Allstate Insur Co v. Keca, Donna E.

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 03-3702 & 03-3835
ALLSTATE INSURANCE COMPANY,
Plaintiff-Appellee, Cross-Appellant,
v.
DONNA E. KECA and TRISHA BONTEMPO,
Individually and as Guardian of Miranda Bontempo,
Defendants-Appellants, Cross-Appellees.
____________
Appeals from the United States District Court
for the Eastern District of Wisconsin.
No. 02 C 746—Rudolph T. Randa, Chief Judge.
____________
ARGUED APRIL 1, 2004—DECIDED MAY 20, 2004
____________
Before FLAUM, Chief Judge, and COFFEY and EVANS,
Circuit Judges.
FLAUM, Chief Judge. This appeal presents the question
whether an underinsured motorist (“UIM”) reducing clause
contained in the insurance policies held by the defendants
is enforceable under Wisconsin law, and if so, how the
clause applies. A severe automobile collision involving an
underinsured motorist and Donna E. Keca (“Keca”), Trisha
Bontempo (“Bontempo”) and Miranda Bontempo, a minor,
led to this action. In dispute is the amount of UIM benefits
2 Nos. 03-3702 & 03-3835
Keca and Bontempo (collectively “defendants”) are owed by
their insurer, Allstate Insurance Company (“Allstate”).
Before the district court, Allstate sought a declaratory
judgment that it owes no more than the $250,000 in UIM
benefits that it has already tendered to Keca and Bontempo
under the policies issued to them. The defendants appeal
the district court’s ruling allowing an offset from Allstate’s
coverage for the payment received by the defendants from
the tortfeasor’s insurance company. Allstate cross-appeals
the district court’s grant of summary judgment to the
defendants on the basis that the benefits Allstate paid to
Bontempo may not be offset from other coverage owed to
Keca by Allstate. For the reasons stated in this opinion, we
affirm the judgment of the district court.
I. Background
On November 21, 2001, Trisha Bontempo was driving her
car in which her mother, Donna Keca, and four-year-old
daughter, Miranda Bontempo, were passengers. The
Bontempo vehicle was struck by a car driven by an intoxi-
cated and underinsured motorist, Tina Cogley. The
Bontempos and Keca sustained serious injuries as a result
of the collision. It is undisputed that collectively their
medical bills are in excess of $449,000. As too often is the
case with reckless drivers, Cogley did not carry enough
insurance to cover the defendants’ injuries. The defendants
received only $50,000 under Cogley’s bodily injury liability.
At the time of the accident, both Keca and Bontempo were
holders of Allstate automobile insurance policies (the “Keca
policy” and the “Bontempo policy” or generally the “Allstate
policy”) which included UIM coverage. The Keca policy has
applicable UIM limits of $300,000 for each accident and the
Bontempo policy has applicable UIM limits of $100,000 for
each accident. Keca resides at the same address as the
Bontempos, making them “resident relatives” covered under
Nos. 03-3702 & 03-3835 3
each other’s insurance policies. It is undisputed that for the
accident at issue the Bontempo UIM coverage was primary
and the Keca UIM coverage was excess. Allstate has
tendered to the defendants $50,000 in UIM benefits under
the Bontempo policy and $200,000 in UIM benefits under
the Keca policy.
Except as to coverage amounts, the Keca and Bontempo
policies are virtually identical. The policies are forty-seven
pages in length, including the main policy jacket and the
added endorsements. The “Auto Policy Declarations”
(“declarations”) page, containing a chart that reflects the
amounts of coverage, types of coverage, premiums, and
deductibles, appears at the beginning of each policy. The
declarations page sets forth the amount of UIM limits and
lists the documents that comprise the policy, including
Amendatory Endorsement form AU 1440-3 (“AU 1440-3”).
AU 1440-3 is a standalone document located at the end of
each policy that contains changes, amendments, and
additions to the provisions contained within the main policy
jacket. The heading at the top of page 1 of AU 1440-3
states, “This Endorsement Changes Your Policy—Keep It
With Your Policy”. AU 1440-3 contains—within five
pages—all the UIM-related provisions. The following basic
UIM coverage provisions are set forth on page 12 of AU
1440-3:
Part VII
Underinsured Motorists Coverage
Coverage SU
If your policy declarations indicates that you have this
coverage, we will pay those damages that an insured
person is legally entitled to recover from the owner or
operator of an underinsured auto because of bodily
injury sustained by an insured person.
4 Nos. 03-3702 & 03-3835
The UIM “Limits of Liability” provision, set forth three
pages later, states that the coverage limit shown on the
policy declarations for “ ‘each accident’ is the maximum we
will pay for damages arising out of bodily injury to two or
more persons in any one motor vehicle accident.” The UIM
reducing clause, which appears immediately below the
Limits of Liability provision, states in part as follows:
The limit of Underinsured Motorists Coverage shall be
reduced by:
1. all amounts paid by or on behalf of any person or
organization that may be legally responsible for the
bodily injury for which the payment is made, including,
but not limited to, any amounts paid under the bodily
injury liability coverage of this or any other insurance
policy. . . .
Based on these provisions, Allstate calculates the amount
it owes to the defendants as follows: the $50,000 received
from the tortfeasor, Cogley, was offset against the UIM
limits of both policies, leaving $50,000 in UIM benefits
under the Bontempo policy, which Allstate tendered, and
$250,000 in UIM benefits under the Keca policy. The
$50,000 in UIM benefits Allstate tendered under the
Bontempo policy was offset against the $250,000 UIM
coverage under the Keca policy, leaving $200,000 in UIM
benefits under that policy, which Allstate also tendered. It
is Allstate’s position that it has fulfilled its UIM coverage
obligations under the plain language of both insurance
policies. The defendants contend that the reduction clause
is unenforceable and they are entitled to $100,000 in UIM
benefits under the Bontempo policy and $300,000 in UIM
benefits under the Keca policy, for a combined total of
$400,000 in Allstate UIM benefits.
Allstate commenced this action seeking a declaratory
judgment that the UIM reducing clauses in the Keca and
Bontempo policies are enforceable, and therefore, no
Nos. 03-3702 & 03-3835 5
benefits beyond the $250,000 already tendered is owed to
the defendants by Allstate. The district court had jurisdic-
tion over the action, pursuant to 28 U.S.C. § 1332(a),
because there was complete diversity of citizenship between
the parties, and the amount in controversy was in excess of
$75,000. Both parties filed motions for summary judgment.
In its order denying summary judgment to Allstate and
granting judgment in part to the defendants, the district
court rejected Allstate’s bid to reduce Keca’s UIM benefits
by the $50,000 paid under the Bontempo policy. However,
the district court also found that Allstate’s reducing clause
was not ambiguous in the context of the policy as a whole
and therefore approved the $50,000 reduction Allstate made
to each policy as a result of the payment tendered by
Cogley’s liability carrier. Allstate now appeals the former
decision, and the defendants appeal the latter.
II. Discussion
A federal court sitting in diversity has the obligation to
apply the law of the state as it believes the highest court of
the state would apply it if presented with the issue. See
Lexington Ins. Co. v. Rugg & Knopp, Inc., 165 F.3d 1087,
1090 (7th Cir. 1999). In this case, interpretation of
Allstate’s insurance policy is governed by the substantive
law of Wisconsin, the forum state. In Wisconsin, the
interpretation of an insurance contract and the conclusion
as to whether coverage exists are questions of law. See
Ledman v. State Farm Mut. Auto Ins. Co., 601 N.W.2d 312,
314 (Wis. Ct. App. 1999). We review grants of summary
judgment de novo to determine whether any genuine issue
of material fact exists and whether the moving party is
entitled to judgment as a matter of law. See Williams v.
Anderson, 959 F.2d 1411, 1413 (7th Cir. 1992).
6 Nos. 03-3702 & 03-3835
A. Enforceability of Reducing Clause
Prior to 1995, a number of Wisconsin courts found
reducing clauses void because they rendered purported UIM
coverage illusory. See, e.g., Kuhn v. Allstate Ins. Co., 510
N.W.2d 826, 827 (Wis. Ct. App. 1993). Courts deemed UIM
coverage subject to a reducing clause illusory because the
full coverage amount would never actually be paid by the
insurer (as the underinsured motorist would always be
contributing some portion of the payment). See, e.g., id. at
830. In 1995, the Wisconsin Legislature passed a statute,
Wis. Stat. § 632.32(5)(i), specifically allowing for UIM re-
ducing clauses that operate to decrease the amount of the
insured’s total damages subject to UIM coverage from the
insurer by any amounts received from the underinsured
tortfeasor. Since the statute’s passage, considerable litiga-
tion relating to the validity and enforceability of reducing
clauses has continued to occur in Wisconsin courts. The
Wisconsin Supreme Court itself described UIM coverage as
a “ ‘legal iceberg,’ a seemingly straightforward area of the
law, which in fact can prove to be nettlesome to analyze.”
Badger Mut. Ins. Co. v. Schmitz, 647 N.W.2d 223, 227 (Wis.
2002) (quoting Dowhower v. W. Bend Mut. Ins. Co., 613
N.W.2d 552, 562 (Wis. 2000)).
In Dowhower, the Wisconsin Supreme Court concluded
that Wis. Stat. § 632.32(5)(i) does not violate substantive
due process under the state or federal constitutions. Id. at
565. It also held that the type of reducing clauses autho-
rized by the statute are neither ambiguous nor against
public policy. Id. at 562. Two years later, in Schmitz, the
Wisconsin Supreme Court explained that although a
reducing clause may itself be clear, courts must still
consider whether it is unambiguous in the context of the
entire policy. 647 N.W.2d at 233. In that case, the court
invalidated an otherwise unambiguous reducing clause that
did not, when viewed in the context of the entire policy,
clearly set forth that the insured was purchasing a fixed
Nos. 03-3702 & 03-3835 7
level of UIM recovery arrived at by combining payments
from all sources. Id. at 238. In reaching this decision, the
court stated that the reducing clause “must be crystal clear
in the context of the whole policy.” Id. at 233.
Focusing on the “crystal clarity” language, a number of
appellate courts post-Schmitz invalidated reducing clauses
after finding that they were contextually ambiguous. See
Gohde v. MSI Ins. Co., 661 N.W.2d 470, 471 (Wis. Ct. App.
2003); Dowhower v. Marquez, 659 N.W.2d 57, 59 (Wis. Ct.
App. 2003); Hanson v. Prudential Prop. & Cas. Ins. Co., 653
N.W.2d 915, 916 (Wis. Ct. App. 2002). However, this trend
was short-lived—the Wisconsin Supreme Court put the
breaks on expansive interpretations of the ambiguity
standard in the case Folkman v. Quamme, 665 N.W.2d 857,
866-70 (Wis. 2003). Folkman itself did not involve a UIM
reducing clause, but the opinion provided an extensive
discussion of such clauses. The Folkman court observed
that the “crystal clear” language it used in Schmitz had
produced the “unintended effect” of “alter[ing] the analytical
focus” in a series of court of appeals decisions. Id. at 868-69.
The court went on to emphasize that perfection in
draftsmanship was not the standard by which policies
should be measured. Id. at 869. Rather, the court explained
that “[t]o prevent contextual ambiguity, a policy should
avoid inconsistent provisions, provisions that build up false
expectations, and provisions that produce reasonable
alternative meanings.” Id. The court admonished that
“[f]erreting through a policy to dig up ambiguity should not
be judicially rewarded because this sort of ambiguity is
insufficient. Rather, inconsistencies in the context of a
policy must be material to the issue in dispute and be of
such a nature that a reasonable insured would find an
alternative meaning.” Id.After Folkman was released, the Wisconsin Supreme
Court summarily vacated and remanded a series of appel-
late court decisions for further consideration in light of
8 Nos. 03-3702 & 03-3835
Folkman. See Gohde v. MSI Ins. Co., 668 N.W.2d 556 (Wis.
2003); Dowhower v. Marquez, 668 N.W.2d 735 (Wis. 2003);
Van Erden v. Sobczak, 668 N.W.2d 735 (Wis. 2003). Relying
on the directives from Folkman, courts reviewing two of
these three vacated cases changed their prior positions and
found the reducing clauses at issue to be contextually
unambiguous. See Gohde v. MSI Ins. Co., No. 01-2121, 2004
Wisc. App. LEXIS 252, at *11 (Wis. Ct. App. Mar. 23, 2004)
(policy not susceptible to more than one reasonable inter-
pretation and language not contextually ambiguous); Van
Erden v. Sobczak, No. 02-1595, 2004 Wisc. App. LEXIS 40,
at **16-17 (Wis. Ct. App. Feb. 17, 2004) (UIM coverge
reducing clause clear and unambiguous). But see Dowhower
v. Marquez, 674 N.W.2d 906, 908 (Wis. Ct. App. 2003) (UIM
provisions contextually ambiguous). An additional post-
Folkman appellate court decision, Commercial Union
Midwest Ins. Co. v. Vorbeck, 674 N.W.2d 665, 676 (Wis. Ct.
App. 2003), also determined that the UIM reducing clause
at issue was unambiguous.
Accordingly, in Folkman, the Wisconsin Supreme Court
clarified that “crystal clear” is not the standard for review-
ing UIM reducing clauses in insurance contracts, and
following this clarification, the appellate courts have been
more reluctant to invalidate such clauses. While Schmitz
may have caused a momentary rush at the intermediate
level towards finding contextual ambiguity, Folkman has
clearly turned back this tide. The defendants submit that
the law on this issue is in a state of flux in Wisconsin and
request that we certify the issue of whether Allstate’s UIM
reducing clause is enforceable to the Wisconsin Supreme
Court. However, we conclude that the rules of decision in
this case have been clearly set out by the Wisconsin Su-
preme Court in Schmitz and Folkman and nothing would be
gained through certification.
Against this backdrop, we now turn to the Allstate policy.
The declarations page in the policy specifically lists
Nos. 03-3702 & 03-3835 9
“Underinsured Motorists Insurance for Bodily Injury” and
the monetary limits for such coverage. The defendants
argue that ambiguity is created because there is no indica-
tion on the declarations page that the UIM maximum
coverage may be subject to further limitations due to the
reducing clause appearing later in the policy. However,
Wisconsin courts have expressly, and wisely, rejected this
argument. See, e.g., Sukala v. Heritage Mut. Ins. Co., 622
N.W.2d 457, 461 (Wis. Ct. App. 2000) (“A declarations page
is intended to provide a summary of coverage and cannot
provide a complete picture of coverage under a policy.”). The
declarations page in the Allstate policy lists many coverages
(e.g., bodily injury, property damage) without describing all
applicable coverage benefits and restrictions set forth in the
policy jacket and endorsements. A detailed description on
the declarations page of all of the policy’s coverage benefits
and restrictions would arguably only create confusion.
After the declarations page, UIM coverage is not men-
tioned again for nearly forty pages, at which point the UIM
endorsement is found within AU 1440-3. The defendants
argue that ambiguity arises from the omission of references
to UIM coverage on various pages throughout the policy
appearing before the UIM endorsement. We disagree.
Insurers routinely add new coverages to their insureds’
policies by way of endorsement. Wisconsin courts have
found that the fact that UIM provisions appear in an
endorsement instead of the policy jacket does not create
ambiguity. See, e.g., Vorbeck, 674 N.W.2d at 673-74 (finding
UIM reducing clause added to policy by endorsement
unambiguous). Even though it appears toward the end of
the policy, a reasonable insured would have no problem
locating the UIM endorsement. Moreover, the fact that all
provisions relating to UIM coverage, including the reducing
clause, are set forth in the separate, standalone endorse-
ment arguably makes the coverage easier for insureds to
locate and understand than if the UIM provisions were
spread throughout various sections of the policy.
10 Nos. 03-3702 & 03-3835
Although it is undisputed that the reducing clause itself
is unambiguous, defendants argue that other provisions
included in the UIM endorsement as well as the endorse-
ment’s structure create confusion and ambiguity. Again, we
disagree. The Limits of Liability subsection of the UIM
endorsement explains that the coverage limit shown on the
declarations page ($300,000 per accident for Keca, $100,000
per accident for Bontempo) is the “maximum that we will
pay for damages arising out of bodily injury . . . .” The
reducing clause is located directly below the “Limits of
Liability” subsection. Thereafter, the “If There Is Other
Insurance” subsection appears and states in part: “If more
than one policy applies on a primary basis to an accident
involving your insured auto, we will bear our proportionate
share with other collectible underinsured motorists insur-
ance . . . . If the insured person was in, on, getting into or
out of a vehicle you do not own which is insured for this
coverage under another policy, we will pay up to your policy
limits only after all other collectible insurance has been
exhausted.”
A reasonable insured reading these provisions would
understand that the insured purchased a fixed level of UIM
recovery which will be arrived at by combining payments
made from all sources. See Schmitz, 647 N.W.2d at 231. It
would be clear to the insured that the UIM coverage limits
are subject to a reduction, thereby putting the insured on
notice that the full policy limits may not be payed out from
the insurer. The policy is reasonably orderly and logical.
None of the provisions are inconsistent. The policy does not
set up roadblocks that would confuse reasonable insureds
as they attempt to navigate their way through the policy.
We are unpersuaded by the fragmented comparisons that
the defendants draw between the Allstate policy and the
policies determined to be ambiguous in Schmitz, supra, and
Hanson v. Prudential Prop. & Cas. Ins. Co., 653 N.W.2d 915(Wis. Ct. App. 2002) (a case the supreme court criticized in
Nos. 03-3702 & 03-3835 11
Folkman). The defendants present us with a laundry list of
alleged infirmities found within the Allstate policy, but this
sort of “[f]erreting through a policy to dig up ambiguity”
was rejected in Folkman. 665 N.W.2d at 869. Simply put,
Allstate’s policy does not create a maze for its insured that
is organizationally complex and plainly contradictory, as
was the case in Schmitz.
B. Application of Reducing Clause
The next question we consider is whether Allstate is
allowed to reduce the UIM limits of the Keca policy by the
$50,000 in UIM limits it tendered under the Bontempo
policy. Again, the reducing clause in the Keca and
Bontempo policies states that UIM coverage shall be
reduced by:
1. all amounts paid by or on behalf of any person or
organization that may be legally responsible for the
bodily injury for which they payment is made, includ-
ing, but not limited to, any amounts paid under the
bodily injury liability coverage of this or any other
insurance policy.
(emphasis added).
Finding that Allstate may not offset benefits paid under
the Bontempo policy from payments it owes to Keca, the
district court accepted the reasoning of a Wisconsin appel-
late court decision that addressed a similar question. See
Janssen v. State Farm Mut. Auto. Ins. Co., 643 N.W.2d 857(Wis. Ct. App. 2002). Janssen held that language in a
reducing clause similar to the one at issue in this case did
not permit the insurer to reduce its liability for uninsured
motorist (“UM”) coverage. Allstate argues that we are not
bound by Janssen, since it is a lower state court decision,
and the Wisconsin Supreme Court has not yet ruled on the
issue. However, in situations where a state supreme court
12 Nos. 03-3702 & 03-3835
has not reached an issue, the rulings of the intermediate
court control, unless there is a persuasive indication that
the highest court would decide the issue differently. See
Lexington Ins. Co. v. Rugg & Knopp, Inc., 165 F.3d 1087,
1090 (7th Cir. 1999). See also Liberty Mut. Ins. Co. v.
Triangle Indus., Inc., 957 F.2d 1153, 1156 (4th Cir. 1992)
(noting that in circumstances where a state’s highest court
has not spoken on an issue decisions from “the state’s
intermediate appellate court decisions ‘constitute the next
best indica of what state law is,’ although such decisions
‘may be disregarded if the federal court is convinced by
other persuasive data that the highest court of the state
would decide otherwise.’ ”) (quoting 19 Charles A. Wright,
Arthur R. Miller & Edward Cooper, Federal Practice &
Procedure § 4507, at 94-95 (1982)). In this case, we are not
persuaded that the Wisconsin Supreme Court would take a
position different from the one set forth in Janssen.
The court in Janssen supported its decision with prece-
dent set by the Wisconsin Supreme Court in Employers
Health Ins. v. General Cas. Co., 409 N.W.2d 172, 177 (Wis.
1991). Employer’s Health held that the plaintiff’s
subrogation clause that referred to a “responsible third
party,” clearly meant “a party responsible for the insured’s
injury and not to an insurer providing uninsured motorist
coverage to the insured.” Id. Adopting this reasoning, the
Janssen court concluded that the phrase “responsible third
party” was similar to the term “legally responsible.” 643
N.W.2d at 863. After drawing this comparison, the Janssen
court held that the term “legally responsible” did not
encompass “contractually responsible” (i.e., UM/UIM
carriers) parties. Id. Therefore, the UM carrier was not
entitled to reduce benefits by payments from other UM/UIM
policies. Id.In the absence of authority from Wisconsin’s highest court
or a compelling indication that it would hold to the con-
trary, there is no reason for us to deviate from this reasoned
Nos. 03-3702 & 03-3835 13
position. Accordingly, the district court correctly required
Allstate to pay an additional $50,000 in UIM benefits under
the Keca policy.
III. Conclusion
For the reasons stated above, we AFFIRM the judgment on
the district court.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—5-20-04