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“Contextual Ambiguity” Argument Fails; Retreat from “Crystal Clarity” Standard

Folkman v. Quamme
July 18, 2003

Barely a year after the Wisconsin Supreme Court first suggested that insurance policies should be drafted so that their meaning would be "crystal clear" to policyholders, the Court issued a decision that expressly rejects "crystal clarity" as the standard for assessing whether an insurance policy is ambiguous.

The Court issued its decision in Folkman v. Quamme, 2003 WI 116, on July 16, 2003. In a unanimous decision, the Court held 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.

Victory for Insurer
This case involves a dispute over the limits of an automobile insurance policy issued by Society Insurance ("Society"). The personal auto policy covered the named insured, her husband, and two of her three sons. One son was driving at the time 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 brought suit against Society and opposed Society’s motion to tender the $50,000 per accident limits, arguing that Society actually owed $125,000 because three insureds under the policy were liable for the accident. In essence, the Folkmans interpreted the policy to apply the split limit of liability ($25,000 per person and $50,000 per occurrence) separately to each insured. The Brown County circuit court judge dismissed Society from the case after it determined that 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. After an extensive review of the Society policy’s language, the Supreme Court reversed the Court of Appeals, reinstating the circuit court judge’s dismissal of Society from the case.

"Contextual Ambiguity" Doctrine Affirmed
The Folkmans’ argument for ambiguity rested on a single sentence that appeared in the split liability endorsement’s property damage section, and appeared nowhere else in the policy. The insureds attempted to persuade the Court that the presence of an ambiguous sentence in the paragraph concerning property damage liability means, by negative implication, that its absence in the bodily injury liability section creates ambiguity with respect to the breadth of Society’s bodily injury liability. They contended that the paragraph is ambiguous because it does not clarify whether the $50,000 limit applies to each insured independently or all together.

The Court rejected Society’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." Id. ¶ 35, 44. The Court considered it particularly damaging to the Folkmans’ case that "an unreasonable negative implication must compete against clear text. The alleged ambiguity is not founded on contradictory language." Id. ¶ 58.

The Folkman decision further articulates the test for lower courts to use in determining whether an insurance provision is ambiguous in the context of an entire policy:

The test for determining whether contextual ambiguity exists is the same as the test for ambiguity in any disputed term of a policy. That is, are words or phrases of an insurance contract, when read in the context of the policy’s other language, reasonably or fairly susceptible to more than one construction? The standard for determining a reasonable and fair construction is measured by the objective understanding of an ordinary insured…. The issue then is, what degree of contextual ambiguity is sufficient to engender an objectively reasonably alternative meaning and, thereby, disrupt an insurer’s otherwise clear policy language?
Id. ¶¶ 29-30. On the facts of this case, the Court held that Society’s policy was not ambiguous.

"Crystal Clarity" Explained and Limited
In the course of reciting the standards for insurance policy interpretation, the Court took the opportunity to clarify its year-old Badger Mutual Ins. Co. v. Schmitz decision, which we discussed in an Insurance Alert dated July 11, 2002. See 2002 WI 98, 255 Wis. 2d 61, 647 N.W.2d 223. In that case, the Court 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 in isolation and even though it was written in conformity with Wis. Stat. § 632.32(5)(i). Schmitz, ¶ 61, 72, 75. Schmitz placed the additional requirement on insurance policy drafters that "reducing clauses must be crystal clear in the context of the whole policy." Id. ¶ 46 (emphasis added).

In Folkman, although the Court affirms the principle of contextual ambiguity, it also explains the limitations of this doctrine. The Court maintains that "any contextual ambiguity in an insurance policy must be genuine and apparent on the face of the policy, if it is to upset the intentions of the insurer embodied in otherwise clear language." Folkman, ¶ 29. Significantly, the Court also limited the holding in Schmitz:

Schmitz and its predecessors do not demand perfection in policy draftsmanship. These decisions advise insurers to draft policies in a clear manner if they upset the reasonable expectations of insured. To prevent contextual ambiguity, a policy should avoid inconsistent provisions, provisions that build up false expectations, and provisions that produce reasonable alternative meanings.
Id. ¶ 31. Furthermore, the Court held that "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. ¶ 32. The decision also refers to crystal clarity as "[a]spirational goals and admonitions on how to avoid ambiguity" rather than "minimum legal standards," and includes a footnote listing the appellate court decisions after Schmitz that (presumably) misapplied the Court’s comments on crystal clarity. Id. ¶ 30

The Supreme Court also praised the Society policy, in contrast to the policy in Schmitz, for its "informative declarations page" and "good index." Id. ¶ 56. Insurers may be gratified that the Court acknowledges, "[c]ourts cannot ask for an informative declarations page and then fault the insurer for failing to address every nuance and speculative interpretation of coverage that an insured might raise." Id.

Other Challenges
Having concluded that the text was not ambiguous, the Court went on to examine and reject the Folkmans’ other challenges to Society’s policy under Wis. Stat. § 632.32(3)(b), (the Omnibus Statute), § 632.32(5)(f) (the anti-stacking law), § 631.43(1) (intra-policy stacking) and an allegation that the coverage was illusory with respect to the driver’s parents.

The Impact on Insurance Companies Doing Business in Wisconsin
Although Folkman is a very favorable decision for the insurance industry, its lessons should not be obscured by the positive result. "Contextual ambiguity" may be here to stay, and insurers should prepare for this doctrine to apply to cases outside of the auto policy context. 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. In addition, insurers should consider scheduling periodic reviews of all policy forms, not only for legal compliance, but also for organization and ease of consumer understanding. To quote the Court’s advice in Folkman, "The insurer’s best defense against an unwarranted but appealing claim is an unambiguous policy." Id. ¶ 18.

The court’s slip opinion can be accessed on the Wisconsin Supreme Court’s web site at http://www.wicourts.gov/html/sc/02/02-0261.htm.


1 Justice Crooks did not participate in the decision.

2 The decisions listed by the Supreme Court are: Gohde v. MSI Ins. Co., 2003 WI App 69, ___ Wis. 2d ___, 661 N.W.2d 470; Dowhower ex rel. Rosenberg v. Marquez, 2003 WI App 23, 260 Wis. 2d 192, 659 N.W.2d 57; and Hanson v. Prudential Prop. & Cas. Ins. Co., 2002 WI App 275, 258 Wis. 2d 709, 653 N.W.2d 915. Id. ¶ 30 n. 14.

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