Ranes v. American Family Mut. Ins. Co.

• Decision Date: 31 July 1997
• Docket Number: No. 97-0441,97-0441
• Parties: John RANES and Mary Ranes, Plaintiffs-Appellants, v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Defendant-Respondent.d
• Court: Wisconsin Court of Appeals

Page 359

569 N.W.2d 359

212 Wis.2d 626

John RANES and Mary Ranes, Plaintiffs-Appellants, v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY,

Defendant-Respondent.d

No. 97-0441.

Court of Appeals of Wisconsin.

Submitted on Briefs July 8, 1997.

Opinion Released July 31, 1997.

Opinion Filed July 31, 1997.

On behalf of the plaintiffs-appellants, the cause was submitted on the briefs of Charles B. Harris and Lora H. Woods of Doar, Drill & Skow, S.C., of Baldwin.

On behalf of the defendant-respondent, the cause was submitted on the brief of Ward I. Richter and David J. Pliner of Bell, Metzner, Gierhart & Moore, S.C., of Madison.

Before CANE, P.J., and LaROCQUE and MYSE, JJ.

MYSE, Judge.

John and Mary Ranes appeal a judgment dismissing their action against American Family Mutual Insurance Company, the Ranes' underinsured motorist carrier. The Ranes contend the trial court erred by concluding that their failure to give notice of a settlement between the insured and the tortfeasor as required by Vogt v. Schroeder, 129 Wis.2d 3, 383 N.W.2d 876 (1986), is a bar to UIM coverage without regard to whether the underinsurer has been prejudiced by the failure to receive notice. Because we conclude that underinsured motorist coverage will not be defeated by failure to give the required Vogt notice unless the insurer has been prejudiced by the failure, we reverse the judgment and remand to the trial court to determine whether American Family has been prejudiced by the failure to give the Vogt notice.

John Ranes was injured in an automobile accident involving a vehicle owned by Kinney Dairy Equipment, Inc., and driven by Robert Elsenpeter. The Ranes started an action against Kinney Dairy, its insurer, Secura Insurance, and Elsenpeter, for injuries sustained as a result of this accident. Dean DuCharme, a passenger in Ranes' vehicle, also commenced an action for damages. Ultimately, both the Ranes and DuCharme settled claims against the defendants and executed releases to the defendants. The Ranes did not give prior notice of the settlement to American Family.

American Family had issued underinsured motorist coverage in a series of policies to the Ranes. The policies provided $100,000 per person and $300,000 per accident coverage, but provided in a reducing clause that the liability limits will be reduced by payment made on or behalf of the tortfeasor. Shortly after the settlement was concluded, the Ranes became aware of the possibility that the reducing clause in American Family's policy might be void as it applied to the underinsured motorist coverage provided by American Family's insurance policies. See Kuhn v. Allstate Ins. Co., 181 Wis.2d 453, 463, 510 N.W.2d 826, 830 (Ct.App.1993), aff'd, 193 Wis.2d 50, 532 N.W.2d 124 (1995).

Accordingly, the Ranes filed suit against American Family asserting a claim for underinsured motorist benefits pursuant to their insurance policies. American Family moved for summary judgment based upon the Ranes' failure to give a Vogt notice prior to completing the settlement with the defendants in the initial action and executing a release to those defendants. Because the issues of notice and prejudice involve substantial discovery and raise issues of fact, the parties agreed to submit the matter to the trial court to determine whether the failure to give the Vogt notice would bar the Ranes' claim for underinsured motorist benefits. The trial court concluded that the failure to give notice was a bar to the Ranes' underinsurance claim regardless whether American Family was prejudiced by the failure to give notice and, accordingly, entered a summary judgment dismissing the Ranes' claim.

The question whether the failure to give a Vogt notice bars a claim for underinsured motorist benefits even in cases when the underinsurer has not been prejudiced by failure to give such notice raises issues of law that are determined independently of the trial court's determination. Delta Group, Inc. v. DBI, Inc., 204 Wis.2d 515, 521, 555 N.W.2d 162, 165 (Ct.App.1996) (Application of principles of law to facts presents question of law.). To the extent that the issues involve an interpretation of an insurance contract, the standard of review once again involves questions of law that we review de novo. Smith v. Atlantic Mut. Ins. Co., 155 Wis.2d 808, 810, 456 N.W.2d 597, 598 (1990).

A notice of the potential settlement of an underinsured's claim against a tortfeasor has been required since Vogt was decided in 1986. The requirement that the underinsured motorist carrier received notice of a potential settlement was designed to protect the underinsurer's right of subrogation against the tortfeasor for benefits it was required to pay pursuant to its underinsured motorist coverage. Vogt, 129 Wis.2d at 20, 383 N.W.2d at 884. Without notice of a potential settlement, the resolution of the insured's claim against the alleged tortfeasors and the execution of releases would defeat the insurer's right to seek subrogation for any money the insurer may be required to pay under the underinsurance motorist provisions of the policy. Id. Accordingly, the supreme court required notice of impending settlement to be given so that the underinsured carrier could take such steps as necessary to protect their subrogation rights against the tortfeasor. Id. at 26, 383 N.W.2d at 885.

Whether the failure to give the Vogt notice bars an underinsured claim even when the underinsured carrier has not been prejudiced by the failure to give notice is a matter of first impression in Wisconsin. A variety of other states, however, have addressed this issue and the majority have determined that the failure to give notice of settlement does not act as a bar to an underinsured claim unless the insurer has been prejudiced by the failure to give notice. Mulholland v. State Farm Mut. Auto. Ins. Co., 171 Ill.App.3d 600, 122 Ill.Dec. 657, 661, 527 N.E.2d 29, 33 (1988); American Family Mut. Ins. Co. v. Baumann, 459 N.W.2d 923, 927 (Minn.1990); Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691, 692 (Tex.1994). While other states have held to the contrary, Hartford Fire Ins. Co. v. Macri, 4 Cal.4th 318, 14 Cal.Rptr.2d 813, 842 P.2d 112 (1992); Lee v. Auto- Owners Ins. Co., 201 Mich.App. 39, 505 N.W.2d 866 (1993) ¹, the overwhelming majority of states have concluded that the failure to give notice will not bar an underinsured motorist claim unless the insurer has suffered some prejudice from the failure to receive such notice.

We conclude that the majority rule is the better reasoned and more persuasive rule of law. We reach this conclusion for a variety of reasons, the most important of which is that this rule comports to the general public policy now in existence in Wisconsin for similar issues. We start with the premise that an insured has by contract obtained certain coverage for which a fair and adequate premium has been paid. American Family argues that the Vogt notice is required not only by the laws of Wisconsin but by the terms of the contract itself. The insurance policy provides: "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 note that the consequence of failing to give notice as specified in the policy is not a bar to insured motorist claims. The result of the breach of the notice requirement, whether created by the policy itself or imposed by operation of law, turns on whether the breach is material. See Management Computer Servs. v. Hawkins, Ash, Baptie & Co., 206 Wis.2d 157, 182, 557 N.W.2d 67, 77-78 (1996). A breach that is formulistic and without consequences to any of the parties should not be a basis to defeat a right to which the insured has negotiated and paid. See id.

Wisconsin has addressed this issue in comparable circumstances and concluded that violations of an insured's obligation will only penalize the insured when the violation was material to the rights of the insurer. In the context of liability insurance, the failure to give notice does not bar coverage unless the insurer was prejudiced. See § 632.26(2), STATS. The statute provides:

632.26. Notice provisions. (1) REQUIRED PROVISIONS. Every liability insurance policy shall provide:

....

(2) EFFECT OF FAILURE TO GIVE NOTICE. Failure to give notice as required by...