## Facts

- Bradley Mowry, a passenger, was seriously injured in a May 3, 1975 automobile crash while riding in a car driven by Steven McCarthy.
- The accident vehicle was titled in McCarthy’s mother’s name but was purchased with Steven’s funds, creating a dispute about whether the vehicle was covered under the parents’ Badger State automobile liability policy.
- Mowry sued McCarthy, his parents, and Badger State, asserting Badger State owed coverage for the accident.
- Badger State denied coverage and refused to defend McCarthy and his parents while the coverage dispute was pending.
- During the underlying liability case, Mowry made multiple settlement offers within policy limits; Badger State rejected them based on its coverage position.
- Badger State obtained a separate trial on coverage under Wis. Stat. § 803.04(2)(b) and lost; the court ruled the policy provided coverage.
- After the coverage determination, Badger State promptly offered policy limits; the underlying case concluded by stipulation for judgment in October 1980 without a liability/damages trial.
- Mowry, as assignee of McCarthy’s rights, brought a separate action against Badger State for breach of the duty to defend and for insurer bad faith based on the earlier refusal to defend and settle.

## Issues

1. Whether an insurer that denies coverage and refuses to defend or settle within limits may be liable for breach of contract and bad faith when it pursued a separate coverage trial under Wis. Stat. § 803.04(2)(b).
2. Whether such an insurer may be liable for the portion of a judgment exceeding policy limits when it tenders limits immediately after losing the coverage trial.

## Decision

- The Wisconsin Supreme Court reversed the circuit court’s judgment against Badger State.
- The court held Badger State did not breach its contractual duty to defend under these circumstances.
- The court held Badger State did not commit the tort of bad faith by rejecting within-limits settlement offers while litigating a fairly debatable coverage issue through a statutorily authorized separate coverage trial.
- Badger State was not responsible for the excess judgment beyond policy limits.

## Legal Principles

- An insurer may seek a judicial determination of a genuinely disputed (“fairly debatable”) coverage question without incurring bad faith liability merely for litigating coverage.
- Use of Wis. Stat. § 803.04(2)(b) to bifurcate and try coverage separately is a permissible procedure for resolving coverage before exposure to the underlying liability trial.
- When coverage is fairly debatable and the insurer promptly tenders policy limits after coverage is adjudicated, rejection of earlier within-limits settlement offers during the coverage dispute does not, by itself, constitute bad faith.
- Under these conditions, the insurer is not liable for damages above policy limits based on alleged bad faith refusal to settle.

## Conclusion

The court held that where coverage was fairly debatable and the insurer pursued a separate statutory coverage trial, then promptly tendered policy limits after losing on coverage, the insurer neither breached its defense obligations nor acted in bad faith, and it was not liable for an excess judgment.


Mowry v. Badger State Mut. Cas. Co., 129 Wis. 2d 496, 385 N.W.2d 171 (Wis. 1986)