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Reducing Clauses Analysis

If this decision is published, and not reversed by the Supreme Court, it is going to cause problems in determining its breadth.

In this case, both the appellant’s and the appellee’s briefs were extremely well written. Significant swaths of text could have been lifted verbatim from either brief, to create a principled rule of law that could easily be applied in future cases.

Gresens’ brief, for example, argued that sec. 632.32(5)(i) prohibits insurers from ever reducing UIM policy limits by payments from joint tortfeasors who are not also underinsured motorists.

Suppose for example, A is in a three-car accident with B and C; B is underinsured; C is not. Gresens argued that A’s UIM limits could never be reduced by payments from C’s insurer, arguing that sec. 632.32(5)(i)1. does not allow it. Whether one agrees with such a proposed rule or not, it would be easy for attorneys and lower courts to apply.

However, the court of appeals declined to address this argument.

Gresens’ alternative argument was that, under State Farm’s policy language, payments from the insured’s own insurer cannot be used to reduce the insured’s policy limits, even if payments from a non-related joint tortfeasor can.

Thus, in the hypothetical above, A’s insurer could reduce her policy limits by payments from C’s insurer, as well as from B’s.

However, where C is A’s husband, and they have the same policy, Gresens argued that UIM policy limits cannot be reduced by payments made pursuant to the liability provisions of the same insurance policy. Only payments from B’s insurer reduce the limits.

That argument was based on particularities in the policy’s choice of language, not statutory grounds. Again, agree with the argument or not, the rule would be easy to apply, and insurers could adapt their policy language to avoid application of the rule.

The court, however, adopted neither of Gresens’ arguments, nor did it adopt any of State Farm’s.

Instead, the opinion goes much further, seeming to disallow reduction of payments made from any source other than an underinsured motorist, even worker’s compensation or disability policies.

The court called the policy “misleading,” because, “There are many instances … where an insured is legally entitled to collect damages from a motorist whose limits of liability are less than the limits of the State Farm policy. Under the policy definition of coverage, State Farm will pay damages in that situation. Yet under State Farm’s UIM reducing clause, State Farm will pay nothing.”

Consider a final hypothetical: A has $100,000 UIM limits, as in the case at bar, and is injured in an accident with just B, who is underinsured, with only $50,000 limits. However, A recovers more than $50,000 in worker’s compensation benefits.

As sec. 632.32(5)(i) has always been understood (provided the policy is not deficient in some way not relevant to this analysis), A can recover nothing under her UIM coverage. The reducing clause is authorized by statute, and because the insured’s recovery exceeds her UIM limits, she cannot recover.

However, the above quote from the court of appeals would apply, just as strongly as it does in the case at bar. The UIM coverage promises coverage; but the reducing clause takes it away. Gresens made no such radical argument in her brief; yet that is what the opinion appears to hold.

If this opinion is published and not reversed, circuit courts will face a dilemma.

This case has unusual facts, in that the underinsured motorist’s joint tortfeasor was the insured’s husband, and her UIM coverage was part of the same policy as his liability coverage. A circuit court limit the case to such facts, or even limit to cases involving two tortfeasors — one underinsured, one not — but neither is covered by the same policy as the insured.

However, if a circuit court takes the court’s reasoning in the case at bar to its logical conclusion, it will have to conclude that a reducing clause that permits reduction for worker’s compensation benefits conflicts with the policy’s UIM coverage, just as a reducing clause that permits reduction for payments from a joint tortfeasor who is not underinsured conflicts with the coverage.

That argument, however, has been rejected by the Supreme Court, and wasn’t argued in the case at bar by the plaintiff.

Obviously, the final hypothetical is explicitly addressed by sec. 632.32(5)(i), and the first two hypotheticals are not, so the case at bar could be distinguished on that ground when the third hypothetical arises.

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Reducing clause conflicts with UIM coverage

But, as noted, the court never addressed the statutory argument, and based its decision solely on the policy language.

Furthermore, the reducing clause in this case, and the definition of underinsured motor vehicle, are no different than those in many other policies from other insurers.

Arguably, some policies may be distinguishable based on the following sentence by the court: “Absent some clue directing the insured to [the reducing clause], an insured could reasonably rely on State Farm’s statement that it ‘will pay damages an insured is legally entitled to collect from’ an underinsured motorist.”

Other than this one sentence, however, everything else the court wrote on the issue is broad enough to encompass any UIM policy that contains a reducing clause. It is not clear why this one sentence should nullify the rest of the analysis.

Unfortunately, this particular policy (at least according to the court) suffers from two other flaws, so it may not be the best vehicle for Supreme Court review of this narrow issue. But, at some point, this opinion will have to be reconciled with existing precedents, limited to its facts, or overruled.

– David Ziemer

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David Ziemer can be reached by email.

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