UIM Coverage Case Analysis

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The court’s opinion only discusses two possible alternatives: under the policy’s definition of "underinsured motor vehicle," the tortfeasor’s vehicle was not underinsured, and therefore, the insured is entitled to nothing; or the definition is invalid, as applied to this insured, and therefore, the vehicle is underinsured, and the insured can recover $100,000 — the UIM coverage less the amount received from the tortfeasor’s insurer.

The court adopted the latter interpretation, but a third option is also plausible — because the definition of "underinsured motor vehicle" operates as an impermissible reduction to UIM coverage, the reducing clause fails as well, and the insured can recover the entire $150,000 of UIM coverage.

Wisconsin courts have held entire reducing clauses invalid for far less. In Hanson v. Prudential Property & Casualty Ins. Co., 2002 WI App 275, 258 Wis.2d 709, 653 N.W.2d 915, the court held a reducing clause invalid because, theoretically, it permitted UIM benefit reductions not authorized by statute.

The statute permits reductions only for amounts paid: by persons legally responsible; under any worker’s compensation law; or under any disability benefits law. Prudential’s policy permitted these reductions, but also reductions for amounts paid under "similar laws."

Because of this minor difference, the court of appeals in Hanson held the entire reducing clause invalid, even though the insurer never sought to reduce benefits because of payment from an impermissible source, but only from an allowed source.

If one were to take the reasoning of Hanson, and apply it to this case, the reducing clause is invalid, not only in this case, but in all Hastings Mutual policies. If the definition of "underinsured motor vehicle" can theoretically operate as an unlawful reducing clause, then the reasoning in Hanson would require that the reducing clause fail in all cases.

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However, just a day before the case at bar was decided, a different district of the court of appeals held that Hanson was no longer valid law, in Klinger v. Prudential Property and Casualty Ins. Co., No. 2004AP1704 (Wis.Ct.App., Apr. 20, 2005). The court wrote, "post-Hanson law has … established that an insured will not be heard to rely on hypothetical scenarios in an effort to invalidate a reducing clause. Instead, we look to the actual facts of the particular case and determine whether the reducing clause at issue permitted the payment reduction in question and whether the reducing clause was authorized by Wis. Stat. sec. 632.32(5)(i).

Since Hanson is no longer valid law, the actual facts in the case at bar could not be invoked, in garden-variety UIM disputes, as a hypothetical that renders the reducing clause invalid in those cases.

Nevertheless, it is not a hypothetical in this case, but the operative facts at issue. Since the effect of the definition is the same as reducing the UIM limits by amounts not paid or payable to the insured, and the insurer invoked the language of its definition to deny coverage, it would not be unreasonable to hold that the remedy is not merely to reform the definition of "underinsured motor vehicle," but to excise the reducing clause, as well.

– David Ziemer

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David Ziemer can be reached by email.