Another reducing clause held ambiguous

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Hon. Thomas Cane

On Oct. 29, the Wisconsin Court of Appeals again held a reducing clause in an underinsured motorist (UIM) policy unenforceable, finding it confusing, misleading, and contradictory.

In September 1995, Gary Hanson was injured in an automobile accident. He was not at fault and settled with the tortfeasor, Thomas Pietz, for Pietz’ liability limit of $150,000.

Hanson’s damages exceeded this limit, however, and he sought to recover from his insurer, Prudential Property & Casualty Insurance Company. Hanson’s policy contained limits of $100,000 per person in UIM coverage, and $300,000 per accident.

The trial court held that Hanson qualified for UIM coverage under a “damages basis” definition, and that Hanson could stack his coverage. The court of appeals, however, reversed that portion of the decision which allowed Hanson to stack his coverage in a published decision, Hanson v. Prudential Prop. & Cas. Ins. Co., 224 Wis. 2d 356, 367-71, 591 N.W.2d 619 (Ct. App. 1999).

After remand, Prudential offered Hanson $25,000, then the financial responsibility limit, to settle his UIM claim. Hanson refused, and Prudential moved to determine its liability under the policy.

Polk County Circuit Court Judge Robert Rasmussen denied Prudential’s motion, finding the policy’s UIM coverage “misleading, confusing, arguably contradictory, and … therefore ambiguous with regard to UIM coverage limits.”

Prudential appealed, but the court of appeals affirmed in a decision by Judge Thomas Cane.

Reducing Clause

The court noted at the outset that Prudential’s reducing clause did not conform to the statutory requirements.

Section 632.32(5)(i) provides, “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.

2. Amounts paid or payable under any worker’s compensation law.

3. Amounts paid or payable under any disability benefits laws.

The reducing clause in Hanson’s policy, however, provided as follows: “The limit stated under UNDERINSURED MOTORIST — EACH PERSON on the Declarations is the limit of our liability less all amounts recovered for all damages, including damages for care or loss of services, arising out of bodily injury to one person as a result of any one accident.”

Another reducing clause found later in the policy provides, “The limit of liability for this coverage will be reduced by any amounts paid by the person responsible for the accident. The limit of liability for this coverage will also be reduced by an amount paid under any other source; however, in no event will the limit of liability be reduced below the Financial Responsibility Limit.”

The court acknowledged that, in Dow-hower v. West Bend Mut. Ins. Co., 2000 WI 73, par. 33, 236 Wis.2d 113, 613 N.W.2d 557, the court held that UIM reducing clauses are valid if “the policy clearly sets forth that the insured is purchasing a fixed level of UIM recovery that will be arrived at by combining payments made from all sources.
”

Nevertheless, the court determined that the reference in Dowhower to “all sources” must be limited to the three sources enumerated in the statute. The court concluded, “Prudential’s policy, by saying the insured’s UIM coverage would be reduced by payments from any and every source, rather than the three allowed by statute, does not clearly inform the insured of the level of UIM coverage actually purchased.”

Not “Crystal Clear”

Without explicitly stating whether the inaccurate scope of the reducing clause renders it unenforceable per se, the court instead held, “Even if the reducing clause conformed to Wis. Stat. sec. 632.32(5)(i), it is not ‘crystal clear’ within the context of the whole policy,” as required by the decision in Badger Mut. Ins. Co. v. Schmitz, 2002 WI 98, par 46, 647 N.W.2d 223.

In Schmitz, the Supreme Court invalidated a reducing clause that, while complying with the statute, was ambiguous, when considered as a whole.

Finding Hanson’s policy suffered from similar defects, the court stated, “We encounter similar problems when we trace the path the insured would have to take through the policy to understand Prudential’s UIM coverage. The declarations, while listing the amount of UIM coverage, do not mention that the coverage is subject to further limitations. The only arguable sign pointing to the reducing clause is the language at the bottom of the first page and the top of the second page saying the policy is made up of the declarations, forms and endorsements. Under the description of “DECLARATIONS” in the general provisions, the policy states an insured should refer to the declarations to determine the insured’s level of coverage. Nothing in this description suggests the UIM coverage will be paid based on other amounts paid to the insured.”

The court acknowledged that the policy stated that it provides endorsements which “add to, delete, or change parts of the policy.” However, the endorsements were not labeled as “endorsements,” but rather as “Special State Provisions.”

The court thus concluded, “A reasonable insured would not know what constitutes the policy’s endorsements as compared with its forms and would be unable to determine which sections limit others.”

In addition, like the policy in Schmitz, Hanson’s policy also stated that Prudential will not pay more than the limit of coverage if an insured is injured in an insured car, implying that it is possible for an insured to recover the UIM limits.

Furthermore, the court found that the reducing clause is contained only in the per person limit of liability section, and is absent from the per accident limitation, and noted that the two reducing clauses cited above are worded differently.

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The court reasoned, “If we are unsure how to reconcile ‘less all amounts recovered for all damages’ with ‘an amount paid by any other source,’ we cannot expect a reasonable insured to do it.”

Finally, the court noted that the policy states that the “limit of coverage” does not apply to part four of the policy, which contains the uninsured motorist (UM) coverage. Noting that the UIM and UM structures are similar, and part four also contains a reducing clause, the court concluded, “A reasonable insured would be confused about why only part four is exempted, adding to the difficulty in reconciling the general coverage with the reduced UIM liability.”

In conclusion, the court stated, “While it is true an insured might work his or her way through the policy, after doing so the insured would still not know the extent of his or her UIM coverage. The reducing clause’s effect is not crystal clear in the context of the whole policy.”

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David Ziemer
can be reached by email.