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Reducing Clause Case Analysis

By: dmc-admin//February 25, 2004//

Reducing Clause Case Analysis

By: dmc-admin//February 25, 2004//

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The decision is a good candidate for review in the Wisconsin Supreme Court, for two reasons: (1) it creates conflict between District I and District III as to whether reducing clauses can include any sources other than the three enumerated examples in sec. 632.32(5)(i); and (2) the court arguably failed to apply Badger Mutual Ins. Co. v. Schmitz, 2002 WI 98, 255 Wis.2d 61, 647 N.W.2d 223, properly.

In Taylor v. Greatway Ins. Co., 2001 WI 93, par. 25, 245 Wis.2d 134, 628 N.W.2d 916, the Supreme Court did speak approvingly of reducing clauses permitting reductions for payments from sources other than the enumerated ones.

However, as the court of appeals acknowledged, it was only in dicta. The actual issue in Taylor was whether the tortfeasor was an underinsured motorist under the definition in the policy.

The year after Taylor was decided, District III of the court of appeals squarely considered whether an addition to the three enumerated reducing sources was lawful, and held it was not. In Hanson v. Prudential Property & Casualty Ins. Co., 2002 WI App 275, 258 Wis.2d 709, 719, 653 N.W.2d 915, the court refused to apply a reducing clause that permitted reduction for payments “paid under any other source.”

Assuming the Supreme Court does take up this issue, argument may focus around the following sentence from Folkman v. Quamme, 2003 WI 116, par. 32, 264 Wis.2d 617, 665 N.W.2d 857: “inconsistencies in the context of a policy must be material to the issue in dispute and be of such a nature that a reasonable insured would find an alternative meaning (emphasis added).”

Insurers will have a strong argument that the phrase, “or any similar law,” is not material. In this case, as in every other reducing clause in reported cases, the payments at issue concerned payments from a permissible source.

In this case, as in the others, the insurer is not actually trying to apply the impermissible language to reduce its coverage, and the phrase is therefore immaterial to the dispute.

For plaintiffs to prevail, notwithstanding the above statement in Folkman, they may have to change the subject of debate away from Folkman — the argument is not whether the policy is inconsistent, but whether the reducing clause fails to comply with the statute, and is therefore void ab initio.

The second ground for likely review is the unusual manner in which the court of appeals purported to apply Schmitz.

In Schmitz, the Supreme Court meticulously navigated the path an insured must take to get from the declarations page to the text of the reducing clause, found the maze complex, and held the clause unenforceable. Schmitz, 2002 WI 98, pars. 52-59. In Hanson, the court did likewise. Hanson, 2002 WI App 275, pars. 8-15.

In two recent court of appeals decisions, both recommended for publication, those courts also detailed the path an insured must make to get from page one to the reducing clause. Dowhower v. Marquez, (No. 01-1347)(Dec. 10, 2003)(2003 WL 22900638)(Dowhower III), pars. 20-26; and Commercial Union Midwest Ins. Co., v. Vorbeck, (No. 03-0100)(Dec. 10, 2003)(2003 WL 22900621), pars. 26-28.

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Wisconsin Court of Appeals

Related Article

13-page auto policy unambiguous

In contrast, in the decision in the case at bar, no similar “navigation” of the policy can be found. Instead, the court found that the policy is only 13 pages long, and therefore, an insured can “easily flip through the policy and find the clearly-labeled endorsement page at the end.”

The court then added the statement, “following the declarations pages is a helpful index entitled ‘Quick Reference’ that, with the exception of the endorsements, assists the reader in locating particular clauses in the policy (emphasis added).”

That final statement in the analysis is nothing short of astounding. Far from easing the insured’s navigation of the policy, “the exception of the endorsements” from the index, can, and probably
should, be considered a hindrance that makes the endorsements difficult to find by directing attention everywhere else.

Admittedly, at only 13 pages, the policy probably is very simple to navigate, and the reducing clause could therefore be enforceable. In Hanson, the policy was much longer — 33 pages. Nevertheless, the court’s total failure to engage in the navigation process required by Schmitz makes the decision useless as precedent.

– David Ziemer

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David Ziemer can be reached by email.

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