Title: Thomas W. Nelson v. John L. McLaughlin

State: wisconsin

Issuer: Wisconsin Supreme Court

Document:

SUPREME COURT OF WISCONSIN 
 
 
Case No.: 
95-3391 
 
 
Complete Title 
of Case: 
 
 
Thomas W. Nelson,  
          Plaintiff-Respondent-Petitioner, 
American Family Mutual Insurance Company  
and Wisconsin Physicians Service  
Insurance Corporation,  
          Plaintiffs-Respondents, 
     v. 
John L. McLaughlin and Mutual Service  
Casualty Company,  
          Defendants-Appellants. 
  
 
ON REVIEW OF A DECISION OF THE COURT OF APPEALS 
Reported at:  205 Wis. 2d 460, 556 N.W.2d 130 
 
 
 
(Ct. App. 1996) 
 
 
 
PUBLISHED 
 
 
Opinion Filed: 
July 2, 1997 
Submitted on Briefs: 
 
Oral Argument: 
May 28, 1997 
 
 
Source of APPEAL 
 
COURT: 
Circuit 
 
COUNTY: 
Douglas 
 
JUDGE: 
Joseph A. McDonald 
 
 
JUSTICES: 
 
Concurred: 
 
 
Dissented: 
Abrahamson, C.J., dissents (opinion filed) 
 
 
  Bablitch and Bradley, JJ, join 
 
 
Not Participating:  
 
 
ATTORNEYS: 
For the plaintiff-respondent-petitioner there 
were briefs by Toby E. Marcovich, George L. Glonek and Marcovich, 
Cochrane & Milliken, Superior and oral argument by Toby E. 
Marcovich. 
 
 
For the defendants-appellants there was a brief 
by Jeffrey A. Schmeckpeper, Christine D. Bakeis and Kasdorf, 
Lewis & Swietlik, S.C., Milwaukee and oral argument by Jeffrey A. 
Schmeckpeper. 
 
 
Amicus curiae was filed by Jason W. Whitely and 
Erspamer Law Office, Amery for the Wisconsin Academy of Trial 
Lawyers. 
 
No. 95-3391 
 
1 
 
NOTICE 
This opinion is subject to further editing and 
modification.  The final version will appear in 
the bound volume of the official reports. 
 
 
No. 95-3391 
 
STATE OF WISCONSIN               :        
        
 
 
 
 
IN SUPREME COURT 
 
 
Thomas Nelson, 
 
 
Plaintiff-Respondent-Petitioner, 
 
American Family Mutual Insurance Company 
and Wisconsin Physicians Service Insurance 
Corporation, 
 
 
Plaintiff-Respondents,            
 
 
v. 
 
John L. McLaughlin and 
Mutual Service Casualty Company, 
 
 
Defendants-Appellants. 
 
FILED 
 
JUL 2, 1997 
 
Marilyn L. Graves 
Clerk of Supreme Court 
Madison, WI 
 
 
 
 
 
 
REVIEW of a decision of the Court of Appeals.  Affirmed. 
¶1 
N. PATRICK CROOKS, J.  Thomas W. Nelson (Nelson) seeks 
review of a published decision of the court of appeals which 
reversed an Order for Judgment of the Circuit Court for Douglas 
County, Joseph A. McDonald, Judge.
1  In the circuit court, Nelson 
filed 
suit 
against 
John 
L. 
McLaughlin 
(McLaughlin) 
and 
McLaughlin's insurer, Mutual Service Casualty Company (Mutual 
                     
1  See Nelson v. McLaughlin, 205 Wis. 2d 460, 462-63, 556 
N.W.2d 130 (Ct. App. 1996).  The court of appeals also rejected 
John L. McLaughlin's claim that the evidence was not sufficient 
to sustain the jury verdict.  Id. at 464-66.  This issue is not 
before us on review. 
No. 95-3391 
 
2 
Service), for damages Nelson suffered in an automobile accident. 
 Prior to trial, Nelson offered to settle the entire case for 
the policy limits of $100,000, but the offer was rejected.  
Subsequently, the jury awarded Nelson $507,407.40 in damages.  
Accordingly, pursuant to Wis. Stat. § 807.01(4) (1993-94),
2 
Nelson was entitled to 12% interest on the amount recovered from 
the date of the offer of settlement until the amount was paid.   
¶2 
The sole issue on review is whether Mutual Service is 
liable for interest owed under Wis. Stat. § 807.01(4) on the 
entire verdict of $507,407.40, rather than its policy limits of 
$100,000.  The court of appeals, applying its recent decision in 
Blank v. USAA Property & Cas. Ins. Co., 200 Wis. 2d 270, 546 
N.W.2d 512 (Ct. App. 1996), held that the circuit court 
improperly imposed interest on the entire verdict against Mutual 
Service.  We agree with the court of appeals that Mutual Service 
is liable for interest imposed under § 807.01(4) only on its 
policy limits.  This conclusion is based on:  (1) the 
legislature's choice of the phrase "amount recovered" instead of 
"verdict" or "judgment" in § 807.01(4); and (2) the fact that if 
"amount recovered" is interpreted to mean the entire verdict, 
                     
2  
Section 807.01(4) provides: 
If there is an offer of settlement by a party under 
this section which is not accepted and the party 
recovers a judgment which is greater than or equal to 
the amount specified in the offer of settlement, the 
party is entitled to interest at the annual rate of 
12% on the amount recovered from the date of the offer 
of settlement until the amount is paid.  Interest 
under this section is in lieu of interest computed 
under ss. 814.04(4) and 815.05(8). 
 
All future references are to the 1993-94 Statutes unless 
otherwise indicated. 
No. 95-3391 
 
3 
insurers will be forced to settle cases that would be more 
appropriately resolved at trial.  We emphasize that our 
interpretation of "amount recovered" will not encourage insurers 
to deny settlement offers in reckless disregard of their 
insureds' interests, because the availability of a bad faith 
claim provides a substantial deterrent against insurers engaging 
in such practices.   
¶3 
In addition, we acknowledge that an insurer may, 
pursuant to its insurance contract, agree to pay interest 
imposed under Wis. Stat. § 807.01(4) on damages above its policy 
limits.  However, in this case, we conclude that Mutual Service 
did not agree to pay interest on damages above its policy 
limits, and that this provision of its insurance contract with 
McLaughlin does not contravene Wisconsin law or public policy.  
Accordingly, we affirm the decision of the court of appeals. 
I. 
¶4 
The pertinent facts are undisputed.  On May 3, 1990, 
an accident occurred involving motor vehicles operated and owned 
by Nelson and McLaughlin.  At the time of the accident, Mutual 
Service insured McLaughlin under a car insurance policy that 
contained a bodily injury liability limit of $100,000 per 
person.  The policy also contained the following provision: 
 
We will pay damages for bodily injury . . . for which 
any insured becomes legally responsible because of an 
accident . . . . We will settle or defend, as we 
consider appropriate, any claim or suit asking for 
these damages. 
(R.68, exhibit 24, at 3) (emphasis added; emphasis from policies 
omitted.)  Therefore, pursuant to this provision, Mutual Service 
had control over the litigation, including settlement.   
No. 95-3391 
 
4 
¶5 
On December 11, 1992, Nelson filed suit against 
McLaughlin and Mutual Service, alleging damages for pain and 
suffering, loss of wages, and medical expenses.  Subsequently, 
Mutual Service conceded that McLaughlin was liable to Nelson; 
therefore, the only remaining issue was the extent of Nelson's 
damages.  However, Mutual Service decided to contest this issue, 
because it believed that surgery performed on Nelson's back in 
1993 was not necessary to alleviate symptoms caused by the 
accident, but instead to alleviate symptoms of Schurmann's 
disease, a preexisting degenerative disc disease. 
¶6 
On November 21, 1994, pursuant to Wis. Stat. § 807.01, 
Nelson served a formal offer of settlement, whereby Nelson 
offered to settle the litigation against both Mutual Service and 
McLaughlin for the $100,000 policy limits.  This offer was not 
accepted. 
¶7 
On August 29, 1995, through August 31, 1995, a jury 
trial was held on the issue of damages.  The jury returned a 
unanimous verdict against Mutual Service and McLaughlin in the 
total 
amount 
of 
$507,407.40. 
 
Since 
Nelson's 
offer 
of 
settlement, was not accepted, and the verdict was greater than 
or equal to the amount specified in the offer, Nelson was 
entitled to 12% interest on the amount recovered from the date 
of the offer of settlement until the amount was paid, pursuant 
to Wis. Stat. § 807.01(4).   
¶8 
In its motions after verdict, Mutual Service argued 
that, pursuant to McPhee v. American Motorists Ins. Co., 57 Wis. 
2d 669, 205 N.W.2d 152 (1973), it was not liable for interest on 
No. 95-3391 
 
5 
the entire verdict because the following language from the 
insurance policy was controlling: 
 
In addition to our limit of liability we will pay for 
an insured: 
  
. . .  
 
4. 
Interest on all damages owed by an insured as the 
result of a judgement until we pay, offer or deposit 
in court the amount due under this coverage.  Interest 
will be paid only on damages which do not exceed our 
policy limits. 
(R.68, exhibit 24, at 3) (emphasis added; emphasis from policies 
omitted.)  Mutual Service therefore contended that it was liable 
for interest only on its policy limits.
3 
¶9 
At a motion hearing held on November 21, 1995, the 
circuit court rejected Mutual Service's argument.  The circuit 
court held that Mutual Service was responsible for interest on 
the entire verdict, based on Knoche v. Wisconsin Mut. Ins. Co., 
151 Wis. 2d 754, 445 N.W.2d 740 (Ct. App. 1989).  Accordingly, 
on November 28, 1995, the circuit court entered judgment against 
Mutual Service in the amount of $100,000, together with double 
taxable 
costs 
and 
disbursements 
pursuant 
to 
Wis. 
Stat. 
                     
3  We acknowledge that, beginning with this motion after 
verdict, Mutual Service's interests have been directly contrary 
to McLaughlin's interests in regard to the issue of interest 
under Wis. Stat. § 807.01(4).  Although it therefore may be 
arguable that Mutual Service had a duty to provide McLaughlin 
with a separate attorney at this point in the litigation, this 
issue is not before us on review.  See Nelson, 205 Wis. 2d at 
467 n.3.  Moreover, although McLaughlin did not have separate 
counsel representing his interests before this court, Nelson's 
attorney stated during oral arguments that he is in effect 
representing McLaughlin's interests, since McLaughlin assigned 
his bad faith claim against Mutual Service to Nelson.  We agree 
that Nelson's attorney in effect has represented McLaughlin's 
interest before this court, and therefore conclude that both 
sides of this controversy have been adequately presented to us 
for our consideration. 
No. 95-3391 
 
6 
§ 807.01(3), 12% interest on the jury verdict of $507,407.40 
from November 21, 1994 through October 24, 1995, and further 
interest until the judgment was paid.  The circuit court also 
entered 
judgment 
against 
McLaughlin 
in 
the 
amount 
of 
$407,407.40.  
¶10 Mutual Service appealed, and the court of appeals 
reversed the circuit court's order.  Nelson v. McLaughlin, 205 
Wis. 2d 460, 467-68, 556 N.W.2d 130 (Ct. App. 1996).  In making 
its determination, the court of appeals relied exclusively on 
its recent decision in Blank, in which it held that Wis. Stat. 
§ 807.01(4) "merely allows a trial court to impose interest 
against a party on the 'amount recovered' against that party."
 4 
 See Nelson, 205 Wis. 2d at 468 (explaining Blank).  Applying 
Blank, the court of appeals held that, under § 807.01(4), Mutual 
Service could only be held liable for interest on its policy 
limits.  Id.  In addition, the court concluded that it was 
"unnecessary to address Mutual Service's argument that its 
contract with McLaughlin denied coverage for penalty interest on 
amounts above the policy limits."  Id. at 468 n.6. 
II. 
¶11 The issue of whether Mutual Service is liable for 
interest on the entire verdict involves the interpretation and 
application of Wis. Stat. § 807.01(4).  Interpretation and 
application of a statute to undisputed facts is a question of 
law, reviewable de novo.  See, e.g., Sievert v. American Family 
Mut. Ins. Co., 190 Wis. 2d 623, 628, 528 N.W.2d 413 (1995); 
                     
4  Blank had not been decided at the time the circuit court 
rendered its decision. 
No. 95-3391 
 
7 
Chang v. State Farm Mut. Auto. Ins. Co., 182 Wis. 2d 549, 560, 
514 N.W.2d 399 (1994).  
¶12 The goal of statutory interpretation is to ascertain 
and give effect to the legislature's intent.  See, e.g., Lake 
City Corp. v. City of Mequon, 207 Wis. 2d 156, 163, 558 N.W.2d 
100 (1997); DeMars v. LaPour, 123 Wis. 2d 366, 370, 366 N.W.2d 
891 (1985).  If the meaning of a statute is clear from its 
language, we are prohibited from looking beyond such language.  
See, e.g. Stockbridge School Dist. v. DPI, 202 Wis. 2d 214, 220, 
550 N.W.2d 96 (1996) (quoting Jungbluth v. Hometown, Inc., 201 
Wis. 2d 320, 327, 548 N.W.2d 519 (1996)).  However, if the 
language of a statute is ambiguous, we must look at the history, 
scope, context, subject matter, and object of the statute to 
discern legislative intent.  See, e.g., Lake City Corp., 207 
Wis. 2d at 164; DeMars, 123 Wis. 2d at 370.  Statutory language 
is ambiguous if reasonably well-informed individuals could 
differ as to its meaning.  Harnischfeger Corp. v. LIRC, 196 Wis. 
2d 650, 662, 539 N.W.2d 98 (1995); Wagner Mobil, Inc. v. City of 
Madison, 190 Wis. 2d 585, 592, 527 N.W.2d 301 (1995).   
¶13 When interpreting a statute, this court is guided by 
several principles.  First, in the absence of a statutory 
definition, 
"[a]ll 
words 
and 
phrases 
shall 
be 
construed 
according to common and approved usage; but technical words and 
phrases and others that have a peculiar meaning in the law shall 
be construed according to such meaning."  Wagner Mobil, Inc., 
190 Wis. 2d at 591 (quoting Wis. Stat. § 990.01(1)).  Second, 
where the legislature uses similar but different terms in a 
statute, particularly within the same section, it is presumed 
No. 95-3391 
 
8 
that the legislature intended such terms to have different 
meanings.  Armes v. Kenosha County, 81 Wis. 2d 309, 318, 260 
N.W.2d 515 (1977); Calaway v. Brown County, 202 Wis. 2d 737, 
758-59, 553 N.W.2d 809 (Ct. App. 1996); American Motorists Ins. 
Co. v. R & S Meats, Inc., 190 Wis. 2d 196, 214, 526 N.W.2d 791 
(Ct. App. 1994).    Third, this court must interpret a statute 
in a manner that avoids an absurd or unreasonable result.  See, 
e.g., Lake City Corp., 207 Wis. 2d at 163; DeMars, 123 Wis. 2d 
at 370. 
¶14  This case also involves the interpretation of an 
insurance policy.  In the absence of extrinsic evidence, we 
determine the interpretation of an insurance policy as a matter 
of law, without deference to the lower courts.  See, e.g., 
Sprangers v. Greatway Ins. Co., 182 Wis. 2d 521, 532, 514 N.W.2d 
1 (1994).  In general, the interpretation of an insurance policy 
is controlled by principles of contract construction.  See, 
e.g., Kuhn v. Allstate Ins. Co., 193 Wis. 2d 50, 60, 532 N.W.2d 
124 (1995); McPhee v. American Motorists Ins. Co., 57 Wis. 2d 
669, 673, 205 N.W.2d 152 (1973).  A court must construe and 
enforce an insurance policy in conformity with the parties' 
intentions.  See, e.g., Maas v. Ziegler, 172 Wis. 2d 70, 79, 492 
N.W.2d 621 (1992); McPhee, 57 Wis. 2d at 673.  "Of primary 
importance is that the language of an insurance policy should be 
interpreted to mean what a reasonable person in the position of 
the insured would have understood the words to mean."  General 
Cas. Co. v. Hills, 209 Wis. 2d 167, 175, 561 N.W.2d 718 (1997) 
(quoting Sprangers, 182 Wis. 2d at 536); accord, e.g., McPhee, 
57 Wis. 2d at 676. 
No. 95-3391 
 
9 
III.  STATUTORY INTERPRETATION OF WIS. STAT. § 807.01(4) 
A. 
¶15 We first consider whether Mutual Service is liable for 
interest 
on 
the 
entire 
verdict 
pursuant 
to 
Wis. 
Stat. 
§ 807.01(4).  Section 807.01(4) provides: 
 
If there is an offer of settlement by a party under 
this section which is not accepted and the party 
recovers a judgment which is greater than or equal to 
the amount specified in the offer of settlement, the 
party is entitled to interest at the annual rate of 
12% on the amount recovered from the date of the offer 
of settlement until the amount is paid.  Interest 
under this section is in lieu of interest computed 
under ss. 814.04(4) and 815.05(8).  
(Emphasis added.)  The parties dispute the meaning of the phrase 
"amount recovered."  Nelson argues, and the circuit court 
agreed, that "amount recovered" means the entire verdict awarded 
against Mutual Service and McLaughlin.  Mutual Service argues, 
and the court of appeals agreed, that "amount recovered" means 
only that portion of the verdict for which it is responsible, 
i.e., the judgment entered against it, not including double 
costs.  We conclude that reasonably well-informed individuals 
could interpret the phrase "amount recovered" in either way; 
therefore, this statutory language is ambiguous.  See Blank, 200 
Wis. 2d at 279-80.   
¶16 Although the parties and lower courts have primarily 
focused on the meaning of "amount recovered," Wis. Stat. 
§ 807.01(4) contains other language that is relevant to our 
determination.  Specifically, § 807.01(4) begins by indicating 
that interest is available when a party's pretrial settlement 
offer is rejected and the party subsequently "recovers a 
judgment which is greater than or equal to the amount specified 
No. 95-3391 
 
10
in the offer of settlement."  § 807.01(4) (emphasis added).  
Next, § 807.01(4) provides that the 12% interest award shall be 
calculated "on the amount recovered until the amount is paid."  
§ 807.01(4) (emphasis added).  Accordingly, in the very same 
sentence of § 807.01(4), the legislature used the distinct legal 
term "judgment"
5 and the phrase "amount recovered."   
¶17 The court of appeals considered this highly relevant 
in another case involving the interpretation of Wis. Stat. 
§ 807.01(4).  In American Motorists Ins. Co., the court 
considered whether "amount recovered" in § 807.01(4) includes 
the double costs portion of a judgment.
6   Id. at 212-15.  The 
court concluded that if the legislature had intended the later 
phrase "amount recovered" in § 807.01(4) to equate with the 
prior word "judgment," the legislature would have simply used 
                     
5 A "judgment" is "[t]he official and authentic decision of 
a court of justice upon the respective rights and claims of the 
parties to an action or suit therein litigated and submitted to 
its determination." Black's Law Dictionary 841 (6th ed. 1990).  
In this case, the judgment against Mutual Service was in the 
amount of $100,000, plus double costs and disbursements, 12% 
interest under § 807.01(4), and further interest until the 
judgment was paid. 
6  We acknowledge, however, that the court in American 
Motorists Ins. Co. wrongly concluded that Wis. Stat. § 807.01(4) 
was enacted by an order of this court.  See American Motorists 
Ins. v. R & S Meats, Inc., 190 Wis. 2d 196, 213-14, 526 N.W.2d 
791 (1994).  Although Wis. Stat. § 807.01 was initially enacted 
by a supreme court order, see Wisconsin Rules of Civil 
Procedure, 67 Wis. 2d 741-42 (1976), subsection (4) was enacted 
solely by the legislature.  See 1979 Wis. Laws ch. 271.  
However, since the court in American Motorists Ins. Co. applied 
traditional principles of statutory construction in reaching its 
holding, its analysis is sound despite this error. 
In addition, note that in our discussion of American 
Motorists Ins. Co., we have replaced the words "supreme court" 
with the word "legislature." 
No. 95-3391 
 
11
the same word.  Id. at 214.  Thus, the court concluded that 
"amount recovered" does not include double costs.  Id.  We agree 
with this reasoning, and therefore presume that the legislature 
did not intend "amount recovered" to mean "judgment." See id.; 
see also Armes, 81 Wis. 2d at 318; Calaway, 202 Wis. 2d at 758-
59.  
¶18 In addition, we find further guidance as to the 
meaning of "amount recovered" in Wis. Stat. § 814.04(4), which 
is explicitly referred to in Wis. Stat. § 807.01(4), and is 
closely interrelated to § 807.01(4) regarding the calculation of 
interest on a verdict.  Section 814.04(4) provides: "Except as 
provided in s. 807.01(4), if the judgment is for the recovery of 
money, interest at rate of 12% per year from the time of 
verdict, decision or report until judgment is entered shall be 
computed by the clerk and added to the costs."
7  (Emphasis 
added.)  Accordingly, in § 814.04(4), the legislature used the 
distinct legal term "verdict."
8   Moreover, in the very same bill 
in which it amended § 814.04(4), the legislature created Wis. 
                     
7  Although this court renumbered ch. 271 as ch. 814 in 
1975, see Wisconsin Rules of Civil Procedure, 67 Wis. 2d 761, 
and deleted the phrase "guardian ad litem fees" from Wis. Stat. 
§ 271.04(2) (now § 814.04(2)) in 1971, see 50 Wis. 2d xv (1971), 
the language of § 814.04(4) originates from the legislature.  In 
fact, the legislature's use of the word "verdict" in § 814.04(4) 
predates this court's amendments to § 814.04.  See § 271.04(4) 
(1969) (now § 814.04(4)).  
8  A "verdict" is "[t]he formal decision or finding made by 
a jury, impaneled and sworn for the trial of a cause, and 
reported to the court (and accepted by it), upon the matters or 
questions duly submitted to them upon the trial."  Black's Law 
Dictionary 1559 (6th ed. 1990).  In this case, the verdict 
against Mutual Service, along with McLaughlin, was in the amount 
of $505,407.74.    
No. 95-3391 
 
12
Stat. § 807.01(4), using similar but different words "amount 
recovered." See 1979 Senate Bill 533; 1979 Wis. Laws ch. 271.   
¶19 It is therefore clear that the legislature knew how to 
use the precise legal terms "judgment" and "verdict" in regard 
to the calculation of interest.  See Wis. Stats. §§ 807.01(4) & 
814.04(4).  Consequently, if it had intended interest owed under 
§ 807.01(4) to be calculated on the amount of the entire 
verdict, it could have easily used the term "verdict" instead of 
"amount recovered."  Thus, the language of §§ 807.01(4) and 
814.04(4), along with American Motorists Ins. Co., strongly 
supports Mutual Service's contention that "amount recovered" 
does not mean the entire verdict, but instead means that portion 
of the verdict for which a party is responsible.
9  
 
B. 
¶20 We do not end our inquiry here, however, because we 
must ensure that this interpretation furthers the purpose of 
Wis. Stat. § 807.01(4).  It is well-settled that Wis. Stat. 
§ 807.01 is intended to encourage pretrial settlement.  See 
DeMars, 123 Wis. 2d at 373; Graves v. Travelers Ins. Co., 66 
Wis. 2d 124, 140, 224 N.W.2d 398 (1974); Gorman v. Wausau Ins. 
Cos., 175 Wis. 2d 320, 328, 499 N.W.2d 245 (Ct. App. 1993).  
                     
9  This interpretation is a logical one, as is demonstrated 
by the following example.  Suppose that, in this case, Nelson 
had 
filed 
suit 
only 
against 
Mutual 
Service 
pursuant 
to 
Wisconsin's direct action statute, Wis. Stat. § 632.24.  The 
verdict would be in the amount of $507,407.40; however, Nelson 
would only receive $100,000, in addition to costs and interest. 
 In such a situation, the "amount recovered" could not possibly 
be equated with the entire verdict, since Nelson would never 
recover more than Mutual Service's policy limit, along with 
costs and interest. 
No. 95-3391 
 
13
Yet, it is also clear that the purpose of § 807.01(4) is not to 
force a party into settlement of a suit that would more 
appropriately be resolved by a trial.  See DeMars, 123 Wis. 2d 
at 373-74; Blank, 200 Wis. 2d at 280. 
¶21 In 
Blank, 
the 
court 
of 
appeals 
considered 
it 
significant 
that 
Wis. 
Stat. 
§ 807.01(4) 
is 
intended 
to 
encourage, but not force, pretrial settlements.  200 Wis. 2d at 
280.  In particular, the court determined that if it were to 
construe "amount recovered" to mean the entire verdict, this 
construction would force pretrial settlement of cases that would 
more appropriately be resolved by a trial.  Id.  The court 
indicated: 
 
Where the insurer provides modest policy limits, where 
the insured's liability is fairly debatable or even 
highly debatable, and where the damages are manifestly 
immense, what insurer could refuse an offer of 
settlement? 
 
Were 
we 
to 
adopt 
the 
plaintiff's 
interpretation of § 807.01(4), STATS., the consequence 
for trying a valid liability issue may be an added 
liability for millions of dollars of interest. 
Id.  Accordingly, the court held that § 807.01(4) "imposes 
penalty interest upon the insurer for the amount recovered 
against it under its policy limits from the date of the offer." 
 Id. at 283 (emphasis added).   
¶22 We agree with the Blank court that if "amount 
recovered" in Wis. Stat. § 807.01(4) is interpreted to mean the 
entire verdict, insurers which provide modest policy limits will 
be compelled to accept pretrial settlement offers rather than 
risk 
substantial 
liability 
for 
interest, 
even 
where 
the 
insured's liability is questionable or the appropriate amount of 
damages is highly debatable.  For example, consider the 
following hypothetical: 
No. 95-3391 
 
14
 
Insured is involved in an automobile accident.  It 
appears likely that the third party's damages total 
$1,000,000; however, the insured's liability for such 
damages is highly debatable.  The third party offers 
to settle the entire litigation for $25,000, which is 
the insurer's policy limits.  The insurer wants to go 
to trial because it believes that its insured was not 
at fault.  However, the insurer is compelled to settle 
because of the substantial interest it would be liable 
for under § 807.01(4) if the jury returned a verdict 
against its insured.   
Consequently, if "amount recovered" were interpreted to mean the 
entire verdict, insurers would be unreasonably forced to settle 
cases that would be more appropriately resolved by a trial.  See 
Blank, 200 Wis. 2d at 280.  Thus, this interpretation must be 
avoided. See, e.g., DeMars, 123 Wis. 2d at 370 (court must 
interpret statute in manner that avoids unreasonable result).  
¶23 The dissent, however, concludes that Blank "should be 
read as condemning only an offer that unreasonably forces 
settlement, that is, an offer which the offeree cannot fairly 
assess in terms of its total individual liability to the 
litigant offering settlement."  Dissenting op. at 8.
10  However, 
                     
10  In Blank, USAA Property & Casualty Insurance Company 
(USAA) rejected a pretrial settlement offer for its liability 
policy limits of $100,000.00. Blank v. USAA Property & Cas. Ins. 
Co., 200 Wis. 2d 270, 275, 546 N.W.2d 512 (Ct. App. 1996).  The 
jury subsequently returned a verdict in favor of the plaintiff 
for $7,500,000; therefore, the plaintiff was entitled to 
interest under Wis. Stat. § 807.01(4).  Id.  In Blank, USAA was 
able to fairly assess the offer of settlement, since the offer 
was made by a single plaintiff to a single defendant.  See 
generally DeMars v. LaPour, 123 Wis. 2d 366, 373, 366 N.W.2d 891 
(1985).  In addition, counsel for Mutual Service conceded that 
liability policies generally contain a provision giving the 
insurer control over litigation; therefore, USAA likely had 
exclusive control over settlement.  The only difference between 
the present case and Blank is that, in Blank, the offer would 
not have released the insured.  Blank, 200 Wis. 2d at 275.  The 
dissent, however, fails to explain adequately why Blank is 
distinguishable because of this factual distinction, or why this 
factual distinction has any bearing in the present case.  
No. 95-3391 
 
15
the dissent ignores precedent which establishes that a party is 
unreasonably forced to settle under § 807.01(4) when forced 
"into settling suits which would be more appropriately resolved 
at trial,"  DeMars, 123 Wis. 2d at 374, which includes suits in 
which damages or liability are debatable, see Blank, 200 Wis. 2d 
at 280.  In addition, the dissent ignores the fact that this 
court cannot look at the present case in isolation, but instead 
must consider the impact of its decision in future cases.  As 
was true of the Blank court, see id., we are persuaded by the 
fact that if "amount recovered" in Wis. Stat. § 807.01(4) is 
interpreted to mean entire verdict, insurers in the future will 
be unreasonably forced to settle cases that should be resolved 
by a trial.  
¶24 Furthermore, the dissent attempts to distinguish Blank 
by concluding that "amount recovered" means the entire verdict 
only when "an insurance company has the sole right and ability 
to settle an entire litigation, yet rejects on behalf of itself 
and its insured a plaintiff's offer . . . ."   Dissenting op. at 
18 (emphasis added).  Accordingly, the dissent concludes that 
"amount recovered" means that portion of a verdict for which an 
insurer is liable, so long as the insurer rejected a settlement 
offer that would have released only the insurer, which was the 
situation in Blank.  However, where the insurer rejected a 
settlement offer that would have released both it and its 
insured, as is the situation here, the dissent concludes that 
"amount recovered" means the entire verdict.  The dissent does 
not adequately explain why these different interpretations of 
"amount recovered" are "consistent with the text of the statute" 
No. 95-3391 
 
16
and "mandated by the principles developed and followed in prior 
decisions interpreting § 807.01 . . . ." Id.
11  
¶25 We cannot conclude that Wis. Stat. § 807.01(4) has a 
different meaning depending on these facts. Section 807.01(4) is 
devoid of any indication that the legislature intended to impose 
interest differently on an insurer that rejects a settlement 
offer releasing both the insurer and insured, as opposed to an 
insurer that rejects a settlement offer releasing only the 
insurer.  Moreover, there is no indication that the legislature 
intended to impose interest differently on insurers as opposed 
to other parties in civil actions.  
¶26 Thus, we conclude that the legislature could not have 
intended "amount recovered" in Wis. Stat. § 807.01(4) to have a 
different meaning depending on the type of settlement offer that 
was refused by an insurer.  Instead, we hold that "amount 
recovered" in § 807.01(4) means that portion of the verdict for 
which a party is responsible, i.e., the judgment entered against 
the party, not including double costs.  This conclusion is based 
on the legislature's use of the phrase "amount recovered" 
instead of "verdict" or "judgment" in § 807.01(4), as well as 
the fact that application of the dissent's interpretation would 
unreasonably force settlement in future cases.  
¶27 Our interpretation of "amount recovered" in Wis. Stat. 
§ 807.01(4) is entirely consistent with Knoche.  In Knoche, the 
                     
11  The dissent further fails to explain adequately why, 
under Wis. Stat. § 807.01(4), it is reasonable to force 
settlement where the plaintiff makes a settlement offer that 
would release the insurer and insured, but unreasonable to force 
settlement where the plaintiff makes a settlement offer that 
would release only the insurer.    
No. 95-3391 
 
17
court of appeals considered whether the insurer was liable for 
interest from the date of the settlement offer under Wis. Stat. 
§ 807.01(4), or whether it was liable only for interest from the 
date of judgment under its insurance contract.  151 Wis. 2d at 
760.  The court held that the insurer was liable for interest 
from the date of the settlement offer under § 807.01(4), and 
could not free itself of this obligation by contract.
12  Id.  The 
Knoche court also considered whether the insurer was liable for 
interest imposed under Wis. Stat. § 807.01(4) on amounts above 
its policy limits.  Id. at 760-61.  The court concluded that the 
insurer was liable for interest above its policy limits pursuant 
to the language of the insurance contract.  Id. at 761.  
Accordingly, the court did not conclude whether the insurer was 
liable 
for 
such 
interest 
pursuant 
to 
§ 807.01(4), 
since 
resolution of this question was unnecessary.  Thus, Knoche does 
not "resolve[] the question presented in the case at bar." 
Dissenting op. at 15. 
¶28 In addition, we stress that because a claim for bad 
faith may be brought where an insurer breaches its duty to 
settle in good faith, see Mowry v. Badger State Mut. Cas. Co., 
129 Wis. 2d 496, 510-18, 385 N.W.2d 171 (1985), application of 
our interpretation of Wis. Stat. § 807.01(4) will not encourage 
insurers to deny settlement offers in reckless disregard of 
their insureds' interests. Specifically, where an insured can 
show by clear and convincing evidence that its insurer rejected 
                     
12  Mutual Service has never contended that it is liable for 
interest under Wis. Stat. § 807.01(4) from the date of judgment 
instead of the date of the settlement offer; therefore, this 
portion of Knoche is not controlling here. 
No. 95-3391 
 
18
a pretrial settlement offer without a reasonable basis for doing 
so, and it knew or recklessly disregarded this lack of a 
reasonable basis, the insurer will be liable for all damages 
that flow from its breach of the duty to settle in good faith. 
See id. 
at 515-16.  Accordingly, 
we 
conclude 
that the 
availability of a bad faith claim will substantially deter 
insurers from engaging in such practices.   
IV.  INTERPRETATION OF THE INSURANCE POLICY 
¶29 Although we have concluded that Mutual Service is not 
liable for interest on the entire verdict pursuant to Wis. Stat. 
§ 807.01(4), it nonetheless may be liable for interest on the 
entire 
verdict 
pursuant 
to 
its 
insurance 
contract 
with 
McLaughlin.  "Parties are at liberty to enter insurance 
contracts which specify the coverage afforded by the contract as 
long as the contract terms do not contravene state law or public 
policy."  Rural Mut. Ins. Co. v. Peterson, 134 Wis. 2d 165, 170, 
395 N.W.2d 776 (1986); accord McPhee, 57 Wis. 2d at 155.  
Accordingly, we must examine Mutual Service's insurance contract 
with Nelson, in order to determine whether Mutual Service agreed 
to pay interest imposed under § 807.01(4) on the amount of the 
entire verdict.  
¶30 The insurance policy at issue contains the following 
relevant provision: 
 
In addition to our limit of liability we will pay for 
an insured: 
  
. . .  
 
4. 
Interest on all damages owed by an insured as the 
result of a judgement until we pay, offer or deposit 
in court the amount due under this coverage.  Interest 
will be paid only on damages which do not exceed our 
policy limits. 
No. 95-3391 
 
19
(R.68, exhibit 24, at 3) (emphasis added; emphasis from policies 
omitted.)  Although this provision initially states that Mutual 
Service will be liable for interest on "all damages," this 
phrase is qualified in the subsequent sentence, which specifies 
that "all damages" means only those damages that do not exceed 
the policy limits.  We conclude, therefore, that this provision 
unambiguously states that Mutual Service is not liable for 
interest on damages that exceed the policy limits.   
¶31 This 
conclusion 
is 
consistent 
with 
precedent.  
Specifically, in McPhee, we considered whether an insurer was 
liable for interest on that portion of a judgment that was in 
excess of its policy limits.  We concluded that determination of 
this issue depended on the language of the insurance contract.  
57 Wis. 2d at 672-73.  The policy provided that the insurer 
would pay "all interest accruing after entry of judgment until 
the company has paid or tendered or deposited in court such part 
of such judgment as does not exceed the limit of the company's 
liability thereon."  Id. at 673 (emphasis added).  The court 
determined that a reasonable person in the position of the 
insured would understand this language to mean that the insurer 
was liable for interest on the entire judgment, since the phrase 
"all interest" connotes "all interest on the judgment, whatever 
its amount in relation to the policy limits."  Id. at 677.   
¶32 Likewise, as previously explained, the Knoche court 
concluded that the insurer was liable for interest imposed under 
Wis. Stat. § 807.01(4) above its policy limits "because under 
its contract it is liable for interest on the entire amount of 
the judgment."  151 Wis. 2d at 761.  Specifically, the insurance 
No. 95-3391 
 
20
policy provided that the insurer would pay "[a]ll interest on 
the entire amount of any judgment which accrues after entry of 
the judgment."  Id. at 760 (emphasis added).  The court, relying 
exclusively on McPhee, concluded that "such language created 
liability upon the insurer for interest upon the entire amount 
of the judgment."  Id. at 761. 
¶33 Both McPhee and Knoche are distinguishable from the 
present case.  Mutual Service did not agree to pay "all 
interest" without any qualification.  Instead, the insurance 
contract explicitly states that Mutual Service will pay interest 
only on damages that do not exceed its policy limits.  A 
reasonable person in the position of McLaughlin simply could not 
have 
understood 
this 
provision 
to 
mean 
anything 
else.  
Therefore, we conclude that Mutual Service is not liable, 
pursuant to its insurance contract with McLauglin, for interest 
imposed under Wis. Stat. § 807.01(4) on the entire verdict. 
¶34 In addition, we acknowledge that if "amount recovered" 
in § 807.01(4) were interpreted to mean the entire verdict, 
Knoche may support the conclusion that an insurer cannot "free" 
itself of interest imposed under this section by an insurance 
contract.  However, since we conclude that "amount recovered" 
under § 807.01(4) does not mean entire verdict, we conclude that 
the insurance contract does not contravene Wisconsin law or 
public policy by providing that Mutual Service is not liable for 
interest on damages that exceed the policy limits. 
¶35 In conclusion, we hold that Mutual Service is liable 
for interest imposed under Wis. Stat. § 807.01(4) only on that 
amount of the verdict for which it is responsible, which is its 
No. 95-3391 
 
21
policy limits of $100,000.  This conclusion is based on:  (1) 
the legislature's choice of the phrase "amount recovered" 
instead of "verdict" or "judgment" in § 807.01(4); and (2) the 
fact that if "amount recovered" is interpreted to mean the 
entire verdict, insurers will be forced to settle cases that 
would be more appropriately resolved at trial.  We emphasize 
that 
this 
interpretation 
of 
"amount 
recovered" 
will 
not 
encourage insurers to deny settlement offers in reckless 
disregard of their insureds' interests, because the availability 
of a bad faith claim provides a substantial deterrent against 
insurers engaging in such practices.   
¶36 We also acknowledge that an insurer may, pursuant to 
its insurance contract, agree to pay interest imposed under Wis. 
Stat. § 807.01(4) on damages above its policy limits. However, 
in this case, we conclude that Mutual Service did not agree to 
pay interest on damages above its policy limits, and that this 
provision of its insurance contract with McLaughlin does not 
contravene Wisconsin law or public policy.  Thus, we affirm the 
court of appeals' decision, which remands this case to the 
circuit court for a recalculation of the interest imposed on 
Mutual Service. 
By the Court.—The decision of the court of appeals is 
affirmed. 
 
 
No. 95-3391.ssa 
 
1 
¶37 SHIRLEY S. ABRAHAMSON, CHIEF JUSTICE (dissenting). I 
dissent because I conclude that the majority opinion reaches a 
result that contravenes the text of Wis. Stat. § 807.01(4)(1995-
96),
13 the purpose underlying § 807.01(4) and prior decisions.  
¶38 I would hold that when an insurance company has the 
sole right and ability to settle an entire litigation, yet 
rejects on behalf of itself and its insured a plaintiff's offer 
made pursuant to Wis. Stat. § 807.01(3) to settle for an amount 
within the policy limits and the plaintiff subsequently recovers 
a total judgment greater than or equal to the amount offered, 
the 
insurer 
is 
responsible 
for 
penalty 
interest 
under 
§ 807.01(4) on the entire amount recovered against the insurer 
and its insured. Such a holding would effect the legislature's 
purpose in enacting § 807.01(4), to encourage settlement before 
trial. 
¶39 Under the majority's holding, on the other hand, the 
purpose of the statute is eviscerated under the facts of the 
present case. A party in Mutual Service's position would have 
virtually no incentive to settle. It could accurately gauge its 
maximum penalty interest (which would be determined by the 
policy limits) and decide whether to go to trial, imposing on 
the insured without the insured's consent an unknown and 
potentially large penalty interest. 
                     
13 All further statutory references are to the 1995-96 
volumes, the relevant parts of which remain unchanged from the 
statutes in effect at the time of the offer of settlement in 
this case. 
 
 
No. 95-3391.ssa 
 
2 
¶40 The 
legislature 
enacted 
the 
§ 807.01(4) 
interest 
penalty with the intent that it be calculated on an amount 
unknown to the recipient of the offer when the offer was made. 
This risk encourages settlement. On the other hand, the penalty 
interest imposed by the majority is calculated on a known and 
limited amount. The majority thus eliminates the risk of 
refusing to accept a settlement offer. Moreover, according to 
the majority opinion, the insured, to whom the plaintiff has 
offered settlement but who has no ability to settle, faces the 
possibility of penalty interest on an unknown and potentially 
large judgment. The majority's imposition of a known and limited 
penalty interest on the insurance company, the only party with 
the ability to settle, and the majority's imposition of an 
unknown and potentially large penalty interest on the insured, 
who has no ability to settle, does not encourage settlement and 
is inconsistent with the legislature's intent in enacting 
§ 807.01(4).  
¶41 I discuss in turn: (1) the text of the statute, (2) 
the purpose of the statute and (3) the application of prior 
cases to the present case. These three subjects are intertwined 
and the discussions necessarily overlap. 
I. 
¶42 Section 807.01(4) provides that if an offer of 
settlement is not accepted and the party offering the settlement 
recovers a judgment which is greater than or equal to the amount 
specified in the offer of settlement, the party offering the 
settlement is entitled to penalty interest at the annual rate of 
 
 
No. 95-3391.ssa 
 
3 
12% on the amount recovered, from the date of the settlement 
offer until the amount is paid. Section 807.01(4) reads as 
follows: 
 
If there is an offer of settlement by a party under 
this section which is not accepted and the party 
recovers a judgment which is greater than or equal to 
the amount specified in the offer of settlement, the 
party is entitled to interest at the annual rate of 
12% on the amount recovered from the date of the offer 
of settlement until the amount is paid. Interest under 
this section is in lieu of interest computed under ss. 
814.04(4) and 815.05(8).  
¶43 In analyzing the text of this statute, we find that 
one key word, "party," is used repeatedly. The word party 
obviously refers to the litigant offering settlement. Indeed, 
the entire statute focuses on the party offering settlement, not 
on the recipient of the settlement offer. The statute does not 
state who pays the penalty interest.  
¶44 Another element of the text which might be analyzed is 
the phrase "amount recovered." This is the phrase upon which the 
majority's holding turns. The majority opinion construes the 
phrase "amount recovered" as "that portion of a verdict for 
which a party [the recipient of the offer] is responsible." 
 
 
No. 95-3391.ssa 
 
4 
Majority 
op. 
at 
12.
14 
Under 
the 
majority 
opinion's 
interpretation, the statute would read as follows: The party 
making the offer of settlement is entitled to penalty interest 
at the annual rate of 12% on that portion of a verdict for which 
the party who is the recipient of the offer is responsible, from 
the date of the offer until the amount is paid. 
¶45 The 
majority 
adds 
words 
to 
the 
statute. 
The 
legislature did not expressly address who was to pay penalty 
interest to a party making an offer when there were several 
persons liable for a judgment. As the court of appeals has 
noted, the phrase "amount recovered" "raises the question 
                     
14 The majority relies on American Motorists Ins. Co. v. R & 
S Meats, Inc., 190 Wis. 2d 196, 212-15, 526 N.W.2d 791 (Ct. App. 
1994), to find meaning in the distinction between the word 
"judgment" and the phrase "amount recovered." American Motorists 
addressed a different issue, whether double costs under Wis. 
Stat. § 807.01(3) are part of the prevailing party's "amount 
recovered" such that they form a basis for additional penalty 
interest to which the plaintiff is entitled under § 807.01(4). 
American Motorists did not involve multiple defendants and thus 
does not address which party must pay the penalty interest to 
which the offering party is entitled. That "judgment" and 
"amount recovered" have different meanings according to American 
Motorists is of no moment as both relate to the party offering 
to settle and neither indicates or suggests reference to the 
recipient of the offer. 
Moreover, 
American 
Motorists' 
conclusion 
that 
"amount 
recovered" does not equate with "judgment," runs counter to the 
majority opinion's conclusion that in this case, "amount 
recovered" means "that portion of the verdict for which a party 
is responsible." The "judgment" against Mutual Service was 
$100,000, majority op. at 10 n.5, as was the "amount recovered" 
under the majority's view. 
 
 
No. 95-3391.ssa 
 
5 
'recovered from whom?'"
15 To answer the question left unanswered 
in the text of the statute, I would look to the statute's 
purpose. 
¶46 Instead, 
the 
majority 
concludes 
that 
"amount 
recovered" must be given a one-size-fits-all reading. Such a 
reading contravenes prior case law, in which the courts have 
examined the facts of each case to determine the applicability 
of 
§ 807.01(4). 
Cases 
have 
determined 
the 
statute's 
applicability to a joint offer of settlement from multiple 
plaintiffs to a defendant,
16 a single offer of settlement from 
multiple plaintiffs to multiple defendants,
17 a joint offer of 
judgment from defendants who were jointly and severally liable 
to a single plaintiff,
18 an offer of settlement made by a single 
plaintiff to multiple defendants jointly and severally liable 
with no one defendant having sole ability to settle,
19 and an 
offer of settlement from a single plaintiff to multiple 
                     
15 Blank v. USAA Property & Cas. Ins. Co., 200 Wis. 2d 270, 
280, 546 N.W.2d 512 (Ct. App. 1996). 
16 White v. General Cas. Co. of Wis., 118 Wis. 2d 433, 439-
40, 348 N.W.2d 614 (Ct. App. 1984)(offer ineffective to invoke 
penalty interest under § 807.01(4)). 
17 DeMars v. LaPour, 123 Wis. 2d 366, 369, 366 N.W.2d 891 
(1985)(offer ineffective 
to 
invoke 
penalty 
interest 
under 
§ 807.01(4)). 
18 Denil v. Integrity Mut. Ins. Co., 135 Wis. 2d 373, 380-
82, 401 N.W.2d 13 (Ct. App. 1986)(offer effective to invoke 
costs under § 807.01(1)). 
19 Wilber v. Fuchs, 158 Wis. 2d 158, 162, 461 N.W.2d 803 
(Ct. App. 1990)(offer ineffective to invoke penalty interest 
under § 807.01(4)). 
 
 
No. 95-3391.ssa 
 
6 
defendants represented by a single insurer with the sole right 
and ability to settle the entire litigation.
20 
¶47 Thus § 807.01(4), simple on its face, has been, and 
must 
be, 
interpreted and 
applied 
in 
a variety of 
fact 
situations. By favoring a one-size-fits-all construction of the 
statutory text, retreating from applying the statute to distinct 
factual circumstances in accordance with the statutory purpose, 
the majority opinion disturbs settled expectations and creates 
as yet unknown inequities in future cases, the facts of which we 
cannot foresee. 
¶48  I turn to the purpose of the statute to answer the 
question "recovered from whom?" 
II. 
¶49 The principal purpose of Wis. Stat. § 807.01(4) is, as 
the majority recognizes, to encourage settlement before trial. 
DeMars v. LaPour, 123 Wis. 2d 366, 373, 366 N.W.2d 891 (1985); 
Blank v. USAA Property & Cas. Ins. Co., 200 Wis. 2d 270, 279, 
546 N.W.2d 512 (Ct. App. 1996). Interest paid under § 807.01(4) 
is referred to as penalty interest because it penalizes failures 
to accept settlement offers;
21 the threat of its imposition is 
intended to encourage settlements. 
                     
20 Testa v. Farmers Ins. Exch., 164 Wis. 2d 296, 303-04, 474 
N.W.2d 776 (Ct. App. 1991)(offer effective to invoke penalty 
interest under § 807.01(4)). 
21 The court of appeals has stated: "The objective of 
§ 807.01, Stats., is to encourage pretrial settlement and avoid 
delays. The purpose of imposing costs and interest under 
subsecs. (3) and (4) is punitive." Blank, 200 Wis. 2d at 279 
(citations omitted).  
 
 
No. 95-3391.ssa 
 
7 
¶50 The majority opinion, however, states a different 
statutory purpose, namely "not to force a party into settlement 
of a suit that would more appropriately be resolved by a trial." 
Majority op. at 13. The majority opinion concludes that in the 
present case imposing penalty interest on the insurance company 
on the entire amount recovered would force settlement.  
¶51 I disagree with this reasoning because the majority 
opinion 
confuses 
unreasonable 
forcing 
of 
settlement 
not 
permitted 
under 
§ 807.01(4) 
with 
reasonable 
forcing 
of 
settlement allowed under § 807.01(4) in our prior cases.  
¶52 In concluding that imposing penalty interest on the 
entire amount recovered in this case would force rather than 
encourage settlement, the majority opinion relies on Blank, 200 
Wis. 2d at 280. 
¶53 In Blank the plaintiff offered to settle only with the 
insurer and not with the insured. Thus the insurer did not have 
the sole right and ability to agree to an offer that would have 
settled the entire litigation. The insurer refused the offer and 
judgment exceeded the amount of the offer. The insurer in Blank 
was assessed penalty interest only on the amount over which it 
had full settlement authority, not on the entire amount of the 
judgment. Imposing penalty interest on the insurer for that 
potion of the judgment over which it had no power to settle 
would have unreasonably forced settlement. 
¶54 The Blank case relied in turn on White v. General Cas. 
Co. of Wisconsin, 118 Wis. 2d 433, 439, 348 N.W.2d 614 (Ct. App. 
1984). White was the first in a line of cases culminating with 
 
 
No. 95-3391.ssa 
 
8 
Blank in which the court of appeals determined the application 
of § 807.01 to settlement offers involving multiple parties. In 
White the court of appeals concluded that § 807.01(4) did not 
apply to cases involving a joint offer of settlement made on 
behalf of individual plaintiffs. The court of appeals concluded 
that to include joint settlement offers under the statute might 
"unreasonably force defendants to settle a case because of the 
leverage exerted by the possibility of an aggregate judgment in 
excess of the joint settlement offer even though, as to 
individual plaintiffs in the lawsuit, a settlement offer would 
have been legitimately rejected." White, 118 Wis. 2d at 439 
(emphasis added).  
¶55 According 
to 
the 
White/Blank 
line 
of 
cases, 
§ 807.01(4) should be read as condemning only an offer that 
unreasonably forces settlement, that is, an offer which the 
offeree cannot fairly assess in terms of its total individual 
liability to the litigant offering settlement. The court of 
appeals explained this principle as follows:  
 
White and DeMars do not condemn offers of settlement 
that can "force" settlements. Rather, they condemn 
offers 
of 
settlement 
that 
unreasonably 
force 
settlements. White, 118 Wis. 2d at 439 . . . . Thus, a 
plaintiff's offer of settlement may properly be said 
to 
"force" 
a 
settlement 
when 
the 
defendant's 
motivation to settle results from an opportunity to 
fairly assess the offer in light of the particular 
claim made against that defendant. . . . [T]he test 
remains the samedoes 
the offeree have 
a 
fair 
opportunity to fully evaluate his or her potential 
individual liability to the plaintiff. 
Wilber v. Fuchs, 158 Wis. 2d 158, 164-65, 461 N.W.2d 803 (Ct. 
App. 1990). 
 
 
No. 95-3391.ssa 
 
9 
¶56 In the present case the settlement offer did not 
unreasonably force a settlement under the White/Blank line of 
cases. Mutual Service had the opportunity to fairly assess the 
offer in light of the particular claim made against it and its 
insured and had exclusive control of settlement of all claims 
against it and its insured.
22 This is not a Blank and White case.  
¶57 The choice Mutual Service faced is the choice usually 
faced by a litigant to whom a settlement offer is madesettle 
the entire litigation for the offered amount or refuse to settle 
it and risk paying penalty interest on an unknown amount of 
damages to be determined at trial.  
¶58 The majority gives a hypothetical example, majority 
op. at 14, of what it views as an unreasonable forcing of 
settlement by the imposition of penalty interest on the entire 
amount recovered. The majority is concerned that "insurers which 
provide modest policy limits will be compelled to accept 
pretrial 
settlement 
offers 
rather 
than 
risk 
substantial 
liability for interest, even where the insured's liability is 
questionable or the appropriate amount of damages is highly 
debatable." Id. 
¶59 I believe that the majority opinion errs in its 
analysis for several reasons. An insurer in the hypothetical can 
fully weigh the relative costs and risks of settling or 
                     
22 In Testa, 164 Wis. 2d at 302-03, the court of appeals 
held that a single offer to an insurer and its insureds validly 
triggers penalty interest when the insurer covers all the 
defendants and the insurer is "the only party that has the right 
and ability to settle the case."  
 
 
No. 95-3391.ssa 
 
10
proceeding to trial. The risk in going to trial (and paying 12% 
interest on the entire amount recovered by the plaintiff) may be 
a heavy one, but that merely tilts the scales in favor of 
encouraging settlement. Such is the purpose of § 807.01(4). An 
insurer faced with the example given by the majority should be 
presented with strong incentives to settle. When an insurer 
chooses to reject such a settlement offer it puts its insured's 
funds in jeopardy.  
¶60 Furthermore, an insurer that drafts an insurance 
contract giving it exclusive control over offers to settle 
within the policy limits cannot be heard to complain that it is 
made to bear responsibility for what may be a difficult decision 
whether to settle or go to trial. It is reasonable to expect an 
insurer to bear responsibility for penalty interest on amounts 
recovered over policy limits when it reserves for itself a 
unilateral privilege affecting its insured.
23  
                     
23 The policy Mutual Service drafted provides: "We will 
settle or defend, as we consider appropriate, any claim or suit 
asking for these damages. We will not defend any suit or make 
additional payments after we have paid the limit of liability 
for the coverage." 
In an analogous context, commentators assert that an 
insurer should be liable for prejudgment interest on amounts 
beyond its policy limits in order to encourage settlement.  
It is argued that insurers should be held liable for 
prejudgment interest on the entire judgment rather 
than merely on their policy limits because they 
exercise full control over the entire litigation 
process . . . . It hardly seems fair to allow the 
insurance company to litigate the entire case in an 
effort to save its policy coverage and then force the 
insured to pay the prejudgment interest on the excess 
 
 
No. 95-3391.ssa 
 
11
¶61 Under the majority's view the insurer is given 
virtually no incentive to settle and in fact is given every 
incentive to expose its insured to tremendous liability, even 
though the insured has no ability to protect against that risk. 
I conclude that in the majority's example the insurer, not the 
insured, should bear the risk of penalty interest; that result 
would be more in keeping with the purpose of the statute. 
¶62 Thus the majority does not demonstrate that a party in 
Mutual Service's position would be unreasonably forced to settle 
if it were to pay penalty interest on the entire amount 
recovered. 
¶63 Turning from the majority's hypothetical, I next 
consider the principles enunciated in our prior cases and apply 
those principles to the facts of the present case.  
III. 
¶64 Since the enactment of § 807.01(4) in 1980, numerous 
cases involving multiple parties have arisen in which the 
                                                                  
verdict 
when 
he 
exercised 
no 
control 
over 
the 
litigation process.  
 
David J. Pierce, Insurer's Liability for Prejudgment Interest; A 
Modern Approach, 17 U. Rich. L. Rev. 621, 627 (1983) (citations 
omitted). See also John Alan Appleman & Jean Appleman, Insurance 
Law and Practice vol. 8A § 4894.25 at p. 77-79 (1981) ("This 
would appear to be the only fair result, inasmuch as the insurer 
has control of the litigation.").  
Prejudgment interest is not punitive but substitutes for 
the 
time 
value 
of 
money. 
The 
rationale 
underlying 
the 
prejudgment interest rule would appear to apply a fortiori to 
penalty interest because penalty interest replaces prejudgment 
interest when a settlement offer is refused and penalty interest 
has a punitive intent so as to effectively encourage settlement. 
 
 
No. 95-3391.ssa 
 
12
validity of a settlement offer as a trigger to penalty interest 
has been addressed.
24 These cases stand for three principles of 
general application: First, § 807.01(4) applies differently to 
different fact situations, consistent with the statute's purpose 
to encourage 
settlement 
before trial. 
Second, 
§ 807.01(4) 
applies when the recipient of an offer has a full and fair 
opportunity to evaluate the offer with respect to its full 
exposure. Third, § 807.01(4) applies when one of multiple 
recipients of an offer has the sole right and ability to accept 
the entire offer on behalf of all recipients. Attorney Warch 
recently summarized these principles: "A reasonable construction 
of the statute's purpose would seem to be imposition of a stiff 
interest penalty for failure to settle a liability after being 
given the opportunity to do so."
25 
¶65 I have discussed the first principle above. In Testa 
v. Farmers Ins. Exch., 164 Wis. 2d 296, 302-03, 474 N.W.2d 776 
(Ct. App. 1991), the court of appeals stated the second 
principle as follows: 
 
As can be seen from these cases [White, DeMars, Denil 
and Wilber], the appellate courts have developed a 
standard to determine the validity of an offer of 
settlement or offer of judgment for purposes of 
                     
24 The following cases set forth core principles for 
interpreting the interest penalty provision which the majority 
opinion disturbs. DeMars, 123 Wis. 2d at 373; Blank, 200 Wis. 2d 
at 280, 282; Testa, 164 Wis. 2d at 300-05; Wilber, 158 Wis. 2d 
at 162-65; Smith v. Keller, 151 Wis. 2d 264, 273-76, 444 N.W.2d 
396 (Ct. App. 1989); Denil, 135 Wis. 2d at 380-82. 
25 Stephen K. Warch, Meeting Head On: Offers of Settlement 
and an Insurer's Bad Faith, Wis. Lawyer, Oct. 1996 at 12. 
 
 
No. 95-3391.ssa 
 
13
invoking the double costs and interest provisions of 
sec. 807.01, Stats., namely, in order for the offer to 
be effective, the offeree must be able to fully and 
fairly evaluate the offer from his own independent 
perspective. Furthermore, where the offeree is the 
defendant, a full and fair evaluation entails the 
ability to analyze the offer with respect to the 
offeree's exposure.  
(Citations omitted).  
¶66 The court of appeals stated the third principle as 
follows: 
 
Rural Mutual is the only party that had a real 
interest with respect to the settlement offer. [The 
defendants] were covered under the same insurance 
policy. That policy was issued by Rural Mutual and 
gave 
it 
the 
right 
to 
control 
the 
litigation. 
Furthermore, the amount of Testa's settlement offer 
was within the policy's liability limits. Given these 
facts, Rural Mutual was the only party that had the 
right and ability to settle the case. Therefore, Rural 
Mutual is the "offeree" that the law dictates must be 
able to fully and fairly evaluate an offer of 
settlement with respect to its potential liability. 
Testa, 164 Wis. 2d at 303.  
¶67 I would apply these principles to the present case. 
Mutual Service had the opportunity to fully and fairly evaluate 
the plaintiff's offer from its own independent perspective. It 
knew the full extent of its exposure and its insured's exposure 
were it to accept the settlement offer because the offer would 
have settled the entire litigation as to both the insurer and 
its insured for an amount within the policy limits. And Mutual 
Service had the sole right and ability to settle the case 
because of its contract with its insured.  
¶68 Under the principles enunciated in the earlier cases, 
Mutual Service should pay penalty interest on the entire amount 
recovered, not merely on its share of that amount. 
 
 
No. 95-3391.ssa 
 
14
¶69 Because a party in Mutual Service's position has the 
right and ability to settle the entire case, it is the party 
upon which the statute must be brought to bear if the statute is 
to have any effect.  
¶70 A party in Mutual Service's position could choose to 
pay its policy limits and settle the entire litigation. Or, in 
the expectation of prevailing, it could force a trial, incurring 
costs itself and imposing costs on its opponent, the courts, 
jurors and its insured. If it chose the latter course it would, 
under my interpretation, risk 12% penalty interest on the entire 
amount recovered. I believe a party in Mutual Service's position 
would be able to evaluate the risks and exercise a meaningful 
choice; it would in no way be unreasonably forced to settle if 
it were made to pay a 12% penalty interest on the entire amount 
recovered.
26 Imposing interest as a penalty on a party with no 
right and ability to settle, such as the insured in the present 
case, does not encourage settlement and would appear to be 
arbitrary and unfair. 
¶71 Looking forward from the Blank case in which he 
represented the insurer and acknowledging the principles of the 
cases, Attorney Warch advised as follows:  
 
In dealing with statutory offers 
of 
settlement, 
insurers should remember that the unique nature of 
                     
26 In this case Mutual Service chose a course of action. "It 
lost. It would be contrary to the purpose of sec. 807.01 to 
allow it to escape the consequence of its choice." Knoche v. 
Wisconsin Mut. Ins. Co., 151 Wis. 2d 754, 755, 445 N.W.2d 740 
(Ct. App. 1989)(imposing penalty interest on the entire valid 
judgment on party controlling settlement) 
 
 
No. 95-3391.ssa 
 
15
Wisconsin's direct action statute, combined with an 
insurer's right to control the litigation, means that 
if an offer of settlement directed to both an insurer 
and its insured is refused, and acceptance of the 
offer would have settled both the insurer and the 
insured's liability, the insurer will be assessed 
penalty interest on the entire verdict, regardless of 
the policy limits."
27  
¶72 Finally, I conclude that Knoche v. Wisconsin Mut. Ins. 
Co., 151 Wis. 2d 754, 761, 445 N.W.2d 740 (Ct. App. 1989), 
properly understood, resolves the question presented in the case 
at bar. The plaintiff in Knoche argued that the insurer must be 
made to pay penalty interest on the entire valid judgment (the 
policy limits plus the accessible portion of the insured's 
estate in bankruptcy) because otherwise "[t]hey have absolutely 
no incentive to settle if sec. 807.01 Stats. does not require 
them to pay interest over the policy limits." Brief for 
plaintiff in Knoche at 16. The court of appeals held the insurer 
liable for penalty interest on the entire valid judgment, that 
is, the policy limits and the available assets of the bankruptcy 
estate. Knoche, 151 Wis. 2d at 761. The court of appeals further 
held that the "trial court did not err in computing the 
[insurer's] interest liability from the date of the settlement 
                     
27 Warch, Meeting Head On at 12 (citing Testa, 164 Wis. 2d 
at 302 and Knoche, 151 Wis. 2d at 759-61). 
 
 
No. 95-3391.ssa 
 
16
offer," even though the policy required only interest from the 
date of judgment. Knoche, 151 Wis. 2d at 760.
28  
¶73 As the majority points out, the court of appeals also 
concluded that the insurer was liable for interest on damages 
beyond the policy limits under the insurance policy. The 
majority contends that the Knoche court ruled solely on the 
basis of the terms of the insurance policy in that case and not 
                     
28 The circuit court in Knoche imposed penalty interest on 
the basis of § 807.01(4) on the entire valid judgment and not on 
the basis of the policy. "I conclude that, pursuant to sec. 
807.01, Stats., the insurer is liable for interest at the rate 
of 12% on the amount plaintiff recovered from the date of the 
settlement offer." Knoche v. Stracka, No. 81-CV-3926 Memorandum 
Decision and Order, Circuit Court for Dane County, June 23, 1988 
at 1. 
Mutual Service argues a further issue addressed in Knoche, 
that even if it were liable under § 807.01(4) for penalty 
interest on the entire amount recovered, it was not obligated to 
pay any amounts beyond its policy limits because of an express 
provision in its contract with the insured. The Knoche court 
held that the insurer could not by the insurance contract free 
itself of § 807.01. 
The Knoche court held that language in the insurance 
contract could not limit the effect of § 807.01(4).  
We agree that this [policy] language does not obligate 
Wisconsin Mutual to pay interest under sec. 807.01(4), 
Stats., from the date of the settlement offer. Its 
obligation to pay interest under sec. 807.01(4) is 
not, 
however, 
limited 
by 
its 
contract. . . . The 
purposes of sec. 807.01, to encourage settlement of 
cases prior to trial, would be subverted if the 
liability insurer could, by contract, free itself from 
the application of secs. 807.01(3) and 807.01(4). 
Knoche, 151 Wis. 2d at 760. 
 
 
 
No. 95-3391.ssa 
 
17
on the basis of § 807.01(4).
29 I understand why the part of the 
Knoche opinion referred to by the majority would lead a reader 
to this conclusion. A study of the entire opinion and the 
insurance policy (which appears in the Knoche briefs) should 
disabuse a reader of the majority's view. 
¶74 The insurance policy at issue in Knoche obligated the 
insurer to pay only interest accruing after entry of judgment 
and before the insurer paid the policy limits. The policy 
established a limit to the insurer's obligation to pay interest 
as follows:  
 
This Company will pay: 
. . . .  
C. All interest on the entire amount of the judgment 
which accrues after entry of the judgment and before 
this Company has paid or tendered or deposited in 
court the part of the judgment which does not exceed 
the limit of this Company's liability. 
See Brief for insurer in Knoche at 3 (emphasis added). The 
insurer in Knoche paid the limits of its liability five days 
after the jury returned its verdict. Thus if the insurer were 
paying interest on the entire judgment pursuant to the insurance 
policy, the insurer would have paid interest for only five 
daysfrom judgment until payment. This result would be contrary 
to the rest of the Knoche holding.  
¶75 Neither the circuit court nor the court of appeals 
limited the insurer's liability for penalty interest to five 
                     
29 References in Knoche and the majority opinion to McPhee 
v. American Motorists Ins. Co., 57 Wis. 2d 669, 205 N.W.2d 152 
(1972), are not applicable because McPhee predated the enactment 
of § 807.01(4). 
 
 
No. 95-3391.ssa 
 
18
days. Rather, the insurer was required to pay 12% of the entire 
valid judgment from the date of the settlement offer until the 
principal and interest were paid. Knoche, 151 Wis. 2d at 760. 
The import of the Knoche opinion is that the insurer must pay 
penalty interest on the policy limits and the non-discharged 
assets of the bankruptcy estate from the offer of settlement to 
payment. 
This 
result 
cannot 
have 
been 
reached 
through 
application of the insurance policy alone. In fact, the court of 
appeals expressly held that the policy did not require the 
insurer to pay interest for periods before judgment but that 
§ 807.01(4) does. Knoche, 151 Wis. 2d at 760. Within the penalty 
interest the court held to be mandated under § 807.01(4) was 
penalty interest on the entire valid judgment. The order for 
judgment and judgment on remand (dated Jan. 12, 1990) supports 
my interpretation of the court of appeals decision. 
¶76 The majority's holding in the case at bar, in my 
opinion, contravenes and silently overrules the Knoche case and 
undermines 
the 
principles 
supporting 
the 
line 
of 
cases 
interpreting § 807.01(4).  
¶77 I conclude that when an insurance company has the sole 
right and ability to settle an entire litigation, yet rejects on 
behalf of itself and its insured a plaintiff's offer made 
pursuant to Wis. Stat. § 807.01(3) to settle for an amount 
within the policy limits and the plaintiff subsequently recovers 
a judgment greater than or equal to the amount offered, the 
insurer is responsible for penalty interest under § 807.01(4) on 
the entire amount recovered against the insurer and its insured. 
 
 
No. 95-3391.ssa 
 
19
This holding, in my opinion, is consistent with the text of the 
statute and is mandated by the principles developed and followed 
in prior decisions interpreting § 807.01 and by the Knoche 
decision. 
¶78 Accordingly, I would reverse the decision of the court 
of appeals and reinstate the order of the circuit court.  
¶79 For the foregoing reasons, I dissent.  
¶80 I am authorized to state that Justice WILLIAM A. 
BABLITCH and Justice ANN WALSH BRADLEY join this dissent.