The “Pay and Walk” Clause—An Overview
A "pay and walk" clause in a bodily injury liability policy is valid, enforceable, and is not against public policy in Wisconsin. The reported cases generally involve facts of a fatal or serious motor vehicle accident (such as with a motorcycle, bicycle or, pedestrian), where the damages claimed are well above the policy limits. The insurer may seek a judicial declaration and summary judgment that upon payment of the policy limits, it is dismissed from the action with prejudice and has no further duty to defend or indemnify the insured. An insurer does not breach its contract with the insured nor act in bad faith by entering into a settlement with the claimant that releases the insured only to the extent of the policy limits.
Further, pursuant to applicable case law, an argument may be made that the duty to indemnify and defend beyond payment of the policy limits may not be established by estoppel or waiver on the part of the insurer, because the pay and walk clause goes to the scope of coverage and is not a forfeiture clause.
Recognition of the “Pay and Walk Clause” in Wisconsin
In 1984, in Gross v. Lloyds of London Insurance Co.,[ii] a case of first impression in Wisconsin at the time, the Wisconsin Supreme Court noted that there were no reported decisions in other jurisdictions construing a “tendered for settlements” clause, now generally referred to as the “pay and walk” clause. Revisions to the standard form liability policy in 1966 stated the insurer’s dual duties to defend and indemnify in the same paragraph, unlike the pre-1966 policy form, and “were meant to clarify when the insurer’s duty to defend the insured has been satisfied by providing that the duty to defend ceases after the policy limits are exhausted by payment of judgments or settlements.”[iii]
However, despite revisions to the clause in 1966 and subsequently, the insurer was cautioned that it
. . . may not walk away from the insured by paying relatively low limits into court and abandon the insured with a substantial judgment simply because the cost of appeal or other handling may be formidable. The insured’s interests may demand continued protection despite threatened exhaustion of the primary limits.[iv]
By 1984, there was a split in authority as to whether an insurer was relieved of the obligation to defend the insured after the policy limits were exhausted.[v] In Gross, a case arising out of an accident at the Experimental Aircraft Association’s annual fly-in at Oshkosh, Wisconsin, the Wisconsin Supreme Court decided the issue by holding that when a policy’s “pay and walk” clause appears in the policy in conspicuous print, such as “bold, italicized, or colored type,” there is adequate notice to the insured that the duty to defend will terminate upon payment of the policy limits, and the insurer is “relieved of its duty to defend by tendering the policy limits for settlement.”[vi]
Subsequent to Gross, in Novak v. American Family Mutual Insurance Co.,[vii] the Wisconsin Court of Appeals held that a “pay and walk” clause which gives adequate notice in the manner described in Gross does not violate public policy:
In the absence of a statement from the supreme court stating otherwise, our holding is controlling. Thus, we conclude that the limitation on the duty to defend is enforceable and is not contrary to public policy.[viii]
Novak further held that an insurer does not breach its contract with the insured nor act in bad faith when it enters into a settlement that releases the insured only to the extent of the policy limits, invokes the “pay and walk” clause, does not dispute coverage, and pays the maximum coverage provided under the clear language of the policy.[ix]
Enforcing the “Pay and Walk” Clause
In Wisconsin, a liability insurer’s contractual duty to defend may require it to furnish a defense to its insured prior to the determination of coverage.[x] However, when an insurer exhausts its liability by judgment or settlement, it fully discharges its obligation to the insured.[xi]
Guidance on enforcement of a “pay and walk” clause, in order to fully discharge the insurer’s obligation to the insured, is found in Novak and in Young v. Welytok,[xii] a 2011 unpublished Wisconsin Court of Appeals decision. According to those cases, if there is no action yet pending, the insurer may settle with the claimant for the policy limits and then file a declaratory judgment action for a determination of its right to “pay and walk.” If there is an action pending and the insurer is a named party, the insurer may bring a motion for declaratory judgment and summary judgment seeking such a determination and securing a dismissal with prejudice. Finally, if there is an action pending but the insurer is not named, the insurer may intervene in the action and file a declaratory judgment motion securing such a determination by that route.
In Novak, the insured motorist struck and killed a bicyclist.[xiii] The insurer offered its policy limits of $100,000 to the claimant, who rejected the offer and filed a wrongful death action. The insurer settled with the claimant after suit was filed for the full policy limits and was released, but the settlement released the insured only to the extent of the policy limits.[xiv] The insured then brought a declaratory judgment action regarding his rights under the policy and for a determination of bad faith and for damages. Summary judgment was granted to the insurer and upheld on appeal pursuant to the policy's "pay and walk" clause.[xv] The clause provided:
You have this coverage if Bodily Injury Liability and Property Damage Liability coverage is shown in the declarations. We will pay damages an insured person is legally liable for because of bodily injury and property damage due to the use of a car or utility trailer. We will defend any suit or settle any claim for damages payable under this policy as wethink proper. HOWEVER, WE WILL NOT DEFEND ANY SUIT AFTER OUR LIMIT OF LIABILITY HAS BEEN OFFERED OR PAID.[xvi]
The court held that the highlighted, bold print of the “pay and walk” clause sufficiently notified the insured that he had purchased a policy which would provide indemnity and defense only up to the point that the insurer tendered the policy limits, and that the insurer’s duty to defend would cease once this tender was made.[xvii] The court found that the insurer had properly paid the maximum coverage provided under the clear language of the policy, and did not act in bad faith entering into a settlement with the claimant which released the insured only to the extent of the policy limits.[xviii]
Another example of enforcement of the “pay and walk” clause is found in Young v. Welytok.[xix] In Young, the court of appeals upheld a “pay and walk” clause that was in capital letters and similarly worded to the clause in Novak.[xx] The policy in Young provided:
We will pay compensatory damages an insured person is legally liable for because of bodily injury ... due to the use of a car .... We will defend any suit or settle any claim for damages payable under this policy as we think proper. HOWEVER, WE WILL NOT DEFEND ANY SUIT AFTER OUR LIMIT OF LIABILITY HAS BEEN OFFERED OR PAID.[xxi]
In Young, the insured’s teenage daughter driver had hit and injured a motorcyclist. The insurer independently investigated and evaluated the claim by obtaining the police report, interviewing the insured driver and a witness to the accident, and evaluating the claimant’s medical expenses and wage loss claim showing his damages to be lower than claimed. The claimant rejected the insurer’s offer to settle with the claimant within the $100,000 policy limit.[xxii] The adjuster in Young then notified the insured that it would attempt to seek a full release in exchange for the policy limits, but that it could not guarantee a full release. The insurer subsequently paid its policy limit in exchange for a release of all claims against the insurer, a covenant not to sue the insured’s teenage daughter, and a release of the insureds to the extent of the $100,000 payment.[xxiii] The claimant then filed suit against the insureds alleging personal injury and seeking recovery of additional sums over and above the $100,000 policy proceeds paid.[xxiv]
The insurer intervened for the purpose of seeking a judicial declaration that it had no further duty to defend on the basis that it had paid its policy limits. The trial court granted summary judgment to the insurer.[xxv] The court of appeals upheld summary judgment, citing Novak,[xxvi] and reiterated that the “duty to defend” was a “creature of contract” and that “[n]o Wisconsin statute—including the statute regulating motor vehicle insurance policies—prescribes a duty to defend or restricts its contractual limitation.”[xxvii] The court of appeals held that under the plain language of the policy’s capitalized “pay and walk” language, the insurer had no duty to defend the insured after the insurer paid the policy limits.[xxviii]
Estoppel and Waiver Cannot Create Coverage
To defend against claims of estoppel or waiver due to the passage of time before seeking enforcement of the “pay and walk” clause—time during which investigation and settlement negotiations often take place—the insurer must establish that the “pay and walk” clause goes to coverage, and is not a forfeiture clause subject to estoppel or waiver.
The general rule is well established that the doctrine of waiver or estoppel based upon the conduct of the insurer or its agent is not applicable to matters of coverage as distinguished from grounds for forfeiture.[xxix]
Unlike a forfeiture clause, a clause which goes to the scope of coverage is not subject to estoppel or waiver.[xxx] Thus, “estoppel cannot be used to enlarge the coverage of an insurance policy, for then the effect would be to create a new contract providing coverage for which no premium has been paid.”[xxxi] Further, estoppel can never create coverage or an obligation to defend which was not contracted for:
Estoppel can block but it cannot create. It is a barricade that can stop a litigant from proceeding down a roadway that, except for estoppel, would be open to him. It is not a bulldozer that can create a roadway where none in fact exists or ever did.[xxxii]
An example of a forfeiture clause is found in Nugent v. Slaght,[xxxiii] where the insurer sent a notice to the insured that it would cancel a policy if it did not receive payment by a certain date. The policy was subsequently cancelled; however, the claims department did not know about the cancellation and continued settlement negotiations for 3 years until the mistake was found. The court of appeals held that the cancellation clause was a forfeiture clause, and that the insurer was estopped from denying coverage, citing Couch on Insurance with approval:
A provision for forfeiture, lapse or suspension for nonpayment of premiums, assessments, dues, or notes therefore when due, is for the benefit of the insurer, so that a waiver may be affected, or an estoppel created [by conduct or words of the insurer] ….[xxxiv]
The cases upholding the "pay and walk" clause—Gross, Novak, and Young[xxxv]—do not specifically identify the “pay and walk” clause as going to the scope of coverage, such that estoppel and waiver would not apply. However, the court of appeals in Woodson v. Kreutzer[xxxvi] did hold that a "tendered for settlements" clause, which was similar in wording and effect to the “pay and walk” clauses in the above reported cases, does "denote the scope and extent of coverage."
In Woodson, the “tendered for settlements” provision was specifically recognized as a liability coverage provision denoting the scope and extent of coverage:
Milwaukee Mutual's obligation to defend an insured only arises in the event the insured is covered by the policy. Thus, to determine whether Milwaukee Mutual has an obligation to defend, it is necessary to examine that portion of the policy pertaining to liability coverage. Because these provisions are directly and inexorably related to the issue of liability, it was not unreasonable for Milwaukee Mutual to place provisions relating to its obligation to defend in the Liability Coverage section. Additionally, we note that the Liability Coverage section is one of the most significant sections of the policy because it denotes the scope and extent of the policy's coverage. This is reflected by the fact that this section is prominently located on page three of the insurance contract. Therefore, because of the significant nature of the Liability Coverage section and because it is conspicuously located on page three of the contract, we conclude that placing the tendered for settlements provision in the Liability Coverage section was consistent with the requirement that the provision be conspicuous.[xxxvii]
The court of appeals in Woodson enforced the “tendered for settlements provision,” conspicuously located in the “Liability Coverage” section of the policy, which provided:
We shall not be obligated to pay any claim or judgment or defend any suit after the applicable limit of our liability has been exhausted by payment of judgments or settlements or after such limit of our liability has been tendered for settlements.[xxxviii]
It may be argued that Wisconsin courts have long recognized that “tendered for settlement” provisions go to coverage, because they are a contractual provision affecting the insurer’s duty to defend.[xxxix] That said, it should be pointed out that the Wisconsin Supreme Court in Gross actually used the term "tendered for settlement," not “pay and walk,” when ruling that insurers may terminate their duty to defend by tendering policy limits where the insured receives adequate notice.[xl] Further, Novak specifically cited Gross when upholding the “pay and walk” clause in that case.[xli] Therefore, Woodson is good authority for the proposition that these clauses go to the scope of coverage, rather that constituting forfeiture provisions, and thus do not subject the insurer to waiver or estoppel.
“Pay and walk” clauses are valid, enforceable, and not contrary to public policy.[xlii] The insurer does not breach its contract with the insured nor act in bad faith when enforcing a “pay and walk” clause.[xliii] Finally, the “pay and walk” clause goes to the scope of coverage; therefore, it may be argued that the provision cannot be waived and is not subject to estoppel.[xliv]
[i] Attorney Eric L. Andrews assisted in the research for this article.
[ii] 121 Wis. 2d 78, 86, 358 N.W.2d 266 (1984).
[iii] Id. at 84-85 (citing 7C J. Appleman, Insurance Law and Practice, § 4682, at 29 (Berdal ed. 1979)).
[iv] Id. at 85 (citing 7C J. Appleman, supra note 3, at 36).
[v] Id. at 86-87.
[vi] Id. at 89 (emphasis added); Woodson v. Kreutzer, 190 Wis. 2d 189, 194, 526 N.W.2d 788 (Ct. App. 1994).
[vii] 183 Wis. 2d 133, 136, 141, 515 N.W.2d 504 (Ct. App. 1994).
[viii] Id. at 140-41 (emphasis added).
[ix] Id. at 141-142.
[x] Mowry v. Badger State Mut. Cas. Co., 129 Wis. 2d 496, 527-28, 385 N.W.2d 171 (1986); Elliott v. Donahue, 169 Wis. 2d 310, 485 N.W.2d 403 (1992).
[xi] Teigen v. Jelco of Wis., Inc., 124 Wis. 2d 1, 8, 367 N.W.2d 806 (1985).
[xii] 2011 WI App 59, 2011 WL 1238723 (unpublished).
[xiii] Novak, 183 Wis. 2d at 136, 141.
[xiv] Id. at 135.
[xv] Id. at 142.
[xvi] Id. at 136 (emphasis and formatting in original).
[xvii] Id. at 139.
[xviii] Id. at 142.
[xix] 2011 WL 1238723 (unpublished).
[xx] Id., ¶¶ 3, 20.
[xxi] Id., ¶ 3 (formatting in original; some spacing omitted).
[xxii] Id., ¶ 6.
[xxiii] Id., ¶ 9.
[xxiv] Id., ¶ 11.
[xxv] Id., ¶¶ 12, 13.
[xxvi] 183 Wis. 2d at 137.
[xxvii] Young, 2011 WL 1238723, ¶ 17.
[xxviii] Id., ¶ 20.
[xxix] Maxwell v. Hartford Union High School District, 2012 WI 58, ¶ 29, 341 Wis. 2d 238, 814 N.W.2d 484 (quoting Shannon v. Shannon, 150 Wis. 2d 434, 450-51, 442 N.W.2d 25 (1989)) (emphasis added).
[xxx] Shannon, 150 Wis. 2d at 454.
[xxxi] Maxwell, 341 Wis. 2d 238, ¶ 38.
[xxxii] Madgett v. Monroe County Mut. Tornado Ins. Co., 46 Wis. 2d 708, 176 N.W.2d 314 (1970).
[xxxiii] 2001 WI App 282, 249 Wis. 2d 220, 638 N.W.2d 597.
[xxxiv] Id., ¶ 27 (citing 6 George J. Couch, Couch on Insurance 2d, § 32.263, at 496 (1961), and quoting Peterson v. Truck Insurance Exchange, 65 Wis. 2d 542, 549, 223 N.W.2d 579 (1974)).
[xxxv] Gross v. Lloyds of London Insurance Co., 121 Wis. 2d 78, 89, 358 N.W.2d 266 (1984) (emphasis added); Novak, 183 Wis. 2d at 136, Young, 2011 WL 1238723.
[xxxvi] 190 Wis. 2d 189, 192-93, 26 N.W.2d 788 (Ct. App. 1994).
[xxxvii] Id. (emphasis added).
[xxxviii] Id. at 191 (emphasis in original).
[xxxix] Id. at 192-93.
[xl] Gross, 121 Wis. 2d at 86-89.
[xli] Novak, 183 Wis. 2d at 137-141.
[xlii] Id. at 140-41.
[xliii] Novak, 183 Wis. 2d at 141-42.
[xliv] Shannon, 150 Wis. 2d at 454.