Underinsured Motorist Claims: The Lines for Breach of Contract and Entitlement of Interest

 

Attorney Mark Thomsen writes the cover story for the Fall, 2017 issue of The Verdict.

Underinsured Motorist Claims:
Tales From The Trenches – Demarcating The Lines for Breach of Contract, Entitlement of Interest pursuant to Wis. Stat. § 628.46 for Delay In Paying UIM benefts, and Bad Faith

By Attorney Mark Thomsen

If your experience in obtaining underinsured motorist (UIM) benefits for your clients is at all like mine, I will assume that rarely, if ever these days, will the UIM insurer pay any UIM benefits unless your client agrees to settle all her claims. For that matter, the same can be said for uninsured motorist (UM) claims. While I have had Secura and American Family make good faith advance payments to clients in recent years, these cases are the rare exception.  Instead, adjusters routinely express their belief that the injuries did not result from the collision, or that negligence is in dispute or that causation is debatable and then insist on a complete settlement but advance no payment until the jury determines the value. This article is written in an attempt to debunk the adjusters’ posturing, provide suggestions for successfully pursuing UIM claims and hopefully contribute to the debate as to how best to prosecute UIM claims for our clients.

Purpose of UIM

It is now well established that our Supreme Court “has stated on multiple occasions that the underlying purpose of UIM coverage is to compensate the victim of an underinsured motorist’s negligence where the third party’s liability limits are not adequate to fully compensate the victim for his or her injuries.”¹  “When purchasing UIM coverage, we believe that a reasonable insured expects to be protected against a loss caused by another that is not covered by the underinsured d¬-river’s liability coverage.”§²  “Underinsured motorist coverage is not purchased to obtain commercial advantage but is instead obtained as protection against calamity. ³  “Underinsured motorist coverage is first-party insurance.⁴ Nearly forty years ago, a Maryland court summarized the essence of a claim for breach of contract of first party insurance as follows:

A suit based upon the insured’s allegations that he is entitled to payment under one of the first party coverage clauses in the contract he entered into with his insurance carrier, and that the carrier has refused payment thereby breaching its promise, is clearly a contract action.⁵

Succinctly stated – “a breach of contract occurs when the insurer denies underinsured motorist benefits requested from an insured.⁶    As a State Farm adjuster told me in her deposition – “Our duty to our insured’s is to pay what we owe for damages incurred based upon the contract within the coverages that they purchased.⁷ So why when we submit substantiated claims do insurers refuse to pay what they owe and insist they have a right to a jury determination of value. My clients, insureds, thought they bought protection not lawsuits. Wisconsin law requires the UIM carrier to pay UIM claims when properly supported and no such payment is conditioned on settlement of the whole claim or having the claim reduced to judgment or arbitration award. At most, the UIM insurer is entitled to only the 30 day safe haven provision of Wis. Stat. § 628.46.

Determining Breach of Contract

“With first-party insurance, the insurer establishes ‘the conditions for both the presentment and payment of claims…. The insurer has what the Arizona Supreme Court has characterized as ‘an almost adjudicatory responsibility.’ ‘The insurer evaluates the claim, determines whether it falls within the coverage provided, assesses its monetary value, decides on its validity and passes upon payment.⁸  Significantly, however, a UIM claim does not exist until the underlying liability limits are exhausted.⁹ The UIM insurer must be notified of the liability limits tender and must consent to the settlement or substitute its funds for both a settlement with the liability carrier and the tortfeaser within 30 days of the respective offers, if different.¹⁰ Our clients are likely contractually obligated to cooperate with the UIM carrier, including during the 30 day evaluation period, and may undergo a defense medical examination.¹¹ An insurer’s failure to timely obtain a defense medical exam to dispute an insured’s UIM claim of injury could actually establish bad faith.¹²

Once the liability carrier tenders and exhausts its coverage and your client submits a UIM claim supported by evidence, the UIM insurer must pay what it determines it owes and cannot insist on waiting for a jury or arbitrators to determine the value.¹³

Insurers provide extensive training to its adjusters and supervisors regarding, among many others, its claims procedure, generally contained in its claims manual, basic medical management training, soft tissue injury training, knee or shoulder injuries training, pain management, business practices of setting reserves, log entries, including referencing when the insurer knows it owes UIM benefits, business practices of entries into the claim file, policies regarding use of defense exams, settlement value ranges, and offers.¹⁴  As Courts have held, even “[m]uch of the information in defendant’s claim file likely will be discoverable in connection with the coverage question [or in other words breach of contract] in the first instance.”¹⁵

Insurers utilize their extensive business training and claims process to determine whether it owes our clients UIM benefits. If a UIM insurer refuses to pay any UIM benefits, utilize Wisconsin Administrative Code Ins. 6.11(5) to require the insurer “to promptly provide a reasonable explanation of the basis in the policy contract or applicable law for denial of a claim or for the offer of a compromise settlement.” You should also always particularize your claim pursuant to Wis. Stat. § 628.46 and submit proof of each element of your claim. Follow up with detailed letters to the adjuster requesting prompt, i.e. 10 day responses, as to why the insurer is not responsible for the amount demanded or “any partial amount supported by written notice.” Your submissions and follow up letters will create the necessary evidence to establish breach of contract, liability for the interest remedy under § 628.46 and bad faith. Even if your efforts are fruitful and your client settles, your client’s UIM settlement will be maximized.

Breach, Delay and/or Bad Faith

An overview of applicable case law teaches us that the UIM carrier must pay our client when it determines it owes its insured UIM benefits and is in breach if it fails to pay. We also know that every failure to pay (or breach of contract) does give rise to a claim for § 628.46 interest but not necessarily bad faith. Brethorst¹⁶, although only a bad faith claim was alleged, teaches us that when our client submits medical bills, together with medical records or reports establishing that the collision was a cause of injuries thus tying the bills to the collision, such proof is likely sufficient to establish breach. Moreover, the UIM insurer’s “belief that [our client’s] injury did not result from the accident is speculation… and provide[s] nothing to justify its failure to pay…¹⁷ Danner, as noted above, implicitly holds that an insurer cannot force an arbitration to avoid paying earlier. Moreover, Danner rejected the Arizona Court of Appeals conclusion in Voland that “a personal injury claim is unique… the ‘pain and suffering’… elements…are inherently flexible… and [o]ftentimes no more precise or predictable than throwing darts at a board.” Voland itself actually involved a UIM case where the “plaintiff never requested, let alone demanded, the carriers to pay her special damages before arbitration,” and the Court noted that “UM carriers do not need” to make gratuitous advance payments which the insured does not request.¹⁸ Voland strongly suggests its outcome would have been different had plaintiff’s counsel submitted proof and requested payment and such a ruling is consistent with Danner and Brethorst.

§ 628.46 itself implies that a breach of contract, i.e. an obligation to pay, triggers the insurers duty to pay within 30 days or pay interest for any subsequent delay. The Wisconsin Supreme Court held that Wis. Stat. § 628.46 “is an additional provision of the insurance contract incorporated into it by operation of law.”¹⁹ In Poling, the Court stated:

We see nothing in the statute, or in the obvious policy behind it, which conditions its application on the reasons why an insurerdenies or delays payment of a claim. The only escape clause for avoidance of this interest assessment is when the insurer has reasonable proof that it is not responsible for the payment. This statute is unrelated to the tort of bad faith and permits the imposition of interest even where bad faith is not present.²⁰

In Fritsche v. Ford Motor Credit Co., the Court held the statute expressly applicable to claims for uninsured motorist benefits, first-party insurance benefits like UIM, holding:

Indeed, were we to conclude that only claims reduced to judgment or those which were the subject of an arbitration award were within the reach of § 628.46, we would effectively repeal the statute. A claim is statutorily deemed overdue if not paid within thirty days after a proof of loss or equivalent evidence of the loss…. That time can be far in advance of a judgement or award.²¹

The Fritsche court returned the case to the trial court for further review, but concluded stating: “It may be that the risk of mis-evaluation outweighs the risk of paying § 628.46, Stats., interest, but Rural has had the use of $25,000 which became owing to the Fritches as a result of an accident which occurred October 11, 1985. Presumably, Rural has received a return on that amount since then. We see nothing illogical in interpreting a broad statute to require Rural to pay for the use of $25,000 from the date by which it had received evidence of the loss equivalent to a proof of loss.”²²

Accordingly, once a UIM claimant submits her proof of entitlement to UIM benefits, the UIM carrier must not only pay UIM benefits but also pay interest after 30 days absent a showing of “reasonable proof to establish that the insurer is not responsible for the payment.” A UIM adjuster claiming the case involves nebulous damages is not a defense.²³

The standard for proving bad faith is higher than mere proof of breach and untimely payment of a claim. Our Supreme Court is clear that “[b] ad faith is not the same as breach of contract, which is a ‘failure to pay the claim in accordance with the policy.’… Rather, bad faith “is a separate intentional wrong, which results from a breach of duty imposed as a consequence of the relationship established by contract.²⁴ “Thus to bring a bad faith claim, ‘a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.²⁵ Brethorst noted that in Danner, a UIM breach of contract and bad faith claim, the court “reiterated the principle that every insurance contract has an implied duty of good faith and fair dealing between the insurer and insured. Although the insurance contract in Danner gave both the insurer and the insured the right to seek arbitration in disagreements about the presence or amount of coverage,… the existence of that right did not relieve the insurer of its duty to act in good faith from the inception of the contract…. When the duty of good faith is breached by the insurer and that breach results in damages, an insured has a cause of action for bad faith.”²⁶

Importantly, “[t]he purpose behind providing a bad faith cause of action to an insured is to ‘protect against the risk that an insurance company may place its own interests above those of the insured and that the recovery available to the insured for breach of contract would not fully compensate the insured for the resulting harms.”²⁷  It is worth noting that in Danner, a bad faith claim with a higher and different standard then breach of contract or for a § 628.46 interest claim, the Court virtually summarily dismissed the insurer’s claims that because liability “rested on credibility determinations”, and given the fact the insurer’s agents themselves had concluded that the claimant’s negligence was less than the underinsured driver’s, that negligence was not fairly debatable. Similarly, given the medical and expert testimony regarding causation, the Court determined that causation was not fairly debatable and upheld the bad faith claims.²⁸  If such arguments fail to meet the higher standard for bad faith then any such defense arguments should be irrelevant to the determination of whether the UIM carrier actually breached when it failed to pay or is liable for interest for delaying payment, i.e. such arguments should not be considered reasonable proof that the insurer is not responsible. If the testimony from the UIM adjusters and evidence in their claim file show that the insurer decided it owed some UIM benefits, the only issue really remaining is whether the failure to timely pay was in bad faith.

Confusion over scope of Dahmen’s bifurcation and stay of discovery in Cases involving both breach and bad faith

Dahmen2²⁹  involved a breach of UIM contract claim and bad faith in which the court essentially summarily ruled, with very little factual background and/or discussion, that because “the Dahmen’s claim for UIM coverage will turn on the amount of their damages,” while their bad faith claim “will examine American Family’s handling of the Dahmen’s UIM claim,” bifurcation was to be presumed. In Dahmen, all we know is that the UIM insurer claimed the value was less than the tendered liability limits leading the Court to conclude the “underlying claim relates to damages only.” But what do we do under circumstances where the insurer concluded it owed UIM but maybe not as much as claimed and yet refused to pay anything? There is much information in a claims file or obtained through the testimony of adjusters that is relevant to whether an insurer breached and when. What if some of the factual evidence of breach looked like the evidence in Danner, e.g. insurance adjusters and employees confirmed liability, but for the purpose of the litigation, the insurer concealed all such information arguing the insured was made whole by the underlying limits? The Court in Brethorst focused on the concern that bifurcation may be necessary in some cases to protect attorney client and work product, but what if the facts otherwise available already establish some wrongfully denied benefits, why should bifurcation be required? We need to submit sufficient proof to our judges to convince them to distinguish the UIM insurers superficial reliance on Dahmen and Brethorst for arguing for bifurcation and stays of discovery.³⁰

Defense Trial Tactics

You should also anticipate that defense counsel will attempt to preclude the jury from hearing about our client’s breach of contract claim, i.e. the real nature of the case. Expect counsel to move in limine and argue that Wis. Stat. § 904.11, Wis. JI-Civil 125, or City of West Allis v. Wisconsin Elec. Power Co., 2001 WI app 226, 248 Wis. 2d. 10, 635 N.W. 2d 873, require the court to limit the jurors’ knowledge of your UIM or UM claim. However, UIM and UM cases involve first-party coverage not “liability insurance.” While not yet addressed in a published Wisconsin case, courts in other states have rejected similar arguments made by first-party insurers and hold that it was improper to “maintain the legal fiction” of permittinga UIM insurer to contend that the action was something other than a claim for benefits under its insurance policy.³¹ As such, your jury will hear evidence of what the insurers already paid to determine whether the defendant breached its contract with the plaintiff by not paying more.

Conclusion

I hope this overview provides a functional frame work for the evaluation of UIM claims and when such claims are entitled to interest and when bad faith is involved. Too often our Judges evaluate these contract claims identically to third-party liability claims. I believe in part, this is because we do not take the time necessary to educate our courts as to the contractual nature of these claims. I look forward to our ongoing discussion. Our clients deserve the first party benefits they purchase.

ENDNOTES

1. Mattheisen v. Continental Casualty Co., 193 Wis.2d 192, 204, 532 N.W. 2d 729 (1995); 193; Wood v American Family Mutual Ins., 148 Wis. 2d 639, 436 N.W. 2d 594 (1989); Kaun v. Industrial Fine & Casualty Ins. Co., 148 Wis. 2d 662, 436 N.W. 2d 321 (1989); State Farm Mutual Automobile Ins. Co. v. Gillette, 251 Wis. 2d 561, 2002 WI 31 ¶ 45 fn 30, 641 N.W. 2d 662
2. Matthiesen, 193 Wis. 2d 204. However, the Court has recognized that the legislature too sets public policy in this regard and has more recently deferred to the legislature’s more narrow view. See e.g. Gillette, 2002 WI 31 ¶ 44 (comparing UIM limits to liability limits to define UIM coverage). However, regardless of the definition, UIM claims are contract claims, not tort claims, or a hybrid claim. See Danner v. Auto-Owners Ins., 245 Wis. 2d 49, 2001 WI 90 ¶¶ 56, 57, 69, 629 N.W. 2d 159
3. Danner, 2001 WI 90 ¶ 51
4. Id. ¶ 49; Anderson v. MSI Preferred Ins. Co., 281 Wis. 2d 66, 91 (2005) (“a UIM claim is a first party contract claim.”); Gillette, 251 Wis. 2d @ 577.
5. Reese v. State Farm Mut. Auto. Ins. Co., 403 A. 2d 1229, 1231-32 (Md. Ct. App. 1979).
6. Yocherer v. Farmers Ins. Exchange, 252 Wis. 2d 114, 119-120, 643 N.W. 2d 457, 2002 WI 41 ¶ 8
7. Deposition of Raelynn M. Kahle January 3, 2017 p.14 in Baires v. State Farm, Case No. 16-CV-402-JPSEastern District of Wisconsin.
8. Danner, 2001 WI 90 ¶ 52.
9. Danbeck v. American Family Mutual Ins. Co., 245 Wis 2d 186, 629 N.W. 2d 150, 2001 WI 91 ¶¶ 22-25. See also Welin v. American Family Mutual Ins. Co.,2006 WI 81¶ …. (holding where multiple claimants exist and given pro-rata exhaustion of UIM aggregate limits constitutes exhaustion and triggers UIM coverage).
10. Vogt v. Schroeder, 129 Wis. 2d 3, 383 N.W. 2d 876 (1986); Pitts v. Revocable Trust of Dorothy Knnueppel, 2005 WI 95. UIM insurer attempting to convince a liability carrier not to pay its limits so as to not trigger any duty of the UIM carrier to pay UIM benefits is evidence of bad faith. See e.g. Danner, 2001 WI 90 ¶ 52. Given applicable Wisconsin law, a UIM carrier is not properly joined in an action with the underinsured tortfeaser or its liability carrier. In any event, why would plaintiff’s counsel give the underinsured tortfeaser the benefit of a defendant UIM insurer in the same case with yet more defense lawyers and experts building a case against your client? However keep in mind Shugarts v. Allstate Property and Cas. Ins. Co., 2017 WI App 7 (Petition for Review granted) until it is reversed (it should be because it is inconsistent with Danbeck and Vogt).
11. Pitts, 2005 WI 95 ¶ 44.
12. Gentry v. State Farm Mut. Auto. Ins. Co., 726 F. Sup. 2d 1160 (E.D. Cal. 2010).
13. Danner, 2001 WI 90 ¶ 54-58 (rejecting the notion that a UIM insurer can force arbitration before paying UIM benefits); Brethorst v. Allstate Property and Casualty Ins. Co., 798 N.W. 2d 407, 2011 WI 41 ¶¶ 82-85 (failure to pay undisputed damages, e.g. medical bills, constitutes proof of breach of contract and satisfies the burden to proceed with discovery on bad faith claim).
14. See endnote #7, i.e. Ms. Kahle’s deposition testimony describes the business practice of the presentment and payment of claims.
15. Trinity Homes LLC v. Regent Ins. Co., 2006 WL 753125 at 2 (S.D. Ind. 2006); McLaughlin v. State Farm Mut. Auto. Ins. Co., 30 F. 3d 861, 871 (7th Cir. 1994); Williams v. Progressive Northern Ins. Co., 2007 WL 2176561 at 1 (S.D. Ind. 2007).
16. Brethorst v. Allstate Property and Casualty Ins. Co., 798 N.W. 2d 467, 2011 WI 41 ¶¶ 83-85.
17. Id.
18. Voland v. Farmers Ins. Co. of Arizona, 189 Ariz. 448, 943 P. 2d 808 (1997).
19. Poling v. Wisconsin Physicians Service, 120 Wis. 2d 603, 613, 357 N.W. 2d 293 (Ct. App. 1984).
20. Id. (emphasis added.
21. 171 Wis. 2d 280, 305, 491 N.W. 2d 119 (Ct. App. 1992)(emphasis added).
22. Id at 307. Note that Kontowicz v. American Standard Ins. Co. of Wisconsin, 2006, 714 N.W. 2d, and Dilger v. Metropolitan Property and Casualty ins. Co., 2015 WI App. 54, involve third-party insurance cases and are not directly on point given UIM is first party insurance. The third party case involves the insurers “takeover of the insured’s defense and “creates a quasi-fiduciary relationship. That relationship is different from the insurer-insured relationship in a first-party claim. In a first-party bad faith claim, the insured insists that the insurer wrongfully denied benefits or intentionally mishandled a legitimate claim for benefits.” Brethorst, 2011 WI 41 ¶ 48; Casper v. Am. Int’l South Ins. Co., 2017 WI App 36, ¶¶ 16-18; Miller v. Safeco Ins. Co. of Am., 761 F. Supp. 2d 813 fn 5 (“Kontowicz, however, was a case involving a third-party claim. This is a…first-party claim…).
23. Fritsche, at 307.
24. Brethorst, 2011 WI 41 ¶ 25 (citing Anderson v.Continental Ins. Co., 85 Wis. 2d 368 (1978)).
25. Id at ¶ 26. See also Wis. JI-Civil 2761.
26. Id at ¶¶30,31 (emphasis added).
27. Id at ¶ 35.
28. Danner, 2001 WI 90 ¶¶ 63-68.
29. Dahmen v. American Family Mutual Ins. Co., 2001 WI App 198.
30. Practice pointer. When an insurer removes your UIM claim on the basis of diversity, any concerns you may have about bifurcation or stays will be removed. Federal procedural law governs the issues of bifurcation and stay, see Klonowski v. Int’l Armament corp., 17 F3d 992, 995 (7th Cir 1994), and District Judges Clevert, Adelman, Stadtmueller and Magistrate Judge Crocker have all essentially concluded that “there will be significant overlap between the claims [for breach and bad faith] such that it would be wasteful to take a piecemeal approach to discovery.” See Fiserv Sols., Inc. v. Westchester Fire Ins. Co., No. 11-C-0603, 2012 WL 2120513, at 1 (E.D. Wis. June 11, 2012), Ingram v. State Farm Mutual Automobile Ins. Co., No. 10C1108, 2011 WL 1998442 (E.D. Wis. May 19, 2011), Eide v. Life Ins. Co. of N. Am., No. 09-CV-671-s/c, 2010 WL 1608658 (W.D. Wis. Apr. 19, 2010), and Baires v. State Farm, Case No. 16-CV-402-JPS (E.D. Wis. Sept. 2, 2016). See Earle v. Cobb, 156 S.W. 3d 257, 260 (Ky 2004) (“Prejudice to a UM/UIM carrier from being identified as a party has been considered insignificant, and in any event, the contractual relationship and full disclosure must prevail); King v. State Farm Mut. Auto. Ins. Co., 850 A. 2d 428, 432-435 (C. Sp. App. Md. 2004)(“Under ordinary circumstances this contract action on first party coverage proceeds with the defendant insurer identified to the jury….Indeed, State Far “deep pocket” corporation that is sued for breach of contract by its promise.”); State Farm Mut. Auto. Ins. Co. v. Earl, 33 N.E. 3d 337 (Ind. 2015)(“[W]e cannot say that the trial court erred in determining the insurance policy – and the coverage limit contained within it – was relevant background information that would help the jury understand the relationship between the Earls and State Farm and the basis of the lawsuit itself); Mallott v. State Farm Mut. Auto. Ins. Co., 798 N.E. 2d 924, 926 (Ind. Ct. App. 2003)(“[I]n the present case the jury was required first to assess the damages Mallott suffered in the accident in accordance with tort law principals, and then it was required to compare this amount with the amount State Farm had actually paid…). |