McPhee v. American Motorists Ins. Co.

• Decision Date: 27 March 1973
• Docket Number: No. 19,19
• Parties: John McPHEE and Sheri McPhee, Respondents, v. AMERICAN MOTORISTS INSURANCE COMPANY, a foreign corp., Appellant.
• Court: Wisconsin Supreme Court

Page 152

205 N.W.2d 152

57 Wis.2d 669

John McPHEE and Sheri McPhee, Respondents, v. AMERICAN MOTORISTS INSURANCE COMPANY, a foreign corp., Appellant.

No. 19.

Supreme Court of Wisconsin.

March 27, 1973.

Hayes & Hayes, Milwaukee, for appellant.

Habush, Gillick, Habush, Davis & Murphy, Milwaukee, Howard A. Davis, Milwaukee, of counsel, for respondents.

CONNOR T. HANSEN, Justice.

The single issue presented to this court concerns the extent of the liability of American, the insurer of Cornith, with respect to the amount of interest owed the plaintiffs who obtained a judgment in excess of the coverage afforded by American's policy.

Whether a liability insurer is liable for interest on that portion of a judgment received against the insured by a third party which is in excess of the amount of the policy limits depends upon the language used by the parties in their contract of insurance. Contracts of insurance rest upon and are controlled by the same principles of law that are applicable to other contracts, and parties to an insurance contract may provide such provisions as they deem proper as long as the contract does not contravene law or public policy. The courts must construe and enforce such agreements as made and not make new contracts for the parties. Bulman v. Bulman (1955), 271 Wis. 286, 73 N.W.2d 599.

The provisions of American's policy pertinent to payment of interests are:

'II. Defense, Settlement, Supplementary Payments. With respect to such insurance as is afforded by this policy, the company shall:

'(a) defend any suit against the insured alleging such injury, sickness, disease or destruction and seeking damages on account thereof, even if such suit is groundless, false or fraudulent; but the company may make such investigation, negotiation and settlement of any claim or suit as it deems expedient:

'(b) (1) pay all premiums on bonds to release attachments for an amount not in excess of the applicable limit of liability of this policy, all premiums on appeal bonds required in any such defended suit, . . .

'(2) pay all expenses incurred by the company, all costs taxed against the insured in any such suit and all interest accruing after entry of judgment until the company has paid or tendered or deposited in court such part of such judgment as does not exceed the limit of the company's liability thereon;

'(3). . . .

'(4). . . .

and the amounts so incurred except settlements of claims and suits, are payable by the company in addition to the applicable limit of liability of this policy.' (Emphasis supplied.)

This policy provision has often been referred to as a 'standard interest clause.' The parties in the instant case denominate it as such and it will hereinafter be referred to as such.

This court has never considered the application of the standard interest clause to facts such as are presented in the instant case. The issue was raised in Nichols v. United States Fidelity & Guaranty Co. (1961), 13 Wis.2d 491, 109 N.W.2d 131, but the issue therein was determined not properly before this court in that the appellant had failed to raise the issue in trial court. However, this court in dictum, at page 501, 109 N.W.2d at page 136, stated:

'. . . Whether the entire amount of interest on the verdict should be allowed against the insurer when the amount of recovery exceeds policy limits seems to us on principle to depend upon the language of the policy. . . .'

Courts which have considered the standard interest clause are divided as to the meaning of the phrase 'all interest accruing after entry of judgment.' ¹

The minority of jurisdictions that have considered the question hold that the standard interest clause must be construed as creating a liability for interest only on that part of the judgment for which the insurer is responsible, thus rendering it liable for interest only on the amount of its liability as determined by its policy limits. These jurisdictions hold that the insurer's liability as so limited runs from the date of judgment until the amount of the policy limit together with interest thereon has been tendered, deposited or paid. ²

Among the reasons advanced by the various courts so holding, and now urged by American in the case at bar, are that the clause is clear and unambiguous; that liability of the insurer for interest on that portion of judgment in excess of the policy limits amounts to vicarious liability; that the insured, during the delay on the part of the insurer in paying its part of the judgment, had the use of the money on that part of the judgment in excess of the policy limits; that liability for the interest upon the entire judgment will tend to discourage otherwise meritorious appeals; and that premium rates are based on insurer's maximum liability, and interest costs upon the entire judgment above and beyond the policy limits are not contemplated. ³

On the other hand, the majority of jurisdictions which have considered the application of the standard interest clause to the factual situation herein presented reach the opposite result. They have construed this policy provision as creating liability upon the insurer for interest upon the entire amount of the judgment. ⁴ The insurer is thus liable for interest upon the entire amount of the judgment, including the portion thereof in excess of the policy limits. ⁵

Among the reasons advanced in these jurisdictions are: The clause is ambiguous and must, therefore, be construed against the insurer; the clause, since it uses the word 'judgment' without qualification in one place, and in another with qualification relating to the policy limit, clearly shows the intention of the insurer to assume liability for interest on the entire judgment; and since the insurer controls the litigation and by delaying payment may influence the accumulation of interest, it should bear the entire expense of such delay. ⁶

There is an irreconcilable conflict among the authorities. We conclude that the reasoning of the majority of jurisdictions, which have considered this issue, is more persuasive.

Necessarily involved in the determination of this question is an analysis and examination of the provisions of the insurance policy. Nichols v. United States Fidelity & Guaranty Co., supra. An insurance policy must be construed in accordance with the principal that the test is not what the insurer intended its words to mean but what a reasonable person in the position of an insured would have understood the words to mean. ⁷ While this court will not, under the guise of strict construction against the insurer, rewrite a policy, ⁸ whatever ambiguity exists in a policy of liability insurance must be resolved in favor of the insured. ⁹

We are of the opinion that a reasonable person in the position of the insured would understand the language used in the American policy to mean that American is liable for interest upon the entire judgment. This would include interest on the portion thereof in excess of the policy limits. The court, in Russom v. United Services Automobile Association (W.D.Tex.1956), 143 F.Supp. 790, 796, stated:

'It would seem that the framers of the policy, for once, used language that was clear and unambiguous to accomplish the intended result, and this clause has been construed to require the company to pay interest on the entire judgment, even that portion thereof in excess of its policy limits, . . .'

The phrase 'all interest' does not connote the thought of some interest, or part of the interest on the judgment, but rather all interest on the judgment, whatever its amount in relation to the policy limits. Powell v. T.A. & C. Taxi, Inc., supra, 188 A.2d p. 655; Mayberry v. Home Insurance Company, supra, 142 S.E.2d p. 630; Draper v. Great American Insurance Company, supra, 458 S.W.2d p. 431; Russom v. United Services Automobile Association, supra. In addition, the language used in this section is consistent with the view that interest on the entire amount should be allowed. The phrase referring to interest uses the term 'judgment' without qualification or restriction, while in the same clause the phrase limiting the duration of liability for interest refers to 'such part of such judgment as does not exceed the limit of the company's liability thereon.'

Also, clause II(b)(1) of the policy provides that the company shall 'pay all premiums on bonds to release attachments for an amount not in excess of the applicable limit of liability of this policy.' We point this out to demonstrate that the insurer knew how to qualify the term 'judgment' to achieve the result American now urges. In the standard interest clause, it did not do so. River Valley Cartage Co. v. Hawkeye-Security Ins. Co., supra; Powell v. T.A. & C. Taxi, Inc., supra. Very little restrictive language would have been required to limit the liability of American to interest only upon that portion of the judgment covered by its policy. The court, in Plasky v. Gulf Ins. Co., supra, 335 S.W.2d at page 583, observed:

'. . . By the terms of the policy the insurer undertakes to pay all interest accruing after entry of judgment until it has paid, tendered or deposited in court that part of the judgment which does not exceed the limit of its liability thereon. The contract thus recognizes that a judgment in excess of the policy limits may be taken against the insured and shows that those who drafted the instrument knew how to differentiate between such a judgment and the company's portion thereof. We think that in this context the agreement to pay 'all interest accruing after entry of judgment' plainly and unequivocally obligates the insurer to pay interest on the entire judgment until its part of the same has been paid, tendered or deposited in court. . . .'

In addition to agreeing to pay the expenses of the defense, costs and interest, American has specifically assumed the obligation in section II that '. . . the amounts so incurred, except settlements of claims and...