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

Heading: Reducing Clauses Prior to 1995

Text: ¶ 25. This court first examined reducing clauses in automobile insurance policies in the context of uninsured motorist (UM) coverage. Leatherman v. American Family Mut. Ins. Co., 52 Wis. 2d 644, 190 N.W.2d 904 (1971). The court in Leatherman held that a reducing clause contained in UM coverage was valid and not against public policy. Id. at 651. The policy at issue in Leatherman predated the statutory mandate of UM coverage. ¶ 26. In 1971 the legislature required all automobile insurance policies issued in Wisconsin to contain UM coverage. § 1, ch. 28, Laws of 1971. This court made clear, once UM coverage became mandatory, that reducing clauses in policies were illegal as applied to UM provisions. Nicholson v. Home Ins. Co., 137 Wis. 2d 581, 594, 405 N.W.2d 327 (1987). The legislative objective in mandating UM coverage is to require that the insured receive the proceeds of the UM coverage free from any reductions. Id. at 604. ¶ 27. In the context of UIM coverage, this court interpreted reducing clauses as reducing the amount of the insured's total damages by the amount of payments received by the insured from the underinsured tortfeasor. Kaun, 148 Wis. 2d at 665; Wood, 148 Wis. 2d at 654. To do otherwise, we concluded, would result in the insurer never paying the policy limits of its UIM policies. Kaun, 148 Wis. 2d at 669-70; Wood, 148 Wis. 2d at 653. Shortly after these two decisions, however, the court of appeals gave a different interpretation to a reducing clause in a policy by distinguishing its language from the language in Kaun and Wood. Smith v. Atlantic Mut. Ins. Co., 151 Wis. 2d 542, 444 N.W.2d 465 (Ct. App. 1989), aff'd on other grounds, 155 Wis. 2d 808, 456 N.W.2d 597 (1990). ¶ 28. In Smith, the court of appeals reasoned that the UIM policies in Kaun and Wood used the ambiguous phrase amounts payable, but the reducing clause in Smith reduced the limit of liability, not the amounts payable, and thus required a different interpretation. Smith, 151 Wis. 2d at 547-48. The fact that the reducing clause for underinsured motorist coverage meant that the insurer would never pay the full UIM limits of its policy was never discussed in Smith. But the court of appeals used that concern as a basis to find reducing clauses void in subsequent cases. ¶ 29. In the first such case, the court held that UIM coverage under which no benefits would ever be paid was illusory and against public policy. Hoglund v. Secura Ins., 176 Wis. 2d 265, 271, 500 N.W.2d 354 (Ct. App. 1993). In Hoglund, the insured had $25,000 of UIM coverage, but statutes mandated that Wisconsin drivers must have at least $25,000 in liability coverage. Thus, the court found that the reducing clause was void because it rendered the coverage illusory: if the reducing clause were applied, Hoglund would never recover under her $25,000 UIM policy. Id. at 270. ¶ 30. After Hoglund, the court of appeals continued to find reducing clauses illusory. In Kuhn v. Allstate Insurance Co., 181 Wis. 2d 453, 510 N.W.2d 826 (Ct. App. 1993), aff'd on other grounds, 193 Wis. 2d 50, 532 N.W.2d 124 (1995), the court held that it was unreasonable for an insured with $50,000 of UIM coverage to expect never to qualify for the stated limits. The court concluded that a representation that there is $50,000 in UIM coverage that will never be paid is illusory. Id. at 465. Consequently, the court held that the reducing clause was void because it rendered the purported UIM coverage illusory and contrary to public policy. Id. at 463. [5]