Only payments to the insured reduce UM benefits

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Hon. Joan Kessler

For an auto insurer to reduce uninsured motorist benefits by a payment from a worker’s compensation insurer, the insured must be the one to receive the payment, the Wisconsin Court of Appeals held on Dec. 7.

Scott Shira died in an automobile accident in Minnesota, while in the course of his employment for Layne Christensen Company, a Wisconsin employer. The accident was caused by the negligence of an uninsured motorist.

Scott’s parents filed a wrongful death action under sec. 895.04, seeking to collect uninsured motorist ("UM") benefits in automobile policies purchased by Scott from American Family Mutual Insurance Company.

At the time of his death, Scott was unmarried and had no children. Because Scott had no dependents as defined by the worker’s compensation statutes, the majority of the worker’s compensation benefits payable as a result of his death, $159,900, were paid to the State of Wisconsin’s Work Injury Supplemental Benefit Fund, pursuant to sec. 102.49(5)(b).

Section 102.49 effectively requires worker’s compensation insurance to pay the State the benefits it would otherwise "save" when a worker dies and, therefore, cannot personally receive the benefits.

American Family moved for summary judgment, arguing that the Shiras are not entitled to receive anything under Scott’s UM policies because the net limits of those policies, totaling $150,000, must be reduced by the amount of worker’s compensation paid to the State by the worker’s compensation carrier or the employer, which exceeded $150,000.

Milwaukee County Circuit Court Judge Jeffrey A. Kremers granted the motion, and the Shiras appealed. The court of appeals reversed in a decision written by Judge Joan Kessler, and joined by Judge Patricia S. Curley. Judge Ralph Adam Fine dissented.

Statutes and Policies

The court held that the reducing clauses in American Family’s policies do not apply, because it is implicit that only payments to the insured will be applied to reduce the insured’s payments under the UM coverage.

The policies provided, in relevant part: "The limits of liability of this coverage will be reduced by: … 3. A payment made or amount payable because of bodily injury under any worker’s compensation or disability benefits law or any similar law.

The clause is specifically authorized by sec. 632.32(5)(i)2., which provides: "(i) 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: … 2. Amounts paid or payable under any worker’s compensation law."

The Shiras did not contest that the policy conforms with sec. 632.32(5)(i)2, but argued that interpreting the clause to reduce American Family’s UM coverage limits by amounts paid to the State rather than to Scott or his heirs or estate is contrary both to the insured’s common sense interpretation of the reducing clause and to public policy.

American Family contended that the statute and policy are unambiguous that payments made to the State are also subject to the reducing clause.

Amounts Received

Agreeing with the Shiras that sec. 632.32(i)(5) refers only to payments made to the insured, the court quoted the following passages from Dowhower v. West Bend Mut. Ins. Co., 2000 WI 73, 236 Wis.2d 113, 613 N.W.2d 557, and Badger Mut. Ins. Co. v. Schmitz, 2002 WI 98, 255 Wis.2d 61, 647 N.W.2d 223:

"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 arriving at by combining payments made from all sources." Dowhower, at par. 33; and

"Implicit in our determination that reducing clauses would be valid only if they ‘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’ was a recognition that the reasonable insured might not understand, intuitively, the scope of his or her UIM coverage. We signaled in Dowhower that UIM insurers that reduce UIM payments by amounts paid from other sources, are required to make clear to purchasers of UIM coverage that they are purchasing coverage that will put them in the same position they would be in if the underinsured tortfeasor had liability limits equal to the amount of UIM coverage the insured purchased. Insureds will then understand that if they want to be assured of having, say, $200,000 in total available coverage, they will have to purchase UIM coverage with a $200,000 limit." Schmitz, at par. 38.

The
court concluded, "Both Dowhower and Schmitz are based on the court’s understanding that Wis. Stat. sec. 632.32(5)(i) refers to payments made to the insured. It was based on this understanding that the court upheld the validity of the statute and reducing clauses consistent with the statute. Although sec. 632.32(5)(i)2. does not explicitly state that the payments must be paid or payable to the insured under any worker’s compensation law, these words are implied from the context of the overall statutory scheme in which they occur. We conclude that sec. 632.32(5)(i)2. unambiguously includes only those payments paid or payable to the insured or the insured’s heirs or estate."

The court added, "Like the hypothetical insured discussed in Schmitz, Scott purchased coverage that would put him in the same position he would be in if the uninsured tortfeasor had liability limits equal to the amount of UM or UIM coverage purchased. By purchasing $150,000 in UM coverage, Scott guaranteed that he, or his heirs or estate, would recover a total of $150,000, through payments by the tortfeasor, worker’s compensation, disability payments and UM payments. To deny recovery in this case would deny Scott the benefit of the coverage he purchased and would provide a windfall for American Family. This would be contrary to both sec. 632.32(5)(i) and the expectations of the insured (cites omitted)."

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Accordingly, the court affirmed.

The Dissent

Judge Fine dissented, concluding that the statute and policy unambiguously reduce coverage by any payment made pursuant to the worker’s compensation laws, regardless of to whom the payment was made.

Noting that the workers compensation laws do not provide for payments to the parents of adult children, Fine concluded, "the Majority’s quotations from fleeting short-hand references in some cases to an ‘insured’ cannot override the unambiguous statutory language, especially when the issue for which the Majority cites those fleeting short-hand references was neither raised nor decided — or even considered — in those decisions. Accordingly, those fleeting short-hand references were hardly ‘judicial acts’ reflecting the discussion and decision of ‘a question germane to, though not necessarily decisive of, the controversy’ then before the courts issuing those decisions."

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David Ziemer can be reached by email.