‘Underinsured motor vehicle’ definition struck down

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“Tying the availability of UIM coverage to the amount of the tortfeasor’s liability limits, even when a portion of those funds are paid to another claimant, is not consistent with any theory of UIM coverage that has been recognized by Wisconsin courts or approved by the legislature.” Hon. Margaret J. Vergeront Wisconsin Court of Appeals

A definition of "underinsured motor vehicle" that fails to account for whether the tortfeasor is liable to another person injured in the accident, resulting in the denial of coverage, is inconsistent with the purpose of UIM coverage, the Wisconsin Court of Appeals held on April 21.

Joshua J. Opichka was a passenger in a car operated by Elizabeth Pryzynski. Pryzynski fell asleep at the wheel and crossed the centerline, striking a car driven by Alison Welin. Pryzynski was solely at fault. Both Opichka and Welin were seriously and permanently injured.

Pryzynski was insured by Secura Insurance under a liability policy with a single combined limit of $300,000 ($300,000 per person and $300,000 per accident).

Opichka was insured by Hastings Mutual Insurance Company under a policy providing UIM coverage with limits of $150,000 per person and $300,000 per accident.

Welin sued Pryzynski and Secura, and Secura, in turn, filed a third-party complaint, asking for a declaratory ruling that the damages claimed by Opichka and Welin exceeded Pryzynski’s $300,000 policy, and no other liability coverage was available to her. Secura paid its policy limits to the court and asked the court to determine the allocation between Pryzynski and Opichka.

Opichka filed a third-party complaint against Hastings Mutual, claiming UIM coverage. Hastings Mutual moved for a declaratory ruling that there was no UIM coverage for Opichka because Pryzynski’s car did not meet the definition of an underinsured motor vehicle in the policy: "a land motor vehicle or trailer of any type to which a bodily injury liability bond or policy applies at the time of the accident but its limit for bodily injury liability is less than the limit of liability for this coverage."

Hastings Mutual argued that, because the limits of Pryzynski’s liability policy were greater than those of Opichka’s UIM policy — $300,000 per person as compared to $150,000 per person — the requirements of this definition were not met. Chippewa County Circuit Court Judge Benjamin D. Proctor granted the motion, and dismissed Opichka’s third-party complaint against Hastings.

The parties stipulated that Welin’s damages exceed $250,000 and Opichka’s damages exceed $50,000, with the exact damages to be litigated. Welin and Opichka agreed to a $250,000/$50,000 split of the $300,000 from Pryzynski’s liability policy.

Opichka appealed the dismissal of Hastings Mutual, and the court of appeals reversed, in a decision by Judge Margaret J. Vergeront.

The court found that, although the policy’s definition of underinsured vehicle was unambiguous, and the tortfeasor’s vehicle did not meet that definition, the definition violated Wisconsin statutes, as applied to Opichka, even though that definition has been upheld as lawful in other cases — Smith v. Atlantic Mut. Ins. Co., 155 Wis.2d 808, 456 N.W.2d 597 (1990), and Taylor v. Greatway Ins. Co., 2001 WI 93, 245 Wis.2d 134, 628 N.W2d 916. The court concluded, "the same definition of ‘underinsured motor vehicle’ may conflict with statutory prohibitions under one set of facts but not under another."

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 Hastings Mutual policy contains a reducing clause that exactly tracks the statute.

The court agreed with Opichka that the effect of the definition of underinsured motor vehicle, as applied to him, is to impermissibly allow a reduction in his UIM limits by amounts not specified in sec. 632.32(5)(i) — amounts paid to the other injured party under the tortfeasor’s policy.

Reviewing prior case law, the court noted that two conflicting theories regarding the purpose of UIM coverage have emerged.

Under the first theory, "the purpose is to compensate an insured accident victim when the insured’s damages exceed the recovery from the at-fault driver;" the insured purchases "coverage for his or her damages in a set dollar amount ‘above and beyond the liability limits of the at-fault driver.’"

Under the second, "the purpose of underinsured motorist coverage is solely to put the insured in the same position as he [or she] would have occupied had the tortfeasor’s liability limits been the same as the underinsured motorist limits purchased by the insured."

The court found that the Legislature’s intent, as expressed in sec. 632.32(5)(i), is that this second theory "is not invalid per se, " quoting Badger Mutual Ins. Co. v. Schmitz, 2002 WI 98, par. 33, 255 Wis.2d 61, 647 N.W.2d 223.

In Badger Mutual, the Supreme Court elaborated, "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." Badger Mutual, at par. 38.

In addition, in the recent case of Teschendorf v. State Farm Ins. Cos., 2005 WI App 10, 691 N.W.2d 882, the court of appeals held that UIM coverage may only be reduced by payments from other sources, if those payments are made to the insured or the insured’s heirs or estate.

The court concluded, "From these cases we draw the following principles: The legislature has sanctioned the second theory of the purpose and function of UIM coverage — under which the UIM limit may be reduced by other sources — only if: (1) the sources are limited to those specified in Wis. Stat. Sec. 632.32(5)(i), and (2) those permissible sources are paid or payable to the insured or the insured’s heirs or estate, and (3) the insurance policy clearly sets forth that the insured is purchasing a fixed level of UIM recovery that will be arrived at by combining the statutorily permissible sources and UIM payments to the extent necessary to reach that fixed level. At the same time, the first theory of the purpose and function of UIM remains viable, though an insurer is not required to provide UIM coverage that fulfills that purpose if the policy meets the above three conditions."

The court acknowledged that those cases, and sec. 632.32(5)(i), itself, concern the reducing clause, not the definition of "underinsured motor vehicle," but found the distinction irrelevant.

The court reasoned, "the two cases [Badger Mutual and Dowhower v. West Bend Mut. Ins. Co., 2000 WI 73, 236 Wis.2d 113, 613 N.W.2d 557] do more than discuss reducing clauses; they also explain the recognized purposes of UIM coverage. In addition, a proper analysis does not ignore the effect of the definition simply because of its label. In Mau v. North Dakota Ins. Reserve Fund, 2001 WI 134, par. 33, 248 Wis. 2d 1031, 1054, 637 N.W.2d 45, the court recognized that the occupancy requirement in the policy’s definition of "named insured" was not couched in terms of an exclusion; but, because it produced the same result as an exclusion, the court treated it as an exclusion for purposes of applying a statutory prohibition on certain coverage exclusions. In this case, the effect of applying the definition of ‘underinsured motor vehicle’ without regard to the amount actually available to Opichka under Pryzynski’s policy has the same effect as reducing the UIM limits by amounts not paid or payable to him. It is therefore appropriate to analyze the definition under the case law and statute addressing permissible reducing clauses."

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