Opinion ID: 2996994
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Heading Rank: 1

Heading: Enforceability of Reducing Clause

Text: Prior to 1995, a number of Wisconsin courts found reducing clauses void because they rendered purported UIM coverage illusory. See, e.g., Kuhn v. Allstate Ins. Co., 510 N.W.2d 826, 827 (Wis. Ct. App. 1993). Courts deemed UIM coverage subject to a reducing clause illusory because the full coverage amount would never actually be paid by the insurer (as the underinsured motorist would always be contributing some portion of the payment). See, e.g., id. at 830. In 1995, the Wisconsin Legislature passed a statute, Wis. Stat. § 632.32(5)(i), specifically allowing for UIM reducing clauses that operate 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. Since the statute’s passage, considerable litigation relating to the validity and enforceability of reducing clauses has continued to occur in Wisconsin courts. The Wisconsin Supreme Court itself described UIM coverage as a “ ‘legal iceberg,’ a seemingly straightforward area of the law, which in fact can prove to be nettlesome to analyze.” Badger Mut. Ins. Co. v. Schmitz, 647 N.W.2d 223, 227 (Wis. 2002) (quoting Dowhower v. W. Bend Mut. Ins. Co., 613 N.W.2d 552, 562 (Wis. 2000)). In Dowhower, the Wisconsin Supreme Court concluded that Wis. Stat. § 632.32(5)(i) does not violate substantive due process under the state or federal constitutions. Id. at 565. It also held that the type of reducing clauses authorized by the statute are neither ambiguous nor against public policy. Id. at 562. Two years later, in Schmitz, the Wisconsin Supreme Court explained that although a reducing clause may itself be clear, courts must still consider whether it is unambiguous in the context of the entire policy. 647 N.W.2d at 233. In that case, the court invalidated an otherwise unambiguous reducing clause that did not, when viewed in the context of the entire policy, clearly set forth that the insured was purchasing a fixed Nos. 03-3702 & 03-3835 7 level of UIM recovery arrived at by combining payments from all sources. Id. at 238. In reaching this decision, the court stated that the reducing clause “must be crystal clear in the context of the whole policy.” Id. at 233. Focusing on the “crystal clarity” language, a number of appellate courts post-Schmitz invalidated reducing clauses after finding that they were contextually ambiguous. See Gohde v. MSI Ins. Co., 661 N.W.2d 470, 471 (Wis. Ct. App. 2003); Dowhower v. Marquez, 659 N.W.2d 57, 59 (Wis. Ct. App. 2003); Hanson v. Prudential Prop. & Cas. Ins. Co., 653 N.W.2d 915, 916 (Wis. Ct. App. 2002). However, this trend was short-lived—the Wisconsin Supreme Court put the breaks on expansive interpretations of the ambiguity standard in the case Folkman v. Quamme, 665 N.W.2d 857, 866-70 (Wis. 2003). Folkman itself did not involve a UIM reducing clause, but the opinion provided an extensive discussion of such clauses. The Folkman court observed that the “crystal clear” language it used in Schmitz had produced the “unintended effect” of “alter[ing] the analytical focus” in a series of court of appeals decisions. Id. at 868-69. The court went on to emphasize that perfection in draftsmanship was not the standard by which policies should be measured. Id. at 869. Rather, the court explained that “[t]o prevent contextual ambiguity, a policy should avoid inconsistent provisions, provisions that build up false expectations, and provisions that produce reasonable alternative meanings.” Id. The court admonished that “[f]erreting through a policy to dig up ambiguity should not be judicially rewarded because this sort of ambiguity is insufficient. Rather, 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.” Id. After Folkman was released, the Wisconsin Supreme Court summarily vacated and remanded a series of appellate court decisions for further consideration in light of 8 Nos. 03-3702 & 03-3835 Folkman. See Gohde v. MSI Ins. Co., 668 N.W.2d 556 (Wis. 2003); Dowhower v. Marquez, 668 N.W.2d 735 (Wis. 2003); Van Erden v. Sobczak, 668 N.W.2d 735 (Wis. 2003). Relying on the directives from Folkman, courts reviewing two of these three vacated cases changed their prior positions and found the reducing clauses at issue to be contextually unambiguous. See Gohde v. MSI Ins. Co., No. 01-2121, 2004 Wisc. App. LEXIS 252, at  (Wis. Ct. App. Mar. 23, 2004) (policy not susceptible to more than one reasonable interpretation and language not contextually ambiguous); Van Erden v. Sobczak, No. 02-1595, 2004 Wisc. App. LEXIS 40, at -17 (Wis. Ct. App. Feb. 17, 2004) (UIM coverge reducing clause clear and unambiguous). But see Dowhower v. Marquez, 674 N.W.2d 906, 908 (Wis. Ct. App. 2003) (UIM provisions contextually ambiguous). An additional postFolkman appellate court decision, Commercial Union Midwest Ins. Co. v. Vorbeck, 674 N.W.2d 665, 676 (Wis. Ct. App. 2003), also determined that the UIM reducing clause at issue was unambiguous. Accordingly, in Folkman, the Wisconsin Supreme Court clarified that “crystal clear” is not the standard for reviewing UIM reducing clauses in insurance contracts, and following this clarification, the appellate courts have been more reluctant to invalidate such clauses. While Schmitz may have caused a momentary rush at the intermediate level towards finding contextual ambiguity, Folkman has clearly turned back this tide. The defendants submit that the law on this issue is in a state of flux in Wisconsin and request that we certify the issue of whether Allstate’s UIM reducing clause is enforceable to the Wisconsin Supreme Court. However, we conclude that the rules of decision in this case have been clearly set out by the Wisconsin Supreme Court in Schmitz and Folkman and nothing would be gained through certification. Against this backdrop, we now turn to the Allstate policy. The declarations page in the policy specifically lists Nos. 03-3702 & 03-3835 9 “Underinsured Motorists Insurance for Bodily Injury” and the monetary limits for such coverage. The defendants argue that ambiguity is created because there is no indication on the declarations page that the UIM maximum coverage may be subject to further limitations due to the reducing clause appearing later in the policy. However, Wisconsin courts have expressly, and wisely, rejected this argument. See, e.g., Sukala v. Heritage Mut. Ins. Co., 622 N.W.2d 457, 461 (Wis. Ct. App. 2000) (“A declarations page is intended to provide a summary of coverage and cannot provide a complete picture of coverage under a policy.”). The declarations page in the Allstate policy lists many coverages (e.g., bodily injury, property damage) without describing all applicable coverage benefits and restrictions set forth in the policy jacket and endorsements. A detailed description on the declarations page of all of the policy’s coverage benefits and restrictions would arguably only create confusion. After the declarations page, UIM coverage is not mentioned again for nearly forty pages, at which point the UIM endorsement is found within AU 1440-3. The defendants argue that ambiguity arises from the omission of references to UIM coverage on various pages throughout the policy appearing before the UIM endorsement. We disagree. Insurers routinely add new coverages to their insureds’ policies by way of endorsement. Wisconsin courts have found that the fact that UIM provisions appear in an endorsement instead of the policy jacket does not create ambiguity. See, e.g., Vorbeck, 674 N.W.2d at 673-74 (finding UIM reducing clause added to policy by endorsement unambiguous). Even though it appears toward the end of the policy, a reasonable insured would have no problem locating the UIM endorsement. Moreover, the fact that all provisions relating to UIM coverage, including the reducing clause, are set forth in the separate, standalone endorsement arguably makes the coverage easier for insureds to locate and understand than if the UIM provisions were spread throughout various sections of the policy. 10 Nos. 03-3702 & 03-3835 Although it is undisputed that the reducing clause itself is unambiguous, defendants argue that other provisions included in the UIM endorsement as well as the endorsement’s structure create confusion and ambiguity. Again, we disagree. The Limits of Liability subsection of the UIM endorsement explains that the coverage limit shown on the declarations page ($300,000 per accident for Keca, $100,000 per accident for Bontempo) is the “maximum that we will pay for damages arising out of bodily injury . . . .” The reducing clause is located directly below the “Limits of Liability” subsection. Thereafter, the “If There Is Other Insurance” subsection appears and states in part: “If more than one policy applies on a primary basis to an accident involving your insured auto, we will bear our proportionate share with other collectible underinsured motorists insurance . . . . If the insured person was in, on, getting into or out of a vehicle you do not own which is insured for this coverage under another policy, we will pay up to your policy limits only after all other collectible insurance has been exhausted.” A reasonable insured reading these provisions would understand that the insured purchased a fixed level of UIM recovery which will be arrived at by combining payments made from all sources. See Schmitz, 647 N.W.2d at 231. It would be clear to the insured that the UIM coverage limits are subject to a reduction, thereby putting the insured on notice that the full policy limits may not be payed out from the insurer. The policy is reasonably orderly and logical. None of the provisions are inconsistent. The policy does not set up roadblocks that would confuse reasonable insureds as they attempt to navigate their way through the policy. We are unpersuaded by the fragmented comparisons that the defendants draw between the Allstate policy and the policies determined to be ambiguous in Schmitz, supra, and Hanson v. Prudential Prop. & Cas. Ins. Co., 653 N.W.2d 915 (Wis. Ct. App. 2002) (a case the supreme court criticized in Nos. 03-3702 & 03-3835 11 Folkman). The defendants present us with a laundry list of alleged infirmities found within the Allstate policy, but this sort of “[f]erreting through a policy to dig up ambiguity” was rejected in Folkman. 665 N.W.2d at 869. Simply put, Allstate’s policy does not create a maze for its insured that is organizationally complex and plainly contradictory, as was the case in Schmitz.