Exhaustion Case Analysis

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Insurers can avoid the result in this case in the future, merely by replacing their exhaustion clauses, if they mirror the one at issue in his case, with the one at issue in Danbeck v. American Family Mut. Ins. Co., 2001 WI 91, 245 Wis.2d 186, 190, 629 N.W.2d 150: "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 judgments or settlements."

The only relevant difference in the two clauses is the inclusion of the words "that apply" after "bodily injury liability bonds and policies" to the State Farm clause.

The court concludes that this makes the State Farm clause ambiguous. How a reasonable person could actually conclude that a legal malpractice policy might constitute an applicable bodily injury policy, is never made clear by the lead opinion or the concurrence, but at least the problem can be easily remedied in the future.

Even if the issue arises again, however, with respect to this particular policy language, there may be other arguments available to auto insurers. In a footnote to his concurrence, Judge Dykman muses, "State Farm may have other reasons why it believes Degenhardt-Wallace cannot recover under her UIM coverage. I do not find those reasons, if they exist, in State Farm’s brief."

While those reasons may not exist in State Farm’s brief, there clearly are arguments the judge considers meritorious in his mind; the job of insurance attorneys is to find them.

One plausible argument is that the result is absurd, because it permits an insured to recover more, if her attorney is negligent, than one competently represented.

For purposes of the argument, assume that the insured sustains damages exceeding $150,000, has UIM limits of $100,000, and the tortfeasor is indisputably 100 percent at fault, and has $50,000 in policy limits.

If the insured’s attorney provides perfect representation, she will collect $50,000 from the tortfeasor’s insurer, and $50,000 from her own insurer under her UIM policy.

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But, if her insurer misses the statute of limitations or commits malpractice in some other way, she will collect $50,000 from her attorney’s malpractice insurer, and $100,000 from her UIM insurer.

Pursuant to sec. 632.32(5)(i), an automobile insurer may reduce its payments to an underinsured motorist in three circumstances: amounts paid under a worker’s compensation law; amounts paid under a disability benefits law; and "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."

Clearly, the $50,000 from the malpractice insurer does not fit into any of these three categories, as the malpractice insurer is not legally responsible for the bodily injury. Therefore, the insured’s auto insurer must pay $100,000, rather than $50,000.

Thus, the effect of the court’s decision is to absurdly place victims of legal malpractice alone in receiving preferential treatment under the UIM statute.

– David Ziemer

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David Ziemer can be reached by email.