A decision of the District Court for the Eastern District of Wisconsin has serious implications regarding the amount of damages payable where an insurance company breaches its duty to defend its insured from claims made against it.

Wisconsin law provides that an insurance company is obligated to defend its insured from legal action even if only one of several claims made against the insured is covered under the insurance policy.  Wisconsin state courts have not specifically addressed what damages are payable by an insurance company where only one of several claims are covered by the policy.

In Johnson Outdoors, Inc. v. General Star Indemnity Co., 2009 WL 4043194, the Eastern District Court determined that damages payable for breach of the duty to defend would be damages attributable to the covered claim only.  Therefore, where there had been a settlement of various claims made against the insured, the insurer could discover information pertinent to the question what portion of the settlement related to the covered claim.

The District Court made its own analysis of existing Wisconsin case law.  It will be interesting to see whether the state courts follow the District Court’s rationale.  Insurers are liable for attorneys fees incurred by an insured in defending itself where the insurer breaches the duty to defend.  It is unclear whether this decision would be applicable with respect to attorneys fees, and it will not necesssarily be easy to determine which fees are related to which claims, if the District Court’s decision is followed.