Opinion ID: 1296223
Heading Depth: 2
Heading Rank: 1

Heading: Overview of UIM Coverage and Reducing Clauses

Text: ¶ 16. We have described UIM coverage as a `legal iceberg,' a seemingly straightforward area of the law, which in fact can prove to be nettlesome to analyze. Dowhower, 2000 WI 73, ¶ 22. Over the years, there has been much uncertainty surrounding the purpose and function of UIM coverage. The confusion has produced a torrent of litigation, much of it centered on whether reducing clauses render UIM coverage illusory. ¶ 17. There are two conflicting theories regarding the purpose and function of UIM coverage. Under the first theory, the purpose of UIM coverage is to compensate an insured accident victim when the insured's damages exceed the recovery from the at-fault driver (or other responsible party). See Taylor v. Greatway Ins. Co., 2001 WI 93, ¶ 32, 245 Wis. 2d 134, 628 N.W.2d 916 (Bradley, J., dissenting) (citing Wood v. American Family Mut. Ins. Co., 148 Wis. 2d 639, 655, 436 N.W.2d 594 (1989), overruled on other grounds by Matthiesen v. Continental Cas. Co., 193 Wis. 2d 192, 532 N.W.2d 729 (1995); Kaun v. Industrial Fire & Cas., 148 Wis. 2d 662, 671, 436 N.W.2d 321 (1989)). According to this theory, UIM coverage operates as a separate fund, available for the payment of the insured's uncompensated damages. 3 Irwin E. Schermer, Automobile Liability Insurance § 57.01, at 57-2 (3d ed. 1995). The insured purchases coverage for his or her damages in a set dollar amount above and beyond the liability limits of the at-fault driver. Taylor, 2001 WI 93, ¶ 35 (Bradley, J., dissenting). ¶ 18. The second theory is that the purpose of underinsured motorist coverage is solely to put the insured in the same position as he [or she] would have occupied had the tortfeasor's liability limits been the same as the underinsured motorist limits purchased by the insured. Dowhower, 2000 WI 73, ¶ 18 (quoting 3 Irwin E. Schermer, Automobile Liability Insurance § 57.01, at 57-2 (3d ed. 1995)). Under this theory, UIM coverage operates as a predetermined, fixed level of insurance coverage including payment from both the at-fault driver's liability insurance and the insured's own UIM coverage. See Kaun, 148 Wis. 2d at 674-75 (Steinmetz, J., dissenting). ¶ 19. The impact of the two theories is often seen in the application of reducing clauses. To illustrate, suppose an insured suffered damages totaling $200,000. Suppose further that the at-fault driver had liability insurance with a $100,000 limit and the insured had UIM coverage with a $150,000 limit. ¶ 20. Under the first theory of UIM coverage, a reducing clause operates to decrease the amount of the insured's total damages subject to UIM coverage from the insurer by any amounts received from the underinsured tortfeasor. Hence, $200,000 in damages minus a $100,000 payment from the tortfeasor leaves $100,000 in uncompensated damages, or $100,000 liability for the insurer. ¶ 21. Under the second theory, a reducing clause reduces the amount of the insurer's liability by the amount recovered from the at-fault driver. Hence, $150,000 total liability minus a $100,000 payment from the tortfeasor leaves $50,000 liability for the insurer. ¶ 22. The first theory fully compensates the insured, while the second theory leaves the insured with $50,000 in uncompensated damages. ¶ 23. If the insured had $300,000 in damages and the same policies were in place, the first theory would require the insurer to pay out all $150,000 in coverage, leaving the insured with $50,000 in uncompensated damages because the insured did not buy enough coverage. The second theory would not increase the insurer's liability: $150,000 total liability minus a $100,000 payment from the tortfeasor leaves $50,000 of liability for the insured. The insured would be left with $150,000 in uncompensated damages. ¶ 24. Wisconsin appellate courts have been asked in case after case to interpret UIM policies and to apply reducing clauses in light of the two contradictory theories of UIM coverage. Not surprisingly, in virtually every case, the insurer has asserted that UIM coverage functions as a predetermined, fixed level of insurance coverage including payment from both the at-fault driver's liability insurance and the insured's own UIM coverage, and the reducing clause reduces the limit of UIM liability. Correspondingly, in virtually every case, the insured has asserted that UIM coverage is intended as excess coverage available when an insured's damages exceed the recovery from the at-fault driver, and the reducing clause decreases the insured's covered damages.