State Farm Mutual Automobile Insurance Company v. Bailey, No. 2003AP2482 (WI 12/1/2005)

Decision Date01 December 2005
Docket NumberNo. 2003AP2482.,2003AP2482.
PartiesState Farm Mutual Automobile Insurance Company, Plaintiff-Appellant-Cross-Respondent, v. Travis L. Bailey, Defendant-Respondent-Cross-Appellant.
CourtWisconsin Supreme Court

Before Lundsten, P.J., Vergeront and Higginbotham, JJ.


The primary issues on this appeal and cross-appeal concern whether and how payments by a second tortfeasor who is not a driver of an underinsured motor vehicle affect the insurer's obligation under the terms of its underinsured motor vehicle (UIM) policy. We conclude that WIS. STAT. § 632.32(5)(i)11 does not permit reducing the limits of UIM liability by amounts paid by or on behalf of a second tortfeasor who is not the UIM driver. Therefore, we construe the clause in State Farm's UIM endorsement that tracks § 632.32(5)(i)1 not to permit a reduction in liability limits for the payment made on behalf of the second tortfeasor in this case. We also conclude that the reducing clause is not ambiguous in the context of the entire policy and, therefore, it validly reduces State Farm's liability limits by the payment on behalf of the underinsured driver. Finally, we conclude that the policy clause providing that State Farm will pay no more than "the amount of damages sustained but not recovered" is not prohibited by § 632.32(5)(i). The result of these conclusions is that State Farm is obligated to pay its UIM insured, Travis Bailey, for damages from bodily injury that exceed $62,500 up to the maximum of its reduced liability limit of $25,000. Accordingly, we affirm in part, reverse in part, and remand for the circuit court to enter a declaratory judgment consistent with this opinion.


¶2 Bailey sustained serious injuries when the car in which he was a passenger traveled at a high rate of speed through a red light and struck a vehicle traveling through the intersection on the green light. The driver of the car in which Bailey was riding, Adrian Levy, was insured at the time under a liability policy issued by American Family Insurance that had a single combined limit of $25,000 per person and $50,000 per accident. The driver of the other vehicle Leticia Regala, also had liability coverage under a policy issued by American Family, with a single combined limit of $250,000 per person and $500,000 per accident. American Family settled Bailey's claims against its insureds by paying the limit of Levy's policy, $25,000, on Levy's behalf and paying $37,500 on Regala's behalf.

¶3 At the time of the accident, Bailey's mother was the named insured on a policy issued by State Farm that provided UIM coverage to her relatives with limits of $50,000 per person and $100,000 per accident. The UIM section of State Farm's policy, as amended by an endorsement, provides:

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" is defined in the policy as 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.

Under this definition, Levy's vehicle was an underinsured motor vehicle because it was covered by a liability policy that had limits for bodily injury that were less than the limits of the State Farm UIM policy. Regala's vehicle was not an underinsured motor vehicle under this definition because the limits of her liability policy were greater than the limits of State Farm's UIM policy.

¶4 Bailey made a claim for UIM benefits under his mother's policy. State Farm denied the claim, relying on clause 2.a.(1) in the Limits of Liability section in the UIM endorsement:2

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.

State Farm construed clause 2.a.(1)3 to permit it to reduce the limit of $50,000 by the American Family payments paid on behalf of both Levy and Regala. Since those payments combined exceeded $50,000, State Farm's position was that there was no UIM coverage for Bailey.

¶5 State Farm filed this action seeking a declaratory judgment that its construction of the policy was correct. Both State Farm and Bailey moved for summary judgment. The circuit court denied State Farm's motion and granted Bailey's motion, concluding that, in the context of the entire policy, clause 2.a. was ambiguous because a reasonable insured would not understand that the UIM limits would be reduced by payments received from other sources. Therefore, the court held, clause 2.a. was not enforceable. Because of that conclusion, the court did not reach the issue whether clause 2.a.(1) permitted the limits to be reduced by the payments on behalf of Regala as well as on behalf of Levy.

¶6 State Farm moved for reconsideration and the court denied the motion. State Farm also asked for a ruling on the extent of its UIM obligation given the court's ruling that clause 2.a. was invalid. The court concluded that, applying clause 2.b., State Farm's liability to Bailey was for provable damages in excess of $62,500 (the combined total of American Family's payments on behalf of Levy and Regala) up to State Farm's $50,000 UIM limit.4


¶7 On appeal, State Farm contends that the circuit court erred in concluding that clause 2.a. is ambiguous when considered in the context of the entire policy. Bailey agrees with that ruling but, on his cross-appeal, he contends that the circuit court erred in concluding that under 2.b. State Farm's obligation is determined by adding the payments made on behalf of both Levy and Regala. According to Bailey, whether or not clause 2.a. is invalid because it is ambiguous in the context of the entire policy, WIS. STAT. § 632.32(5)(i) does not permit the payment by a tortfeasor who is not the driver of an underinsured motor vehicle to reduce State Farm's obligation under its UIM policy. Thus, in Bailey's view neither 2.a.(1) nor 2.b. may be construed to permit the sums paid on behalf of Regala to reduce the UIM payments.

¶8 Because the appeal and cross-appeal raise overlapping issues on the proper construction of insurance policy provisions and the proper construction of WIS. STAT. § 632.32(5)(i), we organize the discussion around these issues rather than around the appeal and cross-appeal. We consider, in this order, the following issues: (1) Does § 632.32(5)(i) permit a construction of clause 2.a. whereby Regala's payment may reduce State Farm's limits of liability? (2) Is clause 2.a. ambiguous in the context of the entire policy? (3) Is clause 2.b. invalid under § 632.32(5)(i)?

¶9 When we review a grant or denial of summary judgment, we employ the same methodology as the circuit court and our review is de novo. State Farm Mut. Auto. Ins. Co. v. Langridge, 2004 WI 113, ¶12, 275 Wis. 2d 35, 683 N.W.2d 75. Where, as here, the material facts are undisputed, the question is which party is entitled to judgment as a matter of law. Id. The construction and application of statutes and insurance policy provisions to undisputed facts are both questions of law, which we review de novo. Van Erden v. Sobczak, 2004 WI App 40, ¶¶11, 22, 271 Wis. 2d 163, 677 N.W.2d 718.

I. Construction of WIS. STAT. § 632.32(5)(i) and Clause 2.a.

¶10 WISCONSIN STAT. § 632.32(5)(i), enacted by 1995 Wis. Act 21, § 4, allows a specific type of reducing clause in uninsured motorist (UM) and UIM policies:

(i) A policy may provide that the limits under the policy for uninsured or underinsured motorist coverage for bodily injury or death resulting from any one accident shall be reduced by any of the following that apply:

1. Amounts 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.

2. Amounts paid or payable under any worker's compensation law.

3. Amounts paid or payable under any disability benefits laws.

Clause 2.a.(1) tracks the language of § 632.32(5)(i)1, except that the policy language does not contain the words "for which the payment is made." Leaving aside that difference—which neither party suggests has any bearing on the issues before uswe note that the statute, like clause 2.a.(1), does not expressly state whether the "person or organization that may be legally responsible" includes a second tortfeasor who is not the UIM or the UM tortfeasor. Because the reducing clause in the policy must be consistent with the statute, we first analyze the meaning of the statutory language. See Teschendorf v. State Farm Ins. Cos., 2005 WI App 10, ¶9, 278 Wis. 2d 354, 691 N.W.2d 882.

¶11 We have located no case, and the parties have provided none, in which this court or the supreme court has considered WIS. STAT. § 632.32(5)(i) in the context of payments by a second non-UIM or non-UM tortfeasor. The supreme court has held this statute unambiguous, but not in the context of addressing the issue presented here. See Dowhower v. West Bend Mut. Ins. Co., 2000 WI 73, ¶17, 236 Wis. 2d 113, 613 N.W.2d 557. Nonetheless, the supreme court...

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