The facts of the case were not in dispute. The plaintiff, Burgraff, was injured while an employee of Menard, Inc. was loading materials onto Burgraff’s vehicle. Burgraff sued Menard for damages. Menard had a commercial general liability policy that provided coverage for the incident. The policy contained a self-insured retention endorsement, under which Menard was responsible for up to $500,000 in damages and defense costs before the insurer’s obligations under the policy kicked in.

Menard, however, sought coverage from Burgraff’s auto policy insurer, Millers First Insurance Company. Menard argued that it was an insured under that policy, which had a liability limit of $100,000, because Menard’s employee was a “permissive user” when he was loading materials onto Burgraff’s vehicle.

The first question in the case involved a provision regarding “other applicable liability insurance” in the Millers First policy. If Menard’s self-insurance qualified as “other insurance,” Menard and Millers First would share liability for Burgraff’s damages pro rata. If not, the Millers First policy would need to be exhausted before Menard’s insurance applied. The trial court decided — and the Court of Appeals and Supreme Court later agreed — that Menard’s self-insured coverage was “other insurance,” with the result that there was $600,000 in total coverage available between them. Pro rata apportionment meant that Millers First was responsible for one-sixth of Burgraff’s damages, and Menard was responsible for five-sixths of the damages.

Burgraff settled with Millers First for $40,000, and the two parties executed a Pierringer-style release in which Burgraff agreed to credit any jury verdict against Menard by one-sixth to account for the Millers First portion. Millers First asked to be dismissed from the suit, and its lawyer withdrew from representing Menard. The case ultimately went to trial, and Burgraff was awarded approximately $240,000 in damages. Menard received a credit of one-sixth of the award (which was, fortuitously, about $40,000), and it paid the rest of the judgment.

The key issue for the Supreme Court was whether Millers First had a continuing duty to defend Menard, even after it settled with Burgraff. For nearly 30 years, Wisconsin courts have applied the principle that an insurer’s duty to defend is not extinguished until the policy limits have been exhausted, so the Supreme Court, agreeing with the Court of Appeals, imposed a duty to defend, even though Millers First had settled the claims against its policy. The only way for Millers First to satisfy the duty was to continue defending Menard even after settlement, or to pay out the full limit of the policy.

The more controversial part of the decision was the remedy that the court imposed for Millers First’s breach of its duty to defend after settling with Burgraff. The court decided that Millers First was required to reimburse Menard for all of the attorney’s fees Menard had incurred after Millers First withdrew its defense of Menard. Millers First had contended that such a result was not fair because Millers First and Menard were both primary insurers, and both had a duty to defend Menard, so Menard should have to contribute a portion of the defense costs.

Although Millers First’s “equitable contribution” argument gained the support of two dissenting justices, the majority rejected it. Because Millers First had breached its duty to defend by directing its attorney to cease representing Menard, the court determined that Millers First should not be able to claim the benefit of equitable contribution. In essence, the court applied the principle that one who has unclean hands cannot call upon the principles of equity. Notably, the court did not say whether Millers First would have any contribution rights against Menard had it not breached its duty to defend.

At bottom, the Supreme Court’s decision reflects the general policy in Wisconsin of protecting insureds first and leaving insurers to sort things out among themselves. The result seems particularly harsh in this case because Menard (while also self-insured) received the full benefit of the Millers First insurance policy for which Menard paid no premium. In addition, while insurers may be able to apportion the defense costs through contribution claims, the Supreme Court has now made clear that neither insurer can leave the insured defenseless without risking forfeiture of its contribution rights.

There are several lessons to be learned from the case:

• Insurers and insureds alike should be mindful of the precise language of policy when evaluating responsibility for defense costs and damages. The Supreme Court squarely rejected Millers First’s appeal to fairness and commonsense in favor of a strict reading of the policy, which placed no limit on the duty to defend before the policy limits were exhausted.

• Insurers should be careful in declining to defend a claim. Wisconsin courts will adhere to the plain language of the policy when deciding whether there is a duty to defend; but if that duty is breached, then fairness and equity will come into play,and the courts will usually balance the equities in favor of the insured.

• The case highlights the benefit of a Loy release (named for the case in which it originated) in situations where more than one insurance policy provides coverage for a claim. Under a Loy release, the plaintiff can settle his claim with one insurance carrier for less than the limits of that policy, but he must credit the full policy limit in his claim against the second insurer. So, for example, if Millers First had received a Loy release in the Burgraff case, the $240,000 verdict against Menard would have been credited by $100,000, the limit of the Millers First policy. The credit would leave Menard to pay only $140,000, rather than the $200,000 Menard had to pay under the Pierringer-style release that Burgraff actually provided. But having “credited” the full policy limit, Millers First would have been released from the duty to defend.

• The case may incite a change in the language of “other insurance” provisions in Wisconsin insurance policies. The Supreme Court specifically noted the distinction between the duty to indemnify and the duty to defend. The Millers First policy provided that liability would be shared pro rata if there was another insurance policy, but it had no similar language with respect to the duty to defend. The court seemed to imply that Millers First would not have had a continuing duty to defend after settling if there was a specific pro rata limitation on the duty to defend as well.