Pitts v. Revocable Trust of Knueppel

• Decision Date: 29 June 2005
• Docket Number: No. 2002AP3394.,2002AP3394.
• Citation: 698 N.W.2d 761,282 Wis.2d 550,2005 WI 95
• Parties: Christina PITTS and Clifford Pitts, Sr., Plaintiffs-Petitioners-Appellants, WISCONSIN PHYSICIANS SERVICE INSURANCE CORPORATION, a Wisconsin insurance corporation and Sentry Insurance, a mutual company, Involuntary-Plaintiffs-Respondents, v. REVOCABLE TRUST OF Dorothy KNUEPPEL, Defendant.
• Court: Wisconsin Supreme Court

282 Wis.2d 550

2005 WI 95

698 N.W.2d 761

Christina PITTS and Clifford Pitts, Sr., Plaintiffs-Petitioners-Appellants, WISCONSIN PHYSICIANS SERVICE INSURANCE CORPORATION, a Wisconsin insurance corporation and Sentry Insurance, a mutual company, Involuntary-Plaintiffs-Respondents, v. REVOCABLE TRUST OF Dorothy KNUEPPEL, Defendant.

No. 2002AP3394.

Supreme Court of Wisconsin.

Oral argument October 26, 2004.

Decided June 29, 2005.

For the plaintiffs-petitioners-appellants there were briefs by Mark L. Thomsen, Charles David Schmidt and Cannon & Dunphy, S.C., Brookfield, and oral argument by Mark L. Thomsen. For the involuntary-plaintiffs-respondents, Sentry Insurance, a mutual company, there was a brief by Robert F. Johnson, Philip C. Reid, Colleen M. Fleming and Cook & Franke, S.C., Milwaukee, and oral argument by Philip C. Reid.

¶ 1. DAVID T. PROSSER, J.

This case is before the court on certification by the court of appeals, pursuant to Wis. Stat. § (Rule) 809.61 (2001-02).¹ The issue presented is whether an underinsured motorist (UIM) insurer has an obligation to consent to, or substitute its own funds for, a proposed settlement between its insured and the tortfeasor, where the tortfeasor's insurer has already settled for its policy limit and the tortfeasor is offering an additional settlement payment in exchange for a full release.

¶ 2. This court has already held that a UIM insurer has an obligation grounded in equity to consent to a settlement or substitute when the settlement offer to its insured emanates from the tortfeasor's insurance company and fully releases both the tortfeasor and the tortfeasor's insurer. Vogt v. Schroeder, 129 Wis. 2d 3, 383 N.W.2d 876 (1986). In this case the UIM insurer (also referred to as the "underinsurer") faces an additional level of risk, considering both the uncertainty of the insured's ultimate damages and the uncertainty of the tortfeasor's non-insurance assets. Nevertheless, we conclude that most of the factors that led to our determination in Vogt are also present here. Consequently, we hold that the Vogt "consent-or-substitute" regimen applies where the insured is willing to accept the tortfeasor's settlement offer.

I. FACTS AND PROCEDURAL HISTORY

¶ 3. The basic facts are undisputed. Christina and Clifford Pitts (Pittses) purchased an automobile insurance policy from Sentry Insurance (Sentry) effective September 29, 1996. The policy provided for $250,000 per person in underinsured motorist (UIM) coverage, with a standard reducing clause.

¶ 4. On December 30, 1996, Christina Pitts (Pitts) was injured in an automobile accident allegedly caused by Dorothy Knueppel (Knueppel). Knueppel had purchased an automobile insurance policy from American Family Mutual Insurance Company (American Family), with $100,000 in liability coverage.

¶ 5. On July 7, 1999, the Pittses commenced a lawsuit against Knueppel and her liability insurer, American Family, claiming damages from the automobile accident. The complaint did not allege a specific amount of damages; it asked for compensatory damages and costs to be determined by a jury.

¶ 6. On September 26, 2000, Knueppel died. The Revocable Trust of Dorothy Knueppel (Trust) was substituted for Knueppel in the lawsuit.

¶ 7. On January 3, 2001, shortly before a scheduled trial, American Family tendered its $100,000 policy limits to the Pittses; and the Pittses' attorney, Mark Thomsen, notified Sentry of American Family's tender that same day. Thereafter, to preserve its subrogation rights, Sentry substituted $100,000 of its own funds in place of American Family's tender. On May 30, 2001, American Family deposited $100,000 into the circuit court and was dismissed from the case.² ¶ 8. Also on May 30, Sentry intervened in the case as a defendant against the Pittses. Later, on November 12, 2001, it moved for a declaratory judgment, asserting that the Pittses had made a claim under the UIM provision of the Sentry Policy and that this claim should be adjudicated to determine how much, if any, UIM coverage Sentry would owe. The Pittses opposed Sentry's motion, and Sentry was dismissed from the case without prejudice.

¶ 9. Sentry's dismissal came on June 17, 2002. Two days later, on June 19, the Pittses and the Trust reached a proposed settlement agreement in which the Trust would pay the Pittses $40,000 in return for a release on the Pittses' claims against the Trust. As required by the Sentry policy and by case law, the Pittses' attorney notified Sentry of the settlement offer and requested that Sentry decide whether to consent (and thereby lose its subrogation rights) or substitute its own funds (to preserve its subrogation rights). Sentry objected, claiming that it was not required to consent or substitute under its policy or under existing case law. It contended that it had already paid the Pittses $100,000 to preserve its subrogation rights against the Trust.

¶ 10. Unable to reach an agreement, the Pittses brought Sentry back into the lawsuit as an involuntary plaintiff. On October 9, 2002, the Pittses filed a motion for declaratory judgment asking the court to order Sentry to consent to the settlement or substitute. The Pittses also sought the award of attorney fees pursuant to Wis. Stat. § 806.04 and interest on the settlement amount pursuant to Wis. Stat. § 628.46.

¶ 11. On December 12, 2002, the circuit court for Milwaukee County, Thomas P. Donegan, Judge, denied the motion, leading to this appeal.

¶ 12. The issue again is whether an underinsured motorist (UIM) insurer [Sentry] has an obligation to consent to, or substitute its funds for, a proposed settlement between its insured [the Pittses] and the tortfeasor [the Trust], where the tortfeasor's insurer [American Family] has already settled for its policy limit [$100,000] and the tortfeasor is offering an additional settlement payment [$40,000] in exchange for a full release.

II. THE SENTRY INSURANCE POLICY

¶ 13. Several provisions of the Sentry policy are important, and we set them out in detail with commentary.

¶ 14. First, the Declarations page shows that the Pittses purchased "Underinsured Motorist Bodily Injury" coverage of $250,000 per person and $500,000 per accident.

¶ 15. Under this specific coverage, the insurer never pays the full $250,000 for a single-person accident because the underinsured tortfeasor, by definition, has some insurance and the policy contains a reducing clause. If the tortfeasor had no insurance, the tortfeasor would be "uninsured" rather than "underinsured." Every dollar obtained from the tortfeasor reduces the potential liability of the UIM insurer.

¶ 16. Second, the policy provides a broad grant of UIM coverage:

Our Promise To You

We promise to pay damages, excluding punitive or exemplary damages, the owner or operator of an underinsured motor vehicle is legally obligated to pay because of bodily injury you suffer in a car accident . . . as a result of having been struck by an underinsured motor vehicle.

¶ 17. Third, the policy defines "Underinsured Motor Vehicle":

An underinsured motor vehicle is a motor vehicle with liability protection afforded by liability insurance policies or bodily injury liability bonds with limits the sum of which are less than the limits you have selected for underinsured motorist coverage as shown on the declarations page. An underinsured motor vehicle does not include an uninsured motor vehicle.

¶ 18. On the facts at hand, Knueppel was the operator of an "underinsured motor vehicle" because her vehicle had "liability protection afforded by liability insurance policies . . . with limits [$100,000] the sum of which are less than the limits [$250,000] you have selected." Until there is a judgment or settlement, a tortfeasor is not "legally obligated to pay" damages. But the insurer (or underinsurer) has an obligation to deal with the insured in good faith at all times. Danner v. Auto-Owners Ins., 2001 WI 90, ¶ 57, 245 Wis. 2d 49, 629 N.W.2d 159.

¶ 19. Fourth, the reducing clause is found under the heading "Payment of Damages." It provides:

. . . The amount of damages payable under this insurance [$250,000] will be the limit of liability reduced by the amount paid by or on behalf of anyone responsible for your injury [i.e., the Trust and American Family].

¶ 20. With this reducing clause in place, an insured who purchases $250,000 of underinsured motorist coverage is taking the risk that he or she will not suffer injuries of more than $250,000. If the insured suffers injuries of, say, $500,000, the only chance of being made whole is to be injured by one or more tortfeasors with liability insurance or other available assets equaling the $500,000 in damages. If a tortfeasor has insurance coverage of $250,000 or more, the insured's UIM policy will pay nothing.

¶ 21. Fifth, also under the heading "Payment of Damages" is a provision partly responding to the Vogt decision:

No damages will be payable under this insurance, as a result of a car accident with an underinsured motor vehicle until:

a. The sum of the limits of liability of available liability insurance policies or bodily injury liability bonds applicable to the underinsured motor vehicle have been exhausted by payment of judgments or settlements; or

b. A tentative settlement has been made between you and the insurer of the underinsured motor vehicle which would exhaust the limits of liability under any applicable bodily injury liability bonds or policies and we have prompt written notice of such tentative settlement and advance payment to you in an amount equal to the tentative settlement within 30 days after receipt of notification.

Paragraph (a) operates in tandem with the reducing clause. No damages will be paid to the insured under UIM coverage until the tortfeasor's limits of liability insurance have been exhausted. Paragraph (b) contemplates the substitution feature of the Vogt decision, in which the insured reaches a settlement with the...