Applying Reducing Clauses to Underinsured Motorist Coverage
Blayne Nicole Christy and Mollie T. Kugler, von Briesen & Roper, S.C.

When defending personal injury cases arising out of motor vehicle collisions, the situation commonly arises in which the injured party presents a claim under his or her underinsured motorist (UIM) coverage that the injured party carries through his or her personal automobile insurance policy. In those situations, it is imperative for defense counsel to consider the implications that payments issued by third parties, such as worker’s compensation carriers and liability insurers, have on the amount of UIM coverage available to the injured party. This is because pursuant to Wis. Stats. § 632.32(5)(i), insurers are permitted to include “reducing clauses” in their UIM policies, which provisions, if enforceable, limits the amount of UIM coverage available to the insured. When determining whether a UIM policy’s reducing clause is enforceable under Wis. Stats. § 632.32(5)(i), courts consider the purpose of UIM coverage, the legislative history of Wis. Stats. § 632.32(5)(i), principles of contract interpretation applied to insurance policies, and the policy language itself. We discuss these issues below.

I. The Statutory Basis for UIM Reducing Clauses

Wisconsin Statutes § 632.32(5)(i) expressly permits insurers to write UIM policies with reducing clauses that “provide that the limits under the policy” shall be reduced by amounts recovered from other sources. Wisconsin Statutes § 632.32(5)(i) states:

Permissible Provisions.

… 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.

This statute permits a motor vehicle insurance contract to state that the maximum amount that the insurer will pay under the policy will be offset by amounts paid by a tortfeasor’s liability insurer and to provide for reduction in UIM coverage for amounts the insured receives from worker’s compensation payments.[1] However, to constitute a valid and enforceable reducing clause, it must comply with the provisions of Wis. Stats. § 632.32(5)(i) and the provision limiting UIM coverage must be unambiguous in the context of the entire policy.[2] The language of a reducing clause need not mirror the language of Wis. Stats. § 632.32(5)(i), though.[3] “There is no ‘magic language’ required by Wis. Stats. § 632.32(5)(i) and a reducing clause does not have to mirror the language of the statute.”[4] For example, in Commercial Union Midwest Insurance Company v. Vorbeck, a UIM reducing clause which stated that the limit of liability shown in the declarations page for each person “shall be reduced by all sums: 1. Paid because of the ‘bodily injury’ by or on behalf of persons or organizations who may be legally responsible” was deemed enforceable even though its language was not identical to the language of Wis. Stats. § 632.32(5)(i).[5]

a. The Purpose of UIM Coverage

As a general matter, the purpose of UIM coverage is to protect “persons insured under that coverage who are legally entitled to recover damages for bodily injury, death, sickness, or disease from owners or operators of underinsured motor vehicles.”[6] With this purpose in mind, there are two different approaches for writing UIM policies, both of which are permitted in Wisconsin.[7]

Under the “separate fund” approach, a set amount of coverage is provided for the insured’s damages that exceed the amount the insured recovers from a responsible party.[8] The insured purchases coverage for his or her damages in a set dollar amount “above and beyond the liability limits of the at-fault driver.”[9] When a policy follows this approach and contains an enforceable UIM reducing clause, the reducing clause decreases the insured’s covered damages.

Under the “limits-to-limits” approach, the UIM coverage provides “a predetermined, fixed level of UIM recovery that is arrived at by combining payments from all sources” legally responsible for the insured’s damages.[10] Wisconsin Statutes § 632.32(5)(i) explicitly allows insurers to write UIM policies using the limits-to-limits approach, and which contain reducing clauses that reduces the amount of the insurer’s liability by the amount recovered from a responsible party.

b. Legislative History

Before 1995, court decisions interpreting UIM reducing clauses were varied and, overall, reducing clauses were determined to be void, illusory, and contrary to public policy.[11] Significant changes to Wisconsin’s statutory scheme regulating motor vehicle insurance policies were introduced by the Legislature in 1995 with the enactment of Wis. Stats. § 632.32(5)(i). The statute expressly permitted reducing clauses that decrease UM or UIM payments by the amounts recovered from other sources. The purpose of this statute was explicitly stated by the drafters as follows:

The bill overturns a series of Wisconsin appellate court decisions which have held that a motor vehicle insurance policy may not prohibit stacking of uninsured or underinsured motorist coverage or any other coverage provided by the policy.... The bill also permits motor vehicle insurance policies to reduce the limits payable under the policy for uninsured or underinsured motorist coverage by payments received from other sources.[12]

The Supreme Court of Wisconsin soon recognized that “[t]he language of Section 632.32(5)(i) is unambiguous…. The statute plainly allows a motor vehicle contract to state that the maximum amount that the insurer will pay under the policy will be set off by amounts paid by a tortfeasor.”[13]

In 2009 and 2011, there were further rounds of automobile insurance legislation. The 2009 law disallowed reducing clauses.[14] In 2011, however, the legislature reversed course, again expressly allowing insurers to include reducing clauses in their policies pursuant to Wis. Stats. § 632.32(5)(i).[15] UIM reducing clauses remain permissible under the current version of Section 632.32. As demonstrated in this article, courts continue to grapple with the interpretation and enforcement of reducing clauses.                                          

c. Principles of Interpretation

The same rules of construction that govern general contracts are applied to the language in insurance policies, including the interpretation of UIM reducing clauses.[16] An insurance policy is construed to give effect to the intent of the parties as expressed in the language of the policy.[17] This concept was recently reiterated by the Supreme Court of Wisconsin:

While our UIM cases provide a helpful framework for interpreting policy language, we pause to note that a UIM policy is a contract, and “[w]here the language of the policy is plain and unambiguous, we enforce it as written… This is to avoid rewriting the contract by construction and imposing contract obligations that the parties did not undertake.”[18]

As a general rule, the language in an insurance contract “is given its common, ordinary meaning,” that is, “‘what the reasonable person in the position of the insured would have understood the words to mean.’”[19] However, insurance policy language, including a reducing clause, is deemed ambiguous “if it is susceptible to more than one reasonable interpretation.”[20] If the UIM reducing clause is ambiguous, it is unenforceable and cannot be used to reduce the UIM coverage.

In response to the enactment of Wis. Stats. § 632.32(5)(i), the Supreme Court of Wisconsin has held that a reducing clause is enforceable if it complies with the provisions of Wis. Stats. § 632.32(5)(i) and its limitation on UIM coverage is not ambiguous in the context of the entire policy.[21] This requires not only an analysis of the language employed in the UIM reducing clause, but also an examination of the entire insurance policy, including provisions such as the policy’s index, “Insuring Agreement,” “Definitions,” and “Limit of Liability” subsections, endorsements attached to the underlying coverage form, and notices issued to the insured. As noted in Myers, contextual ambiguity can render a UIM reducing clause unenforceable if the clause is not easily located in the policy and fails to clearly notify the insured that UIM coverage will be reduced by certain amounts paid or payable.[22] The standard for addressing alleged contextual ambiguity is whether the “organization, labeling, explanation, inconsistency, omission, and text of other provisions in the policy” create “an objectively reasonable alternative meaning and, thereby, disrupt an insurer's otherwise clear policy language.”[23] This analysis is imperative because Wisconsin courts want to ensure that UIM policies with reducing clauses “inform a reasonable insured that he or she is purchasing a fixed level of UIM recovery that would be arrived at by combing payments made from all sources.”[24]

With the enactment of Wis. Stats. § 632.32(5)(i), there is no longer a viable argument that a reducing clause is ipso facto unenforceable when the reducing clause contains the phrase “amounts payable” or “amounts otherwise payable for damages” rather than the word “limits.”[25] In Myers, the appellate court held that a reducing clause containing the phrase “amounts otherwise payable for damages” was enforceable under Wis. Stats. § 632.32(5)(i) and unambiguous.[26] “[T]he language of a policy should not be made ambiguous by isolating a small part from the text of the whole.”[27]

II. Pursuing Enforcement of the UIM Reducing Clause 

In addition to arguing that their UIM policies follow the “separate fund” approach, injured parties who carry UIM coverage will frequently attempt to create an “ambiguity” concerning the UIM reducing clause (where no such ambiguity exists) in order to increase the amount of UIM benefits they might recover under the policy. This legal strategy relies on the precedential Wisconsin case law that holds ambiguities must be construed against the insurer.[28] If the UIM coverage provided is misleading and unclear, the policy will be deemed ambiguous and the UIM reducing clause unenforceable.[29]

Because the above-referenced strategies employed by injured parties will commonly make insurers hesitant to deny coverage based on a policy’s UIM reducing clause, it is important to recognize the existence of a UIM reducing clause and to evaluate its enforceability early on. It is also important to know whether the UIM insured receives payment(s) at any point throughout the course of litigation that could reduce the amount of UIM coverage available pursuant to a reducing clause compliant with the requirements of Wis. Stats. § 632.32(5)(i). For example, third-party distribution agreements, pursuant to which a worker’s compensation carrier is reimbursed a percentage of the amount it paid out to the injured party, must be considered when computing the amount of UIM coverage available to the injured party. This early recognition will protect against the UIM carrier paying out on a case in which there are no UIM benefits available because of the insured’s receipt of payments issued by third parties such as worker’s compensation carriers and liability insurers.

III. The Enforceability of UIM Reducing Clauses Remains a Prevalent Legal Issue

As demonstrated by two recent decisions of the Wisconsin Supreme Court, Secura Supreme Insurance Company v. Estate of Huck and Acuity v. Estate of Shimeta, UIM reducing clauses can markedly impact the amount of UIM coverage available to an injured party.[30] 

a.     Estate of Huck

In Estate of Huck, the Supreme Court held UIM insurers are not statutorily permitted to reduce UIM limits by the amount an injured party must reimburse the worker’s compensation carrier.[31] In Estate of Huck, the decedent Daniel Keith Huck was killed by a motorist while performing his job duties for the Village of Mount Pleasant. After receiving the tortfeasor’s liability limits of $25,000 and $35,798.04 in worker’s compensation benefits from the Village’s insurer, the Estate submitted a claim for UIM coverage under Huck’s automobile insurance policy with Secura that had a UIM limit of $250,000 and contained a reducing clause compliant with Wis. Stats. § 632.32(5)(i). Following the Estate’s receipt of worker’s compensation benefits in the amount of $35,798.04, the Estate was obligated by Wis. Stats. § 102.29 to refund the Village’s insurer $9,718.73 from its settlement with the tortfeasor, netting $26,079.31. Therefore, the Supreme Court evaluated whether Secura was permitted to reduce its $250,000 UIM limit by the $35,798.04 initially received by the Village’s insurer, or just by the net amount of $26,079.31 retained by the Estate. The Supreme Court concluded that a UIM insurer is permitted to reduce its limits, pursuant to Wis. Stats. § 632.32(5)(i) and a policy’s reducing clause, “by the total amount of worker’s compensation actually received.” Thus, Secura was permitted to reduce its $250,000 UIM limit by the $26,079.31 in worker’s compensation benefits that the Estate retained after reimbursing the Village’s insurer.

b.     Estate of Shimeta

In Estate of Shimeta, the Supreme Court addressed whether a UIM reducing clause applied on an individual basis versus a combined basis when two claimants presented claims for UIM benefits under the same automobile policy. In Estate of Shimeta, Michael Shimeta’s Estate (driver) and Terry Scherr (Shimeta’s passenger) each received $250,000 from a tortfeasor’s automobile liability insurer, Farmers Insurance Company, pursuant to Farmer’s policy which provided a $250,000 “per person” limit of liability and a $500,000 “per accident” limit of liability. Subsequently, both the Estate and Scherr sought an additional recovery of $250,000 each under a policy that Acuity issued to Shimeta prior to the accident. Acuity’s policy included underinsured motorist (UIM) coverage with a $500,000 limit for “each person” and a $500,000 limit for “each accident.” Acuity contended it was not obligated to pay the Estate or Scherr any UIM benefits under its policy because of the language of the policy’s UIM reducing clause, which states: “[t]he limit of liability shall be reduced by all sums... [p]aid because of the bodily injury by or on behalf of persons... who may be legally responsible.” According to Acuity, based on the reducing clause, the $500,000 in combined payments that the Estate and Scherr received from Farmers reduces Acuity’s UIM policy limits to $0. The Supreme Court rejected this argument, however, and affirmed the court of appeals’ decision that Acuity’s UIM reducing clause operates on an individual basis to reduce the limit of liability for “each person” by the payment that “each person” insured under the policy received. In other words, the Supreme Court concluded that Acuity owed the Estate and Scherr $250,000 each, because the “limit of liability” in the reducing clause unambiguously refers to only the “each person” limit.

IV. Conclusion

Even though the enforceability of a UIM reducing clause is not always absolute, when an injured party presents a claim for UIM benefits, early recognition of a UIM reducing clause in the claimant’s applicable policy and analysis of its enforceability is essential. This analysis is two-fold: (1) ensuring the language of the reducing clause complies with the requirements of Wis. Stats. § 632.32(5)(i); and (2) confirming the UIM reducing clause is not contextually ambiguous. The amount of UIM coverage available to the injured party, which may be significantly impacted by an enforceable UIM reducing clause, can be outcome-determinative in UIM cases.

Author Biographies:

Mollie Kugler is a shareholder in the Litigation and Risk Management Practice Group at von Briesen & Roper, S.C. in Milwaukee. She focuses her practice on representing and counseling insurance companies in litigation and disputes. Mollie graduated from Georgetown University, cum laude, in 2008. She earned her JD from Fordham University in 2022. She is admitted to practice in Wisconsin and Illinois state courts, the eastern and western federal district courts in Wisconsin, the central and northern federal district courts in Illinois, the eastern federal district court in Michigan, and the U.S. Court of Appeals for the 7th Circuit. In addition to WDC, Mollie is a member of the Defense Research Institute, the National Association of Women Lawyers, the Association for Women Lawyers, the State Bar of Wisconsin, and the Milwaukee Bar Association. She also serves as Georgetown’s Milwaukee-area Chair and Alumni Interviewer for the Georgetown University Alumni Admissions Program. Mollie was selected by The Best Lawyers in America^© in Insurance Law in 2022.

Blayne Christy is a member of the Litigation and Risk Management Practice Group at von Briesen & Roper, S.C. She focuses her practice on representing insurance carriers and their insureds in complex legal disputes, including in areas related to construction defects, contract disputes and professional liability claims. Prior to private practice, Blayne was a claims attorney managing outside counsel for a large insurance company. Blayne obtained her J.D. from the University of Wisconsin Law School. During law school, Blayne was a Member and Managing Articles Editor of the Wisconsin Journal of Law, Gender, and Society, and she interned for the Hon. Juan Colás of Dane County Circuit Court.