Badger Mutual Insurance: One year later

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“Every case is an individual case and in Badger Mutual, they reaffirmed the decision in Dowhower that reducing clauses are enforceable only if the policy clearly sets forth that the insured is purchasing a fixed level of UIM coverage that will be arrived at by combining payments from all sources.” Lynn Laufenberg, WATL President

Since the state Supreme Court released a decision at the end of it’s 2002 term dealing with unambiguous reducing clauses becoming ambiguous when read with the rest of the policy, lower courts have had the responsibility of applying that decision.

During the past year, the Wisconsin Court of Appeals issued four decisions dealing with reducing clauses, but only three applied the standards set forth in Badger Mutual Insurance Co. v. Schmitz, 2002 WI 98, 255 Wis.2d 61, 647 N.W.2d 223. In those three cases, the court found ambiguity. However, the fourth decision, which came from District I, did not address the Badger Mutual standards.

During a tort update discussion for the Wisconsin Academy of Trial Lawyers, Lynn Laufenberg, the group’s president, encouraged plaintiff’s lawyers to review all four of the decisions. Those decisions are:

• Gohde v. MSI Insurance Co., 2003 WI App 69, 261 Wis.2d 710, released on March 4, 2003;

• Hanson v. Prudential Property, 2002 WI App. 275, 258 Wis.2d 709, released on Oct. 29, 2002;

• Dowhower v. Marquez, 2003 WI App 23, 260 Wis.2d 192, 01-1347, released on Jan. 15, 2003 (Dowhower 2); and

• Van Erden v. Sobczak, 2003 WI App 57, 260 Wis.2d 881, released on Feb. 25, 2003.

Badger Mutual

The Badger Mutual decision, issued July 10, 2002, held that an otherwise unambiguous reducing clause may nonetheless be unenforceable if it is found that in the context of a policy as a whole it is ambiguous, Laufenberg said.

“The key point about Badger Mutual v. Schmitz … is that you need to look at the policy,” he explained. “Every case is an individual case and in Badger Mutual, they reaffirmed the decision in Dowhower (1) that reducing clauses are enforceable only if the policy clearly sets forth that the insured is purchasing a fixed level of UIM coverage that will be arrived at by combining payments from all sources.”

Two years earlier, the Supreme Court had issued its decision in Dowhower v. West Bend Mutual Insurance Co., 2000 WI 73, 236 Wis. 2d 113, 613 N.W.2d 557 (Dowhower 1). In that decision, the court addressed the constitutionality of Wis. Stat. Sec. 632.32(5)(i). The plaintiffs in Dowhower (1) had argued that Sec. 632.32(5)(i) was unconstitutional because it authorized fraudulent, illusory UIM coverage. But the court disagreed.

In that decision the court wrote: “When we consider these cases in conjunction with Wis. Stat. § 632.32(5)(i), we conclude that an insurer may reduce payments made pursuant to a UIM policy by amounts received from other legally responsible persons or organizations, provided that 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.”

The Supreme Court in Badger Mutual noted the significance of its recognition in Dowhower (1) that a reducing clause may be ambiguous within the context of the insurance contract. Since last July, the court of appeals has begun to apply the Badger Mutual standards.

Court of Appeals Applies BMI

In Gohde, Hanson and Dowhower (2), the court of appeals determined that the policy in each case the court found that the policy did not meet either the standards set forth in Badger Mutual or Dowhower (1).

The District III Court of Appeals had issued a decision in Gohde back in March 2002. However, the Supreme Court reversed Gohde in light of its Badger Mutual decision and ordered the parties to rebrief it.

Originally, Bobbie and Rick Gohde appealed a summary judgment granted in favor of MSI Insurance Company after the circuit court determined the reducing clause i
n the Gohdes’ underinsured motorist policy, issued by MSI, was unambiguous. In a summary decision, the court of appeals affirmed the trial court’s decision. On remand from the Supreme Court, the District 3 court agreed with the Gohdes that the reducing clause in their UIM coverage was ambiguous under Badger Mutual’s standards and therefore was unenforceable.

The District III Court of Appeals also issued the decision in Hanson. Prudential Property and Casualty Insurance Company had appealed a judgment declaring its reducing clause unenforceable. Prudential sought to enforce a reducing clause contained in Gary Hanson’s underinsured motorist (UIM) policy. The circuit court had denied Prudential’s motion, determining the policy was ambiguous and the reducing clause unenforceable.

The court of appeals found that both the reducing clause itself and the policy as a whole failed to clearly inform Hanson as to the amount of UIM coverage he was purchasing and therefore it affirmed the trial court’s judgment.

In Dowhower (2), the District II Court of Appeals looked at an appeal from West Bend Mutual Insurance Co. challenging a trial court decision that the reducing clause contained in the policy it issued to Larry and Tamara Dowhower was unenforceable.

On review, the court of appeals determined the policy as a whole was inconsistent and contradictory. They concluded that the policy failed to clearly inform the Dowhowers that they were purchasing a fixed level of underinsured motorist recovery that would be arrived at by combining payments made from all sources. Thus, the reducing clause’s effect is not “crystal clear” within the context of the whole policy. Therefore, the policy was ambiguous and the reducing clause was unenforceable.

Van Erden

Laufenberg pointed out that the Van Erden decision by the District I Court of Appeals, was the one decision where the court found there was no ambiguity in the policy. However, he also noted that the court did not apply the Badger Mutual or Dowhower (1) test.

In that case, Steven and Cherie Van Erden appealed a trial court’s order granting summary judgment and dismissing their declaratory judgment action against the City of Milwaukee. The Van Erdens had sought a declaration that the city had a duty to offer underinsured motorist (UIM) coverage to Steven Van Erden, as a city employee. The couple also appealed the trial court’s order granting summary judgment dismissing their declaratory judgment action against American Family Mutual Insurance Company, their automobile insurance carrier, in which they sought full UIM coverage under two policies, despite reducing and anti-stacking clauses in their insurance policies.

Regarding the American Family coverage, the Van Erdens contended that the reducing clauses contained in both policies issued separately to Steven and Cherie Van Erden were ambiguous. The Van Erdens also maintained that the UIM policy issued to Steven was illusory because, as a result of an anti-stacking provision, they would never receive any UIM benefits under Steven’s policy.

The court of appeals disagreed, finding that “the reducing clause in question directly mirrors the language of Sec. 632.32(5)(i).”

Laufenberg strongly urged plaintiff’s lawyers at the WATL conference to reread the Van Erden decision and prepare to distinguish their own challenges of reducing clauses from the case.

“Number one, it didn’t follow the process that was specifically directed to be followed by the Supreme Court,” he said. “Number two, it’s in conflict with those cases that have followed the Badger Mutual process. Number three, it’s not helpful because there’s no discussion of what the policy actually said, what the sequence of pages of the policy were and when it first disclosed that you never get the full limits of coverage.”

Laufenberg also speculated that the state Supreme Court would likely take up Van Erden because that published decision conflicts with the court’s own decision in Badger Mutual.

Tony Anderson can be reached by email.