Is Your Reducing Clause Valid? An Individual Case Study.
Acme Insurance Company (“Acme”) insured Jane Smith. Smith was involved in a three-vehicle accident, caused by Mark Jones, insured by Beta Insurance Company (“Beta”), and John Doe, insured by ABC Insurance Company (“ABC”). Beta’s policy limits are $25,000 per person and $50,000 per accident and ABC’s policy limits are $50,000 per person and $100,000 per accident.
As a result of the accident, Smith suffered injuries and damages totaling $100,000. In addition to Smith’s injuries, Jim Johnson, a passenger in Jones’ vehicle, and Bill Brown, a passenger in Doe’s vehicle, suffered significant injuries. As a result of the accident, Beta and ABC both paid their policy limits. Of the $150,000 in policy limits between the two policies, Acme’s insured, Smith, received $25,000, Johnson received $60,000, and Brown received $65,000.
Because Smith still has $75,000 in uncompensated injuries and damages, she filed an Underinsured Motorist (“UIM”) claim under her Acme policy, which has UIM limits of $100,000 per person and $300,000 per accident. Acme’s policy includes a reducing clause, which provides that benefits available are to be reduced by amounts paid or payable from other responsible parties. The question is whether or not the reducing clause is valid, and whether the effective policy limit applicable to Smith is $75,000 ($100,000 UIM policy limits reduced by the amount paid) or $25,000 ($100,000 UIM policy limits reduced by the amount payable).
As with all insurance policies, the first step is to determine whether there is an initial grant of coverage under the policy. Acme’s policy provides it will pay compensatory damages an insured person is legally entitled to recover from the owner or operator of an underinsured motor vehicle because of bodily injury, sustained by an insured person, and caused by an accident.
In the instant matter, Smith is an insured person – she is the named insured – and her injuries were caused by an accident. Further, she is legally entitled to recover from Jones and Doe. As such, Smith’s injuries clearly fall within the ambit of the Insuring Agreement so long as Jones and Doe were, in fact, driving underinsured motor vehicles at the time of the subject accident.
Acme’s policy defines underinsured motor vehicle as “a land motor vehicle to which a bodily injury liability bond or policy applies at the time of the accident, but its limit for bodily injury liability is less than Limit of Liability for this Coverage.” Jones, Beta’s insured, has policy limits of $25,000 per person and $50,000 per accident. Doe, ABC’s insured, has policy limits of $50,000 per person and $100,000 per accident. Because Acme’s policy has limits of $100,000 per person and $300,000 per accident, both Jones’ and Doe’s vehicles fall within the definition of an underinsured motor vehicle (Jones’ 25/50 limits and Doe’s 50/100 limits are less that Smith’s 100/300 limits).
Based upon the initial grant of coverage under the UIM Insuring Agreement, Acme provides $100,000 per person and $300,000 per accident in UIM benefits to Smith, although the reducing clause may reduce those limits by amounts paid or payable from other responsible parties. The question, and import of this article, is whether the reducing clause is valid.
The reducing clause at issue in Acme’s policy is found in the Limits of Liability section. The clause provides that “[a]ny amounts otherwise payable for damages under this Part shall be reduced by all sums paid or payable because of the bodily injury by or on behalf of persons or organizations who may be legally responsible.” The pertinent language is “payable” and “persons or organizations who may be legally responsible.” Although Smith was paid only $25,000 between the Beta and ABC policies, $75,000 was payable ($25,000 payable under Beta’s $25,000 per person policy limit and $50,000 payable under ABC’s $50,000 per person policy limit). Moreover, while $150,000 in total coverage was available per accident, only $75,000 was payable per person, i.e. the most Smith payable to Smith for a single accident was $75,000.
At first blush, based upon the plain language of Acme’s reducing clause, Smith would be entitled to $25,000. Acme’s $100,000 policy limits would be reduced be the $75,000 payable under Beta’s and ABC’s policies, leaving $25,000 in available UIM benefits under Acme’s. As a result, Smith would receive only $25,000 in UIM benefits from Acme. In this scenario, Smith would have received a total of only $50,000, $25,000 from Acme and $25,000 from Beta/ABC. This would leave Smith $50,000 short of full compensation for her injuries and damages.
The analysis, however, does not end here. Although Acme’s policy is clear, the reducing clause therein may contravene statute or case law. In looking to the statutes, Wis. Stat. § 632.32(5)(i) offers guidance, as it details the permissible provisions of an underinsured motorist policy. Specifically, Wis. Stat. § 632.32(5)(i)(1) allows for the limits under underinsured motorist coverage to be reduced only by “[a]mounts paid by or on behalf of any person or organization that may be legally responsible…” Noticeably absent from the statutory language is the word “payable”; consequently, it is not permissible for underinsured motorist coverage to be reduced by amounts payable. Acme’s reducing clause actually contravenes the statute. Courts have deemed similar reducing clauses invalid to the extent that they purport to reduce the available funds by amounts payable rather than amounts paid. To the extent Acme’s reducing clause attempts to not only reduce policy limits by the amount actually pay but by amounts payable, it violates Wis. Stat. § 632.32(5) (i)1.
In Welin v. American Family Mutual Insurance Company, Alison Welin was one of two individuals injured in an automobile accident caused by Elizabeth Pryzynski. Pryzynski was covered by a liability insurance policy with limits of $300,000. Of that $300,000, Welin received $250,000 (the other $50,000 was received by the other individual injured in the accident). Welin, however, suffered injuries and damages exceeding the $250,000 she received. Because she had a $300,000 in UIM benefits via her American Family policy, she sought an additional $50,000 from American Family, the difference between what she had been paid and her UIM limits.
American Family’s policy, like Acme’s, included a reducing clause that reduced the limits under the policy by amounts paid and amounts payable. Because $300,000 was payable, American Family argued its policy limits were reduced to $0 and therefor owed Welin nothing.
Welin, however, argued that American Family’s reducing clause violated sec. 632.32(5)(i)1, “which limits the reduction to amounts paid by the tortfeasor’s insurer for the bodily injury for which the payment is made.”
Based upon the statutory language, the Court found that when more than one person is injured in a single accident, where the injured persons were not insured under the same UIM policy, a clause attempting to reduce the injured person’s UIM limits without regard to the amount the injured person actually received from the tortfeasor’s insurers was invalid. The Court determined an insurer may not:
reduce coverage below the predetermined, fixed amount of coverage purchased by the named insured. Because the reduction contravenes the purpose of UIM coverage and is not for amounts paid by a legally responsible person to the named insured, the provision is not authorized by Wis. Stat. §§ 632.32(4m) and (5)(i). We conclude that “tying the availability of UIM coverage to the amount of [payable] liability limits, even when a portion of those funds are paid to another claimant (who is not insured under the same UIM policy), is not consistent with any theory of UIM coverage that has been recognized by Wisconsin courts or approved by the legislature.”
It is therefore clear that UIM limits may be reduced only by amounts actually paid, regardless of the reducing clauses’s language.
For purposes of the above fact pattern, because Smith purchased $100,000 in UIM coverage, but was paid only $25,000 by other responsible parties, she is entitled to the $75,000 by which the other responsible parties were underinsured and for which she purchased UIM coverage. This result, although contrary to the language of Acme’s policy, which would have resulted in Smith’s entitlement to only $25,000 in UIM benefits (rather than $75,000), is the result the legislature intended.
Bill Salmonowicz was born and raised in southeastern Michigan. He attended the University of Michigan in Ann Arbor and graduated with a Bachelor of Arts in English and Philosophy in 2006. He went on to the University of Wisconsin- Madison and earned his law degree in 2009. While in law school, Bill was the recipient of The State Bar of Wisconsin and The University of Wisconsin Law School best performance in Insurance Law for Spring 2008. Upon graduation, he was admitted to the State Bar of Wisconsin, as well as the U.S. District Courts for the Eastern and Western Districts of Wisconsin.
Bill is currently an associate with Winner, Wixson & Pernitz. He is a member of the Wisconsin Defense Counsel and Claims and Litigation Management (CLM). His practice focuses primarily on insurance coverage and defense, personal injury, and subrogation. Bill has tried cases to the Court in Milwaukee, Dane, Dodge, Sauk, Rock, and Jefferson Counties and to a Jury in Milwaukee, Juneau, Dodge, and Waupaca Counties.
1 Wis. Stat. § 632.32(5)(i) provides : (i) A policy may provide that the limits under the policy for uninsured motorist coverage 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.
2 See Welin v. American Family Mutual Insurance Company, 2006 WI 81, 292 Wis. 2d 73, 717 N.W.2d 690.
3 Id. at ¶¶ 43- 57.
4 Id. at ¶ 46 citing Wis. Stat. § 632.32(5)(i)1.
5 Welin, 2006 WI 81.
6 Id. at ¶ 57 (citation omitted).
7 Id. at ¶ 49.