Pro rata distributions amid insufficient policy limits

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An insurance company deposited its remaining policy limits with the court after settling with several, but not all, of the claimants in a personal-injury lawsuit.

The non-settling plaintiffs cried foul and invoked Wisconsin’s direct-action statute to argue that the policy limits should have been distributed in their entirety pro rata among all the claimants in accordance with each one’s damages.

The Court of Appeals was called on to weigh in.

Claims against the insurer

Donald Lewallen was driving his construction company’s van to a job site with his stepson and two employees when the van and a vehicle driven by Patricia Hamerski got into a fierce collision.

Lewallen, his stepson and Hamerski died at the scene. The two employees, Curtis Lovelien and Timothy Kroening, were injured.

Lovelien and Kroening sued Austin Mutual Insurance Company, the liability insurer of Lewallen and his construction company.

But they weren’t the only ones with claims against this insurer. The co-defendants – Hamerski’s estate, her adult son and her underinsured-motorist carrier – crossclaimed against it, and Lewallen’s widow intervened with a wrongful-death claim on the behalf of her son.

Settlements

Hamerski’s estate and son settled with her underinsured-motorist carrier, and assigned their claims to that carrier.

Austin Mutual was willing to pay its full policy limits of $500,000, and tried to effectuate a global settlement with the underinsured carrier, as well as with Lovelien, Kroening, and Lewallen’s widow.

When that failed, Austin Mutual settled with Lewallen’s widow for $185,000 and the underinsured carrier for $60,000. Thus, the only claims not settled were those of the plaintiffs Lovelien and Kroening.

Austin Mutual deposited the remaining $255,000 under its policy with the Trempealeau county clerk of court to be distributed to Lovelien and Kroenig.

Circuit court action

Trempealeau County Circuit Judge John Damon dismissed Austin Mutual from the lawsuit after it had deposited those funds.

It then asked Lovelien’s attorney to propose a distribution of the funds, and in the end ordered that $225,000 be distributed to Lovelien and $30,000 to Kroenig.

Both appealed.

Accord and satisfaction

Austin Mutual argued that the appeal was moot because of the doctrine of accord and satisfaction. The court of appeals, in a decision by District III Judge Mark Seidl, disagreed.

Accord and satisfaction is an agreement to discharge a disputed claim. “After receiving an offer, the creditor’s cashing of the full payment check constitutes an accord and satisfaction which discharges the entire debt” and is a defense against any action to enforce the claim.

Here, the so-called offer was actually made pursuant to a court order rather than being an independent offer to settle the plaintiffs’ claims. Moreover, the plaintiffs “could not have done more to manifest” their rejection of the so-called offer since they objected at every turn. Additionally, there was nothing in the record demonstrating that they had, in fact, cashed the court-ordered distribution checks.

Therefore, there was no accord and satisfaction.

Direct action statute

The thrust of the plaintiffs’ appeal was that the direct-action statute, sec. 632.24, “mandates that each person entitled to recover against that insured is entitled to their pro rata share of the applicable policy limit, based on the amount of damages each person sustained.”

The court was unpersuaded.

It pointed out that sec. 632.24 provides that a liability insurer is directly liable to the person entitled to recover from its insured, but, by its plain language, only up to the policy limits.

“Nothing in the language of the statute mandates that a distribution be ‘pro rata’ … when the policy limits are insufficient to satisfy all claimants.”

Additionally, the court found the argument inconsistent with the insurer’s right to settle at any time with any claimant. Seidl also wrote that it meant an insurer would have to litigate each case in order to determine the damages of each claimant.

The plaintiffs posited that fair distribution of insufficient policy limits is a valid public-policy consideration, but the court demurred to the legislature for such a determination.

Lastly, the plaintiffs cited a number of Wisconsin cases involving pro rata distribution of insufficient policy limits post-verdict. The court found them inapposite to this case since the issue here revolves around pretrial distributions.

Commentary

What pathetically insufficient policy limits for an accident resulting in the death of two adults and a teenager, and bodily injuries to two other adults.

Notwithstanding the obvious shortfall each claimant would receive, the plaintiffs seem to have dug their heels in at the possibility of paltry compensation for their injuries.

The plaintiffs’ primary argument in favor of pro rata distribution of insufficient policy limits does have facial appeal. It resonates in basic fairness.

And although the court thought it would lead to the need to litigate each case to determine damages, the fact of the matter is that insurers routinely estimate and determine amounts of damages in settling claims.

Nonetheless, the plaintiffs grounded their argument in the direct-action statute and there simply is no support for it there.

The case also offers an interesting argument about the application of the accord and satisfaction doctrine.