Kaun v. Industrial Fire & Casualty Insurance

436 N.W.2d 321, 148 Wis. 2d 662, 1989 Wisc. LEXIS 28

• Court: Wisconsin Supreme Court
• Decided: March 9, 1989
• Docket: 85-1286
• Status: Published

Opinions

LOUIS J. CECI, J.

This is a review of a decision of the court of appeals, Kaun v. Industrial Fire & Casualty Ins. Co., 142 Wis. 2d 650, 419 N.W.2d 272 (Ct. App. 1987), which affirmed a judgment of the circuit court for Waukesha county, Willis J. Zick, circuit judge, granting summary judgment to Badger Mutual Insurance Company (respondent). Two issues are presented for review. The first issue is whether an insurance company’s payment to its insured under uninsured motorist (UM) coverage becomes a payment under underinsured motorist (UIM) coverage when, at some later date, the tortfeasor’s insurance company admits liability on behalf of the tortfeasor and tenders its liability limit to the court. The second issue is whether the reducing clause in the UIM provision of the insurance policy at issue is valid and enforceable under Wisconsin law so as to reduce UIM benefits recoverable under the policy’s limit by the amount received by the insured from the underinsured driver’s liability policy. We conclude that an insurance company’s payment to its insured under UM coverage becomes a payment under UIM coverage when, at some later date, the tortfeasor’s insurance company admits liability on behalf of the tortfeasor and tenders its liability limit to the court. In addition, we conclude that the reducing clause in the UIM provision of the insurance policy at issue in this case does not reduce the UIM benefits recoverable under the policy’s limit by the amount received by the insured from the underinsured driver’s liability policy. Rather, the “amounts payable” from the UIM provision at issue in this case are measured against the insured’s total damages, and the reducing clause reduces UIM benefits by subtracting from the total damages sustained by the insured the amount received by the insured from the underinsured driver’s liability policy.

The facts in this case are as follows. On April 25, 1983, an action was commenced in the circuit court by Eileen Kaun (petitioner) against Daniel Smith and his insurer, Industrial Fire & Casualty Insurance Company (Industrial), for injuries sustained by the petitioner because of the alleged negligent driving of Daniel Smith. Industrial’s amended answer to the petitioner’s complaint denied liability coverage, and, upon such denial of coverage, the respondent, the petitioner’s insurer, paid the petitioner $49,500 under the UM coverage of its policy with the petitioner.¹

By order dated March 27,1984, the respondent was allowed to intervene in the action. On June 4, 1984, nearly one year after its denial of coverage, Industrial admitted liability on behalf of Smith. On August 2, 1984, Industrial tendered its $15,000 liability limit to the court for determination as to whether the petitioner or the respondent was entitled to the funds. Both the petitioner and the respondent moved for summary judgment, each claiming entitlement to the $15,000. For purposes of its summary judgment motion and through this appeal, the respondent concedes that the petitioner’s injuries are greater than $65,000. The circuit court granted summary judgment in favor of the respondent and awarded it the $15,000. The judgment was affirmed by the court of appeals.

The court of appeals decided that the issue presented in this case was one of underinsurance rather than uninsurance. The court of appeals found that once Industrial admitted coverage and tendered its $15,000 liability limit, Industrial had conceded that the tortfea-sor was insured by Industrial, and, therefore, Smith was not uninsured. Kaun, 142 Wis. 2d at 654-55. In addition, the court of appeals held, citing Kuehn v. Safeco Ins. Co. of America, 140 Wis. 2d 620, 412 N.W.2d 126 (Ct. App. 1987), that the reducing clause in the respondent’s policy was valid and enabled the respondent to reduce its liability to the petitioner by the $15,000 paid by Industrial. Kaun, 142 Wis. 2d at 656. Therefore, the court of appeals affirmed the judgment of the circuit court awarding the $15,000 tendered by Industrial to the respondent.

It is well settled that the construction of an insurance policy is a question of law for the court and, therefore, is reviewed de novo. Lambert v. Wrensch, 135 Wis. 2d 105, 115, 399 N.W.2d 369 (1987).

The pertinent language for UIM coverage in the policy issued by the respondent provides as follows:

We will pay damages for bodily injury which an insured person is legally entitled to recover from the owner or operator of an underinsured motor vehicle. ...

We will pay under this coverage only after the limits of liability under any applicable bodily injury liability policies or bonds have been exhausted by payment of judgments or settlements. As used in this endorsement:

“Underinsured motor vehicle” means a land motor vehicle insured by a liability policy or bond at the time of the accident which provides bodily injury liability limits less than the limit of liability for this coverage. It does not include a vehicle:

(5) which is insured by liability policy or bond at the time of the accident, but the insuring company or bonding denies coverage or is or becomes insolvent.

LIMITS OF LIABILITY

Amounts payable will be reduced by payments:

(1) made by the owner or operator of the underinsured motor vehicle or organization which may be legally liable ....

We agree with the court of appeals that the issue presented in this case is one of underinsurance rather than uninsurance. UM coverage is effective where the tortfeasor has no liability insurance, and UIM coverage is effective where there is a tortfeasor with liability coverage inadequate in amount for the injuries caused. Schwochert v. American Family Mutual Ins. Co., 139 Wis. 2d 335, 346, 407 N.W.2d 525 (1987). A fundamental characteristic of underinsurance is that it only becomes effective when the tortfeasor’s insurance partially compensates but is not adequate to provide full indemnification to the insured. The respondent agrees that under the terms of its policy, even if a tortfeasor is insured, UM coverage is operative if the tortfeasor’s insurer denies coverage. Therefore, had Industrial maintained its denial of coverage of the tortfeasor, this would have been an uninsurance case. However, because Industrial admitted coverage and tendered its $15,000 liability limit, this is an underinsurance case.

We turn now to the issue of the validity and effect of the reducing clause involved in this case. Insurance contracts are controlled by the same rules of construction as are applied to other contracts. Vidmar v. American Family Mutual Ins. Co., 104 Wis. 2d 360, 365, 312 N.W.2d 129 (1981), overruled in part on other grounds, Welch v. State Farm Mutual Automobile Ins. Co., 122 Wis. 2d 172, 179, 361 N.W.2d 680 (1985). See also Ehlers v. Colonial Penn Ins. Co., 81 Wis. 2d 64, 74, 259 N.W.2d 718 (1977). The goal of construction is to ascertain the true intentions of the parties to the insurance contract. Vidmar, 104 Wis. 2d at 365. In the case of an insurance contract, the words are to be construed in accordance with the principle that the test is not what the insurer intended the words to mean but what a reasonable person in the position of an insured would have understood the words to mean. Id., quoting Garriguenc v. Love, 67 Wis. 2d 130, 134-35, 226 N.W.2d 414 (1975). Ambiguities in coverage are to be construed in favor of coverage, while exclusions are narrowly construed against the insurer. Vidmar, 104 Wis. 2d at 365, citing Davison v. Wilson, 71 Wis. 2d 630, 635-36, 239 N.W.2d 38 (1976).

We find that the words “amounts payable” found in the reducing clause at issue are ambiguous. Consequently, we will construe the words in accordance with what a reasonable person in the position of an insured would have understood the words to mean. In this case, $50,000 of UIM coverage was provided by the respondent in the policy issued. It is conceded for the purposes of this appeal that the petitioner’s damages exceed $65,000. The respondent maintains it is liable to the petitioner for only $35,000. However, if the respondent is allowed to offset its $50,000 liability to the petitioner by the $15,000 paid by Industrial, the respondent will not be providing the $50,000 of UIM benefits it indicated it would pay on the declarations page of its policy.

Accepting the respondent’s position, i.e., that the “amounts payable” under the UIM policy are the UIM limitation indicated on the declarations page of the policy reduced by payments made by the tortfeasor, the respondent will never pay the policy limits of its UIM policies. For example, a policyholder purchases and pays a premium for UIM coverage with limits of $25,000. The insurance company would collect a premium for this coverage, but under no circumstances will the insured ever collect anything under that coverage. UIM coverage is effective where there is a tortfeasor with liability coverage inadequate in amount for the injuries caused. Schwochert, 139 Wis. 2d at 346. In Wisconsin, liability coverage currently cannot be issued for less than $25,000. Section 344.33, Stats. Therefore, because underinsurance is only effective where a tort-feasor has liability coverage which must be for at least $25,000 in Wisconsin and since, under the position the respondent urges us to adopt, recovery under UIM coverage is reduced by any amounts received from any liability policies, the insurance company will never have to pay out on a $25,000 UIM policy. Thus, under the respondent’s position, an underinsured liability limit is an illusion because an insured will never be entitled to recover up to that limit. See, e.g., Paape v. Northern Assurance Co., 142 Wis. 2d 45, 48, 416 N.W.2d 665 (Ct. App. 1987), where the insurer issued a policy for $15,000 worth of UIM coverage.

Consequently, we hold that coverage for the UIM policy involved in this case is available for that margin between the amount received by the appellant from the underinsured driver’s liability policy and the actual damages suffered by the appellant. We find that a reasonable person in the position of an insured would understand the words “amounts payable” to be the equivalent of damages compensable because when purchasing UIM coverage, we believe that a reasonable insured expects to be protected against a loss caused by another that is not covered by the underinsured driver’s liability coverage.

Furthermore, this interpretation is consistent with the purpose of UIM coverage as announced by this court. The purpose of UIM coverage is to compensate the victim of an underinsured motorist’s negligence where the third party’s liability limits are not adequate to fully compensate the victim for his or her injuries. Schwochert, 139 Wis. 2d at 346. As we have previously noted,

While it was asserted ... that the protection afforded by underinsured coverage was in each case to be reduced by the amount of liability coverage carried by the underinsured motorist, we see no policy provision that so provides. It would not appear that a reduction of “any amount payable” by reason of the payment by another person liable effects a limitation of the potential liability under any coverage. It would appear, rather, that the amount payable reduction merely prevents a duplication of a payment made by another....

Vogt v. Schroeder, 129 Wis. 2d 3, 18 n. 7, 383 N.W.2d 876 (1986). “[Underinsurance benefits constitute the insurance coverage for damages in excess of the tortfea-sor’s insurance coverage.” Id. at 32 (Steinmetz, J., concurring). “[T]he limit of the underinsurer’s liability is for the amount of damages suffered by the insured in excess of the liability limits of the tortfeasor.” Id. at 28-29.

Our approach in this case is similar to the approach followed by the Ohio Supreme Court in Gomolka v. State Automobile Mutual Ins. Co., 15 Ohio St. 3d 27, 472 N.E.2d 700 (1984). In Gomolka, the insured (appel-lee) recovered the $100,000 liability coverage limit from the third party’s automobile insurance carrier. The insured then made a claim against her own automobile insurer under her UIM coverage. The insurer (appellant) claimed that it was entitled to a $100,000 reduction in the amount it was required to pay under its UIM coverage. The appellant relied on language in its policy providing that the amount payable under its coverage shall be reduced by all sums paid by or on behalf of the third party.

The Ohio Supreme Court rejected this contention:

The appellant argues, in effect, that the words, “any amount payable” should be interpreted to mean “the total amount of coverage provided, if payable.” The appellee, on the other hand, would interpret “any amount payable” to mean “any damages compensable.” We find this latter interpretation clearly to be the most reasonable.

Appellant’s “interpretation” is, in reality, an “insertion.” State Auto would have the court read additional terms into its policy. The appellee’s interpretation, however, equates “amount payable” to “damages compensable” by looking to the plain meaning of the policy’s terms and by focusing on the nature and purpose of uninsured/underinsured motorist coverage. When purchasing this coverage, an insured expects to be protected against a loss caused by another that is not covered by that other person’s insurer. Thus, an “amount payable” under uninsured/underinsured motorist coverage is an amount of damages suffered by the insured, which amount is greater than the insurance coverage held by the party causing the damages.

15 Ohio St. 3d at 29, 472 N.E.2d at 702-03 (emphasis in original).

In conclusion, we hold that an insurance company’s payment to its insured under UM coverage becomes a payment under UIM coverage when, at some later date, the tortfeasor’s insurance company admits liability on behalf of the tortfeasor and tenders its liability limits to the court. In addition, we hold that the reducing clause in the UIM provision of the insurance policy at issue in this case does not reduce UIM benefits recoverable under the policy’s limits by the amount received by the insured from the underin-sured driver’s liability policy. Rather, the “amounts payable” from the UIM provision at issue are measured against the insured’s total damages, and the reducing clause reduces UIM benefits by subtracting from the total damages sustained by the insured the amount received by the insured from the underinsured driver’s liability policy. Therefore, we affirm the decision of the court of appeals in part and reverse in part and remand this case to the circuit court.

By the Court. The decision of the court of appeals is affirmed in part and reversed in part, and the cause is remanded to the circuit court for further proceedings consistent with this opinion.

1 The $49,500 was paid as a compromise agreement rather than the limit of $50,000. This compromise also involved an issue of the medical payments coverage. Therefore, $49,500 was considered full payment of the coverage under the uninsured motorist provision.