Wis. Top Court Retreats on Insurance Policy ‘Crystal Clarity’

The Wisconsin Supreme Court recently issued a decision
rejecting “crystal clarity” as the standard for assessing whether an insurance policy is ambiguous to policyholders.

“The most recent ruling comes barely a year after the Wisconsin Supreme Court, in another case, first suggested that insurance policies should be drafted so their meaning would be ‘crystal clear’ to policyholders to avoid ‘contextual ambiguity,'” said Donald S. Cleasby, assistant vice president and assistant general counsel for the National Association of Independent Insurers (NAII), an industry trade group.

In a unanimous decision in Folkman v. Quamme, the high court determined that an automobile insurance policy unambiguously limited its bodily injury liability protection to $50,000 for a single accident in which only one insured was actively negligent. Specifically, the Court found that the “split liability limits” endorsement in the policy was not ambiguous when read in conjunction with other parts of the policy, and that a single limit of liability applied regardless of the number of insureds.

The original case involved a dispute over the limits of an automobile
insurance policy covering the named policyholder, her husband, and two of her three sons. One son was driving when the Folkmans’ vehicle hit Quamme’s vehicle. Both drivers were at fault for the accident. Because the Folkmans sponsored their son when he obtained his driver’s license, his negligence was imputed to both of his parents.

The Folkmans sued their insurer, arguing that the company owed them $125,000 because three insureds under the policy were liable for the accident. The Brown County circuit court dismissed the insurer from the case after determining the policy’s bodily injury limit was $50,000 per accident, regardless of the number of insureds. The Court of Appeals reversed, holding that the policy’s “split liability limits” endorsement for bodily injury was ambiguous when read in the context of other portions of the policy.

The Supreme Court reversed this decision, reinstating the circuit court judge’s dismissal of the insurer from the case and rejecting the insurer’s arguments that “contextual ambiguity” is not an appropriate doctrine for interpreting insurance policies. When the Court applied the contextual ambiguity doctrine, however, it held that the Folkmans’ interpretation was unreasonable from the standpoint of an ordinary insured and “eviscerates any limit of liability.”

The Court also clarified its 2002 decision in Badger Mutual Ins. Co. v.
Schmitz, in which it held that an underinsured motorist (UIM) provision became ambiguous when read in the context of the entire policy, even though the relevant clause was unambiguous when read alone. The ruling placed the additional requirement on insurers to make reducing clauses “crystal clear in the context of the whole policy.”

“Although Folkman is a very favorable decision, insurers must still be aware that the ‘contextual ambiguity’ concept is here to stay and could be applied to cases outside of the auto policy context,” Cleasby noted. Insurers may be well advised to review not only policy language in light of the Court’s recent guidance, but also the entire policy for organization and placement of policy provisions.”

Topics Carriers Wisconsin