The Wisconsin Supreme Court holds that UIM Limits may Be Reduced by Amounts Paid by a non-UIM Tortfeasor
On July 10, 2007, the Supreme Court of Wisconsin issued decisions in Marotz v. Hallman and State Farm Mut. Auto. Ins. Co. v. Bailey. Both of these cases involved the same UIM reducing clause issues. In each case, the UIM insurer sought to reduce its UIM limit by amounts received from both the UIM tortfeasor and a non-UIM tortfeasor. The Supreme Court determined that Wis. Stats. §632.32(5)(i)1 allows a UIM insurer to include a policy provision that will reduce its UIM limit by the amounts paid to an insured by a non-UIM tortfeasor. The Supreme Court then proceeded to address whether or not the reducing clauses that were at issue in the Marotz and Bailey cases were ambiguous, and therefore unenforceable. In each case, the Supreme Court held that the reducing clauses unambiguously complied with the language in §632.32(5)(i)1, Wis. Stats.
The Marotz and Bailey decisions will no doubt significantly impact the future handling and resolution of UIM claims in Wisconsin. While the language of reducing clauses in individual policies may still give rise to litigation over what constitutes ambiguity, it is now clear that in Wisconsin it is permissible to reduce the UIM policy limits by payments received from both the underinsured tortfeasor and another tortfeasor who does not meet the definition of an “underinsured” motorist.
HISTORY OF WISCONSIN LAW ON UIM REDUCING CLAUSES
Wisconsin has a long and rich history of litigation relating to UIM reducing clauses. So what exactly is a reducing clause? In his work, Wisconsin Insurance Law, Arnold P. Anderson states that a reducing clause subtracts or reduces from UIM policy limits payments to the insured from other sources. Perhaps the most common source of payment for a UIM insured/claimant is the tortfeasor’s liability insurance coverage. For example, if a UIM claimant receives a policy limits payment of $50,000 from the tortfeasor’s liability insurance carrier and has a $100,000 UIM limit on his or her auto policy, the $100,000 UIM limit would be reduced by $50,000, resulting in $50,000 of available UIM coverage.
Prior to 1995 there was a long series of cases dealing with the enforceability of UIM reducing clauses decided by the Wisconsin Appellate Courts culminating in Matthiesen v. Continental Cas. Co. In Matthiesen, the Supreme Court found reducing clauses in two American Family UIM policies to be unenforceable because they violated the “stacking” statute, former §631.43(l), Stats. Matthiesen, along with earlier Wisconsin UIM decisions which found reducing clauses to be unenforceable based upon “illusory” coverage arguments, all but eliminated the use of reducing clauses in Wisconsin UIM coverage as of early 1995.
In 1995 the Wisconsin legislature responded to the increasing number of court decisions that attacked the enforceability of reducing clauses. The legislature then amended §632.32 of the Wisconsin Statutes by passing 1995 Wisconsin Act 21, which became effective as of July 15, 1995. Included among the amendments to §632.32 was the enactment of §632.32(5)(i) which made UM and UIM reducing clauses permissible. §632.32(5)(i) states in relevant part:
“A policy may provide that the limits under the policy for uninsured or underinsured motorist coverage for bodily injury or death resulting from any one accident shall be reduced by any of the following that apply:
1. Amounts paid by or on behalf of any person or organization that may be legally responsible for the bodily injury or death for which the payment is made.”
As a result of this legislation, effective July 15, 1995, UIM insurers had the option of reducing their limits by amounts recovered from a tortfeasor or tortfeasor’s insurer if their policy language included the statutorily permissible reducing clause language, or unambiguous similar language.
After the enactment of the 1995 legislation the constitutionality of §632.32(5)(i) was challenged in Dowhower v. West Bend Mut. Ins. Co. In Dowhower, the Supreme Court found §632.32(5)(i) did not deprive the Dowhowers of any state or federal constitutional right, and therefore did not present a substantive due process violation.
Although the Dowhower court found the reducing clause statute to be constitutional, the Dowhower case was remanded for further proceedings in the circuit court. Specifically, the question of whether or not the reducing clause was ambiguous in the context of the West Bend Mutual insurance policy that was at issue in the case was the subject of further proceedings.
The Supreme Court’s decision in Dowhower commenced several years of activity in the Wisconsin courts on the issue of reducing clause ambiguity and arguments about “contextual ambiguity” when the reducing clause was considered in relationship with the entire policy document. After the Supreme Court decision in Badger Mutual Ins. Co. v. Schmitz held, in so many words, that a reducing clause must be “crystal clear”, several Wisconsin appellate decisions found reducing clauses to be ambiguous and unenforceable due to the language of the reducing clause itself, or due to other policy provisions which created contextual ambiguity.
The “crystal clear” standard that Schmitz appeared to create was essentially retracted by the Supreme Court in Folkman v. Quamme, a case that involved a split limit automobile liability coverage. Nevertheless, the court addressed the “crystal clear” language that had been utilized in Schmitz while addressing issues of insurance policy ambiguity in Folkman. The court in Folkman stated that the “crystal clear” language that appeared in Schmitz was not a standard and did not take the place of examining the policies to see if there were inconsistent provisions that resulted in alternative meanings.
After Folkman was decided in 2003 the stream of published decisions that found ambiguity based upon the “crystal clear” language articulated in Schmitz largely dried up. As a result of the flurry of activity in the appellate courts beginning with the Dowhower decision in 2000 and continuing through the decision in Folkman in 2003, the following principles seemed to be established regarding UIM reducing clauses:
1. The statute permitting reducing clauses was constitutional;
2. Although reducing clauses were subject to the usual rules of construction applicable to insurance policies, it is unnecessary for an insurer to express the reducing clause with “crystal clarity”;
3. While arguments based upon “contextual ambiguity” were still likely to surface, the courts recognized that contextual ambiguity in and of itself was insufficient to render a reducing clause unenforceable, unless the contextual ambiguity rendered an “objectively reasonable alternative meaning”.
MAROTZ AND BAILEY CLARIFY THE SCOPE OF UIM REDUCING CLAUSES
As of December of 2005 when Marotz and Bailey were decided in the Wisconsin Court of Appeals, it was well established that an unambiguous UIM reducing clause that was drafted in a manner consistent with the reducing clause statute would be enforceable. No published Wisconsin decision had determined as of that date, however, whether or not a UIM reducing clause would apply to payments received from both the UIM tortfeasor and another tortfeasor who may not be underinsured, but may have legal liability for the accident giving rise to the UIM claim. This issue was squarely presented in both Marotz and Bailey.
Bailey was the first of the two cases decided by the Court of Appeals, with the decision coming down on December 1, 2005.
In Bailey, the UIM claimant Bailey was a guest passenger in a vehicle operated by Adrian Levy. The Levy vehicle was insured on an American Family policy with a $25,000 per person liability limit. Levy ran a red light and collided with a vehicle operated by Leticia Regala. The Regala vehicle was likewise insured with American Family, with a $250,000 per person liability limit. American Family settled the Bailey injury claim against Regala for the sum of $37,500. Regala was obviously not “underinsured”, in that she had a policy limit of $250,000, but was minimally at fault for the accident and Bailey’s resulting damages.
Bailey had UIM coverage on his mother’s State Farm policy with a $50,000 per person UIM limit. The State Farm policy included a reducing clause that stated that the limits of liability for the UIM coverage would be reduced by any of the following that apply:
“The amount paid to the insured by or on behalf of any person or organization that may be legally responsible for the bodily injury.”
State Farm argued that this policy language allowed it to reduce its UIM policy limit of $50,000 by both the $25,000 Bailey received from American Family on the Levy policy and the $37,500 Bailey received from American Family on the Regala policy.
Bailey argued that the reducing clause statute did not allow State Farm to reduce by the payment received from the non-UIM tortfeasor’s insurer. Bailey also argued that the State Farm reducing clause was contextually ambiguous, and therefore unenforceable.
The Court of Appeals, Judge Vergeront, writing, determined that it would be contrary to the purpose of UIM coverage as expressed by the Supreme Court in earlier decisions to allow State Farm to reduce its UIM limit as a result of payments received from a non-UIM tortfeasor. The court went on to rule that the State Farm reducing clause was not unenforceable due to any policy ambiguity, but rather was not allowed by the reducing clause statute.
Just three weeks later, the Court of Appeals decision in Marotz was issued. Judge Higginbotham was part of the Court of Appeals panel in both the Bailey and Marotz cases and joined in both decisions, despite the fact that they reached different conclusions regarding an insurer’s ability to reduce its UIM limit as a result of payments made by a non-UIM tortfeasor.
In Marotz, the plaintiff Marotz was a passenger in a vehicle operated by Arthur Hallman, Jr., which was insured by Acuity on a minimum limits, $25,000 liability policy. Hallman blew a stop sign and collided with a vehicle operated by Donald J. Hilgemann, causing serious injuries to Marotz. The Hilgemann vehicle was insured on a policy with IMT with a $250,000 per person liability limit.
Marotz received the $25,000 policy limit from Acuity on the Hallman policy and settled with Hilgemann’s insurer for $90,000. Hilgemann was not “underinsured” in that he had a policy limit of $250,000 and his insurer paid $90,000, resulting in a total tort recovery of $115,000 for Marotz.
At the time of the accident, Marotz was an insured on his parents’ policy with Rural Mutual, which included UIM coverage with a $100,000 per person policy limit.
Marotz sued Rural for UIM benefits contending that the $90,000 he had received from IMT on the Hilgemann policy would not reduce his UIM limit with Rural.
The Rural policy included a reducing clause which stated as follows:
“The limit of liability shall be reduced by all of sums:
1. Paid because of the “bodily injury” by or on behalf of persons or organizations who may be legally responsible.”
The Court of Appeals in Marotz found that this reducing clause was not ambiguous, either on its own or in the context of the entire policy. The Court further found that the reducing clause statute did not prohibit a UIM insurer from reducing its UIM limit by amounts paid by a non-UIM tortfeasor. The court concluded that under the plain language of the Rural policy such a reduction was available to Rural and therefore Marotz did not have UIM benefits available as a result of the $115,000 he had received from the two tortfeasors.
Judge Higginbotham, in a concurring opinion, acknowledged that the Marotz decision was inconsistent with the Bailey decision that he had joined in just a few weeks before. Judge Higginbotham indicated that upon reflection he realized that the better and more proper analysis was to consider the clear language of the reducing clause statute and the policy, rather than rely upon language from earlier Supreme Court decisions which described the purpose of UIM coverage.
The Court of Appeals decision in Marotz in effect recognized that in Wisconsin UIM coverage is purchased in a pre-determined amount and represents the amount that will be available to the insured from certain sources as a result of an accident. If the recovery from the tortfeasors exceeds this pre-determined limit, UIM is not available if the reducing clause properly provides for the reduction of limits.
The Court of Appeals in Bailey approached the issue from a different angle. In Bailey, the Court of Appeals observed that a secondary purpose of UIM coverage was to put the tort victim in the same position that he or she would have been in had the underinsured driver had liability limits equal to the tort victim’s UIM limits. Following this premise, the payments received from a non-UIM tortfeasor would have been “over and above” what the tort victim would have received if the underinsured tortfeasor had liability limits equal to the claimant’s UIM policy limit.
These two conflicting approaches to the application of UIM reducing clauses met head on in the Supreme Court.
In a four to three decision authored by Justice Wilcox, the Supreme Court held in Marotz that under §632.32(4)(m) and §632.32(5)(i)1 the UIM coverage limit purchased by the insured is reached by the combination of contributions from all legally responsible sources, including payments by a non-UIM tortfeasor. The Court rebuffed arguments that the language of §632.32(5)(I) was ambiguous and noted that “legally responsible” parties would include all tortfeasors, not just an underinsured tortfeasor.
Having determined that the reducing clause statute permitted the reduction of the UIM limits by payments received from non-underinsured tortfeasors, the Court then turned to the issue of whether or not the reducing clause in the Marotz policy with Rural Mutual was ambiguous.
The Rural Mutual policy provided a notice on the UIM Declarations Page that the limits of liability for the coverages on that page shall be reduced as a result of payments received from other sources. This bold face notification, combined with reducing clause language within the UIM endorsement that mimicked the statutory language in §632.32(5)(i), persuaded the court that the Rural Mutual reducing clause was not ambiguous, or contextually ambiguous taken in the context of the larger policy document.
Justice Ann Walsh Bradley wrote a dissenting opinion in Marotz. Justice Bradley pointed to the conflicting decisions that had been issued by the Court of Appeals in Marotz and Bailey as evidence of ambiguity in the reducing clause statute. She also recited language from the earlier Supreme Court decisions that the Court of Appeals in Bailey had relied upon in determining that it would be inconsistent with the purpose of UIM to allow a reduction of limits for payments received from a non-UIM tortfeasor.
Bailey was decided on the same four to three basis by the Supreme Court, although the State Farm reducing clause language was slightly different than the language that appeared in the Rural Mutual policy covering Marotz. Nevertheless, the Supreme Court found the State Farm policy language to be consistent with the reducing clause statute and unambiguous.
UIM REDUCING CLAUSE ISSUES ON THE HORIZON
Marotz/Bailey make it clear that a reducing clause that is consistent with the permissible provisions set forth in §632.32(5)(i), and is not ambiguous in the context of the entire policy, will be enforced and will allow the reduction of the UIM limit for payments received from all tortfeasors. Undoubtedly, further disputes will arise in the area of UIM reducing clauses. A few areas where disputes can be anticipated are identified below.
It would appear that in both Bailey and Marotz the injured party/UIM claimant settled with both the underinsured tortfeasor and the UIM tortfeasor before seeking UIM benefits. In both cases, it would appear that the UIM tortfeasor was minimally at fault for the accident that gave rise to the UIM claim.
Will a UIM claimant bother to proceed with a claim against a minimally at fault tortfeasor if it simply serves to reduce a UIM recovery? This is no doubt a tactical decision that will be made on a case by case basis by the claimant depending upon the amount of UIM coverage available and the language of the UIM endorsement or coverage part itself.
Some UIM coverages include reducing clauses that refer to payments made or “amounts payable”. If an insured/UIM claimant has a potential claim against a non-UIM tortfeasor, will this policy language allow the UIM carrier to withhold payment until it has been determined what is owed by all potential tortfeasors?
If the UIM claimant elects not to pursue a minimally at fault tortfeasor before presenting a claim for UIM benefits, will any subsequent recovery from the minimally at fault tortfeasor be held “in trust” pursuant to policy provisions? Some UIM coverage parts provide that after the insured receives UIM benefits, subsequent recoveries from a tortfeasor are in effect obtained in trust, and subject to made whole arguments, may inure to the benefit of the UIM insurer. Again, the specific policy language at issue will undoubtedly be paramount in determining the respective rights of the insurer and insured if there is a recovery from a non-UIM tortfeasor after UIM benefits are paid.
What if the UIM claimant/insured suffers enhanced injuries as a result of medical negligence or a vehicle crash-worthiness deficiency? Will recoveries from such sources serve to reduce the UIM limits? It could certainly be argued that the medical provider or manufacturer of the motor vehicle is a person who is “legally liable”. Again, the language of the individual policy will be important to the determination.
The above are a few possible issues that may arise in the future regarding UIM reducing clauses. We now know with certainty and clarity, however, that UIM limits can be reduced by payments from a non-UIM tortfeasor if the insurance policy so provides.
Marotz v. Hallman, 2007 WI 89, ________Wis.2d________, _________N.W.2d_____.
State Farm Mut. Auto. Ins. Co. v. Bailey, 2007 WI 90, ______Wis.2d_______, N.W.2d________.
Arnold P. Anderson, Wisconsin Insurance Law (5th Ed. 2004) §4.45.
Matthiesen v. Continental Cas. Co., 193 Wis. 2d 192, 532 N.W.2d 729 (1995).
Dowhower v. West Bend Mut. Ins. Co., 2000 WI 73, 236 Wis.2d 113, 613 N.W.2d 557.
Dowhower, supra, 2000 WI at ¶36, 236 Wis.2d at 130.
Badger Mutual Ins. Co. v. Schmitz, 2002 WI 98, 255 Wis.2d 61, 647 N.W.2d 223.
Folkman v. Quamme, 2003 WI 116, 264 Wis.2d 617, 665 N.W.2d 857.
Wisconsin Insurance Law, supra, §4.54.
Wisconsin Insurance Law, supra, §4.55.
State Farm Mut. Auto. Ins. Co. v. Bailey, No. 2003 AP 2482, Unpublished slip op. (Wis. Ct. App. December 1, 2005).
Marotz v. Hallman, No. 2005 AP 1579, Unpublished slip op. (Wis. Ct. App. December 22, 2005).
Marotz, 2007 WI at ¶23.
About the author:
Michael W. Gill has been admitted to practice in Wisconsin since 1982 and has been a partner with the La Crosse law firm of Hale, Skemp, Hanson, Skemp & Sleik since 1986. Mr. Gill practices exclusively in the area of insurance defense, insurance coverage litigation, products liability defense, professional negligence and bodily injury law. Mr. Gill is currently on the Board of Directors with the CTCW and is a member of the International Association of Defense Counsel. Mr. Gill practices in the state and federal courts of Wisconsin and Minnesota.