Danbeck v. American Family Mutual Insurance

2001 WI 91, 629 N.W.2d 150, 245 Wis. 2d 186, 2001 Wisc. LEXIS 429

• Court: Wisconsin Supreme Court
• Decided: July 6, 2001
• Docket: 99-1142
• Status: Published

Opinions

DIANE S. SYKES, J.

¶ 1. This case involves an insurance dispute and requires us to interpret language in an underinsured motorist (UIM) policy that obligates the UIM carrier to pay benefits to its insured only after the underinsured motorist's liability limits "have been exhausted by payment of judgements or settlements." The question is whether the policy's exhaustion requirement can be satisfied by a settlement with the underinsured motorist's insurer for less than liability limits, plus a credit to the UIM carrier for the difference. We conclude that the unambiguous language of the insurance policy precludes exhaustion by way of "settlement plus credit" and therefore affirm the court of appeals.

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¶ 2. The relevant facts are undisputed. Dan Danbeck was seriously injured when a car driven by George Horne struck his bicycle. Horne had $50,000 of liability coverage through Country Mutual Insurance Company.

¶ 3. Danbeck was insured by American Family Mutual Insurance Company and had $100,000 of UIM coverage.¹ The UIM policy issued by American Family specified the circumstances under which it would pay UIM benefits:

[American Family] will pay compensatory damages for bodily injury which an insured person is legally entitled to recover from the owner or operator of an underinsured motor vehicle. The bodily injury must be sustained by an insured person and must be caused by accident and arise out of the use of the underinsured motor vehicle.

You must notify us of any suit brought to determine legal liability or damages. Without our written consent we are not bound by any resulting judgment.

We will pay under this coverage only after the limits of liability under any bodily injury liability bonds or policies have been exhausted by payment of judgements or settlements.

¶ 4. Danbeck settled with Country and Horne for $48,000 ($47,500 for bodily injury and $500 for the damage to his bicycle). Pursuant to Vogt v. Schroeder, 129 Wis. 2d 3, 383 N.W.2d 876 (1986), Danbeck's attorney notified American Family of the pending settlement by letter. The letter also stated that Danbeck intended to pursue a UIM claim and that American Family would be given credit for the full $50,000 limit of Horne's liability policy.²

¶ 5. American Family refused to pay Danbeck's claim. The company took the position that UIM coverage was not available under its policy because Danbeck had settled for less than Horne's liability limit and therefore had not "exhausted" that limit within the meaning of the policy language. Danbeck sued.

¶ 6. American Family moved for summary judgment. The Circuit Court for Dane County, Paul B. Higginbotham, Judge, denied the motion on several grounds. First, the circuit court applied Teigen v. Jelco of Wisconsin, Inc., 124 Wis. 2d 1, 367 N.W.2d 806 (1985),. which interpreted an exhaustion clause in a primary/excess insurance situation to allow exhaustion by settlement of less than policy limits. Further, the circuit court found the exhaustion clause to be ambiguous and therefore construed it in favor of coverage. See Vidmar v. Am. Family Mut. Ins. Co., 104 Wis. 2d 360, 365, 312 N.W.2d 129 (1981). The court also noted that allowing coverage under these circumstances would promote the purposes of UIM insurance, including compensating the victims of an underinsured motorist's negligence, and concluded that American Family's interpretation of the policy language violated public policy.

¶ 7. Accordingly, the circuit court interpreted the exhaustion clause to allow recovery of UIM benefits when the UIM policyholder settles his or her claim with the tortfeasor's insurer and credits the UIM carrier for the difference between the settlement amount and the tortfeasor's liability limits. The court then ordered mediation, and the parties agreed that Danbeck was entitled to $20,000.

¶ 8. American Family appealed the denial of summary judgment, and the court of appeals reversed. The court focused on the policy language and concluded that the exhaustion clause unambiguously required the insured to exhaust the underinsured motorist's limits of liability by payment of full policy limits — in this case, $50,000. The court held that the partial settlement and credit endorsed by the circuit court did not satisfy the policy's requirements for coverage. Danbeck v. Am. Family Mut. Ins. Co., 2000 WI App 26, ¶¶ 7-9, 15, 232 Wis. 2d 417, 605 N.W.2d 925 (Ct. App. 1999).

¶ 9. This is an appeal from the denial of a motion for summary judgment, which we review de novo, applying the same methodology as the circuit court. Wis. Label Corp. v. Northbrook Prop. & Cas. Ins. Co., 2000 WI 26, ¶ 22, 233 Wis. 2d 314, 607 N.W.2d 276. Summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Wis. Stat. § 802.08(2) (1997-98).

¶ 10. The interpretation of an insurance contract is a question of law subject to de novo review. Katze v. Randolph & Scott Mut. Fire Ins. Co., 116 Wis. 2d 206, 212, 341 N.W.2d 689 (1984). An insurance policy is construed to give effect to the intent of the parties, expressed in the language of the policy itself, which we interpret as a reasonable person in the position of the insured would understand it. Garriguenc v. Love, 67 Wis. 2d 130, 134-35, 226 N.W.2d 414 (1975). The words of an insurance policy are given their common and ordinary meaning. Henderson v. State Farm Mut. Auto. Ins. Co., 59 Wis. 2d 451, 457-59, 208 N.W.2d 423 (1973). Where the language of the policy is plain and unambiguous, we enforce it as written, without resort to rules of construction or principles in case law. Hull v. State Farm Mut. Auto. Ins. Co., 222 Wis. 2d 627, 637, 586 N.W.2d 863 (1998). This is to avoid rewriting the contract by construction and imposing contract obligations that the parties did not undertake. Gonzalez v. City of Franklin, 137 Wis. 2d 109, 122, 403 N.W.2d 747 (1987). Contract language is considered ambiguous if it is susceptible to more than one reasonable interpretation. Donaldson v. Urban Land Interests, Inc., 211 Wis. 2d 224, 230-31, 564 N.W.2d 728 (1997). If the language is ambiguous, it is construed in favor of coverage. Gar-riguenc, 67 Wis. 2d at 135. In interpreting an insurance policy, the court may also consider the purpose and subject matter of the insurance. Employers Health Ins. v. Gen. Cas. Co. of Wis., 161 Wis. 2d 937, 946, 469 N.W.2d 172 (1991).

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¶ 11. The narrow issue in this case is whether a UIM insurer's obligation to pay UIM benefits to its insured is triggered when the insured settles with the tortfeasor's liability insurer for less than full liability limits and then credits the UIM carrier for the difference. The determination of this issue turns on language in the insurance policy that requires payment of UIM benefits only "after the limits of liability under any bodily injury liability bonds or policies have been exhausted by payment of judgements or settlements."

¶ 12. The parties dispute whether the language of the exhaustion clause is ambiguous. American Family says the language unambiguously requires full payment of the tortfeasor's liability policy limits as a prerequisite to payment of UIM benefits. Danbeck argues that the exhaustion clause is ambiguous because a reasonable insured might understand it to mean that a settlement that barred further claims and gave credit for full payment of liability limits would effectively "exhaust" those limits.

¶ 13. We agree with American Family and the court of appeals that while the "settlement plus credit" approach to exhaustion has the same practical effect as payment of full policy limits, it is not consistent with the plain language of the policy, which unambiguously requires exhaustion "by payment of judgements or settlements," not "settlement plus credit."³

¶ 14. The exhaustion clause in the insurance policy sets forth these requirements for UIM coverage: the limits of the tortfeasor's bodily injury liability policy must be exhausted by payment of judgments or settlements. The phrase "limits of liability" clearly refers to the total amount of liability coverage available under the tortfeasor's bodily injury liability insurance policy. In this case, Horne carried $50,000 of liability insurance.

¶ 15. The term "exhaust" is also plain and unambiguous and has a readily ascertainable common and ordinary meaning. The dictionary defines "exhaust" as: "to use up or consume completely; expend the whole of. ..." Random House Unabridged Dictionary 678 (2d ed. 1993). Accordingly, to "exhaust" the tortfeasor's liability policy limits, the full $50,000 must be expended in total or used up completely.

¶ 16. Finally, the exhaustion clause specifies that only one manner of exhaustion will trigger the obligation to pay UIM benefits: exhaustion "by payment of judgements or settlements." Danbeck argues that the term "payment” can be understood in more than one way: payment of full policy limits, or payment of less than full policy limits plus a credit in favor of the UIM carrier for the difference.

¶ 17. However, a "settlement plus credit" does not constitute "payment" of liability limits as that term is commonly and ordinarily understood. It is true that a settlement of this nature bars further claim against the tortfeasor's insurer and protects the UIM carrier against liability for the difference between the settlement amount and the tortfeasor's full policy limits. But it plainly does not exhaust the tortfeasor's policy limits by payment of those limits, as required by the UIM policy.

¶ 18. A "payment" is "1. something that is paid; an amount paid; compensation; recompense. 2. the act of paying. ..." Random House Unabridged Dictionary 1424 (2d ed. 1993). The court of appeals concluded that, in the context of this UIM exhaustion clause, the term "payment" is susceptible of only one reasonable meaning: "compensation paid by the liability insurer and received by the insured." Danbeck, 2000 WI App 26, ¶ 9. We agree. And here, the liability insurer, Country, paid only $48,000 which did not exhaust Horne’s $50,000 liability limits by payment of those limits.

¶ 19. Danbeck's argument that the exhaustion clause is ambiguous arises primarily out of his reading of Teigen. We reject this argument for two reasons. First, it turns our traditional ambiguity analysis on its head. As we have noted, the fundamental principles of contract interpretation do not permit resort to case law to create ambiguity where the contract language is clear on its face. Second, Teigen is inapplicable because it did not concern the interpretation of an exhaustion clause in a UIM policy.

¶ 20. Teigen arose in the context of a primary/excess insurance dispute. The exhaustion clause at issue in the case established the outer limits of the primary insurer's duty to defend. Specifically, the policy clause in question stated that the insurer was not obligated "to defend any suit after the applicable limit of the company's liability has been exhausted by payment of judgments or settlements." Teigen, 124 Wis. 2d at 8. This court held that the primary insurer's duty to defend was fully discharged — "exhausted" within the meaning of this clause — by a settlement for less than full policy limits, plus the execution of a Loy [Loy v. Bunderson, 107 Wis. 2d 400, 320 N.W.2d 175 (1982)] release. Teigen, 124 Wis. 2d at 8-9. Notably, the opinion did not address whether the policy language was ambiguous. Instead, the decision in Teigen was based primarily on general public policy considerations supporting partial settlements. Id. at 7-8,12.

¶ 21. It is unquestionably true that partial settlements, and Loy-type agreements effectuating them, serve the interests of the parties and promote judicial economy and therefore have been approved by the courts. In Teigen we noted that:

The desirability of Loy-type agreements lies in the encouragement of partial settlements in future cases, thereby fostering effective and expeditious resolution of lawsuits. Partial settlements not only benefit the parties involved, but the justice system as a whole. Further, we reemphasize that "public interest requires that a plaintiff be permitted to settle claims against some of the exposed parties without releasing others." [Loy, 107 Wis. 2d] at 425, 320 N.W.2d 175. Accord, Pierringer v. Hoger, 21 Wis. 2d 182, 124 N.W.2d 106 (1963), and Swanigan v. State Farm Ins. Co., 99 Wis. 2d 179, 299 N.W.2d 234 (1980).

Teigen, 124 Wis. 2d at 7-8. However, this public policy, as important as it is, cannot supersede unambiguous policy language or impose obligations under the contract which otherwise do not exist. The generalized public policy favoring settlements is insufficient to justify voiding or refusing to enforce the clear language of the policy in this case.⁴

¶ 22. As this contract is written, UIM benefits are owed only when the tortfeasor's liability insurance is insufficient to cover the UIM policyholder's damages. According to the plain language of the policy, that insufficiency does not arise unless and until the full limits of the tortfeasor's policy are paid out. In other words, the tortfeasor "motorist" is not "underinsured" as a definitional matter until his or her policy limits are fully — not partially — paid. Thus, although the public policy supporting partial settlements still figures prominently in our jurisprudence, it does not supplant the plain language of the insurance contract. To choose an interpretation that furthers the public policy of encouraging settlements but contradicts the clear language of the contract would be to substitute our policy preferences regarding UIM insurance for the agreement of the parties.⁵

¶ 23. Danbeck also argues pursuant to Ranes v. American Family Mutual Insurance Co., 212 Wis. 2d 626, 634, 569 N.W.2d 359 (Ct. App. 1997), that it is the public policy of this state to provide insurance coverage "as long as the insured's failure to perform under the terms of the insurance contract has not resulted in prejudice to the insurer." Ranes concerned a notice of settlement provision in a UIM policy and the consequences of an insured's failure to give notice to the UIM carrier of a settlement with the tortfeasor. Id. at 630-31. The insurance policy in Ranes did not specifically address the issue of the insurer's duty to pay UIM benefits where the insured has failed to.give notice of settlement. In the absence of specific contract language, the court of appeals looked to public policy to resolve the question. Id. at 630-34.

¶ 24. By contrast, the insurance policy in this case contains explicit, unambiguous language specifying that the UIM carrier's duty to pay does not arise until exhaustion within the meaning of the policy has occurred. Therefore, and once again, we are not at liberty to rewrite the insurance contract to achieve the public policy invoked in Ranes.

¶ 25. In summary, we conclude that the unambiguous language of the exhaustion clause in the UIM policy in this case requires the insured to exhaust the tortfeasor's liability limits by payment of full policy limits in order to trigger the duty to pay UIM benefits. Accordingly, because Danbeck's settlement with Horne's insurer was not for full policy limits, he is not eligible for UIM benefits under his policy with American Family.

By the Court. — The decision of the court of appeals is affirmed. ,

1 1n Wisconsin, UIM coverage is not mandatory. Rather, Wisconsin law only requires that insurers notify policyholders of the availability of such coverage. See Wis. Stat. § 632.32(4m) (1997-98). Once an insured opts for UIM coverage, § 632.32(4m) sets the minimum amount of coverage at $50,000.

2 This type of settlement is similar to what is typically known as a Loy agreement. In Loy v. Bunderson, 107 Wis. 2d 400, 320 N.W.2d 175 (1982), this court approved the use of such agreements, in which a primary insurer is allowed to settle for less than its policy limits and then is released from liability, while the excess insurer remains liable. Loy approved the agreements in the context of primary/excess insurance in order to promote partial settlements. We affirmed the use of these types of agreements in Teigen v. Jelco of Wisconsin, Inc., 124 Wis. 2d 1, 367 N.W.2d 806 (1985).

3 Our conclusion that the language of the UIM exhaustion clause is unambiguous is consistent with cases from other jurisdictions that have construed nearly identical language, either in the context of a UIM policy, a UIM statute, or both. See Robinette v. Am. Liberty Ins. Co., 720 F. Supp. 577, 580 (S.D. Miss. 1989); Birchfield v. Nationwide Ins., 875 S.W.2d 502, 503 (Ark. 1994); Farmers Ins. Exch. v. Hurley, 90 Cal. Rptr. 2d 697, 701 (Cal. Ct. App. 1999); Cont'l Ins. Co. v. Cebe-Haber sky, 571 (Conn. 1990); Lewis v. State Farm Mut. Auto. Ins. Co., 857 S.W.2d 465, 466-67 (Mo. Ct. App. 1993); Fed. Ins. Co. v. Watnick, 607 N.E.2d 771, 774 (N.Y. Ct. App. 1992).

4 The dissent is concerned that "an insured may unknowingly be the subject of agreements between the UIM and liability carriers" in that "the UIM insurer may offer to -underwrite a portion of the settlement costs in order to avoid a larger payout under the UIM endorsement," and refers to another case heard this term in which this fact pattern occurred. Dissent at ¶ 37. However, in Danner v. Auto Owners Insurance, 2001 WI 90, 245 Wis. 2d 49, 629 N.W.2d 159, also issued today, we hold, among other things, that such collusive conduct on the part of a UIM carrier, undertaken to defeat a UIM insured's otherwise available UIM coverage, may give rise to a bad faith claim under Anderson v. Continental Insurance Co., 85 Wis. 2d 675, 271 N.W.2d 368 (1978).

5 The dissent argues that the exhaustion clause in this case is inherently ambiguous because we have interpreted it differently than the exhaustion clause in Teigen. But as we have noted, the policies and the exhaustion clauses in each case are actually quite different, despite the similarity in language. Teigen concerned an exhaustion clause in a primary insurance policy that specified when the insurer's duty to defend its insured was satisfied and at an end. This case, in contrast, concerns an exhaustion clause in a UIM policy (in a sense, an excess policy, as the dissent notes) that specifies when the UIM insurer's duty to pay is triggered, or, stated differently, when the tortfeasor motorist is "underinsured" according to the terms of the policy. This distinction makes Teigen inapplicable; it does not create ambiguity in this contract. If Teigen had concerned the interpretation of language in the excess carrier's policy that specified when excess coverage was triggered, it might well be applicable here. But it did not.