State Farm Mut. Auto. Ins. Co. v. Bailey

Decision Date10 July 2007
Docket NumberNo. 2003AP2482.,2003AP2482.
Citation2007 WI 90,734 N.W.2d 386
PartiesSTATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Plaintiff-Appellant-Cross-Respondent-Petitioner, v. Travis L. BAILEY, Defendant-Respondent-Cross-Appellant-Cross Petitioner.
CourtWisconsin Supreme Court

For the defendant-respondent-cross-appellant-cross petitioner there were briefs by Burton A. Strnad and Burton A. Strnad, S.C., Milwaukee, and oral argument by Burton A. Strnad.

For the plaintiff-appellant-cross-respondent-petitioner there were briefs by Thomas E. Goss, Jr. and Mueller, Goss & Possi, S.C., Milwaukee, and oral argument by Thomas E. Goss, Jr.

An amicus curiae brief was filed by Lynn R. Laufenberg and Laufenberg & Hoefle, Milwaukee, on behalf of Wisconsin Academy of Trial Lawyers.

¶ 1 JON P. WILCOX, J

This is a review of an unpublished court of appeals decision,1 which affirmed in part, reversed in part, and remanded with directions the judgment of Milwaukee County Circuit Court, Timothy G. Dugan, Judge. Judge Dugan entered an order that deemed the reducing clause in a policy issued by State Farm Mutual Automobile Insurance Company (State Farm) unenforceable, dismissed the bad faith claim of Travis L. Bailey (Bailey),2 and declared that State Farm's liability to Bailey is for provable damages in excess of $62,000 up to State Farm's $50,000 underinsured motorist (UIM) limit.

¶ 2 Two issues are before this court.3 First, does Wis. Stat. § 632.32(5)(i)1. (2005-06),4 which allows an insurer to reduce the limit of underinsured motorist (UIM) coverage by "[a]mounts paid by or on behalf of any person or organization that may be legally responsible for the bodily injury or death for which the payment is made," permit an insurer to reduce the UIM limit by the amount paid by a non-UIM tortfeasor? We hold that § 632.32(5)(i)1. does allow an insurer to reduce the limit of UIM liability by the amount paid to an insured by a non-UIM tortfeasor. Second, does the reducing clause in the policy issued by State Farm unambiguously comply with § 632.32(5)(i)1.? We hold that the language unambiguously complies with § 632.32(5)(i)1.

¶ 3 Accordingly, we reverse the court of appeals in part and affirm the court of appeals in part. We reverse the court of appeals in its holding that Wis. Stat. § 632.32(5)(i)1. does not permit an insurer to reduce the limits of UIM liability by payments the insured receives from non-UIM tortfeasors. We affirm the court of appeals in its holding that the reducing clause is unambiguous in the context of the entire policy.

I

¶ 4 On April 8, 1998, Bailey rode as a passenger in a vehicle driven by Adrian J. Levy (Levy). Levy's vehicle, traveling at a high rate of speed, proceeded through a red light. Leticia T. Regala's (Regala) vehicle had already entered the intersection and was struck by Levy's vehicle. As a result of the accident, Bailey sustained injuries.

¶ 5 Levy's vehicle was insured by a liability policy, which American Family Insurance Company (American Family) issued with a limit of $25,000 per person. Regala's vehicle was also insured by a liability policy issued by American Family, which had a limit of $250,000 per person. American Family made a payment of $25,000 to Bailey on behalf of Levy and a payment of $37,500 on behalf of Regala.

¶ 6 Bailey's mother, Loretta Bailey, had a policy issued by State Farm in effect at the time of the accident. Her policy provided UIM coverage for her relatives, such as her son.5 The UIM coverage provided a limit of liability of $50,000 per person.

¶ 7 The declarations page of the policy listed the types of coverage included in the policy and the limits of liability for each. Included in the list was "UNINSURED MOTOR VEHICLE" as one of the coverages. Beneath the list of coverages and limits of liability, a list of exceptions and endorsements was provided. Included in the list was a document labeled 6083BB and entitled "AMENDMENTS TO UNINSURED MOTOR VEHICLE AND UNDERINSURED MOTOR VEHICLE COVERAGES."

¶ 8 The UIM section of the policy, as amended by the endorsement, provided the following:

We will pay damages for bodily injury an insured is legally entitled to collect from the owner or driver of an underinsured motor vehicle. The bodily injury must be caused by accident arising out of the operation, maintenance or use of an underinsured motor vehicle.

. . . .

Underinsured Motor Vehicle—means a land motor vehicle:

1. the ownership, maintenance or use of which is insured or bonded for bodily injury liability at the time of the accident; and

2. whose limits of liability for bodily injury liability:

a. are less than the limits of liability of this coverage; or

b. have been reduced by payments to persons other than the insured to less than the limits of liability of this coverage.

Levy's vehicle was a UIM vehicle because the liability limit of his coverage was $25,000 per person, which is less than the $50,000 liability limit of Bailey's UIM coverage. On the other hand, Regala's vehicle was not a UIM vehicle because the liability limit of her coverage was $250,000 per person, which is more than the $50,000 liability limit of Bailey's UIM coverage.

¶ 9 The policy also included a reducing clause, which read as follows:

2. The most we will pay is the lesser of:

a. the limits of liability of this coverage reduced by any of the following that apply:

(1) the amount paid to the insured by or on behalf of any person or organization that may be legally responsible for the bodily injury; or

(2) the amount paid or payable under any worker's compensation or disability benefits law; or

b. the amount of damages sustained, but not recovered.

¶ 10 Bailey made a claim for UIM benefits against State Farm. State Farm denied that Bailey was entitled to collect on his claim. State Farm asserted that the reducing clause permitted it to reduce the $50,000 UIM liability limit by payments Bailey received from both Levy and Regala. Because the payments from both of them exceeded the $50,000 UIM liability limit, State Farm claimed it did not have to pay Bailey UIM benefits.

¶ 11 State Farm filed a complaint against Bailey, seeking a declaratory judgment from the court stating that it did not owe Bailey UIM benefits for the accident involving the collision between Levy and Regala. Bailey filed a counterclaim alleging that State Farm had acted in bad faith.

¶ 12 Both parties moved for summary judgment. The circuit court issued an order stating that the reducing clause on the policy issued by State Farm was unenforceable. It concluded that contextual ambiguity caused the reducing clause to be ambiguous because a reasonable person in the insured's position would not understand that the limits of UIM liability could be reduced by payments received from sources other than a UIM tortfeasor. The circuit court also dismissed Bailey's bad faith claim.

¶ 13 State Farm filed a motion to reconsider, which the court denied. The court also granted State Farm's motion for declaratory relief in which State Farm requested a ruling that its liability to Bailey is for provable damages in excess of $62,500 up to the $50,000 limit of UIM liability, based on the court's prior ruling that the reducing clause was unenforceable.

¶ 14 State Farm appealed to the court of appeals the circuit court's ruling that its reducing clause was unenforceable. Bailey cross-appealed the circuit court's ruling that State Farm's liability to Bailey is for provable damages in excess of $62,500 up to State Farm's $50,000 UIM limit. Bailey did not appeal his bad faith claim.

¶ 15 The court of appeals considered whether § 632.32(5)(i)1. permits the reducing clause to be construed in a way that permits State Farm to reduce its liability limit by the amount of payment Bailey received from Regala. It held that § 632.32(5)(i)1. does not permit a reducing clause to be construed in a way that permits an insurer to reduce its liability limit by the amount of payment received by an injured insured from a non-UIM tortfeasor. The court of appeals also considered whether State Farm's reducing clause complied with § 632.32(5)(i). Specifically, it concluded that clause 2.a. of the reducing clause was unambiguous in the context of the entire policy and clause 2.b. was valid.

¶ 16 The parties each petitioned this court for review, which was granted.

II

¶ 17 This review presents two issues. First, does Wis. Stat. § 632.32(5)(i)1. permit an insurer to reduce the UIM limit by the amount paid to an insured by a non-UIM tortfeasor? Second, does the reducing clause in the policy issued by State Farm unambiguously comply with § 632.32(5)(i)1.? Because State Farm's policy must conform with § 632.32(5)(i)1., we focus initially on the statute. See Theis v. Midwest Sec. Ins. Co., 2000 WI 15, ¶ 13, 232 Wis.2d 749, 606 N.W.2d 162.

A. Wisconsin Stat. § 632.32(5)(i)1.

¶ 18 We first address whether Wis. Stat. § 632.32(5)(i)1. permits an insurer to reduce an insured's UIM limit by the amount paid to an insured by a non-UIM tortfeasor. This issue involves statutory interpretation and the application of a statute to specific facts, which are questions of law that we review de novo. Teschendorf v. State Farm Ins. Cos., 2006 WI 89, ¶ 9, 293 Wis.2d 123, 717 N.W.2d 258.

¶ 19 In Marotz v. Hallman, 2007 WI 89, ___ Wis.2d ___, 734 N.W.2d 411, which we issued today, we concluded that § 632.32(5)(i)1. does allow an insurer to reduce the UIM limit by the amount paid to an insured by a non-UIM tortfeasor. Although an unambiguous statute in one context may be ambiguous in another, Teschendorf, 293 Wis.2d 123, ¶ 20, 717 N.W.2d 258, that does not apply in this case. The context of this case and Marotz is the same. Both cases involved an injured insured receiving a payment from a UIM tortfeasor and a non-UIM tortfeasor.

¶ 20 Applying our interpretation from Marotz, ___ Wis.2d ___, ¶¶ 15-37, 734 N.W.2d 411, § 632.32(5)(i)1. does not bar State...

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