunAlliance, St. Paul

Fire & Marine Insurance Company, and Selective Insurance Company

of America. CICLA does not appear on behalf of the following members

who are or were parties to this case or whose affiliates are or were

parties in this case: ACE Group of Insurance and Reinsurance Compa-

nies, American International Group Insurance Companies, Chubb &

Son — a Division of Federal Insyrance Company, Hartford Insurance

Group, Liberty Mutual Insurance Company, The Travelers Indemnity

Company, and Zurich American Insurance Company.

3

Court decision in this case, a decision in which the court

(1) reached an issue that was not presented by the policy-

holder’s appeal; (2) abandoned its own nearly ten-year-old

precedent on the meaning of the term “suit”; (3) failed to

afford Wausau notice that the court would decide the

“suit” issue; and (4) failed to give Wausau any opportunity

to be heard on the “suit” issue. As CICLA demonstrates,

this Court should grant certiorari because the Wisconsin

Supreme Court violated Wausau’s right to due process by

refusing to afford Wausau notice and an opportunity to be

heard on the “suit” issue. Moreover, the Wisconsin Su-

preme Court’s conspicuous refusal to hear Wausau’s

arguments on the “suit” issue resulted in a decision which

is extremely prejudicial to Wausau and to all others that

insure risks in Wisconsin. CICLA respectfully requests

leave of the Court to file the attached amicus curiae brief

in support of Wausau.

Respectfully submitted,

LAURA A. FOGGAN

(counsel of record)

ELIZABETH A. EASTWOOD

WiLEY REIN & FIELDING LLP

1776 K Street, N.W.

Washington, D.C. 20006

(202) 719-7000

Attorneys for Amicus Curiae

Complex Insurance Claims

Litigation Association

TABLE OF CONTENTS

Page

INTEREST OF AMICUS CURIAE............ccccssesesnecceeeees 1

SUMMARY OF ARGUMENT. ...........cccccceeseeeeteeeeeeeeeeeens 3

PSTN Essien asissebnviekscndsexsasesavstonsscaswatescxassenetenvsxeenes 6

I. WAUSAU WAS DEPRIVED OF NOTICE AND

AN OPPORTUNITY TO BE HEARD ON THE

“SUIT”? ISSUE AND THUS WAS DENIED

DUE PROCESS .............c.ccsesccosssscccessessssssssscesens 6

A. The Wisconsin Supreme Court’s Ruling In

JCI’s Favor On An Issue JCI Did Not

Raise Undermines Confidence In A Fair

And Impartial Judiciary ............::ccceeeeeeeees 6

B. There Can Be No Justification For The

Wisconsin Supreme Court’s Failure To Af-

ford Wausau Notice And An Opportunity

To Be Heard On The “Suit” Issue............... 7

C. The Wisconsin Supreme Court Failed To

Articulate Any Basis For Departing From

Stare Decisis As To The “Suit” Issue.......... 10

II. THE SUPREME COURT OF WISCONSIN’S

SURPRISE SUA SPONTE 180-DEGREE TURN

ON THE “SUIT” ISSUE IS PROFOUNDLY

PREJUDICIAL TO INSURERS ............::eseeeee 12

A. The Wisconsin Supreme Court Errone-

ously Concluded That Overruling Edger-

ton Would Not Harm Any Significant

Interest Of Insuxrers............ccccccscccccseseossneeee 12

ii

TABLE OF CONTENTS - Continued

Page

B. The Wisconsin Supreme Court Made Un-

supported Determinations Concerning

Purported “Practical Difficulties” Posed By

Edgerton’s “Suit” Rule And Ignored Real

Practical Difficulties That Overruling

Edgerton Will Cause For Insurers.............. 15

CONCLUSION ..........ssssssssscscsvccssssssessssssscscseassocssssnanees 20

ill

TABLE OF AUTHORITIES

Page

CASES

AIU Insurance Co. v. Superior Court, 799 P.2d 1253

Cee TI va cncssictindencnnusssivesecedsiasnnteinpnniasanninciapnennenannens 12

Bouie v. City of Columbia, 378 U.S. 347 (1964)........ see 9

Buss v. Superior Court, 939 P.2d 766 (Cal. 1997 | Fe eee 19

Brinkerhoff-Faris Trust & Savings Co. v. Hill, 281

Te 8 I ica snnktssiesdncinsnerniaiiemasananiannen 8,9

City of Edgerton v. General Casualty Co., 517

N.W.2d 463 (Wis. 1994) .............cccccrscccccrcrrssssssersees passim

Foster-Gardner, Inc. v. National Union Fire Insur-

ance Co., 959 P.2d 265 (Cal. 1998)..............cceeee 12, 18, 20

General Casualty Co. v. Hills, 561 N.W.2d 718 (Wis.

AIOE Y vsicssacincosdcdcunccentoerassbubitettuassviapiapsnsneeaseiatsetsivinignan 10, 11

Grieb v. Citizens Casualty Co., 148 N.W.2d 103

Ci, SI winvnkcniccansctstncsssrincirnarsinicinsisviereennnenmenareeeses 16

Johnson Controls, Inc. v. Employers Insurance of

Wausau, 665 N.W.2d 257 (Wis. 2003)............:.::004 passim

Lapham-Hickey Steel Corp. v. Protection Mutual

Insurance Co., 655 N.E.2d 842 (Ill. 1995).........:. eee 17

Mowry v. Badger State Mutual Casualty Co., 385

N.W.2d 171 (Wis. 1986) .......-.-ssseeeserereserrenesesterensesenencens 18

Newhouse v. Citizens Security Mutual Insurance

Co., 501 N.W.2d 1 (Wis. 1993) .........:::cccecseseseeeeeeesereeeees 18

Richards v. Jefferson County, 517 U.S. 793 (1996)............. 9

Ryan v. Royal Insurance Co., 916 F.2d 731 (1st Cir.

TO os ciniceckecesniansacosaprenceiaaendeainniesnsansnnmipacnecsasionerhter 19

iv

TABLE OF AUTHORITIES -— Continued

Towne Realty, Inc. v. Zurich Insurance Co., 548

N.W.2d 64 (Wis. 1996) .......:cccsseeceesesesreeeeeeeenteeeeeeenees

United States Fidelity & Guaranty Co. v. Wilkin

Insulation Co., 578 N.E.2d 926 (Ill. 1991) ............+.

MISCELLANEOUS

929A Am. Jur. Insurance § 1452, at 562 ...........eeeeeeeees

Cynthia E. Smith, Wisconsin Supreme Court Re-

leases Landmark Environmental Insurance Dect-

sion Reversing Its 1994 Holdings In Edgerton -

You May Now Have Insurance Coverage For En-

_ vironmental Claims, Michael Best & Friedrich LLP

Land & Resources Alert (July 2003), available at

http://www.mbf-law.com/pubs/client/LR_alert_7_03.

David J. Edquist, Edgerton and Johnson Controls:

New Life for Coverage of Old Environmental Li-

abilities, von Briesen & Rober, s.c. Environmental

Law Bulletin (July 2003), available at http://www.

vonbriesen.com/resourcelibrary/docs/environmental/

environmental_liability_coverage.pdf iicahahiiaeselbcnsiaiaiaes

George C. Christie, Objectivity in the Lau, 78 Yale

LJ. 1311 (1969) ...........0--escsceccerrereresscrcesssrerreenenensasers

Pete Millard, Cleanup Ruling Supreme For Busi-

ness, The Business Journal of Milwaukee (July 21,

2003), available at http://milwaukee.bizjournals.

com/milwaukee/stories/2003/07/21/newscolumn1.

BRIEF OF COMPLEX INSURANCE CLAIMS

LITIGATION ASSOCIATION AS AMICUS CURIAE

IN SUPPORT OF PETITIONER

This amicus curiae brief is submitted on behalf of

the Complex Insurance Claims Litigation Association

(“CICLA”). Petitioner Employers Insurance Company of

Wausau and Respondents The Travelers Indemnity Com-

pany and Transamerica Premier Insurance Company have

consented to CICLA’s submission of this brief. Respondent

Johnson Controls, Inc. has withheld consent. A motion for

leave to file an amicus curiae brief pursuant to Supreme

Court Rule 37.2(b) is included with this brief. The letters

from counsel for the parties that consented to the filing of

this amicus curiae brief have been filed in the office of the

Clerk.

INTEREST OF AMICUS CURIAE’

The Complex Insurance Claims Litigation Association

(“CICLA”) is a trade association of major property and

casualty insurance carriers.’ Since its formation in 1986,

3 This brief was not authored, in whole or in part, by any counsel

for any party. No person or entity, other than the amicus curiae, its

members, or its counsel, has made a monetary contribution to the

preparation or submission of this brief.

‘ This brief is submitted on behalf of CICLA member companies

Farmers Insurance Group, Royal & SunAlliance, St. Paul Fire &

Marine Insurance Company, and Selective Insurance Company of

America. CICLA does not appear on behalf of the following members

who are or were parties to this case or whose affiliates are or were

parties in this case: ACE Group of Insurance and Reinsurance Compa-

nies, American International Group Insurance Companies, Chubb &

Son — a Division of Federal Insurance Company, Hartford Insurance

Group, Liberty Mutual Insurance Company, The Travelers Indemnity

Company, and Zurich American Insurance Company.

2

CICLA (formerly known as the Insurance Environmental

Litigation Association) has filed more than 600 amicus

curiae briefs in complex insurance cases. CICLA is vitally

interested in this case because its members have under-

written and continue to underwrite a substantial portion

of the liability insurance contracts in the State of Wiscon-

sin and nationwide, and because many of its members’

liability insurance contracts contain a “suit” provision

similar or identical to the one at issue herein.

As an association of insurers, CICLA brings special

expertise in, and knowledge of, disputes concerning the

meaning of the term “suit” in liability insurance contracts

and how judicial interpretations of the term affect insur-

ers. Further, as a result of its extensive experience as an

advocate for insurers in courts nationwide, CICLA is

uniquely qualified to offer a broader perspective than the

parties on the ramifications of the Wisconsin Supreme

Court decision in this case, a decision in which the court

(1) reached an issue that was not presented by the policy-

holder’s appeal; (2) abandoned its own nearly ten-year-old

precedent on the meaning of the term “suit”; (3) failed to

afford petitioner Employers Insurance of Wausau (“Wau-

sau”) notice that the court would decide the “suit” issue;

and (4) failed to give Wausau any opportunity to be heard

on the “suit” issue. As CICLA demonstrates, the Wisconsin

Supreme Court violated Wausau’s right to due process by

failing to afford Wausau notice and an opportunity to be

heard on the “suit” issue. Moreover, the Wisconsin Su-

preme Court’s conspicuous refusal to hear Wausau’s

arguments on the “suit” issue resulted in a decision which

is extremely prejudicial to Wausau and to all others that

insure risks in Wisconsin.

Ne

cae

3

SUMMARY OF ARGUMENT

This Court should grant certiorari and agree to review

the ruling below in order to protect fundamental due

process interests and correct a serious prejudice to insur-

ers. This case is not simply a dispute over the meaning of

insurance contract terms under state law. To the contrary,

it presents fundamental questions of judicial fairness and

threatens unjustly to alter insurer rights and expecta-

tions.

In its decision giving rise to the instant petition, the

Supreme Court of Wisconsin asked and answered two

questions involving the interpretation of two separate and

distinct terms in a comprehensive general liability insur-

ance policy: (A) “Are CERCLA Response Costs Damages?”

(the “damages” question); and (B) “Do PRP Letters Trigger

The Insurer’s Duty to Defend?” (the “suit” question).

Johnson Controls, Inc. v. Zmployers Ins. of Wausau, 665

N.W.2d 257, 270, 281 (Wis. 2003). On both questions the

Wisconsin Supreme Court overturned its prior rulings in

City of Edgerton v. General Casualty Company, 517

N.W.2d 463 (Wis. 1994).

In deciding the “damages” question, the Wisconsin

Supreme Court made an unfortunate decision in CICLA’s

view, but it did so after a full and fair airing of the issue

when the question was properly presented to it, and

petitioner is not challenging that ruling here. The Wiscon-

sin Supreme Court’s decision on the “suit” question,

however, was more than just unfortunate — it deprived

petitioner of its right to due process junder the Fourteenth

Amendment, and the violation of /petitioner’s right was

severe enough to warrant intervention by this Court.

The “damages” question had been raised on appeal by

Johnson Controls, Inc. (“JCI”); had been addressed by the

4

trial court and the Wisconsin Court of Appeals; and was

the subject of at least ten separate briefs and extensive

oral argument to the Wisconsin Supreme Court. Further,

in reversing its own prior decision on the meaning of

“damages,” the Wisconsin Supreme Court articulated in

detail its rationale for departing from stare decisis on that

point. In marked contrast, the “suit” question was not

presented by JCI’s appeal; had not been addressed by the

trial court or the Wisconsin Court of Appeals; and was not

briefed or argued to the Wisconsin Supreme Court. In- |

stead, the Wisconsin Supreme Court raised the “suit”

question sua sponte, without giving petitioner any notice

that the court would address the issue. Further, the

Wisconsin Supreme Court decided the “suit” question

without affording petitioner any opportunity to be heard

on the issue — Wausau had not briefed the issue before the

decision, and its petition for rehearing, which sought an

opportunity to be heard on the “suit” question, was denied |

without comment. Moreover, with respect to the “suit”

issue, the Wisconsin Supreme Court articulated no ration-

ale whatsoever for its departure from stare decisis.

Because it deprived Wausau of notice and an opportu-

nity to be heard on the “suit” issue, the Wisconsin Supreme

Court did not consider the substantial prejudice that its

surprise sua sponte decision would cause Wausau and other

insurers. While the decision’s retroactive effect may be

litigated further, insurers covering risks in Wisconsin can

now anticipate that policyholders will present claims for

millions of dollars incurred to respond to PRP letters over

the past ten years — claims that insurers could not have

anticipated while Edgerton governed the meaning of “suit”

Se fee as aa nee

ce LLC EE

5

in Wisconsin.° In addition, the Wisconsin Supreme Court’s

decision dramatically expands the scope of a liability

insurer’s prospective defense obligations in a way that is

likely to give policyholders a windfall in the form of a

defense against environmental claims that ultimately will

prove to be beyond the scope of coverage under their

liability insurance contracts.

The Wisconsin Supreme Court’s surprise sua sponte

decision on the “suit” issue is a glaring violation of Wau-

sau’s due process rights which will cause substantial harm

to Wausau and to other insurers. This Court should grant

certiorari to correct this due process violation and reaffirm

the right of litigants to be heard on issues before they are

decided by the judiciary.

® Policyholder advocates have recommended that environmental

claims for which insurers denied coverage pursuant to Edgerton be

resubmitted. See David J. Edquist, Edgerton and Johnson Controls:

New Life for Coverage of Old Environmental Liabilities, von Briesen &

Rober, s.c. Environmental Law Bulletin (July 2003), available at http://

www.vonbriesen.com/resourcelibrary/docs/environmental/environmental_

liability_coverage.pdf (“Johnson Controls may impact insureds’ rights to

reimbursement for settlement payments and defense costs incurred in

environmental cleanup matters, where claims were previously denied

based on the Edgerton ruling.”); Pete Millard, Cleanup Ruling Supreme

For Business, The Business Journal of Milwaukee (July 21, 2003),

available at http://milwaukee.bizjournals.com/milwaukee/stories/2003/

07/21/newscolumn1.html (“Environmental lawyers are digging through

old files to revive cases for corporate clients. ...”); Cynthia E. Smith,

Wisconsin Supreme Court Releases Landmark Environmental Insurance

Decision Reversing Its 1994 Holdings In Edgerton - You May Now Have

Insurance Coverage For Environmental Claims, Michael Best &

Friedrich LLP Land & Resources Alert (July 2003), available at

http://www.mbf-law.com/pubs/client/LR_alert_7_03.cfm (“Based upon

this change in the law, you are encouraged to review your environ-

mental claims history”).

6

ARGUMENT

I. WAUSAU WAS DEPRIVED OF NOTICE AND AN

OPPORTUNITY TO BE HEARD ON THE “SUIT”

ISSUE AND THUS WAS DENIED DUE PROCESS.

A. The Wisconsin Supreme Court’s Ruling In

JCI’s Favor On An Issue JCI Did Not Raise

Undermines Confidence In A Fair And

Impartial Judiciary.

As set forth in detail in Wausau’s petition, JCI asked

the Wisconsin Supreme Court only to overrule Edgerton on

the meaning of the term “damages” and to hold that

environmental response costs incurred pursuant to CER-

CLA qualify as “damages” under a comprehensive general

liability insurance policy. JCI did not ask the Wisconsin

Supreme Court to address the separate holding in Edger-

ton that only an actual lawsuit — and not a PRP letter —

qualifies as a “suit” triggering a liability insurer’s duty to

defend. Because JCI did not ask that Edgerton’s “suit” rule

be overturned, Wausau had no warning that it might be

necessary to defend Edgerton’s rule on that issue. In

deciding nonetheless to rule on the “suit” issue and to

resolve it in JCI’s favor, the Wisconsin Supreme Court

departed from due process requirements.

In this case, like any other litigant in this country,

Wausau had a fundamental right to expect that the

Wisconsin Supreme Court would provide it a full and fair

opportunity to be heard on all issues, but instead the court

acted precipitously on the “suit” issue. When courts act in

this fashion, they undermine what one commentator has

identified as “the primary social purpose” of the adversar-

ial judicial process, that is “deciding disputes in a manner

that will, upon reflection, permit the loser as well as the

winner to feel that he has been fairly treated.” George C.

—" =

Christie, Objectivity in the Law, 78 Yale L.J. 1311, 1329

(1969).

Simply stated, the “suit” issue need not and should

not have been reached by the Wisconsin Supreme Court in

this case. By reaching out to decide the issue despite JCI’s

failure to raise it on its own behalf, the Wisconsin Su-

preme Court erred.

B. There Can Be No Justification For The Wis-

consin Supreme Court’s Failure To Afford

Wausau Notice And An Opportunity To Be

Heard On The “Suit” Issue.

As set forth above, the Supreme Court of Wisconsin

erred when it reached out to consider an issue never

raised by JCI on appeal. The Wisconsin Supreme Court

compounded its error by failing to afford Wausau notice or

any opportunity to be heard on the “suit” issue. The

Wisconsin Supreme Court could have mitigated the

injustice done to Wausau: having decided sua sponte to

address the “suit” issue in addition to the “damages” issue

raised by JCI, the Wisconsin Supreme Court could have

advised the parties of that decision, thereby giving Wau-

sau the opportunity to place before the court its very

substantial arguments on the “suit” issue by addressing

them in its briefs and at oral argument. However, the

Wisconsin Supreme Court did not request briefing on the

“suit” issue, nor did any member of the court question the

parties on the issue during oral argument. Wausau liter-

ally learned of the Wisconsin Supreme Court’s decision to

revisit Edgerton’s “suit” rule only by reading the Wisconsin

Supreme Court’s opinion issued on July 11, 2003, without

having been afforded any opportunity to be heard on the

issue beforehand. Moreover, when Wausau filed a timely

motion for rehearing, which pointed out that Wausau had

8

been deprived of notice and an opportunity to be heard on

the “suit” issue, the Wisconsin Supreme Court denied

Wausau’s motion without explanation. Thus, having

deprived Wausau of notice and an opportunity to be heard

on the “suit” issue, the Wisconsin Supreme Court also

refused the chance to rectify its error.

This Court’s precedents make clear that the Wisconsin

Supreme Court’s failure to provide Wausau with an

opportunity to be heard on the “suit” issue deprived

Wausau of its Constitutional right to due process. More

than seventy years ago this Court considered a case

similar to the case at bar in Brinkerhoff-Faris Trust &

Savings Co. v. Hill, 281 U.S. 673 (1930). In Brinkerhoff-

Faris, a bank had filed a bill in equity to challenge a tax

assessment, which was dismissed by a Missouri state trial

court. On appeal, the Missouri Supreme Court disagreed

with the trial court’s grounds for dismissing the bank’s bill

in equity. However, the Missouri Supreme Court then

proceeded, sua sponte and without affording the bank

notice or an opportunity to be heard, to (a) consider

whether the bank should have filed a complaint with the

state tax commission; (b) overrule its own six-year-old

precedent holding that the state tax commission had no

authority to consider such a complaint; and (c) hold that

the bank’s claim was barred by its failure to make such a

complaint to the state tax commission. On certiorari, this

Court overturned the Missouri Supreme Court’s decision

on due process grounds. Writing for a unanimous court,

Mr. Justice Brandeis stated as follows:

We are not now concerned with the rights of the

plaintiff on the merits . . . or with the accuracy of

the state court’s construction of the statute in ei-

ther the Laclede Case or in the case at bar. Our

present concern is solely with the question

whether the plaintiff has been accorded due

9

process in the primary sense - whether it has

had an opportunity te present its case and

be heard in its support. Undoubtedly, the state

court had the power to construe the statute deal-

ing with the state tax commission; and to re-

examine and overrule the Laclede Case. Neither

of these matters raises a federal question; nei-

ther is subject to our review. But, while it is for

the state courts to determine the adjective as

well as the substantive law of the state, they

must, in so doing, accord the parties due

process of law.

281 U.S. at 681-82 (emphasis added). The Brinkerhoff-

Faris Court concluded that “the Supreme Court of Mis-

souri must be reversed because it has denied to the plain-

tiff ‘due process of law’ — using that term in its primary

sense of an opportunity to be heard and to defend its

substantive right.” Id. at 678.

The rule articulated in Brinkerhoff-Faris — that a

state court may not deprive a litigant of “an opportunity to

present its case and be heard in its support” — repeatedly

has been reaffirmed by this Court. See, e.g., Richards v.

Jefferson County, £17 U.S. 793 (1996) (citing Brinkerhoff-

Faris and holding that the Alabama Supreme Court

violated due process when it deprived taxpayers of oppor-

tunity to be heard on constitutional challenge to state

statute); Bouie v. City of Columbia, 378 U.S. 347, 354-55

(1964) (citing Brinkerhoff-Faris and holding that the

South Carolina Supreme Court violated due process by

applying its 1961 construction of a criminal statute to

conduct that occurred in 1960 such that defendants lacked

notice that conduct would be considered a criminal of-

fense).

In this case Wausau clearly was denied “an opportu-

nity to present its case and be heard in its support” with

10

regard to the “suit” issue. For this reason, the Wisconsin

Supreme Court’s decision on the “suit” issue cannot stand.

C. The Wisconsin Supreme Court Failed To Ar-

ticulate Any Basis For Departing From

Stare Decisis As To The “Suit” Issue.

The Wisconsin Supreme Court explicitly acknowl-

edged that, under its own jurisprudence, its disagreement

with Edgerton was not sufficient reason to overrule it, and

that “[o]verruling Edgerton requires a compelling justifica-

tion.” 665 N.W.2d at 285 (citations omitted). The court

further stated that a decision to depart from precedent

“must be explained carefully and fully to insure that the

court is not acting in an arbitrary or capricious manner.”

Td. at 285 (citation omitted). Nevertheless, the Wisconsin

Supreme Court provided no explanation whatsoever of its

decision to overrule Edgerton on the “suit” issue. )

’ The Wisconsin Supreme Court concluded that it was

“justified in overruling Edgerton because it believed that

Edgerton was fundamentally irreconcilable with its

subsequent decision in General Casualty Co. v. Hills, 561

N.W2d 718 (Wis. 1997), such that the efforts of lower

courts in Wisconsin to adhere to both Edgerton and Hilis

resulted in “arbitrary and illogical distinctions.” 665

N.W2d at 289. Importantly, however, the issue on which

Hills diverged from Edgerton — and created what the

Wisconsin Supreme Court in this case viewed as an

irreconcilable conflict — was the issue of whether environ-

mental response costs under CERCLA can ever qualify as

“damages.” Hills did not address the separate issue of

whether a PRP letter — as distinguished from a lawsuit -

implicates a liability insurer’s duty to defend. Instead,

Hills left completely intact and unqualified the bright-line

rule of Edgerton that a liability insurer’s duty to defend

i, a a ase.

11

extends only to a “suit” and not to a PRP letter. Thus, the

perceived incongruity between Edgerton and Hills, on

which the Wisconsin Supreme Court relied to justify

overruling Edgerton on the “damages” issue, simply has no

application whatsoever to the “suit” issue. Indeed, because

Edgerton adopted a bright-line rule on the “suit” issue,

there can be no suggestion that it has generated any

confusion at all on the part of the Wisconsin courts tasked

with applying it.

The Wisconsin Supreme Court recognized that the

difficulty in applying Edgerton and Hills involved the

“damages” issue alone: .

By overruling Edgerton’s conclusion on the “as

damages” language and adopting the Hills ration-

ale, we will rectify the present confusion and arbi-

trariness surrounding CERCLA cost recovery

actions in Wisconsin, while heading off some of

the troubling issues still on the horizon. The re-

sulting rule should be clear, comprehensive, and

logical: The liability imposed under CERCLA

against an insured who has contributed to the

contamination of property is covered “as damages”

if the costs to satisfy that liability are expended to

remediate, or pay for the remediation of, the dam-

aged property, provided that the costs are not ex-

cluded by some other provision of the policy.

665 N.W.2d at 292.

The Wisconsin Supreme Court may have assumed

implicitly that its abandonment of the Edgerton rule on

“damages” was reason enough to jettison Edgerton’s “suit”

rule as well. To the extent the court made such an as-

sumption, Wausau should have been given the chance to

debunk it. As Wausau demonstrates (Cert. Pet. at 16, n.

14), courts in a number of jurisdictions have held that

environmental cleanup costs qualify as “damages” but

nonetheless have recognized that a PRP letter is not a

12

“suit” triggering an insurer’s duty to defend. Indeed, the

California Supreme Court considered and explicitly

rejected the argument that if cleanup costs are “damages,”

PRP letters must be “suits.” Foster-Gardner, Inc. v. Nat'l

Union Fire Ins. Co., 959 P.2d 265, 283-284 (Cal. 1998)

(rejecting policyholder’s contention that “[t]he conclusion

that coercive administrative actions are ‘suits’ flows

naturally from this Court’s holding in Al U* that costs

incurred to comply with an injunction mandating cleanup

or to reimburse a government agency for cleanup expenses

_.. constitute ‘damages’ under a CGL policy.”)

The Wisconsin Supreme Court not only failed to offer

a “compelling justification” for overruling Edgerton on the

“syit” issue — it offered no justification at all. Moreover, as

Petitioner has amply demonstrated (see Cert. Pet. at 15-

18), there are many powerful arguments militating in

favor of adhering to stare decisis on the “suit” issue —

arguments the Wisconsin Supreme Court never considered

because it refused to hear them, in violation of Wausau’s

due process rights.

Il. THE SUPREME COURT OF WISCONSIN’S

SURPRISE SUA SPONTE 180-DEGREE TURN

ON THE “SUIT” ISSUE IS PROFOUNDLY

PREJUDICIAL TO INSURERS.

A. The Wisconsin Supreme Court Erroneously

Concluded That Overruling Edgerton Would

Not Harm Any Significant Interest Of In-

surers.

In deciding that departure from stare decisis to

overrule Edgerton was justified, the Wisconsin Supreme

® AIU Ins. Co. v. Superior Court, 799 P.2d 1253 (Cal. 1990)

Lh 0B a oe -

13

Court expressly determined that doing so would not harm

any “significant” interests of insurers. 665 N.W.2d at 294.

Because the “suit” issue had not been presented to the

Court by the policyholder’s appeal, and because the Court

had not advised the parties of its intention to consider the

“suit” issue, the Court made its determination in this

regard without the benefit of any evidence whatsoever

concerning what impact a reversal on the “suit” issue

actually could be expected to have on insurers. In the

absence of any evidence, the Court determined:

(a)

(b)

(c)

that insurers’ reliance on Edgerton could be

relevant for stare decisis purposes only if it

affected “how insurance contracts have been

drafted and bargained for”;

that insurers’ and insureds’ reliance on

Edgerton in “assess[ing] their respective ex-

pected costs and obligations [] and [] ac-

count[ing] accordingly” was mere “ancillary

reliance” that is not relevant for stare de-

cisis purposes; and

that the insurers thus had no reliance inter-

ests worthy of protection because most li-

ability insurance contracts issued since 1985

have contained absolute pollution exclusions

that would bar coverage for CERCLA-

related liabilities.

665 N.W.2d at 294. In the Wisconsin Supreme Court’s

words:

Because the meaning of insurance contract terms

should remain settled whenever possible, we are

generally disinclined to reverse prior interpreta-

tions of these terms.

However, the CGL’s treatment of CERCLA

claims presents unusual, if not unique, policy

construction problems, which justify this court’s

deviation from general principle. Most, if not all,

own

14

CGL policies executed today will not be governed

by either this decision or by Edgerton. The CGL

policy language at issue in this case was drafted

long ago and has since been rendered largely in-

applicable in the context of CERCLA actions. Be-

ginning in 1985, insurance companies revised

their standardized CGL policies to include abso-

lute pollution exclusions from coverage. [] The

CGL policies given effect in this case are no

longer being marketed, nor were they at any time

after Edgerton. Therefore, the insurers cannot

credibly argue that Edgerton established signifi-

cant reliance interests, in terms of how insurance

contracts have been drafted and bargained for,

that will be harmed by its reversal.

665 N.W.2d at 293-294 (emphasis in original). By casting

the reliance issue in these terms, the Court overlooked (1)

the very real extent to which current environmental

cleanup litigation arises from conduct many years or even

decades ago and thus still potentially implicates pre-1985

liability insurance contracts that lack absolute pollution

exclusions; (2) the substantial magnitude of costs that may

be claimed for responding to environmental cleanup

demands, which policyholders in the absence of Edgerton

now will characterize as costs of defending a “suit”; (3) the

fact that most liability insurance contracts do not have a

limit of liability applicable to defense costs, such that

expanding the definition of “suit” to include PRP letters

will increase a liability insurer’s potential defense cost

liability exponentially; and (4) the fact that creating

insurance coverage where none existed under Edgerton

will require higher premiums from Wisconsin policyhold-

ers so that insurers will have funds to pay for the unfore-

seen liabilities.

Simply stated, the Wisconsin Supreme Court was

wrong to conclude that because post-1985 policies have

btn ie Sas ta

15

absolute pollution exclusions, reversing Edgerton’s “suit”

rule could inflict no significant harm on insurers. The

Wisconsin Supreme Court’s erroneous conclusion was the

direct result of its reaching out to decide an issue not

- presented on appeal, failing to give notice of its intention

to address the “suit” issue, and failing to afford petitioner

any opportunity to be heard on the issue.

B. The Wisconsin Supreme Court Made Un-

_ supported Determinations Concerning Pur-

ported “Practical Difficulties” Posed By

Edgerton’s “Suit” Rule And Ignored Real

Practical Difficulties Overruling Edgerton

Will Cause For Insurers.

The Wisconsin Supreme Court opined that “[a] literal

definition of the term ‘suit’ in the CGL policy presents

some practical difficulties in understanding and reconcil-

ing the obligations of the parties in the presence of a

CERCLA claim.” 665 N.W.2d at 282. As there was no

evidentiary record concerning the “practical” implications

of the “suit” rule established by Edgerton, the “practical

difficulties” identified by the Wisconsin Supreme Court

were devoid of factual support and highly dubious. More-

over, because it failed to afford Wausau any opportunity to

be heard on the “suit” issue, the Wisconsin Supreme Court

overlooked the very real — and very costly — practical

difficulties insurers face when the duty to defend is ex-

panded to encompass not only “suits” but PRP letters as

well.

Central to the Wisconsin Supreme Court’s conclusion

that insurers should be required to defend against PRP

letters as well as “suits” was its determination — based on

no evidence whatsoever — that PRP letters are “more

analogous to a civil complaint than a traditional demand

16

letter.” 665 N.W.2d at 284. In reality, however, a PRP

letter differs vastly from a complaint in terms of providing

the information an insurance carrier needs in order to

determine whether it has any duty to defend. In Wiscon-

sin, as in most states, the existence of a duty to defend is

determined by comparing the terms of the insurance

contract to the allegations of the complaint. See, e.g., Grieb

v. Citizens Cas. Co., 148 N.W.2d 103, 106 (Wis. 1967) (“the

insurer is under an obligation to defend only if it could be

held bound to indemnify the insured, assuming that the

injured person proved the allegations of the complaint”

(quoting 29A Am. Jur. Insurance § 1452, at 562)). Unlike

complaints, however, PRP letters generally do not include

the sort of details that would permit an insurer to deter-

mine whether coverage under its liability insurance

contract potentially is implicated, e.g., how and when the

environmental contamination occurred. Indeed, the

Illinois Supreme Court, in concluding that only “an action

in a court of law” qualifies as a “suit,” relied explicitly on

the fact that an insurer must analyze the allegations of a

“complaint” to determine whether it has any defense

obligation:

The definition of the word “suit” as requiring an

action in a court of law is further supported by

analyzing the connection between the filing of a

complaint and the duty to defend. Whether an

insurer’s duty to defend has arisen is deter-

mined by looking to the allegations in the un-

derlying complaint and comparing these

allegations to the policy provisions. If the facts

alleged in the underlying complaint fall within

or even potentially within policy coverage, the

insurer has a duty to defend its insured against

the complaint. Thus, the duty to defend extends

only to suits and not to allegations, accusations

or claims which have not been embodied within

17 ¥

the context of a complaint. In the instant case

[where the policyholder had received a PRP let-

ter], a complaint alleging liability for property

damage has never been filed against Lapham-

Hickey. Without a complaint, there is no “suit.”

And without a “suit,” Protection’s duty to defend

Lapham-Hickey is not triggered.

Lapham-Hickey Steel Corp. v. Prot. Mut. Ins. Co., 655

N.E.2d 842, 846 (Ill. 1995) (citing United States Fid. &

Guar. Co. v. Wilkin Insulation Co., 578 N.E.2d 926, 930

(Ill. 1991).

The lack of specific details in a PRP letter leaves the

insurer in a quandary if a PRP letter is deemed to be a

“suit,” or the “functional equivalent” thereof, giving rise to

a duty to defend. As the Wisconsin Supreme Court ob-

served in this case, when an insurer is assessing the

existence of a defense obligation, “[i]f there is any doubt

about the duty to defend, it must be resolvéd in favor of

the insured.” 665 N.W.2d at 283 (quoting Towne Realty,

Inc. v. Zurich Ins. Co., 548 N.W.2d 64, 67 (Wis. 1996)). If a

PRP letter qualifies as a “suit,” and the letter is silent as

to how contamination occurred, or whether any “property

damage” took place within the policy period of the in-

surer’s policy, the policyholder can be expected to argue

that the PRP letter leaves doubt which must be resolved in

favor of a duty to defend. If Wisconsin courts accept this

policyholder argument, a liability insurer’s defense obliga-

tion often will extend to environmental claims which, once

the relevant facts became available, will prove never to

have presented any potential for coverage under the

insurer’s policy.

The risk that equating a PRP letter with a “suit” will

give policyholders a windfall in the form of a defense

against claims not potentially covered under their policies

is particularly acute in Wisconsin. As noted in Wausau’s

a ee ee

18

petition, under Wisconsin law an insurer from whom a

defense is requested risks being estopped to raise coverage

defenses unless it either provides the requested defense or

intervenes in the underlying action to seek a stay pending

a declaratory judgment on the existence of coverage.

Wausau Cert. Pet. at 17-18 (citing Newhouse v. Citizens

Sec. Mut. Ins. Co., 501 N.W.2d 1 (Wis. 1993) and Mowry v.

Badger State Mut. Cas. Co., 385 N.W.2d 171 (Wis. 1986)).

Unlike an underlying lawsuit, however, a PRP letter is not

something in which an insurer can intervene to seek a

stay.

This problem disappears if a PRP letter is treated as a

“claim” rather than as a “suit,” because the CGL policy

language at issue here draws a clear distinction between

the two: the insurer “shall have the right and duty to

defend any suit,” whereas the insurer “may make such

investigation and settlement of any claim or suit as it

deems expedient.” When a PRP letter received by a policy-

holder alleges liability for environmental cleanup costs

that qualify as “damages” under governing law, an insurer

has every incentive to investigate the “claim” asserted in

the PRP letter, and to involve itself in the defense and

possible settlement of that “claim” if its investigation

discloses that the claim is potentially covered under its

insurance policy. See Foster-Gardner, 959 P.2d at 283

(noting that where insurers ultimately will have indem-

nity obligations arising from administrative proceedings,

“insurers have an inherent incentive to participate in

those proceedings where the costs are ascertained.”)

Stated another way, where a PRP letter is treated as a

“claim” seeking “damages,” it is likely that the insurer will

choose to assist in the defense of the claim if it is poten-

tially covered. If, however, a PRP letter is treated as a

“suit,” it is extremely likely that the insurer will have no

choice but to defend whether or not the claim is potentially

5 ot

19

covered. Under the latter scenario — i.e., the scenario

created by the Wisconsin Supreme Court decision at issue

here — the insurer will either (a) bear the cost of defending

non-covered claims for which it never collected any pre-

mium; or (b) to the extent permitted by Wisconsin law,

initiate litigation against the policyholder seeking to

recoup defense costs paid for environmental claims which

ultimately prove never to have been potentially covered

under its policies. See, e.g., Buss v. Superior Court, 939

P.2d 766 (Cal. 1997). Neither is an efficient result.

Equating a PRP letter with a “suit” triggering the

duty to defend creates other practical difficulties for

insurers as well. As pointed out by Wausau (Cert. Pet. at

18), requiring insurers to defend against PRP letters will

increase disputes and litigation between insurers and

policyholders over the characterization of remedial inves-

tigation costs. Once policyholders have succeeded in

expanding the definition of “suit” to include a PRP letter,

their next objective will be expanding the definition of

“defense costs” to include amvunts spent on remedial

investigation, so that their ability to recover such amounts

~ from insurers will be unconstrained by any applicable

policy limit. Moreover, because there are so many types of

PRP letters, with some being “coercive” and others much

less so, the Wisconsin Supreme Court’s ruling in this case

may not be the last word on whether every PRP letter

rises to the level of a “suit.” Courts in some jurisdictions

have adopted a “hybrid” approach and ruled that whether

a particular PRP letter constitutes a “suit” depends on the

degree of “coerciveness,” such that a state environmental

agency’s mere “invitation to voluntary action” would not be

a “suit.” See, e.g., Ryan v. Royal Ins. Co., 916 F.2d 731, 741-

742 (1st Cir. 1990).

The Wisconsin Supreme Court’s decision here, which

abandons the bright-line “suit” rule of Edgerton, will

20

increase litigation and generate exactly the sort of uncer-

tainty and confusion among lower courts in Wisconsin that

the court sought to avoid by overruling Edgerton’s “dam-

ages” rule. See Foster-Gardner, 959 P.2d at 286 (concluding

that equating PRP letters with “suits” would “open the

flood gates of litigation by inviting, and requiring, a case-

by-case determination whether each new and different

letter presenting the claim of an administrative agency is

to be deemed the ‘functional equivalent of a suit brought

in a court of law.’”) (internal quotation omitted).

For all of these reasons, the Wisconsin Supreme

Court’s decision causes severe prejudice to insurers, in

ways the court almost certainly never contemplated. The

court’s failure to foresee the prejudice caused by its ruling

is the direct result of its failure to afford Wausau notice

and an opportunity to be heard on the “suit” issue, which

deprived Wausau of due process.

CONCLUSION

The Wisconsin Supreme Court's surprise sua sponte

decision on the “suit” issue clearly violated Wausau’s due

process rights, and that decision is highly prejudicial to

Wausau and to insurers generally. The petition for certio-

rari should be granted.

Respectfully submitted,

LAURA A. FOGGAN

(Counsel of Record)

ELIZABETH A. EASTWOOD

WILEY REIN & FIELDING LLP

1776 K Street, N.W.

Washington, D.C. 20006

(202) 719-7000