Ranes v. American Family Mut. Ins. Co.

• Decision Date: 19 June 1998
• Docket Number: No. 97-0441,97-0441
• Parties: John RANES and Mary Ranes, Plaintiffs-Appellants, v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Defendant-Respondent-Petitioner.
• Court: Wisconsin Supreme Court

Page 197

580 N.W.2d 197

219 Wis.2d 49

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

No. 97-0441.

Supreme Court of Wisconsin.

Argued April 29, 1998.

Decided June 19, 1998.

For the defendant-respondent-petitioner there were briefs by Ward I. Richter, David J. Pliner and Bell, Metzner, Gierhart &amp Moore, S.C., Madison and oral argument by Ward I. Richter.

For the plaintiffs-appellants there was a brief by Charles B. Harris, Martha Heidt and Doar, Drill & Skow, S.C., Baldwin and oral argument by Matthew A. Biegert ¶1 SHIRLEY S. ABRAHAMSON, Chief Justice.

This is a review of a published decision of the court of appeals ¹ reversing a judgment and an order of the Circuit Court for Pepin County, Dane F. Morey, Judge. The circuit court granted summary judgment to American Family Mutual Insurance Company, holding that the failure of John and Mary Ranes, the plaintiffs-insureds, to give notice of settlement to American Family pursuant to Vogt v. Schroeder, 129 Wis.2d 3, 383 N.W.2d 876 (1986), bars underinsured motorist (UIM) coverage regardless of whether American Family was prejudiced by the lack of notice. ²

¶2 The court of appeals reversed the judgment of the circuit court, concluding that the failure of the plaintiffs-insureds to give notice of settlement to American Family violates the Vogt decision but that the lack of notice does not bar UIM coverage unless American Family was prejudiced by the lack of notice. See Ranes v. American Family Mut. Ins. Co., 212 Wis.2d 626, 632, 569 N.W.2d 359 (Ct.App.1997). The court of appeals further concluded that the plaintiffs-insureds must produce sufficient evidence to satisfy the fact finder by a preponderance of the evidence that American Family suffered no prejudice as a result of the lack of notice. See Ranes, 212 Wis.2d at 636, 569 N.W.2d 359. The court of appeals remanded the cause to the circuit court to determine whether American Family was prejudiced by the failure of the plaintiffs-insureds to give notice of settlement.

¶3 For the reasons set forth, we affirm the decision of the court of appeals reversing the judgment and order of the circuit court and remanding the cause for determination of prejudice. We hold, as did the court of appeals, that the failure of the plaintiffs-insureds to give notice of settlement to American Family does not bar UIM coverage unless American Family was prejudiced by the lack of notice. We differ, however, with the court of appeals on whether a rebuttable presumption of prejudice arises when an insured fails to give notice of settlement to the UIM insurance company. The court of appeals declined to apply a rebuttable presumption of prejudice. We conclude that because the plaintiffs-insureds failed to give notice of settlement to American Family, there is a rebuttable presumption of prejudice, with the burden on the plaintiffs-insureds to prove by the greater weight of the credible evidence that American Family suffered no prejudice.

I

¶4 For purposes of the motion for summary judgment, the facts are not in dispute. John Ranes was severely injured in an automobile accident involving a vehicle owned by Kinney Dairy Equipment, Inc., and driven by Robert Elsenpeter. John and Mary Ranes (the plaintiffs-insureds) commenced an action against Elsenpeter, Kinney Dairy and Kinney Dairy's insurer Secura Insurance (collectively the tortfeasors) for injuries sustained as a result of the accident.

¶5 The plaintiffs-insureds settled their claims against the tortfeasors in exchange for a full and comprehensive release in favor of the tortfeasors. The plaintiffs-insureds did not give notice of settlement to American Family, their UIM insurance company.

¶6 At the time of the accident the plaintiffs-insureds had multiple insurance policies issued by American Family and providing UIM coverage. The American Family policies provided UIM coverage in the amount of $100,000 per person and $300,000 per accident. The insurance policies also provided that the limits of liability would be reduced by payment made on behalf of the tortfeasors. Shortly after the settlement was concluded, the plaintiffs-insureds became aware of Matthiesen v. Continental Cas. Co., 193 Wis.2d 192, 532 N.W.2d 729 (1995), which alerted them to the possibility that the reducing clause in the American Family policies might be void. The plaintiffs-insureds therefore filed suit against American Family, claiming UIM coverage. American Family moved for summary judgment based on the failure of the plaintiffs-insureds to give notice of settlement.

¶7 American Family and the plaintiffs-insureds submitted a single issue to the circuit court on summary judgment--whether the failure to give notice pursuant to Vogt bars the plaintiffs-insureds' UIM coverage. The parties agreed that for purposes of the summary judgment motion, a factual dispute exists whether American Family was prejudiced by the lack of notice. The circuit court granted summary judgment in favor of American Family. ³ The issue of what constitutes prejudice was not addressed by the parties, and the court does not address it.

II

¶8 This case presents a question of law, namely whether the failure of an insured to give notice of settlement to a UIM insurance company bars UIM coverage, regardless of whether the UIM insurance company was prejudiced by the lack of notice. ⁴ This court determines questions of law independent of the circuit court and the court of appeals, benefiting from their analyses. See Miller v. Thomack, 210 Wis.2d 651, 659, 563 N.W.2d 891 (1997).

¶9 The judgment of the circuit court was entered on a motion for summary judgment. In reviewing a grant of summary judgment, an appellate court applies the standards set forth in Wis. Stat. § 802.08(2) (1993-94) ⁵ in the same manner as does the circuit court in deciding a motion for summary judgment. See Miller, 210 Wis.2d at 659, 563 N.W.2d 891. Summary judgment is properly granted when there is only a question of law at issue and the moving party is entitled to judgment as a matter of law. See Id.

III

¶10 When an insured settles with a tortfeasor, the settlement agreement generally includes release of the tortfeasor and forecloses subrogation claims of a UIM insurance company. Recognizing that a UIM insurance company has an interest in preserving its subrogation claims against a tortfeasor, the Vogt court fashioned a notice of settlement procedure designed to allow the UIM insurance company to decide whether it wants to pay the insured and assume subrogation rights against the tortfeasor.

¶11 The court of appeals concluded that failure to give notice of settlement pursuant to Vogt does not bar UIM coverage unless the UIM insurance company was prejudiced by the lack of notice. The court of appeals based its conclusion on the following reasons, with which we agree.

¶12 First, the court of appeals was persuaded that a majority of state courts considering the question have concluded that failure to give notice of settlement does not bar UIM coverage unless the UIM insurance company was prejudiced by the lack of notice. ⁶ American Family argues that these cases are thin in reasoning and that many of them involve interpretation of consent-to-settlement provisions.

¶13 We are not convinced by American Family's attempt to diminish the import of the cases. Courts generally seek to avoid an insured's forfeiture of a claim resulting from the insured's failure to comply with a provision in an insurance policy or statute when the failure to comply does not prejudice the insurance company. This doctrine corresponds with principles of contract law and insurance law and is applicable to the present case.

¶14 Second, the court of appeals concluded that the Wisconsin legislature has enacted statutes declaring that violations of an insured's obligation to give notice will penalize the insured only when the insurance company is prejudiced by the lack of notice. The court of appeals looked to three statutes--two insurance statutes and the notice of claims statute relating to claims against a governmental body. See Wis. Stat. § 632.26(2) (notice required under a liability policy) ⁷; Wis. Stat. § 631.81 (notice of proof of loss) ⁸; Wis. Stat. § 893.80(1)(a) (notice of injury against a governmental body). ⁹ The court of appeals viewed these statutes, taken together, as an expression of a legislative policy.

¶15 American Family correctly asserts, and the court of appeals agreed, that none of these statutes applies to this case or resolves the issue presented here. Nevertheless, we agree with the court of appeals that these statutes give an indication of the legislature's policy to require prejudice before an insured's rights are forfeited for failure to give notice.

¶16 Third, the court of appeals considered principles of contract law to determine whether an insured's failure to give notice relieves a UIM insurance company of its obligations. Under Wisconsin common law, a party to a contract is obligated to perform in accordance with the contract terms unless the other party's breach is material. See Management Comp. Serv., Inc. v. Hawkins, Ash, Baptie & Co., 206 Wis.2d 158, 183, 557 N.W.2d 67 (1996) (internal citations omitted). For a breach to be material, it must be so serious as to destroy the essential object of the agreement. See Appleton State Bank v. Lee, 33 Wis.2d 690, 692-93, 148 N.W.2d 1 (1967). When the breach is "relatively minor" and not "of the essence," the nonbreaching party is not excused from performance. Management Comp. Serv., 206 Wis.2d at 183, 557 N.W.2d 67 (quoting Arthur L. Corbin, Corbin on Contracts, § 700, at 310 (1960)).

¶17 We agree with the court of appeals' application of general contract principles to conclude in this case that failure to give notice should not void the obligations of the UIM insurance company unless the breach is material, that is, the...