Midwest Commercial Funding LLC v. Cincinnati Specialty Underwriters Insurance Company

Filing 117

ORDER signed by Judge Lynn Adelman on 7/12/19. IT IS ORDERED that the parties' motions for summary judgment 46 , 71 , 76 & 80 are GRANTED IN PART and DENIED IN PART. Midwest's motion for leave to file a brief exceeding the page limit 93 is GRANTED. (cc: all counsel) (jad)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
MIDWEST COMMERCIAL
FUNDING, LLC,
Plaintiff,
v.

Case No. 16-C-0885

CINCINNATI SPECIALTY
UNDERWRITERS INSURANCE
COMPANY, et al.,
Defendants.
______________________________________________________________________
DECISION AND ORDER
Midwest Commercial Funding, LLC, purchased commercial property insurance
from Cincinnati Specialty Underwriters Insurance Company. 1 During the winter of 2016,
one of the covered properties sustained a loss caused by water lines that froze and
burst. Midwest filed a claim under the policy, which Cincinnati denied based on an
exclusion for water damage caused by frozen pipes. Cincinnati also threatened to
rescind the policy on the ground that Midwest misrepresented its interest in the property
when it applied for the insurance. Cincinnati alleges that it issued the property policy
believing that Midwest owned the property. In fact, Midwest had only a security interest.
Cincinnati alleges that had it known Midwest did not own the property, it would not have
issued the property policy. Instead, it would have told Midwest that it needed “forced
place” insurance.

1

In this opinion, I will refer to defendant Cincinnati Specialty Underwriters Insurance
Company as “Cincinnati.” However, because this case involves other entities that use
the Cincinnati name, I will sometimes use the defendant’s full name to distinguish it from
these other entities.

Following the denial of coverage, Midwest filed this suit for breach of the
insurance contract and bad faith against Cincinnati. Cincinnati filed a counterclaim for
rescission of the policy and a declaration of no coverage. In addition to suing Cincinnati,
Midwest sued Marsh & McLennan Agency, LLC—the insurance brokerage firm that
assisted Midwest in procuring the policy—and CSU Producer Resources, Inc.—the
broker that placed the policy with Cincinnati. Midwest asserts claims against these
parties that are best described as back-ups to its main claim against Cincinnati. Midwest
alleges that Marsh and CSU Producer Resources violated several provisions of
Wisconsin’s insurance code in procuring the policy for Midwest, which resulted in the
creation of an illegal insurance contract. Under Wisconsin law, if a policy is illegal and
the insurer does not pay a claim or loss payable under the policy, then the insured may
look to any person who assisted in the procurement of the policy for payment, provided
that the person knew or should have known that the policy was illegal. See Wis. Stat.
§ 618.44. Midwest contends that if the Cincinnati policy is found to cover the loss at
issue in this case and is also found to be an illegal policy, then Marsh and CSU
Producer Resources will be jointly and severally liable with Cincinnati for payment of the
loss.
In addition, Midwest brings an alternative claim for professional negligence
against Marsh. This claim relates primarily to Cincinnati’s counterclaim for rescission.
Midwest alleges that Marsh should have advised it that because it held only a security
interest in the property, the type of insurance it needed was forced-place insurance.
Thus, argues Midwest, if Cincinnati succeeds on its rescission claim, Marsh will be
liable for making it whole. Midwest also contends that a forced-place policy would have
2

contained a more favorable freeze exclusion than the Cincinnati property policy, and
that therefore Marsh may be liable for negligence even if Cincinnati is not entitled to
rescind the property policy.
Each party has filed a motion for summary judgment on certain claims and
issues, which I address in this order.
I. BACKGROUND
Midwest manages property, develops real estate, and lends money to other
entities and individuals for use in rehabilitating or managing real estate. In August 2014,
Midwest loaned money to an entity known as RNTSDU Investments, LLC. At the time,
RNTSDU owned a commercial property located at 1442 N. Farwell Avenue in
Milwaukee, Wisconsin. The property served as collateral for the loan. The terms of the
loan required RNTSDU to maintain property and liability insurance on the property and
to provide proof of such insurance to Midwest.
In late 2014 or early 2015, RNTSDU failed to provide proof of insurance for the
Farwell property. Midwest notified its accounting firm, Matrix Enterprises, Inc., that it
needed to secure its own insurance for the property. Midwest and Matrix then contacted
Midwest’s insurance broker, Richard Niestrom of the Marsh agency, to obtain coverage
for the Farwell property.
Due to the frequency with which Midwest would purchase and sell real estate,
Niestrom was frequently asked to add or remove properties from the schedule of
insured properties that was attached to Midwest’s existing policies. Thus, when Midwest
informed Niestrom that it needed insurance for the Farwell property, he added that
property to Midwest’s existing commercial property policy, which had been issued by
3

Berkley Regional Specialty Insurance. It appears that Niestrom simply assumed that
Midwest owned the property. He did not ask Midwest about its ownership interest in the
property, and he does not claim that anyone at Matrix or Midwest specifically told him
that Midwest owned the property.
The misunderstanding about Midwest’s interest in the property caused Niestrom
to procure the wrong kind of insurance for the Farwell property. According to Cincinnati
and CSU Producer Resources, when a lender needs insurance for real property held as
collateral for a loan, the proper type of coverage to obtain is “forced place” insurance.
This is insurance that a lender takes out on a property after the borrower fails to
maintain required coverage. Ordinarily, the lender will charge the borrower for the cost
of the insurance. See Patel v. Specialized Loan Servicing, LLC, 904 F.3d 1314, 1316–
17 (11th Cir. 2018). Here, Niestrom added the Farwell property to Midwest’s existing
property policy instead of procuring a separate forced-place policy.
Because the Berkley policy to which Niestrom added the Farwell property was
expiring in April 2015, Niestrom also began searching for a new insurer to provide
property and casualty insurance to Midwest. Because of the risks involved in Midwest’s
business, Niestrom could not obtain property and casualty insurance from an ordinary
“admitted” insurer. Instead, Niestrom needed to access what is known as the “surplus
lines” insurance market.
To understand surplus-lines insurance, some background on insurance
regulation is helpful. Most states heavily regulate typical insurers, such as by approving
their rates, examining the terms of their policies, and monitoring their financial solvency.
The insurers that are subject to such extensive regulation in a state are known as
4

“admitted” or “authorized” insurers. See Richard R. Spencer, Jr., Surplus Lines Insurers
and Guarantee Funds, 10 Seton Hall Leg. J. 93, 96 (1986). The goal of such regulation
is consumer protection. See Congressional Research Service, Surplus Lines Insurance:
Background and Current Legislation (July 22, 2010) (summary page). Such extensive
regulation, however, creates barriers to entry into the insurance market and reduces the
types of policies available for consumers to purchase. Id. When a consumer has an
insurance need that cannot be met by an authorized or admitted insurer, the state will
allow that consumer to purchase insurance from certain unauthorized or nonadmitted
insurers. These are surplus-lines insurers, and they are regulated differently than
admitted insurers. Id. While admitted insurers are regulated directly, surplus-lines
insurers are typically regulated indirectly through insurance brokers who are licensed by
the state to place surplus-lines insurance. See id.; Joseph A. Kilbourn & Jeffrey M.
Winn, Excess, Surplus Lines and Reinsurance: Recent Developments, 25 Tort & Ins.
L.J. 288, 304 (1989). Although nearly any insurance could be sold on a surplus-lines
basis, in general such insurance covers unusual risks that the admitted insurance
market is unprepared or unable to accept. See Spencer, 10 Seton Hall Leg. J. at 96.
Because Niestrom could not find an admitted insurer that would issue
commercial property and casualty insurance to Midwest, he contacted CSU Producer
Resources, which places insurance with Cincinnati Specialty Underwriters Insurance
Company, a surplus-lines insurer. CSU Producer Resources acted as what might be
described as a “wholesale broker” in the transaction. A wholesale broker places
business brought to it by a retail broker—which in this case was the Marsh &
McClennan Agency—with an insurer, often a nonadmitted insurer. See Crusader Ins.
5

Co. v. Harry W. Gorst Co., No. B182480, 2016 WL 1494110, at *1 (Cal. Ct. App. June 1,
2006); www.irmi.com/term/insurance-definitions/wholesale-broker (last viewed July 11,
2019). Essentially, when a retail broker has a risk that it cannot place with an ordinary
insurer, it contacts a wholesale broker, which will usually have specialized expertise and
access to surplus-lines insurers. In this case, CSU Producer Resources was what might
be described as a “captive” wholesale broker, in that it placed policies exclusively with
Cincinnati. CSU Producer Resources was in the same corporate family as Cincinnati,
performed underwriting and collected premiums for Cincinnati, and had binding
authority from Cincinnati.
When Niestrom turned to CSU Producer Resources, he worked primarily with
Thomas Berryman, who was CSU Producer Resource’s underwriting supervisor.
Berryman did not hold a license as a surplus-lines broker or agent in Wisconsin.
However, once Niestrom and Berryman agreed on the policies to purchase for Midwest,
CSU Producer Resources used the surplus-lines license number of Scott Hintze, its
director of underwriting, to formally place the insurance with Cincinnati. Hintze’s name
and license number are printed on the declaration pages of the policies, where he is
identified as the “broker” for the transaction. See, e.g., ECF No. 49-3 at p. 2 of 467.
After the policies were procured, copies were sent to Niestrom as Midwest’s
agent. Niestrom states that he forwarded the policies to Midwest in July 2015. Midwest
denies having received copies of the policies at that time. The policies went into effect
on April 29, 2015, with the Farwell property listed as a covered property under the
commercial property policy.

6

On April 27, 2015, Midwest initiated foreclosure proceedings against RNTSDU
and the Farwell property. On October 28, 2015, Midwest obtained a judgment of
foreclosure with a three-month redemption period. On December 19, 2015, during the
redemption period, Midwest received notice that gas and electric service had been
turned off at the Farwell property. That same day, Midwest contacted the utility
company and demanded that gas and electric service be restored. However, the utility
refused to turn the power back on. Between December 21, 2015 and January 15, 2016,
Midwest repeatedly called and emailed the utility in an attempt to get gas and electric
service restored. Among other things, Midwest submitted a commercial application to
transfer the account into Midwest’s name, paid an unrelated bill on a different property
that the utility had sent to the wrong address, provided documentation necessary to
show that Midwest had filed a foreclosure action against the owner of the Farwell
Property, and ensured that the utility company had access to the property in order to
restore power. According to Midwest, the utility company dragged its heels. Finally, on
January 9, 2016, the utility company sent a crew to the Farwell property to restore the
gas and electric, but the crew did not have everything that it needed to turn the
electricity back on.
The utility crew returned to the property on January 15, 2016 and discovered
standing water in the electrical room. Sometime between the crew’s two visits to the
property, a water line in the building froze and burst. Midwest contends that the water
damage in the building was extensive, and that the total loss was more than $2.5
million, the limits of the Cincinnati policy.

7

After discovering the loss, representatives of Midwest searched its records to find
copies of the Cincinnati policies but could not locate them. Midwest believes that it did
not receive copies of the policies before the loss occurred. After the loss, Niestrom filed
a claim with Cincinnati on Midwest’s behalf.
Another company within the Cincinnati family—Cincinnati Insurance Company—
adjusted Midwest’s claim. On March 11, 2016, it sent Midwest a letter in which it
formally denied Midwest’s claim on the ground that the loss fell within a policy exclusion
for water damage caused by freezing. See ECF No. 49-8. The exclusion stated in
relevant part that Cincinnati would not pay for water damage caused by frozen and
burst pipes unless the insured “[did its] best to maintain heat in the building or
structure.” ECF No. 49-3 at 24. Cincinnati Insurance Company concluded that Midwest
did not do its best to maintain heat in the building.
In its March letter, Cincinnati also informed Midwest that it was investigating the
facts surrounding Midwest’s application for the insurance to determine whether the
policy should be rescinded. Cincinnati stated that because Midwest had only a security
interest in the property, it should have obtained forced-place insurance rather than
property insurance. Cincinnati asked Midwest to provide it with information about its
communications with Marsh at the time it applied for the policy. Cincinnati stated that if it
determined that misrepresentations were made when the policy was procured, it would
consider rescinding the policy. Cincinnati stated that it “specifically reserve[d] the right to
rescind the policy” after it completed the investigation. ECF No. 49-8 at 6. However,
Cincinnati did not attempt to formally rescind the policy until August 2, 2016, when it
filed its counterclaim in this action and included a count for rescission.
8

II. DISCUSSION
Summary judgment is required where “there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P.
56(a). When considering a motion for summary judgment, I view the evidence in the
light most favorable to the non-moving party and must grant the motion if no reasonable
juror could find for that party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 255
(1986).
At the outset, I note that no party has moved for summary judgment on the
central coverage issue in this case, i.e., whether Midwest used its best efforts to
maintain the heat in the Farwell property. Instead, each party moves for summary
judgment on other issues, which I discuss in turn.
A.

Whether Cincinnati May Rely on Policy Exclusions
Midwest moves for summary judgment on its claim for breach of contract on the

ground that Cincinnati is barred from denying coverage based on policy exclusions,
including the freeze exclusion. This is so, Midwest contends, because Midwest did not
receive a copy of the policy before the loss occurred. Midwest’s position is based on a
case decided by the Wisconsin Court of Appeals holding that “an insurer may not deny
coverage based on limitations or exclusions in a policy, even if clearly stated, where the
insured was not otherwise informed of such provisions.” Kozlik v. Gulf Ins. Co., 268 Wis.
2d 491, 503 (Ct. App. 2003). 2 Cincinnati contends that it is not barred from denying
coverage based on the policy exclusions because it (or CSU Producer Resources)
2

Midwest also cites Miller v. Safeco Insurance Co. of North America, 683 F.3d 805, 811
(7th Cir. 2012), but in that case, the Seventh Circuit merely applied the rule stated in
Kozlik. Thus, I focus on the Kozlik case.
9

provided copies of the policy to the Marsh & McClennan Agency—Midwest’s agent in
the insurance transaction—before the loss. Midwest, in turn, contends that notice to its
agent was not sufficient and that, to enforce the policy exclusions, Cincinnati was
required to provide copies of the policy directly to Midwest or ensure that Marsh
provided copies to Midwest.
In Kozlik, the insured was a person who rented a car from Enterprise Rent-A-Car.
When the driver went to the Enterprise office to rent his car, he purchased accident
insurance. The Enterprise employee who handled the rental transaction did not provide
the driver with a copy of the insurance policy. Later, the driver used the rental car while
intoxicated and caused an accident in which he was killed. When his estate made a
claim under the rental insurance, the insurance company denied coverage based on a
policy exclusion for losses caused by intoxicated driving. The Wisconsin Court of
Appeals held that because Enterprise did not provide the driver with a copy of the policy
before the loss, the insurance company could not deny coverage based on an
exclusion.
Kozlik was not a case in which copies of the policy were provided to an insured’s
agent. The insured was a natural person who procured the insurance without the
assistance of an agent. Here, in contrast, Midwest is a corporation and thus can act or
receive notice only through its agents. See Hensel v. Hensel Yellow Cab Co., 245 N.W.
159, 163–64 (Wis. 1932). And, unlike in Kozlik, Midwest was represented in the
insurance transaction by an insurance broker—the Marsh & McClennan Agency—that
did receive copies of the policy. Under general principles of agency law, a principal is
charged with knowledge of matters learned by an agent within the scope of the agency.
10

See, e.g., Johnson v. Associated Seed Growers, 240 Wis. 278, 282–83 (1942). This is
true even if the agent does not actually communicate the knowledge to the principal.
See Admiral Ins. Co. v. Paper Converting Mach. Co., 339 Wis. 2d 291, 312 (2012).
Thus, by providing the policy to Marsh, Midwest’s agent for insurance matters,
Cincinnati satisfied the rule of Kozlik requiring notice to the insured of the policy’s
exclusions.
Moreover, the rule of Kozlik is based on the premise that “it would be unjust to
permit an insurance company to accept premiums and then deny liability based on an
exclusion of which the insured was not aware because the insurance company had not
informed him or her of the exclusion or given him or her the means to ascertain its
existence.” 268 Wis. 2d at 502–03 (emphasis added). In the present case, there is no
dispute that Marsh acted as Midwest’s agent with respect to the insurance at issue and
that Midwest could have asked Marsh to provide it with a copy of the policy had anyone
at Midwest wanted to review it. Thus, in providing the policy to Marsh, Cincinnati gave
Midwest the “means to ascertain” the existence of the freeze exclusion. Accordingly,
Cincinnati is not barred from denying coverage based on the exclusion.
In any event, even if Cincinnati could not enforce the policy exclusion unless
Marsh forwarded the policy to someone at Midwest, there is a genuine factual dispute
over whether Marsh did so forward the policy. Niestrom states in his declaration that his
regular practice was to forward copies of newly issued policies to an insured after he
finished reviewing them. Decl. of Richard Niestrom ¶ 15, ECF No. 62. He states that he
followed this practice with respect to the Cincinnati policies and delivered them to
Midwest no later than July 2015, when he met with representatives of Midwest to “go
11

through the [Cincinnati] policies.” Id. Midwest denies that Niestrom actually provided it
with copies at that time, but Niestrom’s declaration is sufficient to prevent entry of
summary judgment for Midwest on the question of whether Niestrom provided copies of
the policy to Midwest before the loss. For this reason, Midwest is not entitled to
summary judgment on its claim against Cincinnati for breach of contract.
B.

Rescission
Both Midwest and the Marsh & McClennan agency move for summary judgment

on Cincinnati’s claim for rescission. They contend that Cincinnati did not comply with
two statutory provisions that restrict an insurer’s ability to rescind a policy. First, they
point to Wis. Stat. § 631.11(1)(a), which states that “[n]o representation or warranty
made by a person other than the insurer or an agent of the insurer in the negotiation for
an insurance contract affects the insurer’s obligations under the policy” unless it is
stated either in the policy, a written application that is made part of the policy by
amendment or endorsement, or a written communication from the insurer to the insured
within 60 days after the policy’s effective date. Second, Midwest and Marsh point to
Wis. Stat. § 631.11(4)(b), which provides that an insurer may rescind a policy only if the
insurer notifies the insured of its intent to rescind the policy within 60 days of “acquir[ing]
knowledge of sufficient facts to constitute grounds for rescission of the policy.”
In the present case, Cincinnati does not dispute that it did not satisfy these
statutory provisions. Cincinnati does not contend that Midwest or Marsh made a
statement about Midwest’s owning the Farwell property that was included in the policy. 3

3

At one point, Cincinnati references an “owned property schedule” and states that
some representation was “within the policy itself.” Cincinnati Br. at 18 n.2, ECF No. 77.
12

Cincinnati does not contend that any such statement was included in the application for
the policy or that the application was incorporated into the policy by amendment or
endorsement. And it does not contend that the statement was included in a written
communication to Midwest within 60 days of the policy’s effective date. Likewise,
Cincinnati does not contend that it provided notice of its intent to rescind the policy
within 60 days of learning sufficient facts to support its rescission claim.
Instead, Cincinnati argues that its rescission claim satisfies a different provision
of the Wisconsin Statutes, Wis. Stat. § 631.11(1)(b). Under this provision, no
misrepresentation by an insured constitutes grounds for rescission of the policy unless
the insured knew or should have known that the representation was false and either (1)
the insurer relied on the misrepresentation or the misrepresentation was material or
made with intent to deceive, or (2) the fact misrepresented contributed to the loss.
However, Cincinnati’s argument that it satisfies § 631.11(1)(b) misses the point of
Midwest’s and Marsh’s motions for summary judgment on the rescission claim. They do
not dispute that a genuine factual dispute exists as to whether Cincinnati can prove the
elements of a misrepresentation claim under § 631.11(1)(b). Rather, they contend that,
to rescind the policy, Cincinnati must also satisfy § 631.11(1)(a) and § 631.11(4)(b).
Cincinnati essentially concedes that Midwest and Marsh are entitled to summary
judgment on the rescission claim by failing to argue either that it has satisfied these
other statutory provisions or that it is not required to do so.

However, Cincinnati does not identify any document in the record that corresponds to
this supposed “owned property schedule” and points to no part of the policy that
contains a representation that Midwest owned the Farwell property. Thus, this
somewhat cryptic argument is not a basis for avoiding summary judgment.
13

In any event, the undisputed evidence submitted by Midwest and Marsh
establishes that Cincinnati did not comply with the notice provision of § 631.11(4)(b). 4
Cincinnati “acquire[d] knowledge of sufficient facts to constitute grounds for rescission
of the policy,” id., no later than May 31, 2016. On that date, it sent a letter to Marsh
describing the facts underlying its rescission claim and stating that it “appear[ed]” that
Cincinnati had a basis to rescind the policy. ECF No. 62-1 at 2. But Cincinnati did not
notify anyone that it intended to actually exercise its right to rescind the policy until more
than 60 days later when, on August 2, 2016, it filed its counterclaim in this matter and
asserted a claim for rescission. Accordingly, Midwest and Marsh are entitled to
summary judgment on Cincinnati’s rescission claim.
C.

Claim for Professional Negligence Against Marsh
Midwest alleges that Marsh was negligent in insuring its interest in the Farwell

property under a commercial property policy rather than a forced-place policy. Marsh
moves for summary judgment on this claim on a number of grounds. I will discuss only
one of those grounds—Midwest’s failure to show that such negligence resulted in an
actual injury or damages—because it is dispositive.

4

The undisputed evidence also supports Midwest’s and Marsh’s position that Cincinnati
has not satisfied Wis. Stat. § 631.11(1)(a). However, it is arguable that this statutory
provision does not apply to Cincinnati’s rescission claim. Unlike § 631.11(1)(b) and
(4)(b), section 631.11(1)(a) does not expressly apply to a claim for rescission. Instead, it
states that if the insured’s representation is not incorporated into the policy or a
communication made within 60 days, then the representation does not “affect[] the
insurer’s obligations under the policy.” It is arguable that this phrase means something
different than prohibiting an insurer from rescinding the policy, for subsection (4)(b) uses
both that phrase and the term “rescission.” Because of this possible difference in
meaning, I will rely on Cincinnati’s undisputed failure to satisfy the notice requirement of
§ 631.11(4)(b) as the reason to grant summary judgment on the rescission claim.
14

Under Wisconsin law, a negligence claim has four elements: (1) the existence of
a duty of care on the part of the defendant; (2) a breach of that duty of care; (3) a causal
connection between the defendant’s breach and the plaintiff’s injury; and (4) actual loss
or damage resulting from the injury. Emer’s Camper Corral, LLC v. Alderman, 386
Wis.2d 592, 602–03 (Ct. App. 2019). Marsh contends that Midwest has not satisfied its
burden to show a genuine factual dispute on the latter two elements, i.e., that Marsh’s
failure to procure forced-place insurance rather than commercial property insurance
caused Midwest to suffer an injury that resulted in damages.
Midwest contends that it will suffer an injury from Marsh’s alleged negligence if it
is ultimately determined that either (1) Cincinnati is entitled to rescind its policy, or (2)
Cincinnati properly denied coverage based on the freeze exclusion. I have already
granted summary judgment to Midwest on Cincinnati’s claim for rescission, so that is no
longer a potential source of injury to Midwest.
As for the freeze exclusion, Midwest contends that if Cincinnati is ultimately
found to have properly denied coverage based on the exclusion, then Marsh’s failure to
procure forced-place insurance will have caused it an injury. However, that could be so
only if Cincinnati’s policy does not cover the loss and the insurance that Marsh should
have procured for Midwest would have covered it. Midwest has produced no evidence
from which a reasonable jury could conclude that the insurance Marsh should have
procured would have covered the loss. Although Midwest has an expert witness who
opines that Marsh should have procured forced-place insurance, see Decl. of Jim
Leatzow ¶ 5, ECF No. 100, this witness does not also opine that forced-place insurance
would have covered the Farwell property loss. Indeed, when asked at his deposition
15

whether forced-place insurance would have covered the loss, the witness stated that he
had no opinion on that matter. ECF No. 75-2 at p. 9 of 18. The witness does opine that
forced-place insurance “would have been available in the marketplace” to cover
Midwest’s “insurable interests” in the Farwell property. See Leatzow Decl. ¶ 8. But to
prove that Marsh’s negligence caused it an injury, Midwest must do more than show
that Marsh could have procured forced-place insurance to cover Midwest’s insurable
interest in the property. Marsh must also show that the forced-place policy that Marsh
should have procured would have provided coverage for the exact loss that occurred at
the property in January 2016. Because Midwest’s expert has no opinion on this latter
question, his testimony does not create a genuine factual dispute as to whether Marsh’s
failure to procure forced-place insurance caused Midwest an injury.
Midwest also points out that, after the loss, its new insurance broker procured a
forced-place policy with a freeze exclusion that is slightly different than the freeze
exclusion in the Cincinnati policy. See ECF No. 97-7 at p. 3 of 62. Both policies exclude
water damage caused by frozen pipes unless the insured exercises some care in
maintaining the heat in the building. However, under the forced-place policy, the
exclusion does not apply unless the building was vacant for more than 30 days.
Moreover, while the Cincinnati policy required the insured to use its “best efforts” to
maintain the heat, the forced-place policy requires the insured to use “reasonable care”
to maintain the heat.
Midwest’s reliance on its new policy does not create a genuine factual dispute as
to whether Marsh’s negligence caused it an injury. This is for two reasons. First,
Midwest has not shown that the new policy would have covered the Farwell loss had it
16

been in effect at the time. It has not pointed to evidence suggesting that the Farwell
building was vacant for less than 30 days prior to the loss, and it has not developed a
legal argument showing that there is a difference in meaning between “best efforts” (the
term used in the Cincinnati policy) and “reasonable care” (the term used in the forcedplace policy). Thus, although the freeze exclusion in the new policy is different than the
freeze exclusion in the Cincinnati policy, Midwest has not shown that the difference
would have resulted in a different coverage outcome.
Second, and more importantly, Midwest has not shown that all forced-place
policies contain freeze exclusions that are more favorable to the insured than the freeze
exclusions that appear in commercial property policies. In fact, Midwest states that
forced-place policies are typically custom policies that are not written on standard forms.
See Leatzow Decl. ¶ 6. Thus, even if the forced-policy that Midwest now holds would
have covered the loss, it would not follow that the jury could reasonably conclude that
every forced-place policy available in the marketplace would have covered the loss. For
all the record shows, Marsh could have complied with the standard of care by obtaining
a forced-place policy that contained the exact freeze exclusion that appears in the
Cincinnati policy. And because Midwest’s expert does not opine that the standard of
care required Marsh to procure any specific forced-place policy, the jury would have no
grounds for concluding that, had Marsh satisfied the standard of care, the loss in this
case would have been covered.
For these reasons, I will grant summary judgment to Marsh on Midwest’s claim
for professional negligence.

17

D.

Claim for Bad Faith Against Cincinnati
Midwest alleges a cause of action for insurance bad faith against Cincinnati.

Under Wisconsin law, such a claim has two elements. The first—which has been
described as the “objective” element—is that “there is no reasonable basis for the
insurer to deny the insured’s claim for benefits under the policy.” Brethorst v. Allstate
Property and Cas. Ins. Co., 334 Wis.2d 23, 46 (2011). The second, “subjective” element
is that “the insurer knew of or recklessly disregarded the lack of a reasonable basis to
deny the claim.” Id.
In its amended complaint, Midwest identifies two separate bases for its bad-faith
claim. First, Midwest alleges that Cincinnati did not have a reasonable basis to deny the
claim based on the freeze exclusion. Am Compl. ¶¶ 89–90. Second, Midwest alleges
that Cincinnati did not have a reasonable basis to assert a right to rescind the policy. Id.
¶¶ 88, 91. Cincinnati moves for summary judgment on all aspects of this claim. Midwest
also moves for summary judgment on the claim, but only on the rescission component.
That is, Midwest contends that even if Cincinnati had a reasonable basis to deny
coverage based on the freeze exclusion (which it disputes), Cincinnati would still be
liable for bad faith because it did not have a reasonable basis for asserting a right to
rescind the policy.
Initially, I question whether Midwest can succeed on a claim for bad faith by
showing that Cincinnati did not have a reasonable basis for asserting a right to rescind
the policy without also showing that Cincinnati did not have a reasonable basis for
denying coverage based on the freeze exclusion. As stated above, the focus of a badfaith claim is on whether the insurer lacked a reasonable basis for denying the insured’s
18

claim. See, e.g., Brethorst, 334 Wis. 2d at 46. Here, Cincinnati relied on two reasons to
deny Midwest’s claim: (1) the freeze exclusion, and (2) Midwest’s alleged
misrepresentation about its ownership interest in the Farwell property, which Cincinnati
believes provides grounds for rescinding the policy. So long as one of these grounds
was reasonable, Cincinnati would have had a reasonable basis for denying Midwest’s
claim. Thus, unless Midwest establishes that both grounds lacked reasonable support
and Cincinnati either knew of or recklessly disregarded the lack of reasonable support, it
could not prevail on a bad-faith claim.
Perhaps Midwest means to argue that rescission is a different act than claim
denial, and that therefore an insurer’s attempting to rescind a policy when it knows it
has no reasonable basis for doing so can give rise to a freestanding claim for bad faith,
even if the insurer had reasonable grounds to deny the insured’s claim. However,
Midwest does not cite, and I have been unable to find, any Wisconsin case that would
support this theory of bad faith. To the contrary, the Wisconsin Supreme Court has held
that an insured cannot prevail on a bad-faith claim unless it also shows that the insurer
breached the insurance contract. Brethorst, 334 Wis. 2d at 52 (holding that “some
breach of contract by an insurer is a fundamental prerequisite for a first-party bad faith
claim against the insurer by the insured”).
Moreover, even if rescission could be distinguished from claim denial for
purposes of a bad-faith claim, it is not clear what the remedy would be in a case where
the insurer properly denied coverage under the policy but wrongfully asserted a right to
rescind the policy. The Wisconsin Supreme Court has held that a bad-faith claim cannot
be used to create coverage that would not otherwise exist under the policy. Id.
19

(concluding that “creating coverage” is not an appropriate remedy for “bad behavior by
insurers against their insureds”). Thus, if in this case Cincinnati properly denied
coverage based on the freeze exclusion but wrongfully asserted a right to rescind,
Midwest would not be entitled to coverage for the Farwell property loss. In moving for
summary judgment on its bad faith claim, Midwest does not suggest that it suffered any
injury or damages from Cincinnati’s assertion of a right to rescind the policy other than
the denial of its claim for coverage. Thus, Midwest’s request for summary judgment on
its bad-faith claim must be denied. Whether Cincinnati is liable for bad faith cannot be
determined until the facts surrounding both of its grounds for denying the claim—the
freeze exclusion and rescission—are established.
Cincinnati’s motion for summary judgment on the bad-faith claim must also be
denied. As discussed above, Cincinnati did not comply with the 60-day notice
requirement that applies to a claim for rescission of an insurance policy. See Wis. Stat.
§ 631.11(4)(b). Instead, it filed its counterclaim for rescission more than 60 days after it
acquired knowledge of the facts constituting grounds for rescission. To date, Cincinnati
has not offered an explanation for its conduct or tried to show that it did not know of or
recklessly disregard the 60-day notice provision. Thus, a reasonable jury could find that
Cincinnati wrongly asserted rescission as a basis for denying coverage for the Farwell
property loss.
Likewise, there is a genuine factual dispute as to whether Cincinnati had a
reasonable basis to deny coverage based on the freeze exclusion. Cincinnati contends
that because all Midwest needed to do to get the heat turned back on was pay the
electric bill, it is obvious that Midwest did not use its “best efforts” to maintain the heat in
20

the Farwell property. However, Midwest has submitted evidence from which a
reasonable jury could conclude that getting the heat turned back on was not simply a
matter of paying the electric bill. This evidence shows that Midwest contacted the utility
company as soon as it learned that the heat had been shut off and asked to have the
power restored. The utility company refused to act until Midwest paid an outstanding bill
on a different property, which the utility company had mailed to the wrong address. After
Midwest paid the bill, the utility company waited several more days before sending a
crew to the property to restore the power. But even then, the utility company could not
restore the heat because the crew did not bring everything it needed to turn the
electricity on. The utility company did not return to the property until several days later,
and by then the pipes had frozen and caused the loss. If the jury finds both that the
above facts are true and that Cincinnati knew that they were true or recklessly failed to
investigate to determine whether they were true, then it could reasonably find Cincinnati
liable for bad faith. Accordingly, Cincinnati’s motion for summary judgment on the badfaith claim will be denied.
E.

Cincinnati’s Request to Limit Damages to Midwest’s Insurable Interest
In its motion for summary judgment, Cincinnati contends that Midwest’s claim for

coverage under the policy should be limited to $533,948.00, which was the amount of
its mortgage lien at the time of the loss. Cincinnati contends that the mortgage lien was
Midwest’s only insurable interest in the property, and that, for this reason, allowing it to
collect more than the amount of the lien would conflict with a principle of insurance law
providing that a party may not obtain insurance in the absence of an insurable interest.

21

Cincinnati cites no authority to support its assertion that Midwest’s claim should
be limited to the amount of its insurable interest at the time of the loss. Moreover, a
Wisconsin statute provides that “[n]o insurance policy is invalid merely because the
policyholder lacks insurable interest.” Wis. Stat. § 631.07(4). Instead, if an insurer
issues a policy to a person who lacks an insurable interest, the insurer is still liable to
provide coverage under the policy, but the court may order the proceeds to be paid to
someone other than the insured—i.e., to the person who had the insurable interest in
the subject of the policy. See id. Thus, even if Midwest did not have an insurable
interest in the entire property at the time of the loss, Cincinnati’s obligations under the
policy would not be limited to the amount of Midwest’s interest. Moreover, because no
one besides Midwest has come forward to claim an interest in the Farwell property,
Midwest is entitled to collect the full policy proceeds. See Martin v. Tower Ins. Co., 119
Wis. 2d 48, 51 (Ct. App. 1984).
F.

Alleged Violations of Wisconsin Insurance Statutes
Chapter 618 of the Wisconsin Statutes applies to nondomestic insurers and

surplus-lines insurance. It contains various provisions that are intended to protect
consumers who cannot obtain insurance from admitted insurers and who must therefore
access the surplus-lines market. Midwest alleges that the defendants violated several
provisions of this chapter while procuring the Cincinnati policy at issue in this suit.
Midwest contends that, because of these violations, it is entitled to the relief specified in
Wis. Stat. § 618.44. That statute provides as follows:
An insurance contract entered into in violation of [Chapter 618] is
unenforceable by, but enforceable against, the insurer. The terms of the
contract are governed by chs. 600 to 646 and 655 and rules promulgated
22

thereunder. If the insurer does not pay a claim or loss payable under the
contract, any person who assisted in the procurement of the contract is
liable to the insured for the full amount of the claim or loss, if the person
knew or should have known the contract was illegal.
Wis. Stat. § 618.44. Midwest has moved for summary judgment on its claims
under this statute. The defendants have also moved for summary judgment on
these claims.
Initially, I must discuss the nature of the two forms of relief available under
§ 618.44. First, the statute provides that an insurance contract entered into in violation
of Chapter 618 is “unenforceable by, but enforceable against, the insurer.” Midwest
contends that this language means that, if statutory violations have occurred, then the
insurer “cannot enforce the exclusions stated in the [policy].” Br. in Opp. at 11, ECF No.
94. However, Midwest’s contention is not consistent with the plain meaning of the
statutory language. The statute provides that, in the event of a violation, the “insurance
contract” is enforceable by, but unenforceable against, the insurer. The exclusions are
part of the “insurance contract,” and the statute does not give the insured the right to
remove the exclusions from the contract and enforce the remainder. Midwest seems to
believe that anytime an insurer denies coverage based on an exclusion, it is “enforcing”
the policy against the insured. However, while that may be a colloquial way to describe
the insurer’s conduct, it is not legally correct. An insurer “enforces” an insurance policy
against the insured by collecting the policy premiums. See Combined Investigative
Servs., Inc. v. Scottsdale Ins. Co., 165 Wis. 2d 262, 272 (Ct. App. 1991) (noting that
insured sought “a full refund of all its premiums” under § 618.44). Refusing to pay a
claim is not enforcing the policy. It is the insured who seeks to enforce the policy by
making a claim for benefits. When the insurer denies the claim based on a policy
23

exclusion, it is simply defending against the insured’s claim, not prosecuting its own
claim for enforcement of the contract. Thus, even if Midwest establishes that the
insurance contract is illegal, Cincinnati may point to the freeze exclusion as a reason to
deny the claim.
The other relief available under § 618.44 is stated in its third sentence: “If the
insurer does not pay a claim or loss payable under the contract, any person who
assisted in the procurement of the contract is liable to the insured for the full amount of
the claim or loss, if the person knew or should have known the contract was illegal.”
This sentence is the basis for Midwest’s claim against CSU Producer Resources and its
remaining claims against the Marsh & McClennan Agency. That is, Midwest alleges that
because various statutory violations were committed in connection with the Cincinnati
policies, and because CSU Producer Resources and Marsh either knew or should have
known that such violations were committed, both CSU Producer Resources and Marsh
will be liable for the full amount of the Farwell property loss if Cincinnati does not pay.
Here, I note that there seems to be virtually no chance that Cincinnati will not pay
a judgment entered against it in this case. Midwest has not suggested that Cincinnati is
insolvent or that there is any other reason to think that Cincinnati will not pay if it is
found liable. Nonetheless, until Cincinnati pays the claim or is found to have properly
denied it, Midwest may continue to prosecute its claims against CSU Producer
Resources and Marsh under § 618.44. Thus, I will address whether Midwest is entitled
to summary judgment on its claims under § 618.44, and whether either CSU Producer
Resources or Marsh is entitled to summary judgment on those claims.

24

1.

Surplus Lines Licensing

Midwest contends that the Cincinnati policy is illegal because the employees of
Marsh and CSU producer resources who worked on procuring it were not licensed as
surplus-lines agents or brokers in Wisconsin. Marsh’s employee—Niestrom—was
licensed as an agent or broker with respect to property and casualty insurance, but he
did not hold a separate license for surplus-lines insurance. Likewise, the employee of
CSU Producer Resources who performed the underwriting for the transaction—Thomas
Berryman—was not licensed as a surplus-lines agent or broker. However, Scott Hintze
of CSU Producer Resources was licensed as a surplus-lines broker in Wisconsin. After
Niestrom and Berryman agreed on the policy for Midwest, the policy was formally
placed with Cincinnati using Hintze’s name and license number, which are listed on the
policy’s declarations page. See ECF No. 49-3 at p. 2 of 467.
Midwest concedes that Hintze was properly licensed as a surplus-lines broker.
However, it contends that this is irrelevant, since Hintze had no direct involvement with
the negotiation and underwriting of the Cincinnati policy. In Midwest’s view, Wisconsin
law requires the individuals who actually negotiate and underwrite a surplus-lines policy
to hold surplus-lines licenses.
The Wisconsin insurance code provides in relevant part that “[n]o natural person
may perform, offer to perform, or advertise any service as an intermediary in this state,
unless the natural person obtains a license under § 628.04.” Wis. Stat. § 628.03(1). A
person is an “intermediary” if the person “[s]olicits, negotiates or places insurance or
annuities on behalf of an insurer or a person seeking insurance or annuities” or
“[a]dvises other persons about insurance needs and coverages.” Id. § 628.02(1).
25

Wisconsin Statute § 628.04 establishes several different types of insurance licenses.
The licenses relevant to this case are the general license under § 628.04(1) and the
surplus-lines license under § 628.04(2). Under the latter provision, a surplus-lines
license may be issued to an applicant who shows that “in addition to the qualifications
necessary to obtain a general license under [§ 628.04(1)], the applicant has the
competence to deal with the problems of surplus lines insurance.”
With one exception, no provision of the Wisconsin insurance code expressly
forbids an insurance intermediary from soliciting, negotiating, underwriting, or obtaining
surplus-lines insurance without a surplus-lines license. The exception appears in Wis.
Stat. § 618.41(7m), which provides that “[a] natural person may not solicit, negotiate or
obtain liability insurance for a risk purchasing group from an unauthorized insurer unless
the natural person is licensed as a surplus lines agent.” This exception does not apply
here, because Midwest is not a risk purchasing group. Thus, Midwest is unable to point
to a provision of Wisconsin law that required Niestrom and Berryman to hold surpluslines licenses to perform their roles in the transaction.
Still, the Wisconsin insurance code clearly contemplates that surplus-lines
insurance will be placed only through a licensed surplus-lines broker or agent. As
discussed in the background section, above, states typically regulate surplus-lines
insurers indirectly through brokers who are licensed by the state to place such
insurance. See Congressional Research Service, Surplus Lines Insurance: Background
and Current Legislation (July 22, 2010) (summary page) (“The sale of [surplus lines]
insurance is regulated and taxed by the states largely through requirements placed on
the brokers who usually facilitate the insurance transactions.”); Kilbourn & Winn, 25 Tort
26

& Ins. L.J. at 304 (“Generally, brokers and agents who place surplus lines insurance are
required to obtain a license or certificate pursuant to state law and regulations. The
failure of a broker or agent to obtain such a license or certificate before placing
insurance on behalf of an unauthorized insurer may result in fines, penalties, and in
some instances, civil liability.”). The Wisconsin insurance code fits the typical pattern.
For example, the code forbids agents and brokers from placing insurance with surpluslines insurers that are not financially sound and that engage in unfair practices unless
they provide certain disclosures to the proposed insured. See Wis. Stat. § 618.41(8).
Moreover, agents and brokers must collect the 3% tax imposed on surplus-lines policies
and are jointly liable with the policyholder for payment of the tax. See Wis. Stat.
§ 618.43(1)–(2); Wis. Admin Code § INS 6.17(5).
Because the Wisconsin insurance code regulates surplus-lines insurance
through agents and brokers, it is natural to interpret the code as requiring that a
licensed surplus-lines intermediary be involved in the transaction. Several code
provisions provide textual support for this licensing requirement. First, Wis. Stat.
§ 628.02(5) defines “surplus lines agent or broker” as “one licensed to place insurance
with unauthorized insurers, under § 628.04(2).” Although this provision is just a
definition, it clearly contemplates that surplus-lines insurance will be placed through
licensed surplus-lines agents or brokers. Second, Wis. Stat. § 628.04(2) provides that a
surplus-lines license “authorize[s]” an agent or broker “to place business under” the
surplus-lines statute, § 618.41. This implies that a broker who does not hold a surpluslines license may not place business with a surplus-lines insurer. Finally, the code’s
definition of surplus-lines insurance states that such insurance is “placed through a
27

surplus lines agent or broker” with an unauthorized insurer. Wis. Stat. § 618.40(10)(b).
This may be the most direct statement of the licensing requirement, for unless a policy
issued by an unauthorized insurer qualifies as surplus-lines insurance, it is an illegal
policy. See Wis. Stat. § 618.41 (providing that insurer without a certificate of authority
may issue insurance contracts on risks in the state only if it complies with the surpluslines statute).
Based on the above statutory provisions, I conclude that surplus-lines insurance
must be “placed” with an insurer through an agent or broker who holds a Wisconsin
surplus-lines license. However, it does not follow that Niestrom and Berryman needed
to hold surplus-lines licenses to perform their work on the Midwest policy. Niestrom and
Berryman negotiated the policy, and then Berryman performed the underwriting. No
provision of the Wisconsin insurance code requires a person to hold a surplus-lines
license to perform these tasks (unless the policy is for a risk purchasing group, see Wis.
Stat. § 618.41(7m), which in this case it was not). Instead, the code requires that a
licensed surplus-lines agent or broker “place” the policy with the insurer.
In the present case, the policy was placed with Cincinnati using Scott Hintze’s
surplus-lines license. Although Hintze was not directly involved in the transaction, he
consented to the use of his name and broker’s license, as evidenced by the policy’s
declarations page. Perhaps Berryman performed the ministerial tasks that resulted in
the insurance being placed with Cincinnati. However, Hintze supervised Berryman. The
Wisconsin insurance code does not provide that a licensed surplus-lines broker may not
rely on employees or agents to perform the acts that result in the insurance being
placed with a surplus-lines insurer. Indeed, the purpose of requiring surplus-lines
28

insurance to be placed through a licensed broker seems to be to ensure that the broker
conducts an investigation to determine that the insurer is financially sound and
otherwise reputable, such that the insurer is likely to pay a covered loss should one
occur. See Wis. Stat. § 618.41(8). A broker can perform this role with respect to a given
insurer, such as Cincinnati, and then allow others to place policies with that insurer
under the broker’s license. Especially in this case, there would seem to be no reason to
have Hintze involved in every transaction in which CSU Producer Resources placed a
policy, for it placed policies exclusively with Cincinnati. Hintze would be familiar with the
general financial condition and business practices of the only insurer with which CSU
Producer Resources placed policies. He could therefore authorize the employees he
supervised to place insurance with Cincinnati under his license. 5
For these reasons, I conclude that Niestrom and Berryman did not need to hold
Wisconsin surplus-lines licenses to perform their work on the Midwest policy. The policy
was placed through a licensed surplus-lines broker and therefore was not illegally
placed with an unauthorized insurer. Accordingly, Midwest’s motion for summary

5

Marsh’s expert witness, William Way, testified that it is typical within the insurance
industry to have “the boss” at a wholesale broker hold a surplus-lines license and have
him or her “sign off” on the policies placed with the surplus-lines insurer by others at the
brokerage. See ECF No. 85-1 at p. 13 of 29 (deposition p. 258). The fact that this
practice is typical in the industry does not mean it is legal, but it does suggest that state
insurance commissioners do not require that all intermediaries involved in a surpluslines transaction be licensed as surplus-lines agents or brokers. Indeed, the defendants
have produced an email from an employee of the Wisconsin Office of the Commissioner
of Insurance in which the employee states that “certainly not every broker in the
[surplus-lines brokerage] needs to have his/her own surplus lines authority.” ECF No.
61-5. Rather, only “the head” of the brokerage must hold the surplus-lines license. Id.
29

judgment on this issue will be denied, and the defendants’ cross-motions on the issue
will be granted. 6
2.

Surplus Lines Proposal Letter

Midwest next contends that the Cincinnati policy is illegal because no defendant
sent Midwest a surplus-lines proposal letter. Sending this letter is one of the
requirements that must be fulfilled for a nonadmitted insurer to legally issue an
insurance policy on a risk located in Wisconsin. See Wis. Stat. § 618.41(1) & (4). The
Wisconsin insurance code states as follows:
Information to policyholder. The insurer and any agent or broker are
obligated promptly to furnish the policyholder a statement in a form
prescribed or approved by the commissioner, informing the policyholder
that the insurer has not obtained a certificate of authority to do business in
this state and is not regulated in this state except as provided in this
section.
Wis. Stat. § 618.41(4). The Wisconsin insurance commissioner has adopted a
regulation to implement this provision. It provides that “[e]very licensed surplus lines
agent who procures surplus lines insurance shall . . . [f]orward promptly to the
policyholder a completed copy of a Surplus Lines Insurance Proposal in a form
substantially as in Appendix 1 to this rule.” Wis. Admin Code § INS 6.17(3)(a). The
appendix consists of the following form letter:
Dear ________:
You have asked that I procure the following insurance coverage on your
behalf: ___________________.
I can procure the coverage desired from the following insurer(s) at the
premium listed: ____________.
6

My conclusion that Niestrom and Berryman were not required to hold surplus-lines
licenses also resolves Midwest’s related claim that the property policy was illegal due to
the payment of commissions to unlicensed intermediaries. See Wis. Stat. § 628.61(1).
30

This insurance is with an insurer which has not obtained a certificate of
authority to transact a regular insurance business in the state of
Wisconsin, and will be issued and delivered as a surplus lines coverage
pursuant to § 618.41, Stats. The insurance is regulated by the
Commissioner of Insurance only as provided in §§ 618.41 and 618.43,
Stats. Section 618.43 (1), Stats., requires payment by the policyholder of a
3% tax on gross premium (except for Ocean Marine Insurance on which
the tax is one-half of 1%). The tax in this instance amounts to
$_____________.
If the above transaction is not satisfactory, please advise immediately.
Wis. Admin. Code § INS 6.17 App. 1.
In the present case, no defendant sent Midwest a proposal statement that is
identical to the form letter contained in the insurance regulation. However, the
defendants note that the declarations page of the Cincinnati policy contained a “notice
to policyholder” that included some of the information that must be part of the proposal
statement. This notice was “stamped” on the policy as required by a separate provision
of the insurance code, Wis. Stat. § 618.41(9). 7 The notice stated as follows:
NOTICE TO POLICYHOLDER:
This insurance contract is with an insurer which has not obtained a
certificate of authority to transact regular insurance business in the state of
Wisconsin, and is issued and delivered as a surplus line coverage
pursuant to § 618.41 of the Wisconsin Statutes. Section 618.43(1),
Wisconsin Statutes, requires payment by the policyholder of 3% tax on
gross premium.
ECF No. 493- at p. 2 of 467. The defendants contend that this notice contained enough
of the information specified in the commissioner’s form letter to render it substantially
similar to the form letter. Essentially, the defendants contend that their compliance with
the “stamping” requirement of Wis. Stat. § 618.41(9) resulted in compliance with the
7

Technically, the notice was printed on the declarations page, not stamped. But in the
insurance industry, the notice is commonly referred to as a “stamp” because brokers
used to literally stamp the notice on surplus-lines policies using a rubber stamp and red
ink. See Report of William Way at 6, ECF No. 85-2.
31

“proposal” requirement of Wis. Stat. § 618.41(4). For the reasons stated below, I
disagree.
First, the proposal requirement is distinct from the stamping requirement, and
each disclosure must be made at a different time. The proposal letter must be
“furnish[ed]” to the policyholder “promptly.” Wis. Stat. § 618.41(4). The commissioner’s
form letter makes clear that this means before the policy has been procured, for it
informs the insured that the agent or broker intends to procure the policy on a surpluslines basis and instructs the insured to contact the agent or broker if the proposal is not
satisfactory. In contrast, the information required to be stamped on the policy must be
disclosed at the time the policy is “procured and delivered.” Id. § 618.41(9). Thus, an
insurer’s or broker’s compliance with the stamping requirement will not automatically
result in compliance with the proposal requirement.
Second, both the statute and the commissioner’s regulation require the proposal
letter to include information that is not included in the stamped notice. Specifically, the
statute and the regulation require the proposed insured to be informed that the insurer is
not regulated by the state except as provided in Wis. Stat. § 618.41. This is important
information, for it warns the proposed insured that the insurer is not subject to the same
regulation as an admitted insurer, and that therefore there may be a higher risk of the
insurer’s failing to pay a covered claim. And this is information that the insured must
receive before the policy is issued, so that the insured may decline to proceed with the
transaction if it is unwilling to assume the higher risk. Thus, the stamp that appears on
the policy’s declarations page cannot serve as a proposal letter.

32

For these reasons, I conclude that the Cincinnati policy was issued in violation of
Wis. Stat. § 618.41(4), which means that the policy is technically illegal and
“unenforceable by, but enforceable against,” Cincinnati. Wis. Stat. § 618.44. However,
as discussed above, Midwest has elected to enforce the contract, and therefore the
finding of illegality does not have much of an impact on Cincinnati. 8 However, if Marsh
and CSU Producer Resources “knew or should have known the contract was illegal”
because no proposal letter was sent, then they will be liable for paying Midwest’s claim
if Cincinnati does not pay. Id.
Here, I conclude that a genuine factual dispute exists over whether Marsh and
CSU Producer Resources knew or should have known that no proposal letter was sent.
Under the commissioner’s regulation, it was CSU Producer Resources who was
responsible for sending the proposal letter. This is so because the regulation requires
the proposal to be sent by the “licensed surplus lines agent.” Wis. Admin. Code § INS
6.17(3)(a). As discussed above, that was Hintze, who worked for CSU Producer
Resources. However, prior to the transaction, CSU Producer Resources entered into a
“producer agreement” with Marsh that essentially allowed Marsh to place policies with
Cincinnati through CSU Producer Resources. See ECF No. 49-11. Under this

8

The finding of illegality may render Cincinnati liable for attorneys’ fees and punitive
damages under Wis. Stat. § 618.48, which allows punitive damages and attorneys’ fees
against an insurer who issued an illegal policy and who does not pay a covered claim
within 30 days without reasonable cause. However, Cincinnati is already exposed to
such liability in connection with Midwest’s bad-faith claim. See Water Well Solutions v.
Consol Ins. Co., 369 Wis. 2d 607, 633 (2016); DeChant v. Monarch Life Ins. Co., 200
Wis. 2d 559, 571 (1996). It is difficult to conceive of a circumstance in which Cincinnati
could be found to have lacked reasonable cause to deny the claim and not be liable for
bad faith. So again, the finding of illegality does not have much of an impact on
Cincinnati.
33

agreement, Marsh agreed to “ensure compliance with various State laws requiring
notice to a proposed insured, before coverage is placed by [CSU Producer Resources],
that coverage will be provided by an insurer not licensed in that State and that, in the
event of insolvency, the payment of loss may not be guaranteed.” Id. ¶ 14. Thus, as
between Marsh and CSU Producer Resources, it was Marsh that should have sent the
proposal letter to Midwest.
Of course, the producer agreement could not relieve Hintze and CSU Producer
Resources of their responsibilities under state law. So Marsh’s failure to send Midwest
the proposal letter exposed Hintze to the possibility that the insurance commissioner
would impose forfeitures or penalties on him or revoke his surplus-lines license. See
Wis. Admin. Code § INS 6.17(6). But the question at hand is not whether any specific
person violated Wisconsin law by failing to send the surplus-lines proposal letter. The
question is whether either Marsh or CSU Producer Resources “knew or should have
known” that the proposal letter was not sent. Wis. Stat. § 618.44. The record does not
contain evidence showing that anyone at CSU Producer Resources knew that Marsh
did not send the proposal letter to Midwest. Although it is arguable that CSU Producer
Resources should have kept tabs on Marsh to ensure that it sent the letter, I cannot say
that a reasonable jury would be compelled to find that CSU Producer Resources should
have known that Marsh did not send the letter.
Likewise, there is a genuine dispute of fact as to whether Marsh knew or should
have known that the letter was not sent. Although the producer agreement placed the
burden to send the letter on Marsh, there is no evidence that Niestrom or anyone else at
Marsh was aware of that fact during the negotiation of the policy. Again, it is arguable
34

that Marsh should have known that CSU Producer Resources was relying on it to send
the proposal letter, but a reasonable jury would not be compelled to accept this
argument. Thus, no party is entitled to summary judgment on the question of whether
Marsh and CSU Producer Resources knew or should have known that the policy was
illegal due to the failure to send the surplus-lines proposal letter.
3.

Managing General Agent

Midwest next contends that CSU Producer Resources acted as a “managing
general agent” for Cincinnati without holding a license to do so, as required by Wis.
Stat. § 628.04(5) and its implementing regulations. A managing general agent is a type
of agent or broker that performs functions ordinarily handled by the insurer itself, such
as underwriting, binding coverage, and adjusting claims. See Wis. Stat. § 628.02(4g);
https://www.irmi.com/term/insurance-definitions/managing-general-agent (last viewed
July 11, 2019).
The parties dispute whether CSU Producer Resources was Cincinnati’s
managing general agent. However, even if it was, the lack of a license could not result
in a finding of policy illegality under § 618.44. The latter statutory provision applies only
to insurance contracts entered into in violation of Chapter 618 of the Wisconsin
Statutes—the chapter that governs surplus-lines insurers and other nonadmitted or
unauthorized insurers. The requirement that all managing general agents be licensed is
not found in Chapter 618; it is found in Chapter 628. Moreover, no provision of Chapter
618 prohibits unlicensed managing general agents from participating in surplus-lines
transactions. Rather, as discussed above, so long as the broker who places the policy
holds a surplus-lines license, the licensing requirements for surplus-lines transactions
35

will be satisfied. Thus, even if Midwest proves that CSU Producer Resources acted as
Cincinnati’s managing general agent without a license, it would not be entitled to relief in
this case.
In any event, CSU Producer Resources was not required to hold a license to act
as Cincinnati’s managing general agent. The Wisconsin Statutes do not expressly
require managing general agents to be licensed. Rather, they authorize the
commissioner of insurance to adopt rules requiring managing general agents to be
licensed. See Wis. Stat. § 628.04(5). The commissioner has adopted such a rule, which
states in relevant part that “[n]o person, including, but not limited to, a natural person,
may act as a managing general agent for an insurer with respect to a risk located in this
state unless the person is licensed as a managing general agent.” See Wis. Admin
Code § INS 42.02 (emphasis added). The commissioner has defined the word “insurer”
in a way that excludes surplus-lines insurers such as Cincinnati. That definition provides
that an “insurer” is an entity “which has a certificate of authority under ch. 611, 612, 613,
614 or 618, Stats.” Id. § INS 42.01(2). But Cincinnati is a surplus-lines insurer doing
business in Wisconsin without a certificate of authority. See Pl. Prop. Findings of Fact
¶ 22, ECF No. 47. So even if CSU Producer Resources acted as a managing general
agent for Cincinnati, it did not act as a managing general agent “for an insurer.”
Therefore, it was not subject to the licensing requirement of Wis. Admin. Code § INS
42.02(1).
For these reasons, Midwest’s motion for summary judgment on this issue will be
denied, and the defendants’ cross-motions will be granted.

36

4.

Misrepresentation of Broker Status

Under Wis. Stat. § 628.34(1)(a), it is unlawful to communicate “false or
misleading information” with respect to an insurance transaction. Midwest contends that
CSU Producer Resources violated this provision by referring to itself as a “broker” on
the declarations page of the Cincinnati policies. Midwest’s argument is based on the
definition of “broker” in the Wisconsin Statutes, which provides that “[a]n intermediary is
an insurance broker if the intermediary acts in the procuring of insurance on behalf of an
applicant for insurance or an insured, and does not act on behalf of the insurer except
by collecting premiums or performing other ministerial acts.” Wis. Stat. § 628.02(3).
Midwest contends that CSU Producer Resources was not a broker under this definition
because it performed various non-ministerial acts for Cincinnati, including underwriting
and binding policies.
However, the declarations page does not state that CSU Producer Resources
was Midwest’s broker as defined in the Wisconsin Statutes. Rather, it simply lists CSU
Producer Resources next to the word “broker.” See ECF No. 49-3 at p. 2 of 467. In the
insurance industry, it would not be false or misleading to refer to CSU Producer
Resources as a broker. Technically, a broker is a person who represents the insured in
an insurance transaction, and an agent is a person who represents the insurer. See
Billy L. Akin, What Attorneys Need to Know About Insurance, 45 Tenn. B.J. 22, 23
(2009). “In actual practice,” however, “the distinction between broker and agent has
been blurred, and both terms are used for those entities procuring coverage.” Id.
Indeed, an entity, like CSU Producer Resources, who places insurance with a surpluslines carrier is commonly described as a “wholesale broker” or a “surplus lines broker.”
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See Crusader Ins. Co. v. Harry W. Gorst Co., 2016 WL 1494110, at *1;
www.irmi.com/term/insurance-definitions/wholesale-broker (last viewed July 11, 2019).
Likewise, companies such as Marsh who are technically brokers because they
represent insureds are often referred to as “agents” or “agencies,” even though those
terms technically mean entities that work for the insurer. See Dep. of William Way at
262, ECF No. 85-1 at p. 17 of 29. Thus, under ordinary usage—as opposed to the
usage in the Wisconsin Statutes—CSU Producer Resources could accurately refer to
itself as a “broker.” And because nothing in the context of the declarations page
suggests that the term “broker” was being used as defined in Wis. Stat. § 628.02(3),
CSU Producer Resources did not, in using the term, communicate false or misleading
information. Accordingly, Midwest’s motion for summary judgment on this issue will be
denied, and the defendants’ cross motions will be granted.
III. CONCLUSION
For the reasons stated, IT IS ORDERED that the parties’ motions for summary
judgment (ECF Nos. 46, 71, 76 & 80) are GRANTED IN PART and DENIED IN PART,
as follows: Summary judgment is entered in favor of Midwest and Marsh on Cincinnati’s
claim for rescission; summary judgment is entered in favor of Marsh on Midwest’s claim
for negligence; and summary judgment is entered in favor of the defendants on
Midwest’s claims under Wis. Stat. § 618.44 based on the lack of surplus-lines licenses,
managing general agent status, payment of commissions, and communication of false
or misleading information. In all other respects, the motions are denied.

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IT IS FURTHER ORDERED that Midwest’s motion for leave to file a brief
exceeding the page limit (ECF No. 93) is GRANTED.
Dated at Milwaukee, Wisconsin, this 12th day of July, 2019.

s/Lynn Adelman
LYNN ADELMAN
United States District Judge

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