Opinion ID: 1290952
Heading Depth: 2
Heading Rank: 4

Heading: The Risks of Underinsurance

Text: ¶ 41. An underinsurer is placed in a somewhat awkward position upon receiving notice of a settlement like the Pittses' or Vogt's. As we recently recognized, an underinsurer owes a duty of good faith and fair dealing to its insured. Danner, 245 Wis. 2d 49, ¶ 57. At the same time, the underinsurer has an incentive to minimize its insured's damages while it is negotiating with its insured, thus minimizing its own liability under the policy. However, should it decide to substitute its own funds for those proferred by a tortfeasor's insurer, it must execute a 180-degree turn in the follow-up action against the tortfeasor, attempting to maximize its insured's damages to obtain the largest possible settlement or judgment. ¶ 42. This stylized dance between the underinsurer and its insured necessarily involves some degree of uncertainty because much of the dance occurs before the insured formally makes a UIM claim under the policy. The underinsurer must calculate the value of the damages it believes its insured has suffered. Having arrived at this estimate, if the underinsurer believes the proposed settlement with the tortfeasor is too low, it should substitute its own funds and pursue the tortfeasor and the tortfeasor's insurer in a subrogation action, assuming the tortfeasor has additional assets. On the other hand, if the underinsurer believes the settlement is adequate to cover the insured's damages, it should consent to the settlement with confidence that the insured will not be able to recover additional damages in a subsequent UIM claim. The decision whether to consent should not turn on the source of the settlement funds, but rather on the adequacy of the funds. ¶ 43. In this case, court documents show that the Pittses alleged that Christina Pitts had suffered permanent injuries, disability, and specials totaling $403,904.70 in damages. Sentry characterizes claims of this magnitude as questionable. It notes that Pitts had an extensive medical history including involvement in five prior automobile accidents of varying severity. ¶ 44. Under the policy, the Pittses have a contractual duty to cooperate with Sentry during the claim investigation process. [6] In satisfaction of that duty, the Pittses claimed that they sent Sentry over 1000 pages of documentation regarding Pitts's injuries. The record includes a summary transmittal form listing several medical reports the Pittses sent, but does not contain the actual reports. Sentry claims that despite its endeavor[s] to do discovery into the claimed damages[, the Pittses] never complied with the requests. The record reveals that on August 20, 2001, while still a defendant, Sentry sent the Pittses an extensive set of interrogatories. Sentry also included a request for production of documents containing over 20 separate requests for Pitts to release access to her medical records held by various health care providers. The record does not reflect how the Pittses responded, but in a motion filed February 28, 2002, Sentry's counsel asserted: Plaintiff would have the court believe that she has provided Sentry with all documents that Sentry needs to fully evaluate the case. That is not true. Plaintiff did not provide Sentry with two examiner reports . . . These reports make it abundantly clear that plaintiff's alleged damage claim is not what she says it is. ¶ 45. The issue of whether the Pittses breached their contractual duty to cooperate with Sentry is not before us. However, it must be emphasized that the insured is bound by the terms of the insurance contract. If contractually obligated, the insured must provide the documentation required by the contract to allow the underinsurer to make an informed decision on whether to consent or substitute. ¶ 46. Effectively, the underinsurer must answer the same question of ultimate damages, whether a settlement offer comes from the tortfeasor's insurer or whether it comes from the tortfeasor herself. In both cases, the underinsurer must evaluate the tortfeasor's personal assets. If the settlement offer fully releases both the tortfeasor and the tortfeasor's insurer but the settlement funds emanate solely from the tortfeasor's insurer, the underinsurer's substitution of its own funds allows it to sue not only the tortfeasor's insurer but also the tortfeasor. Any other result would not make sense. What underinsurer would substitute its funds against a tortfeasor's insurer's tendered policy limits if the underinsurer could proceed only against the tortfeasor's insurer? There would be no point to such an action, because the maximum the underinsurer could recover would be the same amount that was already tendered. The underinsurer's recovery would be further reduced by its costs in prosecuting the action. What makes substitution an attractive option is the possibility that the tortfeasor has substantial wealth or assets, and that the underinsurer will be able to negotiate a better settlement than its insured because of the greater resources at its disposal. In that scenario, both the insured and the underinsurer are benefited. The insured receives a prompt settlement payment and the underinsurer may secure more from the tortfeasor, thereby eliminating or reducing its liability. ¶ 47. In this case, Sentry attempted to remove all uncertainty by intervening in the case between the Pittses and the Trust. Sentry asked the circuit court to adjudicate the Pittses' damages so that all three partiesSentry, the Pittses, and the Trustwould have a rock-solid number from which to negotiate. This position is defensible because it would, to some degree, eliminate duplicitous litigation. Once their damages had been determined, the Pittses would be free to settle with the Trust. At that point, it would be obvious to Sentry whether a settlement was adequate, and the decision whether to consent to a settlement would also be relatively simple. Further, any future litigation between the Pittses and Sentry would be simplified. Sentry could start with the arrived-upon damage amount, subtract the amount recovered from the Trust and American Family, and pay the remaining amount to the Pittses (assuming that amount came within the policy limits). ¶ 48. This court could have adopted such an approach in Vogt. It did not. Even Sentry's trial counsel admitted that its request and accompanying approach was novel, but felt that it had no choice but to ask [the circuit] court to order that the plaintiff continue with her UIM claim against Sentry so the matter can be litigated and eventually resolved. [7] While Sentry's approach is understandably preferable to Sentry, it is not preferable to the Pittses. Sentry's approach might eliminate future litigation between the Pittses and Sentry, but it would also have the effect of creating unnecessary litigation between the Pittses and the Trust. Those two parties have already reached what they believe to be an equitable settlement. If Sentry were to accept that proposed settlement, it is possible that the entire matter could be settled without litigation. Instead of adopting Sentry's admittedly novel approach, we choose to continue to rely on the principles in Vogt.