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Dowhower reducing clause held illegal again


“In common, everyday language, ‘to endorse’ would mean to endorse a check or endorse a candidate. I hate to sound like Andy Rooney, but why can’t insurance policies simply call changes in policies for what they are — changes?”

Hon. Richard S. Brown

The first of the three reducing clause decisions vacated by the Wisconsin Supreme Court for reconsideration in light of Folkman v. Quamme, 2003 WI 116, 264 Wis. 2d 617, 665 N.W.2d 857, was reissued by the court of appeals on Dec. 10, as well as another reducing clause case that had been held in abeyance by that court.

In the previously vacated case, Dowhower v. Marquez, the court reaffirmed its previous holding that the clause at issue is unenforceable, but in the new case, it enforced the clause.


Dowhower is the case that arguably began the current state of uncertainty about the validity of clauses that reduce underinsured motorist (UIM) coverage by amounts received from other sources.

In Dowhower I, the Wisconsin Supreme Court held that sec. 632.32(5)(i), which explicitly authorizes reducing clauses to UIM coverage, does not violate the U.S. or Wisconsin Constitutions. The court remanded to determine whether or not the clause was ambiguous and therefore unenforceable.

On remand, the court of appeals held that it was (Dowhower II). The Supreme Court again accepted review, in addition to two other UIM cases — Gohde v. MSI Ins. Co., and Van Erden v. Sobczak — and vacated all three for reconsideration in light of Folkman.

On remand once again, the court of appeals reaffirmed that the clause is unenforceable, reconciling Folkman with the Wisconsin Supreme Court decision in Badger Mutual Ins. Co. v. Schmitz, 2002 WI 98, 255 Wis.2d 61, 647 N.W.2d 223.

Schmitz held that, although a reducing clause standing alone was unambiguous, the clause’s effect was ambiguous within the context of the whole policy, and the clause was therefore unenforceable. The court stated that a policy must be “crystal clear.”

In Folkman, however, the court withdrew the “crystal clear” language, explaining that, “[s]ometimes it is necessary to look beyond a single clause or sentence to capture the essence of an insurance agreement. The language of a policy should not be made ambiguous by isolating a small part from the context of the whole. …

[A]ny contextual ambiguity in an insurance policy must be genuine and apparent on the face of the policy, if it is to upset the intentions of an insurer embodied in otherwise clear language. The test for determining whether contextual ambiguity exists is the same as the test for ambiguity in any disputed term of a policy. That is, are words or phrases of an insurance contract, when read in the context of the policy’s other language, reasonably or fairly susceptible to more than one construction?”

Reconciling Schmitz and Folkman, the court of appeals stated, “We used the phrase “crystal clarity” in Dowhower II as nothing more than shorthand for ‘unambiguous within the context of the whole policy,’ a principle Folkman reaffirmed. Despite this fact, we will not rubber-stamp our decision in Dowhower II. Rather, in fairness to West Bend, and because it supports the integrity of the judicial process, we feel obliged to examine the West Bend policy anew, with the teachings of both Schmitz and now Folkman in mind.”

Examining the policy anew, the court again found it ambiguous. The court explained, “We have painstakingly poured over this policy on numerous occasions and each time it has been an interpretational nightmare. Unlike the policy in Folkman, the West Bend policy is organizationally complex. It throws up several roadblocks and detours in front of an insured trying to navigate his or her way through the policy. The declarations page, for some reason, sends the insured to the uninsured motorist provision, which does not even mention UIM coverage at all; the table of contents does not list UIM among the types of coverage provided in the policy and does not even alert the insured to the existence of endorsements that are attached at the end of the policy. The endorsement schedule, while listing underinsured motorists coverage, does not inform the insured that the endorsements will change the policy nor does it provide the insured with any guidance on how to locate the endorsements; and finally, the summary and notice send the insured back to the declarations page for a more complete description of the coverages.”

The court added, “The policy’s inadequate and misle
ading organization, labeling and explanations make it nearly impossible for a reasonable insured to locate, let alone to comprehend the extent of, his or her UIM coverage. We are convinced that even after carefully working his or her way through the policy, a reasonable insured might not arrive at the conclusion that he or she has purchased a fixed level of UIM recovery that would be determined by combining payments made from all sources.”

Accordingly, in a decision by Judge Richard S. Brown, the court held that the UIM provisions are ambiguous and must be construed in favor of coverage.

Commercial Union

In the second case, Commercial Union Midwest Ins. Co. v. Vorbeck, decided the same day, by the same district, the court of appeals held in a decision by Judge Neal P. Nettesheim that the reducing clause at issue there is enforceable.

Finding that the policy does not produce contextual ambiguity, the court held, “The policy takes the insured through the policy in an orderly and logical sequence. The policy first recites the split limits of UIM coverage on the declarations page and immediately thereafter cautions that the following attachments contain ‘detailed information on vehicles, operators and deductibles.’ Next, before listing the attachments, the policy advises, ‘The following Forms, Endorsements, and Exceptions to conditions are part of this policy ….’ The Wisconsin Endorsement is then listed among the attachments. Finally, the Wisconsin Endorsement is prefaced with the highlighted caution, ‘THE ENDORSEMENTS CONTAINED IN THIS COMPOSITE CHANGE THE POLICY.’” The court added, “None of the provisions are inconsistent. Nor do they mislead the insured or build up false expectations producing an objectively reasonable alternative meaning of the policy. See Folkman, 264 Wis. 2d 617, par. 31. Neither does the policy set up roadblocks or diversions that would befuddle a reasonable insured while navigating through the policy. Instead, the policy presents an orderly framework, allowing the insured to transition from section to section without undue confusion or frustration. In short, the Commercial policy does not represent the organizational maze condemned in Schmitz.”

The court acknowledged one “arguable failing” in the policy — the “Quick Reference” index does not expressly refer to the Wisconsin Endorsement, which recites the reducing clause.

The court found, however, that the endorsement is expressly referenced in the attachments that immediately follow the declarations page at the beginning of the policy.

The court also noted that the attachments are preceded by admonitions that the attachments contain detailed information regarding the policy, and that the attached “Forms, Endorsements, and Exceptions” are part of the policy.

The court concluded, “Armed with these warnings and that information, we conclude that a reasonable insured would seek out the Wisconsin Endorsement, even though it is not expressly referenced in the index.”

The court also noted that no case requires that the policy index must expressly reference a reducing clause as a condition to enforcing it, stating, “Instead, this is but a factor, among others, which bears upon the enforceability of the reducing clause.”

Finally, the court rejected the plaintiff’s argument that the reducing clause contradicts language in the endorsement that the limits of liability is the “maximum” that Commercial will pay. The court stated that this reading would violate Folkman.

The court stated, “We do not agree with [the insured] that Commercial’s statement in the substituted paragraph represents an unequivocal commitment to pay the maximum limits of its liability to the exclusion of other relevant provisions of the policy. Instead, we view this paragraph as stating nothing more than the obvious under the well-established precepts of insurance contract law: Commercial will pay the maximum of its limits of liability in the appropriate case and under the appropriate circumstances subject to the terms of the insurance policy read as a whole. Reducing clauses are common to insurance policies. The reducing clause in paragraph B unambiguously qualifies Commercial’s obligation to pay the maximum limits of liability.”

Accordingly, the court held the policy unambiguous and affirmed the lower court’s enforcement of the reducing clause.

Judge Brown’s Concurrence

Beginning with a legalese version of “The Night Before Christmas” (quoted from a bar journal article), Judge Brown wrote separately to make a case for simpler language in insurance clauses.

As examples, Brown maintained that no reasonable insured would interpret “endorsement” to mean a change in the policy. Brown wrote, “It is not until the policyholder actually turns to the endorsement itself that it tells how the endorsement ‘changes’ the policy terms. … In common, everyday language, ‘to endorse’ would mean to endorse a check or endorse a candidate. I hate to sound like Andy Roon
ey, but why can’t insurance policies simply call changes in policies for what they are — changes? If the object is to alert the policyholder to changes in the terms and conditions of the policy, why not say so?”


Wisconsin Supreme Court

Related Article

Case Analysis

Brown also complained of the term, “split liability limits,” stating, “The author of the lead opinion in this case had to literally hunt the electronic libraries to find a definition for this term. Think of how difficult it must be for the nonlawyer policyholder to understand what the term means. Instead of a heading entitled ‘split liability limits’ which, I submit, leaves the policyholder clueless, why not say ‘maximum limit per person’ and ‘total limit regardless of the number of insureds?’”

Brown acknowledged, “I realize that insurers have used insurance jargon in policies for just about forever. But the passage of time has not made it any easier for the policyholding public to understand its terminology. Sometimes change is good. Maybe it’s time for a change.”

Brown added, “I am not naive. I know that even if the changes I propose are acted upon, plaintiff’s lawyers will still bring suits claiming that a policy is ambiguous. That is as certain as death and taxes because policy writers cannot foresee every circumstance which may arise and because the policy, as applied, may be claimed to be ambiguous in those circumstances. But I will bet that the number of lawsuits based on ambiguity would dwindle. And that would mean less litigation. And less litigation could only present a win-win situation for the insurance industry. The cost of producing a clearer policy is low and the economic benefit is high.”

Cases: Dowhower v. Marquez, No. 01-1347; Commercial Union Midwest Ins. Co. v. Vorbeck, No. 03-0100.

Click here for Case Analysis.

David Ziemer can be reached by email.

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