Danbeck v. American Family Mut. Ins. Co.

• Decision Date: 06 July 2001
• Docket Number: No. 99-1142.,99-1142.
• Citation: 2001 WI 91,245 Wis.2d 186,629 N.W.2d 150
• Parties: Dan DANBECK, Plaintiff-Respondent-Petitioner, v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Defendant-Appellant.
• Court: Wisconsin Supreme Court

245 Wis.2d 186

2001 WI 91

629 N.W.2d 150

Dan DANBECK, Plaintiff-Respondent-Petitioner, v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Defendant-Appellant.

No. 99-1142.

Supreme Court of Wisconsin.

Oral argument November 1, 2000.

Decided July 6, 2001.

For the plaintiff-respondent-petitioner there were briefs by Michael J. Luebke and Gingras, Cates & Luebke, S.C., Madison, and oral argument by Michael J. Luebke.

For the defendant-appellant there was a brief by Ward I. Richter, John M. Christenson and Bell, Gierhart & Moore, S.C., Madison, and oral argument by Ann E. Curtiss.

An amicus curiae brief was filed by Michael Riley and Atterbury & Riley, S.C., Madison, on behalf of the Wisconsin Academy of Trial Lawyers.

¶ 1. DIANE S. SYKES, J.

This case involves an insurance dispute and requires us to interpret language in an underinsured motorist (UIM) policy that obligates the UIM carrier to pay benefits to its insured only after the underinsured motorist's liability limits "have been exhausted by payment of judgements or settlements." The question is whether the policy's exhaustion requirement can be satisfied by a settlement with the underinsured motorist's insurer for less than liability limits, plus a credit to the UIM carrier for the difference. We conclude that the unambiguous language of the insurance policy precludes exhaustion by way of "settlement plus credit" and therefore affirm the court of appeals.

I

¶ 2. The relevant facts are undisputed. Dan Danbeck was seriously injured when a car driven by George Horne struck his bicycle. Horne had $50,000 of liability coverage through Country Mutual Insurance Company.

¶ 3. Danbeck was insured by American Family Mutual Insurance Company and had $100,000 of UIM coverage.¹ The UIM policy issued by American Family specified the circumstances under which it would pay UIM benefits:

[American Family] will pay compensatory damages for bodily injury which an insured person is legally entitled to recover from the owner or operator of an underinsured motor vehicle. The bodily injury must be sustained by an insured person and must be caused by accident and arise out of the use of the underinsured motor vehicle.

You must notify us of any suit brought to determine legal liability or damages. Without our written consent we are not bound by any resulting judgment.

We will pay under this coverage only after the limits of liability under any bodily injury liability bonds or policies have been exhausted by payment of judgements or settlements.

¶ 4. Danbeck settled with Country and Horne for $48,000 ($47,500 for bodily injury and $500 for the damage to his bicycle). Pursuant to Vogt v. Schroeder, 129 Wis. 2d 3, 383 N.W.2d 876 (1986), Danbeck's attorney notified American Family of the pending settlement by letter. The letter also stated that Danbeck intended to pursue a UIM claim and that American Family would be given credit for the full $50,000 limit of Horne's liability policy.²

¶ 5. American Family refused to pay Danbeck's claim. The company took the position that UIM coverage was not available under its policy because Danbeck had settled for less than Horne's liability limit and therefore had not "exhausted" that limit within the meaning of the policy language. Danbeck sued.

¶ 6. American Family moved for summary judgment. The Circuit Court for Dane County, Paul B. Higginbotham, Judge, denied the motion on several grounds. First, the circuit court applied Teigen v. Jelco of Wisconsin, Inc., 124 Wis. 2d 1, 367 N.W.2d 806 (1985), which interpreted an exhaustion clause in a primary/excess insurance situation to allow exhaustion by settlement of less than policy limits. Further, the circuit court found the exhaustion clause to be ambiguous and therefore construed it in favor of coverage. See Vidmar v. Am. Family Mut. Ins. Co., 104 Wis. 2d 360, 365, 312 N.W.2d 129 (1981)

. The court also noted that allowing coverage under these circumstances would promote the purposes of UIM insurance, including compensating the victims of an underinsured motorist's negligence, and concluded that American Family's interpretation of the policy language violated public policy.

¶ 7. Accordingly, the circuit court interpreted the exhaustion clause to allow recovery of UIM benefits when the UIM policyholder settles his or her claim with the tortfeasor's insurer and credits the UIM carrier for the difference between the settlement amount and the tortfeasor's liability limits. The court then ordered mediation, and the parties agreed that Danbeck was entitled to $20,000.

¶ 8. American Family appealed the denial of summary judgment, and the court of appeals reversed. The court focused on the policy language and concluded that the exhaustion clause unambiguously required the insured to exhaust the underinsured motorist's limits of liability by payment of full policy limits — in this case, $50,000. The court held that the partial settlement and credit endorsed by the circuit court did not satisfy the policy's requirements for coverage. Danbeck v. Am. Family Mut. Ins. Co., 2000 WI App 26, ¶¶ 7-9, 15, 232 Wis. 2d 417, 605 N.W.2d 925 (Ct. App. 1999).

II

[1, 2]

¶ 9. This is an appeal from the denial of a motion for summary judgment, which we review de novo, applying the same methodology as the circuit court. Wis. Label Corp. v. Northbrook Prop. & Cas. Ins. Co., 2000 WI 26, ¶ 22, 233 Wis. 2d 314, 607 N.W.2d 276. Summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Wis. Stat. § 802.08(2) (1997-98). [3-9]

¶ 10. The interpretation of an insurance contract is a question of law subject to de novo review. Katze v. Randolph & Scott Mut. Fire Ins. Co., 116 Wis. 2d 206, 212, 341 N.W.2d 689 (1984). An insurance policy is construed to give effect to the intent of the parties, expressed in the language of the policy itself, which we interpret as a reasonable person in the position of the insured would understand it. Garriguenc v. Love, 67 Wis. 2d 130, 134-35, 226 N.W.2d 414 (1975). The words of an insurance policy are given their common and ordinary meaning. Henderson v. State Farm Mut. Auto. Ins. Co., 59 Wis. 2d 451, 457-59, 208 N.W.2d 423 (1973). Where the language of the policy is plain and unambiguous, we enforce it as written, without resort to rules of construction or principles in case law. Hull v. State Farm Mut. Auto. Ins. Co., 222 Wis. 2d 627, 637, 586 N.W.2d 863 (1998). This is to avoid rewriting the contract by construction and imposing contract obligations that the parties did not undertake. Gonzalez v. City of Franklin, 137 Wis. 2d 109, 122, 403 N.W.2d 747 (1987). Contract language is considered ambiguous if it is susceptible to more than one reasonable interpretation. Donaldson v. Urban Land Interests, Inc., 211 Wis. 2d 224, 230-31, 564 N.W.2d 728 (1997). If the language is ambiguous, it is construed in favor of coverage. Garriguenc, 67 Wis. 2d at 135. In interpreting an insurance policy, the court may also consider the purpose and subject matter of the insurance. Employers Health Ins. v. Gen. Cas. Co. of Wis., 161 Wis. 2d 937, 946, 469 N.W.2d 172 (1991).

III

¶ 11. The narrow issue in this case is whether a UIM insurer's obligation to pay UIM benefits to its insured is triggered when the insured settles with the tortfeasor's liability insurer for less than full liability limits and then credits the UIM carrier for the difference. The determination of this issue turns on language in the insurance policy that requires payment of UIM benefits only "after the limits of liability under any bodily injury liability bonds or policies have been exhausted by payment of judgements or settlements."

¶ 12. The parties dispute whether the language of the exhaustion clause is ambiguous. American Family says the language unambiguously requires full payment of the tortfeasor's liability policy limits as a prerequisite to payment of UIM benefits. Danbeck argues that the exhaustion clause is ambiguous because a reasonable insured might understand it to mean that a settlement that barred further claims and gave credit for full payment of liability limits would effectively "exhaust" those limits.

[10]

¶ 13. We agree with American Family and the court of appeals that while the "settlement plus credit" approach to exhaustion has the same practical effect as payment of full policy limits, it is not consistent with the plain language of the policy, which unambiguously requires exhaustion "by payment of judgements or settlements," not "settlement plus credit."³ ¶ 14. The exhaustion clause in the insurance policy sets forth these requirements for UIM coverage: the limits of the tortfeasor's bodily injury liability policy must be exhausted by payment of judgments or settlements. The phrase "limits of liability" clearly refers to the total amount of liability coverage available under the tortfeasor's bodily injury liability insurance policy. In this case, Horne carried $50,000 of liability insurance.

¶ 15. The term "exhaust" is also plain and unambiguous and has a readily ascertainable common and ordinary meaning. The dictionary defines "exhaust" as: "to use up or consume completely; expend the whole of...." Random House Unabridged Dictionary 678 (2d ed. 1993). Accordingly, to "exhaust" the tortfeasor's liability policy limits, the full $50,000 must be expended in total or used up completely.

¶ 16. Finally, the exhaustion clause specifies that only one manner of exhaustion will trigger the obligation to pay UIM benefits: exhaustion "by payment of judgements or settlements." Danbeck argues that the term "payment" can be understood in more than one way: payment of full policy limits, or payment of less than full policy limits plus a credit in favor of the UIM carrier for the...