Hunton Insurance Recovery Blog: Wisconsin High Court Finds Duty To Defend Notwithstanding Fraudulent Conduct Falling Under Knowing Violation Exclusion

The Wisconsin Supreme Court held last week in West Bend Mut. Ins. Co. v. Ixthus Med. Supply, Inc., that West Bend Mutual Insurance Co. ("West Bend") could not escape its duty to defend by relying on the knowing violation and criminal acts exclusions in a commercial general liability policy issued to Ixthus Medical Supply, Inc. ("Ixthus"). The court required the insurer to defend notwithstanding underlying allegations that Ixthus acted wrongfully and knowingly in defrauding Abbott Laboratories ("Abbott").

In 2015, Abbott brought suit in New York federal court against Ixthus and more than 100 other pharmacies and medical supply distributors asserting federal statutory and common law claims that the defendants were importing and advertising foreign versions of Abbott's FreeStyle blood glucose diabetes test strips, and reselling them to U.S. customers at lower prices. Abbott alleged that Ixthus' conduct caused a variety of injuries including consumer confusion and mistake, damage to its goodwill and trademarks, and the loss of millions of dollars in unreimbursable and uninsurable rebates.

West Bend denied Ixthus's tender of defense and filed an action seeking a declaratory judgment that it need not defend or indemnify Ixthus in the Abbott lawsuit. On summary judgment, the trial court held that, although Abbott's allegations fell within Ixthus's initial grant of coverage under the "personal and advertising injury liability" section of its insurance policy, coverage was bared by the policy's exclusion for claims arising from Ixthus's "knowing violation of rights of another," thereby eliminating West Bend's duty to defend.

On appeal, the Wisconsin Court of Appeals reversed the trial court's decision, holding that the knowing violation exclusion did not apply because at least some of Abbott's claims (specifically its counts for deceptive business practices and trademark infringement and dilution under the Lanham Act) could be established without proving Ixthus's actions were intentional. Thus, because there was a potential for liability not subject to the policy's knowing violation exclusion, the Court of Appeals held that West Bend had a duty to defend Ixthus.

The Wisconsin Supreme Court affirmed the lower court's decision, finding that West Bend could not avoid its duty to defend. In reaching its conclusion, the Wisconsin Supreme Court provided valuable guidance on two issues.

First, the court rejected West Bend's argument that the underlying...