The Supreme Court Authorizes § 628.46 Interest on Third-Party Claims Will Chaos or Order Ensue?
Section 628.46 requires insurance companies to pay insurance claims within 30 days under threat of a 12% interest charge. During the statute’s first 30 years of existence, appellate courts applied it exclusively to first-party claims. This term, however, the Wisconsin Supreme Court extended § 628.46’s reach to certain third-party claims in Kontowicz v. American Standard Ins. Co. of WI.1 While gleeful plaintiffs’ lawyers may be rubbing their hands in anticipation of the extra 12% prejudgment interest, doomsayer defense lawyers are more likely fearing upheaval in the litigation and settlement of third-party claims. The fact of the matter is, the supreme court limited its decision to third-party claims that meet three stringent conditions. Trial and appellate courts will have to sort out the meaning of these conditions, but it is too soon to declare chaos in third-party litigation. If the defense bar understands the history and purpose of § 628.46, the case law interpreting it, and the new Kontowicz conditions, they can help the lower courts reinforce the statute’s limited reach.
Section 628.46(1), debuted in the Wisconsin Statues in 1975.2 It provides that “an insurer shall promptly pay every insurance claim.”3 If the insurer fails to pay the claim within 30 days after receiving notice “of the fact of a covered loss and of the amount of the loss,” then the “overdue payments shall bear simple interest at the rate of 12% per year.” This interest charge applies both to total claims and partial claims supported by the required written notice. However, an insurance claim is not “overdue,” and the insurer need not pay the interest charge, when the insurer has “reasonable proof” that it is “not responsible for the payment.” Section 628.46(2) explains that the payment of an insurance claim is not overdue “until 30 days after the insurer receives the proof of loss required under the policy or equivalent evidence of such loss.” And § 628.46(3) clarifies that the statute “applies only to the classes of claims enumerated in s. 646.31(2).”
The Application of § 628.46 to First-Party Claims
Initially, § 628.46 generated little controversy. In the statute’s first 17 years on the books, only six Wisconsin appellate decisions substantively addressed it, and they focused on the scope and application of subsection (1) to first-party claims.4 The appellate courts held that § 628.46 is an additional provision of an insurance contract, incorporated by operation of law. It applies to cases in which the insurer has delayed payment or denied claims. It does not require a finding that the insurer acted in bad faith.5 And due to its “all inclusive first sentence” the statute applies to all insurers, including service insurance corporations.6 Insurance companies can avoid an interest assessment under the statute by offering “reasonable proof” that they are not responsible for payment of the insurance claim.7 Furthermore, insurers are not required to pay prejudgment interest under both § 628.46(1) and § 807.01, which governs offers of settlement. Interest under § 628.46(1) stops accumulating when interest under § 807.01 starts accruing.8
While the early decisions interpreting § 628.46 did not appear ominous for the insurance industry, Fritsche v. Ford Motor Credit Co.9 and Allstate Ins. v. Konicki10—two court of appeals’ decisions from the 1990s—did. By that time, Johnson v. Pearson Agri-Systems, Inc.11 and Nicholson v. Home Ins. Cos., Inc.12 had established that common law prejudgment interest was available for damages that were liquidated or determinable by reference to an objective standard but not for personal injury damages, such as pain and suffering, which are impossible to value. This precedent did not stop the Fritsche and Konicki courts from allowing § 628.46 prejudgment interest on personal injury damages in uninsured/underinsured motorist cases. The court of appeals did, however, fashion a procedural safeguard for insurers. Trial courts could not automatically charge § 628.46 interest—even in lawsuits where the parties conceded negligence or settled the personal injury claims. In these circumstances, trial courts had to conduct evidentiary hearings to determine whether the insurer possessed “reasonable proof” to deny the payment of benefits.13
Kontowicz: § 628.46 Interest Applies to Certain Third-Party Claims.
In 1999, two plaintiffs firms began pushing § 628.46’s reach even further—to personal injury lawsuits where the plaintiff had sued both the tortfeasor and the tortfeasor’s insurer. Their motions focused on a provision that had received scant attention before. Section 628.46(3) provides that § 628.46 interest “applies only to the classes of claims enumerated in s. 646.31(2).” According to § 646.31(2), one of those classes is “third party claimants” defined as “a claim under a liability . . . insurance policy, if either the insured or the 3rd party claimant was a resident of this state at the time of the insured event.”14 Based upon the plain language of the statute, circuit courts began awarding § 628.46 interest.
These decisions portended conflicts of interest for insurers. Kranzush v. Badger State Mut. Cas. Co.15 and Bruheim v. Little16 had established that an insurer owes a duty to its insured to exercise good faith in the settlement of a claim, but that duty did not extend to third-party claimants because they are not parties to the insurance contract and because they are adversaries of the insured. If the circuit court decisions were correct in allowing a third-party claimant to invoke § 628.46, would the insurer owe simultaneous duties to its insured and the adversary of its insured? Would an insurer have an obligation to pay a third-party claim for personal injury within 30 days under threat of a 12% interest charge even if payment of the claim was not in the insured’s best interest?
This issue reached the court of appeals in the consolidated Kontowicz and Buyatt cases. In a unanimous, published decision the court of appeals declared § 628.46 ambiguous and held that the legislature never meant for it to compromise an insurer’s duties to its insured. The court of appeals therefore confined the application of § 628.46 to third-parties whose claims arose in the same manner and under the same provisions as the insured.17
The supreme court viewed the matter differently. It ruled that § 628.46 unambiguously applies to third-party claimants. As for the insurer’s potential conflicts of interest in third-party litigation, the majority said simply: “We disagree with these arguments. The purpose of Wis. Stat. § 628.46 is to discourage insurance companies from creating unnecessary delays in paying claims owed. This purpose is advanced if the injured party is a third-party claimant just as much as if he or she is the insured.”18
Had the supreme court simply stopped with the declaration that § 628.46 extends to third-party claims, it would have wreaked havoc in third-party personal injury litigation. Perhaps recognizing this possibility,19 the majority imposed three restrictions on § 628.46’s application to third-party claims:
[W]e limit our holding to only those situations in which three conditions to trigger interest are met. First, there can be no question of liability on the part of the insured. Second, the amount of damages must be in a sum certain amount. Third, the claimant must provide written notice of both liability and the sum certain amount owed.20
The majority opinion reiterated that the statute does not apply when insurers have “reasonable proof” that they are not responsible for payment of the third-party claim. It explained that the “reasonable proof” standard is generally the same as the “fairly debatable” standard for coverage disputes. And it authorized trial courts to bifurcate claims for § 628.46 interest so that these matters are decided after the merits of the underlying tort litigation.21
The supreme court established and applied this new framework in a consolidated appeal from two very different trial court cases, thus providing clues about how § 628.46 should work in future. In both Kontowicz and Buyatt, plaintiff/third-party claimants sued tortfeasors and their insurers for personal injuries sustained in car accidents. In both cases, the tortfeasors and their insurers conceded negligence. But the similarities ended there.
In the Kontowicz case, the plaintiff suffered a severed spinal cord and quadriplegia; her medical bills amounted to $238,379.53; and the policy limit was $500,000. American Standard, the insurer, conditioned payment of the policy limits upon the release of its insured, even though its policy included a “pay and walk” provision. When the case settled and the plaintiff signed a release, American Standard immediately paid the policy limits. The supreme court held that because the insured had conceded liability and because American Standard had investigated and determined that its policy provided coverage, American Standard should have paid the plaintiff’s medical bills within 30 days of submission. (There was no evidence that the bills were unreasonable.) Given the severity of plaintiff’s injuries and her substantial medical bills, American Standard also should have paid the full policy limits within 30 days of receiving a demand letter for it.22
In the Buyatt case, the parties stipulated that the insured’s negligence was the sole cause of the plaintiff’s injuries, but Metropolitan, the insurer, did not stipulate to damages because it possessed information that the third-party claimant had: (1) suffered similar injuries in a prior accident, (2) failed to follow medical treatment recommendations, (3) complained of pain in the injured area prior to the accident, and (4) suffered similar injuries in a subsequent accident. The case went to trial on the amount of damages; the jury awarded $24,081; and the trial court awarded § 628.46 interest starting from 30 days (plus 3 days for mailing) after the insured
conceded liability for the accident. Due to this information, the supreme court reversed the trial court’s holding:
[B]ecause Metropolitan had information that there were preexisting injuries of a similar nature, as well as similar injuries subsequent to the Schoessow accident, and it was fairly debatable as to whether the wage loss and medical specials wereall attributable to the Schoessow accident, we determine that Metropolitan had reasonable proof to establish that it was not responsible for at least a portion of Buyatt’s claim. The amount it was responsible for could not be determined with any certainty. Therefore, interest under Wis. Stat. § 628.46 is not appropriate in Buyatt’s case.23
The upshot of the Kontowicz/Buyatt decision appears to be that third-party claimants may collect § 628.46 interest on third-party claims where the insurer concedes 100% liability and either the amount of damages is certain or the amount of damages clearly exceeds the insurer’s policy limits. In contrast, in the typical personal injury lawsuit, where liability and/or the amount of damages is “fairly debatable,” the third-party claimant cannot collect § 628.46 interest.
Future Battles Over the Application of § 628.46 to Third-Party Claims
After Kontowicz, plaintiffs lawyers will probably seek § 628.46 interest on most third-party claims. Given the court-imposed limitations on the statute, insurance defense lawyers can and should aggressively defend against these claims on a number of fronts.
1. “No question of liability.”
This condition should rule out § 628.46 interest in situations where there is evidence of a third-party claimant’s contributory negligence or where the relative liability of multiple tortfeasors is at issue. Apportionment of liability can affect the extent of the insured’s liability as well as the amount of damages the insured owes. This condition should also preclude an award of § 628.46 interest in cases where there is a factual dispute over the cause of the third-party claimant’s injuries.
2. Damages in a “sum certain” amount.
Attorney Donald Piper, who represented Metropolitan, observes that “the supreme court’s holding in his case opens the door to a number of good arguments for insurance defense lawyers on the ‘sum certain’ issue.” The supreme court did not define that term. However, Piper explained that “the majority opinion denied § 628.46 on all of Buyatt’s claim because Metropolitan had reasonable proof that it was not responsible for at least a portion of Buyatt’s claim.” Thus, Piper notes that insurance defense lawyers can strongly argue that whenever a portion of total damages is fairly debatable, an insurer is not subject to a § 628.46 interest charge—even if there is no question of liability.
In addition, a plaintiff’s damages should qualify as “fairly debatable” when the there is a dispute over: (a) the reasonableness and necessity of past medical expenses, (b) the length of the plaintiff’s healing period because that can affect the amount of medical expenses and wage loss, and (c) the proper calculation of future medical expenses and loss of earning capacity. Also, because pain and suffering are not determinable by reference to an objective standard, this form of damages should never meet the “sum certain” standard.
3. Written notice of both liability and the sum certain amount owed.
Apart from stating this requirement, the majority opinion did not explicitly describe the form of written notice that a third-party must submit in order to trigger § 628.46 interest. In the Kontowicz case, it was undisputed that the insurer knew of the insured’s loss, so the supreme court held that § 628.46’s 30-day clock began to run the day American Standard received copies of the plaintiff’s medical bills and a hospital discharge summary documenting her injuries. But since § 628.46(2) requires a claimant to give the insurer “the proof of loss required under the policy or equivalent evidence of such loss” insurance defense lawyers should check the third-party claimant’s written notice against the proof of loss requirements in the insured’s policy (assuming that it lists such requirements).
4. The “fairly debatable” standard.
According to the majority opinion, reasonable proof of non-responsibility under § 628.46 is equivalent to whether a coverage issue is “fairly debatable.”24 There is a substantial body of case law applying the “fairly debatable” standard in coverage disputes generally. However, U.S. Fire Ins. Co. v. Good Humor Corp.25 applies the standard to a § 628.46 interest claim (a coverage dispute). The Good Humor court refused to award § 628. 46 interest because the issues in the case were “complex,” and there was no Wisconsin law on many of the points in controversy.26 This amounted to reasonable proof that the insurer was not responsible for payment of the insured’s claim. The U.S. District Court for the Eastern District of Wisconsin took Good Humor one step further and denied § 628.46 interest in a coverage case where the issues were not complex but the law on point was “somewhat contradictory.”27 These decisions provide a starting point for shaping a § 628.46 “fairly debatable” test that is fair to insurers.
5. Bifurcation of § 628.46 interest claims.
The supreme court approved the bifurcation of § 628.46 interest claims, pursuant to Wis. Stat. § 805.05(2). Thus, if plaintiffs lawyers try to litigate the question of whether the insurer had “reasonable proof” to deny a third-party claim and the merits of the third-party claim simultaneously, insurers should move for a stay of discovery and any hearing on the § 628.46 issue until the underlying personal injury claim has been resolved. As with bad faith claims, this procedure will prevent prejudice to the insurer, narrow the issues for trial and promote judicial economy by potentially eliminating the need for a post-verdict hearing on the § 628.46 issue.28
6. “Unless otherwise provided by law.”
Section 628.46(1) opens with a sweeping caveat—the statute applies “unless otherwise provided by law.” The parties to the Kontowicz and Buyatt appeals briefed the question of whether § 628.46’s 30-day deadline runs headlong into the civil procedure deadlines for answering complaints, requests to admit, and so forth in third-party litigation. The supreme court did not address the issue, but Justice Prosser’s dissent notes that the statute’s opening clause requires practitioners to consider § 628.46’s interaction with other statutes.29 When another statute, such as a civil procedure rule, “provides otherwise” § 628.46, by its plain language, should not apply.
Unless and until the legislature amends § 628.46, it is up to the defense bar to determine the legacy of the Kontowicz decision. Boning up on the early case law interpreting the statute, understanding the policy considerations that informed the supreme court’s reluctance to apply § 628.46 to all third-party claims, and vigorously defending the Kontowicz conditions, should control the impact of the supreme court’s decision upon third-party litigation.
Colleen Ball is an appellate attorney in Milwaukee, Wisconsin. She was co-counsel for American Standard Insurance Company in the Kontowicz appeal.
1 2006 WI 48, __Wis. 2d __, __N.W.2d__.
2 See 1975 Wisconsin Act 39 § 708, which created Wis. Stat. § 631.02. Later in 1975, the legislature created Chapter 636 titled “Claims Adjustment” and continued § 631.02 as § 636.10(1). At the same time, the legislature added § 636.10(2) and (3), which correspond to § 628.46(2) and (3) in today’s version of the statute. See 1975 Wisconsin Act 375 § 43.
3 The full text of § 628.46(1) reads:
(1) Unless otherwise provided by law, an insurer shall promptly pay every insurance claim. A claim shall be overdue if not paid within 30 days after the insurer is furnished written notice of the fact of a covered loss and of the amount of the loss. If such written notice is not furnished to the insurer as to the entire claim, any partial amount supported by written notice is overdue if not paid within 30 days after such written notice is furnished to the insurer. Any part or all of the remainder of the claim that is subsequently supported by written notice is overdue if not paid within 30 days after written notice is furnished to the insurer. Any payment shall not be deemed overdue when the insurer has reasonable proof to establish that the insurer is not responsible for the payment, notwithstanding that written notice has been furnished to the insurer. For purposes of calculating the extent to which any claim is overdue, payment shall be treated as being made on the date of the draft or other valid instrument which is equivalent to payment was placed in the U.S. mail in a properly addressed, postpaid envelope, or, if not so posted, on the date of delivery. All overdue payments shall bear simple interest at the rate of 12% per year.
4 See Anderson v. Continental Ins. Co., 85 Wis. 2d 675, 271 N.W.2d 368 (1978) (interpreting § 636.10, the predecessor to § 628.46);Coleman v. American Universal Ins. Co., 86 Wis. 2d 615, 273 N.W.2d 220 (1979) (discussing § 636.10); Wis. Phys. Serv. Ins. Corp. v. Mitchell, 114 Wis. 2d 338, 338 N.W.2d 326 (Ct. App. 1983); Poling v. Wisconsin Phys. Serv., 120 Wis. 2d 603, 357 N.W.2d 293 (Ct. App. 1984); Upthegrove Hardware, Inc. v. Penn. Lumbermans Mut. Ins. Co., 146 Wis. 2d 470, 431 N.W.2d 689 (Ct. App. 1988); Upthegrove Hardware, Inc. v. Penn. Lumbermans Mut. Ins. Co., 152 Wis. 2d 7, 447 N.W.2d 367 (Ct. App. 1989).
5 Anderson, 85 Wis. 2d at 696; Coleman, 86 Wis. 2d at 626; Poling, 120 Wis.2d at 612-613. However, a jury finding of bad faith can trigger the statute. Upthegrove Hardware I, 146 Wis. 2d at 485.
6 Mitchell, 114 Wis. 2d at 344. The Seventh Circuit Court of Appeals subsequently held that the statute also applies to title insurers. Allison v. Ticor Title Ins. Co., 979 F.2d 1187, 1202-1203 (7th Cir. 1993).
7 Poling, 120 Wis. 2d at 613.
8 Upthegrove Hardware II, 152 Wis. 2d at 15.
9 171 Wis. 2d 280, 491 N.W.2d 119 (Ct. App. 1992).
10186 Wis. 2d 140, 519 N.W.2d 723 (Ct. App. 1994).
11 119 Wis. 2d 766, 350 N.W.2d 127 (1984).
12 137 Wis. 2d 581, 405 N.W.2d 327 (1987).
13 Konicki, 186 Wis. 2d at 160-161; Fritsche, 171 Wis. 2d at 306-307.
14 Wis. Stat. § 646.31(2)(d).
15 103 Wis. 2d 56, 64, 307 N.W.2d 256 (1981).
16 98 Wis. 2d 178, 180, 295 N.W.2d 793 (Ct. App. 1980), aff’d, 103 Wis. 2d 96, 307 N.W.2d 276 (1981).
17 Kontowicz v. American Standard Ins. Co. of WI, 2005 WI App 22, ¶ 24, 278 Wis. 2d 664, 693 N.W.2d 112, rev’d, 2006 WI 48, __Wis. 2d__, __N.W.2d__.
18 Id., 2006 WI 48, ¶ 47.
19 In a 21-page dissenting opinion Justice Prosser noted that “[i]f the majority were not concerned about the far-reaching implications of its decision, it would not have decided to rewrite a purportedly unambiguous statute to create ‘tests’ for the third party tort plaintiff to meet.”Id., ¶ 109 (Prosser, J., dissenting).
20 Id., ¶ 48.
22 Id., ¶ 53.
23 Id., ¶54 (emphasis in original).
24 Id., ¶ 48.
25 173 Wis. 2d 804, 496 N.W.2d 730 (Ct. App. 1993).
26 Id. at 835-836.
27 Bradley Corp. v. Zurich Ins. Co., 984 F. Supp. 1193, 1205-1206 (E.D. Wis. 1997).
28 See Dahmen v. American Fam. Mut. Ins. Co., 2001 WI App 198, ¶ 20, 247 Wis. 2d 541, 635 N.W.2d 1.
29 Kontowicz, ¶ 67 (Prosser, J., dissenting).