Kaun v. Industrial Fire & Cas. Ins. Co.

• Decision Date: 09 March 1989
• Docket Number: No. 85-1286,85-1286
• Citation: 436 N.W.2d 321,148 Wis.2d 662
• Court: Wisconsin Supreme Court
• Parties: Eileen C. KAUN, Plaintiff-Appellant-Petitioner, Badger Mutual Insurance Company, a domestic corporation, Intervenor-Plaintiff-Respondent, v. INDUSTRIAL FIRE & CASUALTY INSURANCE COMPANY, and Daniel J. Smith, Defendants.

Page 321

436 N.W.2d 321

148 Wis.2d 662

Eileen C. KAUN, Plaintiff-Appellant-Petitioner Badger Mutual Insurance Company, a domestic corporation Intervenor-Plaintiff-Respondent, v. INDUSTRIAL FIRE & CASUALTY INSURANCE COMPANY, and Daniel J Smith, Defendants.

No. 85-1286.

Supreme Court of Wisconsin.

Argued Oct. 4, 1988.

Decided March 9, 1989.

Morton Gollin, Palm Springs, Cal., for plaintiff-appellant-petitioner.

Kurt H. Frauen (argued), James M. Fredericks and Borgelt, Powell, Peterson & Frauen, S.C., on brief, Milwaukee, for intervenor-plaintiff-respondent.

Boyd M. McGranaghan and McGranaghan & Stawski, Milwaukee, amicus curiae, for Wisconsin Academy of Trial Lawyers.

Eric Englund, Madison, amicus curiae, for Wisconsin Ins. Alliance.

CECI, Justice.

This is a review of a decision of the court of appeals, Kaun v. Industrial Fire & Casualty Ins. Co., 142 Wis.2d 650, 419 N.W.2d 272 (Ct.App.1987), which affirmed a judgment of the circuit court for Waukesha County, Willis J. Zick, circuit judge, granting summary judgment to Badger Mutual Insurance Company (respondent). Two issues are presented for review. The first issue is whether an insurance company's payment to its insured under uninsured motorist (UM) coverage becomes a payment under underinsured motorist (UIM) coverage when, at some later date, the tortfeasor's insurance company admits liability on behalf of the tortfeasor and tenders its liability limit to the court. The second issue is whether the reducing clause in the UIM provision of the insurance policy at issue is valid and enforceable under Wisconsin law so as to reduce UIM benefits recoverable under the policy's limit by the amount received by the insured from the underinsured driver's liability policy. We conclude that an insurance company's payment to its insured under UM coverage becomes a payment under UIM coverage when, at some later date, the tortfeasor's insurance company admits liability on behalf of the tortfeasor and tenders its liability limit to the court. In addition, we conclude that the reducing clause in the UIM provision of the insurance policy at issue in this case does not reduce the UIM benefits recoverable under the policy's limit by the amount received by the insured from the underinsured driver's liability policy. Rather, the "amounts payable" from the UIM provision at issue in this case are measured against the insured's total damages, and the reducing clause reduces UIM benefits by subtracting from the total damages sustained by the insured the amount received by the insured from the underinsured driver's liability policy.

The facts in this case are as follows. On April 25, 1983, an action was commenced in the circuit court by Eileen Kaun (petitioner) against Daniel Smith and his insurer, Industrial Fire & Casualty Insurance Company (Industrial), for injuries sustained by the petitioner because of the alleged negligent driving of Daniel Smith. Industrial's amended answer to the petitioner's complaint denied liability coverage, and, upon such denial of coverage, the respondent the petitioner's insurer, paid the petitioner $49,500 under the UM coverage of its policy with the petitioner. ¹

By order dated March 27, 1984, the respondent was allowed to intervene in the action. On June 4, 1984, nearly one year after its denial of coverage, Industrial admitted liability on behalf of Smith. On August 2, 1984, Industrial tendered its $15,000 liability limit to the court for determination as to whether the petitioner or the respondent was entitled to the funds. Both the petitioner and the respondent moved for summary judgment, each claiming entitlement to the $15,000. For purposes of its summary judgment motion and through this appeal, the respondent concedes that the petitioner's injuries are greater than $65,000. The circuit court granted summary judgment in favor of the respondent and awarded it the $15,000. The judgment was affirmed by the court of appeals.

The court of appeals decided that the issue presented in this case was one of underinsurance rather than uninsurance. The court of appeals found that once Industrial admitted coverage and tendered its $15,000 liability limit, Industrial had conceded that the tortfeasor was insured by Industrial, and, therefore, Smith was not uninsured. Kaun, 142 Wis.2d at 654-55, 419 N.W.2d 272. In addition, the court of appeals held, citing Kuehn v. Safeco Ins. Co. of America, 140 Wis.2d 620, 412 N.W.2d 126 (Ct.App.1987), that the reducing clause in the respondent's policy was valid and enabled the respondent to reduce its liability to the petitioner by the $15,000 paid by Industrial. Kaun, 142 Wis.2d at 656, 419 N.W.2d 272. Therefore, the court of appeals affirmed the judgment of the circuit court awarding the $15,000 tendered by Industrial to the respondent.

It is well settled that the construction of an insurance policy is a question of law for the court and, therefore, is reviewed de novo. Lambert v. Wrensch, 135 Wis.2d 105, 115, 399 N.W.2d 369 (1987).

The pertinent language for UIM coverage in the policy issued by the respondent provides as follows:

We will pay damages for bodily injury which an insured person is legally entitled to recover from the owner or operator of an underinsured motor vehicle.... We will pay under this coverage only after the limits of liability under any applicable bodily injury liability policies or bonds have been exhausted by payment of judgments or settlements. As used in this endorsement: . . . . .

'Underinsured motor vehicle' means a land motor vehicle insured by a liability policy or bond at the time of the accident which provides bodily injury liability limits less than the limit of liability for this coverage. It does not include a vehicle: . . . . .

(5) which is insured by liability policy or bond at the time of the accident, but the insuring company or bonding denies coverage or is or becomes insolvent. . . . . .

LIMITS OF LIABILITY . . . . .

Amounts payable will be reduced by payments:

(1) made by the owner or operator of the underinsured motor vehicle or organization which may be legally liable....

We agree with the court of appeals that the issue presented in this case is one of underinsurance rather than uninsurance. UM coverage is effective where the tortfeasor has no liability insurance, and UIM coverage is effective where there is a tortfeasor with liability coverage inadequate in amount for the injuries caused. Schwochert v. American Family Mutual Ins. Co., 139 Wis.2d 335, 346, 407 N.W.2d 525 (1987). A fundamental characteristic of underinsurance is that it only becomes effective when the tortfeasor's insurance partially compensates but is not adequate to provide full indemnification to the insured. The respondent agrees that under the terms of its policy, even if a tortfeasor is insured, UM coverage is operative if the tortfeasor's insurer denies coverage. Therefore, had Industrial maintained its denial of coverage of the tortfeasor, this would have been an uninsurance case. However, because Industrial admitted coverage and tendered its $15,000 liability limit, this is an underinsurance case.

We turn now to the issue of the validity and effect of the reducing clause involved in this case. Insurance contracts are controlled by the same rules of construction as are applied to other contracts. Vidmar v. American Family Mutual Ins. Co., 104 Wis.2d 360, 365, 312 N.W.2d 129 (1981), overruled in part on other grounds, Welch v. State Farm Mutual Automobile Ins. Co., 122 Wis.2d 172, 179, 361 N.W.2d 680 (1985). See also Ehlers v. Colonial Penn Ins. Co., 81 Wis.2d 64, 74, 259 N.W.2d 718 (1977). The goal of construction is to ascertain the true intentions of the parties to the insurance contract. Vidmar, 104 Wis.2d at 365, 312 N.W.2d 129. In the case of an insurance contract, the words are to be construed in accordance with the principle that the test is not what the insurer intended the words to mean but what a reasonable person in the position of an insured would have understood the words to mean. Id., quoting Garriguenc v. Love, 67 Wis.2d 130, 134-35, 226 N.W.2d 414 (1975). Ambiguities in coverage are to be construed in favor of coverage, while exclusions are narrowly construed against the insurer. Vidmar, 104 Wis.2d at 365, 312 N.W.2d 129, citing Davison v. Wilson, 71 Wis.2d 630, 635-36, 239 N.W.2d 38 (1976).

We find that the words "amounts payable" found in the reducing clause at issue are ambiguous. Consequently, we will construe the words in accordance with what a reasonable person in the position of an insured would have understood the words to mean. In this case, $50,000 of UIM coverage was provided by the respondent in the policy issued. It is conceded for the purposes of this appeal that the petitioner's damages exceed $65,000. The respondent maintains it is liable to the petitioner for only $35,000. However, if the respondent is allowed to offset its $50,000 liability to the petitioner by the $15,000 paid by Industrial, the respondent will not be providing the $50,000 of UIM benefits it indicated it would pay on the declarations page of its policy.

Accepting the respondent's position, i.e., that the "amounts payable" under the UIM policy are the UIM limitation indicated on the declarations page of the policy reduced by payments made by the tortfeasor, the respondent will never pay the policy limits of its UIM policies. For example, a policyholder purchases and pays a premium for UIM coverage with limits of $25,000. The insurance company would collect a premium for this coverage, but under no circumstances will the insured ever collect anything under that coverage. UIM coverage is effective where there is a tortfeasor with liability coverage inadequate in amount for the injuries caused. Schwochert, 139 Wis.2d at 346, 407 N.W.2d 525. In Wisconsin, liability coverage currently cannot be issued for less than $25,000. Section 344.33, Stats. Therefore, because...