UIM definition impermissible reducing clause

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Underinsured motorist (UIM) benefits cannot be reduced by payments to other injured parties, the Wisconsin Supreme Court held on June 30. Where the effect of an automobile policy’s definition of underinsured motorist is to reduce the insured’s expected level of coverage, the court held the definition could not be enforced.

Elizabeth A. Pyrzynski fell asleep while driving, and two persons were injured as a result: her passenger, Joshua Opichka; and another driver, Alison M. Welin.

Pyrzynski had policy limits of $300,000, and Welin had UIM coverage of $300,000. Welin’s policy defines “underinsured motor vehicle” as “a motor vehicle which is insured by a liability bond or policy at the time of the accident which provides bodily injury liability limits less than the limits of liability of this Underinsured Motorists coverage.”

Welin brought suit against Pyrzynksi, Pyrzynski’s insurer, and her own insurer, American Family.

The parties stipulated that Welin’s damages were greater than $250,000 and that the tortfeasor’s $300,000 limits of liability would be shared between the two injured persons; the plaintiff received $250,000, and Opichka, $50,000.

American Family moved for summary judgment on the ground that its UIM endorsement was not triggered because Pyrzynksi’s vehicle did not meet the policy’s definition of an underinsured motor vehicle. Chippewa County Circuit Court Judge Benjamin D. Proctor granted the motion.

The court of appeals initially reversed, but withdrew that decision on motion for reconsideration, and then affirmed in its second unpublished opinion.

The Supreme Court granted review, and reversed, in a decision by Chief Justice Shirley S. Abrahamson.

Section 632.32(5)(i) provides that a reducing clause in uninsured or underinsured motorist coverage may allow for reduction of coverage for only three types of payments: 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; amounts paid or payable under any worker’s compensation law; and amounts paid or payable under any disability benefits laws.

The court concluded that the policy’s definition of underinsured vehicle operates as an unlawful reducing clause, and thus, cannot be enforced against Welin to exclude coverage.

The court noted that it permits UIM coverage to operate in two manners. Under the first, UIM coverage compensates an insured accident victim whenever the insured’s damages exceed the recovery from the at-fault driver, and coverage is for a set dollar amount above and beyond the liability limits of the at-fault driver.

Under the second, UIM coverage is designed 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 UIM limits purchased by the insured — the “limits-to-limits” view. Under this coverage, an insured purchases a predetermined, fixed level of insurance coverage made up of payments from both the at-fault driver’s liability policy and the injured person’s UIM policy.

American Family’s policy falls into this latter category. Thus, the court found, the policy creates a predetermined, fixed level of UIM coverage of $300,000 that must be paid by either the tortfeasor or American Family.

The court concluded, “The tortfeasor’s insurance company’s payment to the plaintiff was less than the plaintiff’s UIM limits. To put the plaintiff in the same position she would have been in had the tortfeasor’s liability limits as to her been the same as the UIM limits she purchased, she must receive $50,000 from American Family to bring her recovery to $300,000.”

The court then addressed two prior cases that seem to support American Family’s position: State Farm Mut. Automobile Ins. Co. v. Langridge, 2004 WI 113, 275 Wis. 2d 35, 683 N.W.2d 75; and Praefke v. Sentry Ins. Co., 2005 WI App 50, 279 Wis.2d 325, 694 N.W.2d 442.

In Langridge, the Supreme Court commented that in a UIM policy using American Family’s definition of an underinsured motor vehicle, the “payment to other injured parties that reduces the coverage available to an insured below the UIM limits will usually not trigger UIM coverage.”

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In Praefke, the court of appeals held, interpreting an identical definition of underinsured vehicle, that the tortfeasor’s vehicle did not meet the definition.

The Supreme Court concluded it was not bound by the term “usually,” in Langridge, and limited Praefke to its facts, because the court there only addressed whether the vehicle qualified as an underinsured motorist, without considering whether that definition operated as an impermissible reducing clause.

Holding that strict application of the policy definition would contravene the statute, the court reasoned, “Were we to allow the plaintiff, under the circumstances of the present case, to receive a payment from the tortfeasor’s insurer that is less than the plaintiff’s UIM coverage and not have the plaintiff’s UIM coverage be triggered, the plaintiff would not have purchased a predetermined, fixed level of $300,000 coverage from some combination of sources of payment. Furthermore, the plaintiff’s recovery would be reduced by an amount not permitted under Wis. Stat. sec. 632.32(5)(i).”

Accordingly, he court held that Welin is entitled to recover $50,000 from American Family — the difference between her UIM limits, and the amount she received from Pyrzynski’s insurer.

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David Ziemer can be reached by email.