In Lovelien et al. v. Austin Mutual Insurance Company et al., No. 2016AP1679 (Wis. Ct. App. Dec. 27, 2017), the Wisconsin Court of Appeals addressed an issue that often arises when multiple claimants allege damages against an insured and the total damages claims exceed the coverage limits of the relevant insurance policy: does Wisconsin law impose any restrictions or other obligations on how an insurer elects to distribute the available funds among the claimants through pre-verdict settlements?
In Lovelien, Austin Mutual had issued a $500,000 liability policy to an insured who was facing claims from multiple parties in excess of that amount arising from a multi-fatality automobile accident. After failing to reach a global settlement, Austin Mutual settled with all but two of the claimants for $245,000. Austin Mutual then deposited the remaining $255,000 with the court clerk and the court distributed those limited funds equitably between the remaining two claimants. Lovelien, slip op. at ¶¶ 5-6. The two remaining claimants appealed, arguing that Austin Mutual’s settlement and release with the other claimants violated Wisconsin’s “direct action” statute. Id. ¶ 12.
Wisconsin’s direct action statute states the following:
Any bond or policy of insurance covering liability to others for negligence makes the insurer liable, up to the amounts stated in the bond or policy, to the persons entitled to recover against the insured for the death of any person or for injury to persons or property, irrespective of whether the liability is presently established or is contingent and to become fixed or certain by final judgment against the insured.
Wis. Stat. § 632.24.
According to the appellants, Austin Mutual’s partial settlement and release violated the clear intent of this statute by making payments to certain claimants without a determination of each claimant’s equitable pro rata share of the $500,000 policy limit based on the amount of damages each claimant suffered. Lovelien, slip. op. at ¶ 12.
Writing for a unanimous Court of Appeals, Judge Seidl rejected the appellants’ argument. Noting that courts are bound by unambiguous statutory language, Judge Seidl explained that the direct action statute merely creates an avenue for a claimant to recover directly from an insurer without having to first establish an insured’s liability. While the statute does limit an insurer’s exposure to the relevant policy limit, it otherwise is silent as to how an insurer must distribute those funds among the claimants. To accept the appellants’ argument, the Court held, would be tantamount to impermissibly inserting additional requirements into the statute. Id. ¶¶ 14-19.
The Court further held that the appellants’ position was unsupported by the Wisconsin case law they cited, as those cases all addressed factually distinguishable post-verdict pro rata distributions where the respective liability of the insured to each claimant had already been established. Placing the same pro rata burden on an insurer prior to trial would curtail both the insurers’ and claimants’ rights to settle, reasoned the Court, as it arguably would require every multi-claimant dispute to proceed to trial. Moreover, to the extent that allowing an insurer to enter into potentially inequitable (non pro rata) partial settlements prior to trial creates valid public policy concerns, the Court concluded that it is up to the legislature to determine what public policy best serves the people of Wisconsin. Id. ¶¶ 20-22.
Having been recommended by the Court for publication as binding Wisconsin precedent, the Lovelien decision raises a number of questions and concerns for those injured by Wisconsin insureds. Under circumstances where an insured’s policy limits are well below the total amount of damages incurred by multiple injured parties, is an insurer free to simply pick and choose which party or parties get rewarded with the available funds? May an insurer pay the full policy amount to one claimant and leave the other victims wholly uncompensated? May an insurer use the threat of paying the available policy limits to other claimants as a sword during settlement negotiations to create leverage? Under the rationale applied by the Court here, the answer to all of these questions now appears to be “yes” in Wisconsin.
In the wake of Lovelien, therefore, parties involved in multi-victim accidents in Wisconsin should attempt to identify as early as possible whether any potentially responsible party may be underinsured and, if discovered, alter their settlement negotiation strategy accordingly. Under such circumstances, failing to engage in prompt settlement discussions with Wisconsin insurer(s) could result in the policy limits being distributed to other claimants, leaving a party to have to pursue an insured directly to seek redress.