Liberty Mutual (“LM”) insured the Germantown School District. The policy includes an employee benefit plan administration endorsement, providing coverage for errors made in the administration of an employee benefit plan. The district was sued by a group of retired administrators after it decided (after Act 10) to discontinue paying for the administrators’ long term care coverage. LM denied coverage for this claim, and filed a motion to stay the merits so the coverage issues could be decided. The court denied the motion to stay and LM provided a defense at that time, pursuant to a reservation. The parties proceeded to brief the coverage issues, but the court concluded that there were facts in dispute so it could not decide the issue of coverage as a matter of law. A trial was ultimately held and the jury found (and the court later affirmed) that there was coverage. The case then went to trial on the merits and the district won, so ultimately the issue of coverage dropped out of the case (no indemnity was owed because the district prevailed). The district then moved for recovery of its attorney fees in establishing coverage under LM’s policy. The court denied that motion, relying on well-established rules regarding recovery of attorney fees in that context. The court of appeals affirmed.
The two issues before the court are (1) whether an insurer breaches a duty to defend by defending only after the court denied the motion to stay (or whether it must provide defense counsel immediately, before the motion to stay is resolved), and (2) whether the district should be awarded its attorney fees in establishing coverage.