Contextual Ambiguity: The New Rules of Insurance Policy Construction?

WDC Journal Edition: Fall 2003
By: Beth Boyer-Ryan - American Family Insurance

I. Introduction

Is it ambiguous, or isn't it? This question is at the heart of the contentious debate regarding the validity of UIM reducing clauses. The debate is not new. Prior to the legislative enactment of Wis. Stat. §632.32(5)(i) in 1995, Wisconsin Courts struck down reducing clauses as providing "illusory coverage".i After 1995, the court's unwavering animosity towards reducing clauses has created result-oriented decisions which have brought into question the integrity of an insurance contract. Is it ambiguous or is it reasonable?

Specifically, over the past year, three Wisconsin appellate court cases, Badger Mutual v. Schmitz, Dowhower v. Marquez, (Dowhower II) and Gohde v. MSI Ins. Co., invalidated UIM reducing clauses.ii In doing so, the courts created a new set of subjective rules of policy construction, while implicitly overturning decades of well established policy construction law.

The Wisconsin Supreme Court addressed the validity of Wis. Stat. §632.32(5)(i), which codified UIM reducing clauses in Dowhower v. West Bend Mut. Ins. Co.iii Dowhower I held §632.32(5)(i) constitutional and a reducing clause authorized by the statute unambiguous. iv However, the decision, for the first time, ruled that an unambiguous UIM reducing clause may be ambiguous within the context of the insurance contract as a whole, and remanded the case to the circuit court for resolution of that issue.v

Dowhower I ignored the well-founded policy construction rule that "[w]here no ambiguity exists in the terms of a policy, a court will not engage in construction but will merely apply those terms."vi Had the Court followed precedent, it would not have remanded the case for further analysis, and would have found the unambiguous reducing clause to be valid. Finding that a reducing clause "may be ambiguous within the context of the insurance contract" was the Court's first step down the slippery slope of ignoring the discipline of precedent to reach a desired result.

Subsequent to the new standard set forth in Dowhower I, the Wisconsin Supreme Court in Badger Mutual v. Schmitz first analyzed whether a UIM reducing clause was ambiguous in the context of the entire policy. Initially, it appeared as though the Court would apply well established rules of construction to interpret the policy, as the Court cited to that body of law at the outset of its analysis. Instead, the Court did not engage in any traditional policy construction analysis to hold the reducing clause invalid. The analysis was ad hoc and provided no clarity as to how the unambiguous reducing clause became ambiguous within the context of the policy or how the policy should have been written, organized or formatted to avoid ambiguity in the Court's eyes.

The Schmitz decision briefly cited to Justice Bradley's concurrence in Dowhower I: "[I]t reflects the reasoning in Dowhower that reducing clauses must be crystal clear in the context of the whole policy."vii The phrase "crystal clear" does not appear anywhere else in Schmitz, or for that matter, had not appeared in the majority opinion in Dowhower I or any other Wisconsin UIM case. The Schmitz Court held that the UIM clause did not meet the standard set forth in Dowhower I, that a reducing clause will be upheld "provided that the policy [in which the reducing clause appears] clearly sets forth that the insured is purchasing a fixed level of UIM recovery that will be arrived at by combining payments made from all sources."viii

Following Schmitz, the "crystal clear" comment became the battle cry for two more litigants attempting to invalidate UIM reducing clauses. The Court of Appeals in Dowhower II and Gohde, heard the battle cry and elevated "crystal clear" to an unprecedented standard for construing insurance policies. Both decisions stated that according to Schmitz, a reducing clause's effect must be "crystal clear" in the context of the whole policy.ix
The subjective "crystal clear" standard of these decisions was unprecedented, insupportable and set the bar so high that it would be impossible for insurers to meet. As the Wisconsin Supreme Court explained in a more recent case, unambiguous is not equivalent to "crystal clear". Wisconsin courts have used the term "clear" when construing an insurance policy, but "crystal clear" suggested that an additional amount of clarity is required. Despite the supreme court’s recent revisitation of this issue, how much additional clarity is required remains an open question and one that may well have to be answered case-by-case. That would effectively set the stage for the courts to usurp the traditional role of insurance regulators in determining the structure, content and readability of policies.

Further, the "crystal clear" standard contradicted the established Wisconsin law that contracts of insurance are controlled by the same principles of law that are applicable to other contracts.x Also, the test in construing policies has long been held to be "the ordinary meaning of a policy's language" or what the "reasonable person in the position of the insured would understand the policy to mean."xi

The "crystal clear" standard implicitly relabeled insurance contracts as adhesion contracts, a consumer contract offered on a take it or leave it basis without affording a consumer a realistic opportunity to bargain for their desired product. The Wisconsin Supreme Court has previously refused to label insurance contracts as adhesion contracts. In Katze v. Randolph, the Wisconsin Supreme Court stated:

The rules of insurance policy interpretation have
developed gradually and when necessary for law
development. To sweep out in a single labeling
of adhesion contract the well-established case law
used in the interpretation of insurance contracts
would not be of service to the public…There are
sufficient rules of interpretation of the policy
and its meaning available.xii

Yet the court’s decision in Badger Mutualenunciating the "crystal clear" standard essentially did just what the Katze court refused to do—swept out all of the well-settled rules of policy construction.

Indeed, in Kendziora v. Church Mutual Insurance Company,xiii the court of appeals noted that no “bright line” rule exists any longer; instead, case-by-case analysis is required: “The remaining question is whether the unambiguous definition becomes ambiguous in the context of the whole policy. This is a question that is being presented repeatedly to the appellate courts, and one that must be decided on the individual facts of each case.”
Obviously, such an individual examination simply creates more work for courts and more expense for litigants. Moreover, the sophistry of these decisions is further illustrated by the time-tested rules of policy construction, so recently applauded in Katze, which were disregarded within the decisions' contextual ambiguity analysis.

A major focus of the Schmitz, Dowhower II and Gohde decisions was the absence of mention of the UIM reducing clause contained on the declarations page. "[W]e conclude the fact the declarations do not refer to the reducing clause is relevant."xiv

In the courts' eyes, the text of the declarations page is paramount as "a reasonable insured often only looks to the declarations to verify they have been provided with the coverage for which they have contracted."xv

By focusing upon the perceived deficiency of the declarations page, these courts disregarded the established case law that describe a declarations page as a mere summary of coverage which cannot provide a complete picture of coverage under a policy.xvi

These decisions eviscerate the requirement that insureds review the content of the policy they purchased. Prior to Dowhower II, an insured had the duty to read his or her policy, and any insured who failed to do so was charged with knowledge of its provisions.xvii

Moreover, under general contract principles, "one who accepts a written contract is conclusively presumed to know its contents and to assent to them…"xviii

The effect of Schmitz, Dowhower II, and Gohde is to elevate one page of the policy, the declarations page, above all other pages, making it a guarantee of coverage despite language elsewhere in the policy limiting it. These decisions effectively require an insurer to put every important policy term, condition, limitation and exclusion on this one page, an impossible task. The decisions make even the most frivolous argument for coverage meritorious if the coverage question cannot be answered by a glance at the declarations page.

While one effect of these decisions has been to elevate the significance of declarations pages, another effect has been to downgrade the significance of endorsements. For example, the West Bend policy at issue in Dowhower II set forth its UIM coverages, including reducing clause, in an endorsement. The Dowhower II Court found no ambiguity within the endorsement, yet proceeded to conclude that the endorsement, viewed in conjunction with the declarations page, endorsement schedule and table of contents, created confusion, rendering the reducing clause invalid. This decision ignored the priority historically bestowed to endorsements. Prior to Dowhower II, if an irreconcilable conflict existed between policy provisions and an endorsement or rider, the endorsement controlled.xix

Further, the Schmitz, Dowhower II and Gohde decisions focused extensively upon the length, organization and complexity of the respective policies, which they reasoned contributed to its ambiguity. Admittedly, insurance policies do not make for the easiest or most fascinating reading, but historically, Wisconsin courts have not invalidated policies because they are unnecessarily cumbersome, complex and hard to read.xx

For example, in Heater v. Fireman's Fund Ins. Co., the Wisconsin Supreme Court noted that, "the language of the disputed rider [in an accident and health insurance policy] is unnecessarily cumbersome, complex and hard to read…" In spite of these shortcomings, the Court found the policy unambiguous, because "[a]fter a disciplined and careful reading, the meaning is clear and not subject to different interpretations."xxi Instead of invalidating the rider, the Court suggested that the language of the policy be simplified to become reader friendly.xxii

Schmitz, Dowhower II and Gohde raise the question whether any insurance policy of any length containing any endorsements is enforceable in Wisconsin. After all, while the factual context addressed in those cases was UIM coverage, the courts’ decisional rationales are not limited to these facts. This obviously leaves the door open to unfettered litigation of coverage issues requiring a case-by-case examination of every policy, or else a recognition that the rules enunciated in these cases are “special” rules of contract construction applying only to certain types of coverage. Such an analysis, however, flies in the face of the Katze decision, lauding Wisconsin’s well-settled rules of insurance policy construction and the predictability of results they fostered.

By invalidating UIM reducing clauses, the Schmitz, Dowhower II and Gohde decisions rendered them meaningless. This conclusion violates the canon of policy interpretation that one must construe an insurance contract to give reasonable meaning to each of its provisions.xxiii Consistent with that tenet is the law that "interpretations which render insurance contract language superfluous are to be avoided where a construction can be given which lends meaning to the phrase."xxiv In Bulen, the Court of Appeals rejected the insured's argument that a provision of the insurance policy restated coverage which was explicitly excluded by a prior provision. The court stated that the insured's argument would violate the rule of insurance construction that interpretations rendering contract language superfluous should be avoided.xxv

After Schmitz, Dowhower II, and Gohde, the question must be asked, what, if any meaning can be given to UIM reducing clauses? Historically, the objective in interpreting and construing insurance policies was to ascertain and give meaning to the true intentions of the parties.xxvi
There is no doubt that insurers, after tailoring their UIM reducing clauses to the language set forth in Wis. Stat. §632.32, intended that UIM coverage be reduced by payments from other sources. Clearly the legislature contemplated and approved of such action, and the Schmitz Court acknowledged that virtually all insurers intend to reduce UIM coverage.xxvii

On the other hand, the Schmitz court, without stating any foundation for its analysis, held that virtually every insured's intent is that UIM coverage not be reduced. Schmitz then “honors” this “intent” by focusing not on the language of the policy, but instead upon the insured’s “reasonable expectations of coverage.” xxviii An insured's expectation of coverage is guaranteed, by this decision, regardless of whether an insured has looked past his declarations page to ascertain coverage. This guarantee violates the established rule of statutory construction that an insurer should not be bound to a risk that it did not contemplate and for which it did not receive a premium.xxix Further, it violates the court’s express direction that an insured cannot have a reasonable expectation of coverage in the face of an unambiguous policy provision to the

Perhaps recognizing these unintended consequence of Schmitz and its progeny, the Wisconsin Supreme Court took a step back from its reasoning in Folkman v. Quamme.xxxi There, the court considered and rejected the argument that a split liability limit provision relating to an auto policy’s liability coverage was not crystal clear within the context of the policy as a whole, entitling the insured to five times the policy limits in liability coverage. Folkman explained that:

[A]ny contextual ambiguity in an insurance policy must be genuine and apparent on the face of the policy, if it is to upset the intentions of an insurer embodied in otherwise clear language. The test for determining whether contextual ambiguity exists is the same as the test for ambiguity in any disputed term of a policy.xxxii

The court made clear that the term “crystal clear” was not the standard for construction of policies. Rather, the court explained that “inconsistencies in the context of a policy must be material to the issue in dispute and be of such a nature that a reasonable insured would find an alternative meaning,” in order to invalidate policy provisions.xxxiii The court concluded that the policy, a “standard policy” interpreted by numerous courts, was not ambiguous and refused to invalidate the split limit of liability provisions.

Folkman took pains to mention, however, that the underinsured motorists coverage considered in Badger Mutual was ambiguous in context due to the fact that the limits of liability would never be paid, and that the declarations page failed to point that out. Interestingly, the court stated: “[T]he effect of the reducing clause was made clear but only in the reducing clause itself. There was no explanation of it.”xxxiv Is an “explanation” of every unambiguous clause required? If so, how does that lead to the simplification of policies that the court desired in Heater?

Despite the court’s retraction in Folkman of the “crystal clear” standard, the full impact of the Schmitz decision remains to be seen. Perhaps the most harmful consequence of the failure by the courts in Schmitz, Dowhower II and Gohde to follow settled contract construction law is the uncertainty and expense created for the buyers and sellers of insurance products. If these decisions stand, contract interpretation based on settled and widely understood rules will be supplanted by ad hoc judicial determination of the existence and scope of insurance coverage. Expectation of coverage formulated after a loss will provide the framework within which coverage will be determined in a result-oriented analysis. No one will know from one case to the next what the likely outcome will be, but all should expect litigation on the issue, as the courts and litigants count the pages of each policy to argue whether the position of a particular provision makes it ambiguous or not. Until the courts speak on each policy and each provision in it, insurers will not know what they are selling or what premium to charge, and insureds will not know what they are buying. That would be unfortunate, and expensive, for everyone.


i. Kuhn v. Allstate Co, 181 Wis. 2d 453, 510 N.W.2d 826 (Ct. App. 1993); Hoglund v. Secura Ins., 176 Wis. 2d 265, 500 N.W.2d 354 (Ct. App. 1993); and Sweeney v. General Casualty Co., 220 Wis. 2d 183, 582 N.W.2d 735 (Ct. App. 1998).

ii. Badger Mutual v. Schmitz, 2002 WI 98, 255 Wis. 2d 61, 647 N.W.2d 223; Dowhower v. Marquez, 2003 WI App 23, 260 Wis. 2d 192, 659 N.W.2d 57; and Gohde v. MSI Insurance Co., 2003 WI App 69, 661 N.W.2d 470.

iii Section 632.32(5)(i), Wis. Stats.

iv. Dowhower v. West Bend Mut. Ins. Co., 2000 WI 73, 236 Wis. 2d 113, 613 N.W.2d 557

v Id., at 35.

vi. Kremers-Urban Co. v. American Employers Insurance Co., 119 0 Wis. 2d 722, 351 N.W.2d 156, 163, (1984).

vii Schmitz, at 46

viii. Schmitz, at 73

ix. Dowhower II, at 23; Gohde, at 6

x. Garriguence v. Love, 67 Wis. 2d 130, 226 N.W.2d 414 (1975).

xi. Danbeck v. American Family Mut. Ins. Co., 2001 WI 91 10, 245 Wis. 2d 186, 193, 629 N.W.2d 150, 153

xii.Katze v. Randolph, 116 Wis. 2d 206, 341 N.W.2d 689, 692 (1984).

xiii. Kendziora v. Church Mutual Insurance Company, 2003 WI App 83, 23, 661 N.W.2d 456.

xiv. Gohde, at 15

xv. Id., at 16.

xvi.Sukula v. Herigage Mut. Inc. Co., 2000 WI App 266, 11, 240 Wis. 2d 65, 622 N.W.2d 457.

xvii. Martinson v. North Central Life Insurance Co., 65 Wis. 2d 268, 277, 222 N.W.2d 611 (1974).

xviii. Id., citing 17 Am. Jur.2d, Contracts, page 297, sec. 149.

xix. Inter-Insurance Exch. v. Westchester Fire Ins. Co., 25 Wis. 2d 100, 130 N.W.2d 185, 188 (1964).

xx Heater v. Fireman's Fund Insurance Co., 30 Wis. 2d 561, 141 N.W.2d 178, 181 (1966).

xxi Id. at 181.

xxii. Id.

xxiii. Stanhope v. Brown Cty., 20 Wis. 2d 823, 280 N.W.2d 711, 722 (1979).

xxiv. Bulen v. West Bend Mut. Ins. Co., 125 Wis. 2d 259, 371 N.W.2d 392, 394 (Ct. App. 1985).

xxv. Id., at 394.

xxvi Westerman v. Richardson, 43 Wis. 2d 587, 168 N.W.2d 851, 853 (1969).

xxvii. Schmitz, at 24.

xxviii. Id., at 51.

xxix. Limpert v. Smith, 56 Wis. 2d 632, 203 N.W.2d 29 (1973).

xxx City of Edgerton v. General Cas. Co., 184 Wis. 2d 750, 780, 517 N.w.2D 463 (1994), rev’d on other grounds, Johnson Controls v. Employers Ins. Of Wausau, 2003 WI 108

xxxi 2003 Wis. 116, Wis. 2d. , N.W.2d , reversing 2002 Wis. App. 237, 257 Wis. 2d 864, 652 N.W.2d 406.
xxxii Folkman, 29.
xxxiii Id. at 32.
xxxiv Id. at 52.