UIM limits reduced by second tortfeasor payments

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The Wisconsin Court of Appeals held on Dec. 22 that a reducing clause in an underinsured motorist (UIM) endorsement allows reductions for payments from a second tortfeasor who is not underinsured.

In doing so, the court directly contradicted a holding from the same district just three weeks ago, in a case that was also recommended for publication in the official reports.

Jeffrey E. Marotz was a passenger in an automobile driven by Arthur Hallman. Hallman failed to stop at a stop sign and was struck by a vehicle driven by Donald Hilgemann. Marotz suffered extensive injuries.

Hallman had policy limits of $25,000, and his insurer settled with Marotz for that amount.

Marotz is insured under his parents’ policy with Rural Mutual Insurance Company, which contains UIM coverage of $100,000.

Hilgemann had more insurance than Marotz’ parents, and Hilgemann’s insurer settled with Marotz for $90,000.

Marotz then sought coverage from Rural Mutual, seeking UIM benefits of $75,000 ($100,000 policy limits less the $25,000 policy limits received from Hallman’s insurer). Rural denied coverage because the combined payments from Hallman’s insurer and Hilgemann’s insurer exceeded $100,000.

Marotz brought suit, but Waupaca County Circuit Court Judge John P. Hoffman held that he was not entitled to recover UIM benefits from Rural. Marotz appealed, but the court of appeals affirmed in a decision written by Judge Charles P. Dykman, and joined by Judge David G. Deininger. Judge Paul B. Higginbotham wrote a concurring opinion.

Section 632.32(5)(i) permits insurers to include reducing clauses in their policies, providing as follows:

“(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:

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.”

Rural’s reducing clause provides, in relevant part, “The limit of liability shall be reduced by all sums … [p]aid because of the ‘bodily injury’ by or on behalf of persons or organizations who may be legally responsible.”

Marotz argued the clause is ambiguous because it could include both payments from tortfeasors who are not also underinsured motorists, or it could be limited to meaning only “persons who may be legally responsible for the negligence of the owner or operator of the underinsured motor vehicle.”

Marotz argued that, had Rural intended to include payments by adequately insured tortfeasors within the reducing clause, its policy would have so stated, but the court disagreed, concluding, “an insurance policy cannot be written to cover every possible situation.”

The court explained, “Hilgemann’s insurer paid Marotz $90,000 because it apparently concluded that Hilgemann would be found legally responsible for Marotz’s bodily injury. The Rural policy need not explain all of the myriad possibilities which would result in a payment to Marotz. By using the phrase ‘all sums,’ the policy unambiguously conveys a meaning that whatever the source, Rural was entitled to reduce UIM benefits by the sums paid. It need not have added: ‘By “all” we mean all.’ Likewise, the statute’s use of the phrase ‘paid by or on behalf of any person or organization that may be legally responsible’ plainly conveys the same meaning.”

The court cited Supreme Court precedent supports its interpretation, as well. In Dowhower v. West Bend Mut. Ins. Co., 2000 WI 73, par. 17, 236 Wis.2d 113, 613 N.W.2d 557, the court wrote, “The statute plainly allows a motor vehicle insurance contract to state that the maximum amount that the insurer will pay under the policy will be setoff by amounts paid by a tortfeasor.”

The court of appeals concluded, “it defies common sense to say that the phrase in Dowhower, ‘amounts paid by a tortfeasor,’ means one thing where there is one tortfeasor and another where there are two. Even Marotz must concede that Hilgemann is a tortfeasor, for without that, Marotz could recover nothing from him.”

The court also rejected Marotz’ argument that the reducing clause in ambiguous in the context of the policy as a whole.

The court reasoned, “Marotz contends that contextual ambiguity exists here because Rural’s insuring clause does not suggest to an insured that damages recovered from a fully insured tortfeasor may reduce UIM coverage. Marotz is correct; Rural’s UIM insuring clause does not mention fully insured
tortfeasors. But ambiguity does not exist because one clause in Rural’s UIM coverage requires Rural to pay for damages caused by an underinsured motorist and another reduces that payment by amounts paid by other persons or organizations. The two clauses are readily understandable and do not conflict.”

The court added, “We agree that Marotz was involved in an accident with an underinsured motor vehicle. Hallman’s vehicle fits that description. But the fact that Hallman’s vehicle was underinsured has nothing to do, either factually or logically, with the different question of whether Rural is entitled to reduce the payment it is required to make by a payment made on behalf of a fully insured motor vehicle driver, or for that matter, worker’s compensation payments, as also permitted under the statute and Rural’s policy.”

Finally, the court concluded that case law does not require a different result. The court acknowledged that the Supreme Court has stated, in several cases, that the purpose of the UIM coverage is “solely 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,” but concluded this did not affect the analysis.

The court wrote, “We conclude that Marotz’s parents, when they purchased UIM coverage from Rural, received a promise that regardless of the liability coverage of the person or persons responsible for an accident, their son, while a passenger in another’s automobile, would be able to recover at least $100,000. He has done so. It is undisputed that the tortfeasors’ liability limits of $25,000 and at least $90,000 not only equal Marotz’s UIM coverage, they exceed it. Marotz focuses solely on Hallman’s status as an underinsured motorist, and argues that had Hallman been fully insured, Marotz would have been entitled to $100,000 from Hallman’s insurer and $90,000 from Hilgemann’s insurer. That is true, but it does not alter the fact that, under the language of Marotz’s policy, Rural is entitled to reduce the amount it is obligated to pay Marotz by the amounts he received from both tortfeasors, a result permitted by Wis. Stat. sec. 632.32(5)(i)1.”

The court concluded, “were we to conclude that the purpose of UIM coverage as Marotz defines it overcomes the plain language of Wis. Stat. sec. 632.32(5)(i)1., the same reasoning would excise subds. 2. and 3. from sec. 632.32(5)(i). The result would be that even though the legislature has expressly permitted insurers to reduce UIM payments by worker’s compensation and disability payments, insurers would be prevented from doing so by judicial fiat.”

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Accordingly, the court held that the reducing clause is unambiguous and permits Rural to reduce the amount it must pay Marotz by the $90,000 Hilgemann’s insurer paid Marotz.

In a footnote, the court acknowledged that a different panel of the court of appeals recently accepted the final argument made by Marotz, and denied a reduction for payments from tortfeasors other than the underinsured driver. State Farm Mutual v. Bailey, No. 2003AP2482 (WI App Dec. 1, 2005, recommended for publication).

Nevertheless, the court wrote, “A majority of this panel, however, reached a different conclusion. We assume the losing parties in both appeals will seek review by the supreme court, which we recommend be granted.”

Judge Higginbotham, the only judge who sat on both this case, and Bailey, wrote separately to explain his position: “after having the unusual and rare opportunity to reconsider the issue here, I conclude that the better and more proper analysis is to consider the plain and unambiguous language of the statute and of the policy. I believe the majority opinion has done so here.”

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David Ziemer can be reached by email.