UIM limits not reduced by tortfeasor payments

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The Wisconsin Court of Appeals held on Dec. 1 that a reducing clause in an underinsured motorist endorsement does not permit reductions for amounts paid by a second tortfeasor who is not an underinsured motorist.

Travis L. Bailey was injured in an automobile accident, in which he was a passenger. Adrian Levy was the driver of the car in which he was riding, and was insured by American Family Insurance with limits of $25,000 per person and $50,000 per accident.

The driver of the other vehicle, Leticia Regala, was also insured by American Family, with limits of $250,000 per person and $500,000 per accident. American Family settled Bailey’s claims against its insureds by paying the limit of Levy’s policy, $25,000, on Levy’s behalf, and paying $37,500 on Regala’s behalf.

Bailey was insured by a State Farm Mutual Automobile Insurance policy with limits of $50,000 per person and $100,000 per accident. Thus, only Levy was an underinsured motorist.

The UIM endorsement provided in relevant part as follows:

“2. The most we will pay is the lesser of:

a. the limits of liability of this coverage reduced by any of the following that apply:

(1) the amount paid to the insured by or on behalf of any person or organization that may be legally responsible for the bodily injury; or
(2) the amount paid or payable under any worker’s compensation or disability benefits law; or

b. the amount of damages sustained, but not recovered.”

State Farm denied coverage and filed suit for declaratory judgment, contending that, because the total payments from American Family exceeded $50,000, there was no UIM coverage. Milwaukee County Circuit Court Judge Timothy G. Dugan disagreed, concluding that the policy was ambiguous, and the reducing clause invalid.

Both parties appealed, and the court of appeals affirmed in part, and reversed in part, in a decision by Judge Margaret J. Vergeront. The court reversed the holding that the policy was ambiguous, but held that that the UIM limits could not be reduced by the payment based on Regala’s liability.

Section 632.32(5)(i), which authorizes reducing clauses, 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 court noted that the policy tracks the language, except that the policy language does not contain the words “for which the payment is made,” — a difference to which no party attached relevance.

The court also noted that both the statute and the reducing clause are silent as to whether the “person or organization that may be legally responsible” includes a second tortfeasor who is not the UIM tortfeasor.

The court found that payments by second tortfeasors may not be used to reduce the UIM limits, because it is inconsistent with the purpose of UIM coverage: “to put the insured in the same position 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 reasoned, “If Levy’s liability policy had a limit of $50,000, then Bailey would have had that sum available to him in addition to the liability limits of Regala’s policy. If only the $25,000 payment on behalf of Levy reduces Bailey’s UIM limit of $50,000, then Bailey is in the same position he would have been if Levy had had a liability policy of $50,000: Bailey has $25,000 from Levy, another $25,000 available to him under his reduced UIM policy limits, and whatever he receives under Regala’s liability policy. However, if the payment from Regala may also reduce the UIM liability limits, then Bailey is entitled to no UIM coverage. Thus, Bailey is worse off than if Levy had a $50,000 liability policy by whatever amount his damages exceed $62,500, up to $87,500.”

The court concluded, “we must construe Wis. Stat. sec. 632.32(5)(i)1 in a manner consistent with the supreme court’s statements in Dowhower, Schmitz, and Langridge on the purpose of UIM coverage that underlies this statute. Accordingly, we conclude that the ‘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’ does not include payments by or on behalf of a second tortfeasor who is not the UIM tortfeasor.”

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The court thus held that State Farm’s limit of liability is only reduced by the $25,000 payment on behalf of the UIM tortfeasor, Levy, but not by the payment on behalf of Regala.

Turning to the policy as a whole, the court held that the reducing clause is not ambiguous in the context of the entire policy. Although the policy is lengthy, the court found that the endorsement can be easily located, and the organization of the policy is clear. Accordingly, the court reversed as to this issue.

Finally, the court held that Clause 2.b — which provides that regardless of the reduced limits of liability, State Farm will pay no more than “the amount of damages sustained but not recovered” — is enforceable, because it merely prevents recovery beyond actual damages.

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David Ziemer can be reached by email.