Badger Mutual Insurance Company v. Dennis Schmitz

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2002 WI 98 SUPREME COURT CASE NO.: OF WISCONSIN 00-2682 COMPLETE TITLE: Badger Mutual Insurance Company, Plaintiff, v. Dennis Schmitz, Defendant-Respondent-Petitioner, The American Hardware Insurance Group, Defendant-Appellant, Valerie Schmitz and SCI Management Corp., Defendants. REVIEW OF A DECISION OF THE COURT OF APPEALS Reported at: 247 Wis. 2d 497, 633 N.W.2d 278 (Ct. App. 2001-Unpublished) OPINION FILED: SUBMITTED ON BRIEFS: ORAL ARGUMENT: March 6, 2002 SOURCE OF APPEAL: COURT: COUNTY: JUDGE: Circuit Outagamie James T. Bayorgeon JUSTICES: CONCURRED: DISSENTED: July 10, 2002 CROOKS, J., dissents (opinion filed). WILCOX and SYKES, JJ., join dissent. NOT PARTICIPATING: ATTORNEYS: For the defendant-respondent-petitioner there were briefs by Russell T. Golla, and Anderson, Shannon, O'Brien, Rice & Bertz, Stevens Point, and oral argument by Russell T. Golla. For the defendant-appellant there was a brief by Keith W. Kostecke and Menn, Teetaert & Beisenstein, Ltd., Appleton, and oral argument by Keith W. Kostecke. An amicus curiae Laufenberg & Hoefle, and Domnitz, Mawicke the Wisconsin Academy brief was filed by Lynn R. Laufenberg and S.C., Milwaukee, and Robert L. Jaskulski & Goisman, S.C., Milwaukee, on behalf of of Trial Lawyers. 2 2002 WI 98 NOTICE This opinion is subject to further editing and modification. The final version will appear in the bound volume of the official reports. No. 00-2682 (L.C. No. 99 CV 293) STATE OF WISCONSIN : IN SUPREME COURT Badger Mutual Insurance Company, Plaintiff, v. FILED Dennis Schmitz, JUL 10, 2002 Defendant-Respondent-Petitioner, The American Hardware Insurance Group, Cornelia G. Clark Clerk of Supreme Court Defendant-Appellant, Valerie Schmitz and SCI Management Corp., Defendants. REVIEW of a decision of the Court of Appeals. ¶1 DAVID T. PROSSER, J. This is a Reversed. review of an unpublished decision of the court of appeals1 that reversed a decision of the circuit court for Outagamie County, James T. Bayorgeon, Judge. 1 There are two issues before the court. Badger Mut. Ins. Co. v. (Wis. Ct. App. July 31, 2001). Schmitz, unpublished slip op. No. 00-2682 ¶2 First, does this court's decision in Dowhower v. West Bend Mutual Insurance Co., 2000 WI 73, 236 Wis. 2d 113, 613 N.W.2d 557, preclude a court from finding that an unambiguous clause reducing the underinsured motorists (UIM) liability of an insurer, is ambiguous in the context of a specific policy? ¶3 Second, if the answer to the first question is "no," is the reducing clause in the policy before the court ambiguous in the context of the entire policy, thereby rendering the reducing clause illusory and unenforceable? ¶4 This case involves an automobile liability insurance policy that provided UIM coverage and had a reducing clause that conforms to Wis. Stat. § 632.32(5)(i) (1999-2000).2 The statute reads in part: (i) A policy may provide that the limits under the policy for uninsured or underinsured motorist coverage for bodily injury or death resulting from any one accident shall be reduced by any of the following that apply: (1) Amounts paid by or on behalf of any person or organization that may be legally responsible for the bodily injury or death for which the payment is made. Wis. Stat. § 632.32(5)(i). ¶5 The reducing clause in the policy in question provided that the limit of UIM liability would be reduced by payments made to the insured by or on behalf of parties legally responsible for damages caused by an underinsured motorist. In this case, after the insured suffered injuries in an accident 2 All subsequent references to the Wisconsin statutes are to the 1999-2000 volumes unless otherwise indicated. 2 No. 00-2682 involving an underinsured motorist, and after the insured received payments from the underinsured motorist, the insurer applied the reducing clause in the insured's policy to reduce its liability to its insured by the amount of the payments received from the underinsured motorist. ¶6 The insured moved for a judgment declaring the UIM provisions invalid. The circuit court granted the declaratory judgment, determining that the insurance policy was illusory and unenforceable. The court of appeals reversed, holding that the policy was unambiguous and could not be deemed illusory. ¶7 After a thorough review of the insurance policy in question, we determine that while the reducing clause complies with the provision in Wis. Stat. § 632.32(5)(i), its limitation on UIM coverage policy. is ambiguous in the context of the entire We believe that a reasonable insured would not realize or expect that the insured's recovery under the UIM provision of the policy would be reduced by the payments received from the underinsured motorist. Thus, in the context of the entire policy, the reducing clause is ambiguous and renders the UIM coverage illusory. We further conclude that the inquiry undertaken by the circuit court was wholly consistent with the inquiry contemplated in the Dowhower decision. Accordingly, we reverse the decision of the court of appeals. I. FACTS ¶8 22, The facts of this case are undisputed. 1997, accident. Dennis Schmitz was injured in a On November single vehicle Schmitz was riding as a guest passenger in a 1997 3 No. 00-2682 Chevrolet pick-up truck traveling southbound on U.S. Highway 441 in Appleton. over. The vehicle slid on a patch of ice and rolled Schmitz sustained injuries in the accident and was rendered a quadriplegic. ¶9 by The driver of the truck, Valerie Johnson, was insured Badger automobile $100,000 Mutual Insurance insurance per policy person. Company (Badger contained Badger Mutual a Mutual).3 liability commenced Her limit this of action seeking a declaration of its rights, duties and obligations with respect to the liability insurance proceeds it wished to pay in settlement of Schmitz's personal injury claim. ¶10 issued Schmitz by himself American had an Merchants automobile insurance Company4 Casualty policy (American Merchants) which included UIM coverage with a liability limit of $250,000 per person. Schmitz filed a cross-claim against American Merchants, asserting that the vehicle in which he was a passenger was an underinsured motor vehicle as defined in the American Merchants policy and that he was "entitled to the 3 The insurance policy was issued to Valerie Johnson. By the time this action was commenced, Valerie Johnson had become Valerie Schmitz. 4 In the complaint filed by Badger Mutual, the American Hardware Insurance Group (AHIG) is a named defendant. American Merchants Casualty Company (American Merchants), a member of the AHIG, acknowledges that AHIG was "incorrectly named" and that American Merchants is the correct name of the insurer named as defendant. Both parties refer to the insurer as American Merchants in their briefs and we will refer to the insurer as American Merchants in this opinion. 4 No. 00-2682 entirety of the $250,000 per-person limit of liability set forth in that policy." ¶11 In its answer, American Merchants acknowledged that the vehicle in question was an underinsured motor vehicle under its policy and "admit[ted] underinsured motorists policy. entire that Schmitz coverage" under will the be entitled American to Merchants It denied, however, that Schmitz was entitled to the $250,000 per-person limit of liability. It "affirmatively allege[d] that the applicable limit of liability must be reduced by the sums paid Schmitz by Badger Mutual Insurance Company." ¶12 American Merchants' claim of reduction in its $250,000 liability relied on a reducing clause in the policy, which reads in part: "The limit of liability shall be reduced" by all sums "paid because of the 'bodily injury' by or on behalf of persons or organizations who may be legally responsible." American Merchants applied this clause to reduce the $250,000 UIM limit of liability by the $100,000 that Schmitz received from Badger Mutual. Thus, American Merchants paid Schmitz only $150,000 on the policy. As a result, Schmitz filed a motion for summary declaratory judgment against American Merchants, seeking recovery of the full $250,000 limit of liability of his UIM coverage. ¶13 After extensive briefing by the parties, Judge Bayorgeon acknowledged that the reducing clause in the American Merchants policy conformed Wis. Stat. § 632.32(5)(i). to He the determined, 5 requirements however, that of the No. 00-2682 reducing clause failed to clearly set forth that UIM payments would be reduced by sums paid by others, "so that there is no mistake, confusion or illusion with respect to what is being provided for the premium being paid." Judge Bayorgeon concluded that, "The contract is illusory and therefore unenforceable." Consequently, the circuit court granted Schmitz's motion for summary declaratory judgment. ¶14 On appeal, the court of appeals unanimous, unpublished, per curiam opinion. reversed in a Badger Mut. Ins. Co. v. Schmitz, unpublished slip op. (Wis. Ct. App. July 31, 2001). The court noted that, "A policy that contains an unambiguous reducing provision under [Wis. Stat. § 632.32(5)(i)] is valid and enforceable, and may no longer be deemed illusory." Id. at ¶4 (citing Sukala v. Heritage Mut. Ins. Co., 2000 WI App 266, ¶¶15-20, 240 Wis. 2d 65, 622 N.W.2d 457). It determined that the American Merchants policy "sets forth an unambiguous, enforceable reducing clause, liability in this case." limiting Id. at ¶1. [American Merchants'] Accordingly, the court concluded that the policy was not illusory or unenforceable and it reversed the order of the circuit court. ¶15 Schmitz appealed and we granted his petition for review. II. ANALYSIS A. Overview of UIM Coverage and Reducing Clauses ¶16 We have described UIM coverage as a "'legal iceberg,' a seemingly straightforward area of the law, which in fact can prove to be nettlesome to analyze." 6 Dowhower, 2000 WI 73, ¶22. No. 00-2682 Over the years, there has been much uncertainty surrounding the purpose and function of UIM coverage. The confusion has produced a torrent of litigation, much of it centered on whether reducing clauses render UIM coverage illusory. ¶17 There are two conflicting theories purpose and function of UIM coverage. regarding the Under the first theory, the purpose of UIM coverage is to compensate an insured accident victim when the insured's damages exceed the recovery from the at-fault driver (or other responsible party). Greatway Ins. Co., 2001 WI 93, ¶32, 245 See Taylor v. Wis. 2d 134, 628 N.W.2d 916 (Bradley, J., dissenting) (citing Wood v. American Family Mut. Ins. Co., 148 Wis. 2d 639, 655, 436 N.W.2d 594 (1989), overruled on other grounds by Matthiesen v. Continental Cas. Co., 193 Wis. 2d 192, 532 N.W.2d 729 (1995); Kaun v. Industrial Fire & Cas., 148 Wis. 2d 662, 671, 436 N.W.2d 321 (1989)). separate According to this theory, UIM coverage operates as a fund, uncompensated available damages. for 3 the Irwin payment E. of the Schermer, Liability Insurance § 57.01, at 57-2 (3d ed. 1995). insured's Automobile The insured purchases coverage for his or her damages in a set dollar amount "above and beyond the liability limits of the at-fault driver." Taylor, 2001 WI 93, ¶35 (Bradley, J., dissenting). ¶18 motorist The second theory is that "the purpose of underinsured coverage is solely to put the insured in the same position as he [or she] would have occupied had the tortfeasor's liability limits limits purchased been by the the same as insured." 7 the underinsured Dowhower, 2000 motorist WI, ¶18 No. 00-2682 (quoting 3 Irwin E. Schermer, Automobile Liability Insurance § 57.01, at 57-2 (3d ed. 1995)). Under this theory, UIM coverage operates as a predetermined, fixed level of insurance coverage including payment from both the at-fault driver's insurance and the insured's own UIM coverage. liability See Kaun, 148 Wis. 2d at 674-75 (Steinmetz, J., dissenting). ¶19 The impact of the two theories is often seen in the application insured of reducing suffered clauses. damages totaling To illustrate, $200,000. suppose Suppose an further that the at-fault driver had liability insurance with a $100,000 limit and the insured had UIM coverage with a $150,000 limit. ¶20 Under the first theory of UIM coverage, a reducing clause operates 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. damages minus a $100,000 payment from the Hence, $200,000 in tortfeasor leaves $100,000 in uncompensated damages, or $100,000 liability for the insurer. ¶21 Under the second theory, a reducing clause reduces the amount of the insurer's liability by the amount recovered from the at-fault driver. Hence, $150,000 total liability minus a $100,000 payment from the tortfeasor leaves $50,000 liability for the insurer. ¶22 the The first theory fully compensates the insured, while second theory leaves the uncompensated damages. 8 insured with $50,000 in No. 00-2682 ¶23 If the insured had $300,000 in damages and the same policies were in place, the first theory would require the insurer to pay out all $150,000 in coverage, leaving the insured with $50,000 in uncompensated damages because the insured did not buy enough coverage. the insurer's The second theory would not increase liability: $150,000 total liability minus a $100,000 payment from the tortfeasor leaves $50,000 of liability for the insured. The insured would be left with $150,000 in uncompensated damages. ¶24 after Wisconsin case clauses to in insurer interpret light coverage. Not has predetermined, appellate of courts UIM the policies two fixed asked in to apply reducing and theories in virtually every UIM that level been contradictory coverage functions surprisingly, asserted have of insurance case UIM case, coverage of the as a including payment from both the at-fault driver's liability insurance and the insured's own UIM coverage, and the reducing clause reduces the limit of UIM liability. Correspondingly, in virtually every case, the insured has asserted that UIM coverage is intended as excess coverage available when an insured's damages exceed the recovery from the at-fault driver, and the reducing clause decreases the insured's covered damages. B. Reducing Clauses Prior to 1995 ¶25 This automobile court insurance motorist (UM) coverage. Co., 52 Wis. 2d 644, first examined policies in reducing the context clauses of in uninsured Leatherman v. American Family Mut. Ins. 190 N.W.2d 904 9 (1971). The court in No. 00-2682 Leatherman held that a reducing clause contained in UM coverage was valid and not against public policy. Id. at 651. The policy at issue in Leatherman predated the statutory mandate of UM coverage. ¶26 In 1971 the legislature required all automobile insurance policies issued in Wisconsin to contain UM coverage. § 1, ch. 28, Laws of 1971. coverage became mandatory, This court made clear, once UM that reducing clauses were illegal as applied to UM provisions. Ins. Co., 137 Wis. 2d 581, 594, 405 in policies Nicholson v. Home N.W.2d 327 (1987). The legislative objective in mandating UM coverage is to require that the insured receive the proceeds of the UM coverage free from any reductions. ¶27 Id. at 604. In the context of UIM coverage, this court interpreted reducing clauses as reducing the amount of the insured's total damages by the amount of payments received by the insured from the underinsured tortfeasor. 148 Wis. 2d at 654. in the insurer policies. 653. Kaun, 148 Wis. 2d at 665; Wood, To do otherwise, we concluded, would result never paying the policy limits of its UIM Kaun, 148 Wis. 2d at 669-70; Wood, 148 Wis. 2d at Shortly after these two decisions, however, the court of appeals gave a different interpretation to a reducing clause in a policy by distinguishing its language from the language in Kaun and Wood. Wis. 2d 542, 444 Smith N.W.2d 465 v. Atlantic (Ct. App. Mut. 1989), grounds, 155 Wis. 2d 808, 456 N.W.2d 597 (1990). 10 Ins. Co., aff'd on 151 other No. 00-2682 ¶28 In Smith, the court of appeals reasoned that the UIM policies in Kaun and Wood used the ambiguous phrase "amounts payable," but the reducing clause in Smith reduced the "limit of liability," not the "amounts different interpretation. payable," and thus required Smith, 151 Wis. 2d at 547-48. a The fact that the reducing clause for underinsured motorist coverage meant that the insurer would never pay the full UIM limits of its policy was never discussed in Smith. But the court of appeals used that concern as a basis to find reducing clauses void in subsequent cases. ¶29 In the first such case, the court held that UIM coverage under which no benefits would ever be paid was illusory and against public policy. Hoglund v. Secura Wis. 2d 265, 271, 500 N.W.2d 354 (Ct. App. 1993). Ins., 176 In Hoglund, the insured had $25,000 of UIM coverage, but statutes mandated that Wisconsin drivers must have at least $25,000 in liability coverage. Thus, the court found that the reducing clause was void because it rendered the coverage illusory: if the reducing clause were applied, $25,000 UIM policy. ¶30 Hoglund would never recover under her Id. at 270. After Hoglund, the court of appeals continued to find reducing clauses illusory. In Kuhn v. Allstate Insurance Co., 181 Wis. 2d 453, 510 N.W.2d 826 (Ct. App. 1993), aff'd on other grounds, 193 Wis. 2d 50, 532 N.W.2d 124 (1995), the court held that it was unreasonable for an insured with $50,000 of UIM coverage to expect never to qualify for the stated limits. The court concluded that "a representation that there is $50,000 in 11 No. 00-2682 UIM coverage that will never be paid is illusory." Id. at 465. Consequently, the court held that the reducing clause was void because it rendered the purported coverage illusory and Id. at 463.5 contrary to public policy. C. UIM Wisconsin Stat. § 632.32(5)(i) ¶31 In legislature 1995, clauses created that in a decrease response created July 15, 1995. these statute expressly UM UIM or recovered from other sources. which to decisions, permitting payments by the reducing the amounts It enacted 1995 Wis. Act 21, § 4, Wis. Stat. § 632.32(5)(i) (1995-96), effective Section 632.32(5)(i) states in relevant part that: (i) A policy may provide that the limits under the policy for uninsured or underinsured motorist coverage for bodily injury or death resulting from any one accident shall be reduced by any of the following that apply: 1. Amounts paid by or on behalf of any person or organization that may be legally responsible for the bodily injury or death for which the payment is made. Wis. Stat. § 632.32(5)(i). ¶32 The explicitly by purpose the behind drafters 1995 of Wis. 1995 S.B. Act 6, 21 the was stated bill that resulted in 1995 Wis. Act 21: 5 In 1995, this court in Matthieson v. Continental Casualty Co., 193 Wis. 2d 192, 532 N.W.2d 729 (1995), "applied the stacking statute [Wis. Stat. § 631.43(1) (1993-94)] to void all reducing clauses in UIM policies even if not ambiguous." Arnold P. Anderson, Wisconsin Insurance Law § 4.1 (4th ed. 1998). 12 No. 00-2682 This bill overturns a series of Wisconsin appellate court decisions which have held that a motor vehicle insurance policy may not prohibit stacking of uninsured or underinsured motorist coverage or any other coverage provided by the policy. . . . . . . . The bill also permits motor vehicle insurance policies to reduce the limits payable under the policy for uninsured or underinsured motorist coverage by payments received from other sources. Legislative Reference Bureau Drafting File for 1995 Wis. Act 21, Analysis by the Legislative Reference Bureau of 1995 S.B. 6. ¶33 In legislature 2000 WI Dowhower, in 73, creating ¶17. We we recognized the intent Wis. Stat. § 632.32(5)(i). stated unambiguous. . . . The statute that: plainly "The of the Dowhower, language . . . is allows a motor vehicle insurance contract to state that the maximum amount that the insurer will pay under the policy will be setoff by amounts paid by a tortfeasor." In other words, the legislature made clear that the second theory of UIM coverage, in which the insured is purchasing a fixed amount of coverage, is not invalid per se. ¶34 Even after the passage of Wis. Stat. § 632.32(5)(i), however, cases came to Wisconsin appellate courts on the issue of the validity and enforceability of reducing clauses. instance, in 1998 the court of appeals held in Sweeney For v. General Casualty Co., 220 Wis. 2d 183, 197, 582 N.W.2d 735 (Ct. App. 1998), coverage that illusory. a specific The reducing reducing clause clause at rendered issue in UIM Sweeney provided that "The limit of liability shall be reduced by all sums paid because of the 'bodily injury' by or on behalf of 13 No. 00-2682 persons or organizations who may be legally responsible." at 185. Id. No claim was made that the reducing clause was contrary to Wis. Stat. § 632.32(5)(i). Because the accident occurred in 1993, before the statute, the majority opinion did not address the new statute. The court instead reasoned that the holding in Kuhn that a UIM coverage limit of $50,000 that would never be paid rendered the coverage illusory applied because that decision had not been reversed or called into question by the supreme court. Id. at 197. Consequently, the court of appeals held that the reducing clause in the insurance policy rendered the $100,000 UIM coverage illusory. D. Id. Dowhower ¶35 Two years constitutionality ago, and Dowhower, 2000 WI 73. § 632.32(5)(i) fraudulent, is illusory this import of court addressed the Wis. Stat. § 632.32(5)(i). The plaintiffs in Dowhower argued that unconstitutional UIM coverage. because We it disagreed, authorizes concluding that the statute does not violate substantive due process under the state and federal constitutions. ¶36 Id. at ¶2. We also determined that the type of reducing clause authorized in § 632.32(5)(i) is neither ambiguous nor against public policy. Id. at ¶20. We noted that "[w]hile reducing clauses have in some instances rendered UIM coverage illusory, we have not held that reducing clauses are per se contrary to public policy." policy Id. at ¶22. contains a Wis. Stat. § 632.32(5)(i), We further stated that when a UIM reducing an clause insured 14 is conforming "purchasing to a No. 00-2682 predetermined level of coverage against injury sustained from an underinsured motorist." ¶37 Id. at ¶20. After discussing the holdings in several of the pre- § 632.32(5)(i) UIM cases outlined in this opinion, we concluded that: When we consider these cases in conjunction with Wis. Stat. § 632.32(5)(i), we conclude that an insurer may reduce payments made pursuant to a UIM policy by amounts received from other legally responsible persons or organizations, provided that the policy clearly sets forth that the insured is purchasing a fixed level of UIM recovery that will be arrived at by combining payments made from all sources. Id. at ¶33 (emphasis added). Significantly, we also recognized that "a reducing clause may be ambiguous within the context of the insurance contract." ¶38 Id. at ¶35 (emphasis added). Implicit in our determination that reducing clauses would be valid only if they "provided that the policy clearly sets forth that the insured is purchasing a fixed level of UIM recovery that will be arrived at by combining payments made from all sources" was a recognition that the reasonable insured might not understand, coverage. intuitively, the scope of his or her UIM We signaled in Dowhower that UIM insurers that reduce UIM payments by amounts paid from other sources, are required to make clear to purchasers of UIM coverage that they are purchasing coverage that will put them in the same position they would be in if the underinsured tortfeasor had liability limits equal to the amount of UIM coverage the insured purchased. Insureds will then understand that if they want to be assured of 15 No. 00-2682 having, say, $200,000 in total available coverage, they will have to purchase UIM coverage with a $200,000 limit. ¶39 In her concurring opinion, Justice Bradley emphasized the requirement that reducing clauses and automobile policies as a whole be written so as to clearly inform insureds of exactly what coverage their UIM provisions afford them: The legislature was aware of the concerns over deception voiced by Wisconsin courts. Although it authorized reducing clauses under Wis. Stat. § 632.32(5)(i)1, the legislature envisioned clear policies without a hint of illusion to protect consumers from fraudulent practices. It did not authorize deception in the implementation of the statute. Id. at ¶50 (Bradley, J., concurring). E. Post-Dowhower Cases ¶40 Since we issued our decision in Dowhower, the court of appeals has decided numerous cases involving UIM coverage and reducing clauses. In 2000, the court of appeals decided Sukala, 2000 a WI App 266, case in which plaintiffs challenged validity of the reducing clauses in two UIM provisions. the The court "conclude[d] that under § 632.32(5)(i) and Dowhower, UIM reducing clauses like those at issue considered to render coverage illusory." ¶41 court's here can no longer be Id. at ¶15. The Sukala court further stated: "We read the Dowhower statements to mean either that (1) unambiguous UIM reducing clauses can no longer be considered 'illusory' or (2) asking whether unambiguous UIM reducing clauses are illusory is no longer a valid inquiry." Id. at ¶19. 16 No. 00-2682 ¶42 In essence, we agree with this analysis. But then the court proceeded to an ambiguous and misleading conclusion: We conclude that under Dowhower and the declared public policy of the legislature in Wis. Stat. § 632.32(5)(i), UIM reducing clauses complying with § 632.32(5)(i) cannot render UIM coverage "illusory." Once we have concluded that the UIM provisions of a policy are unambiguous, as we have here, then our inquiry is at an end. Id. at ¶20. In the quoted language, the Sukala court shifted terms, moving from the reducing clause to "the UIM provisions of the policy," although the two could easily be read as one and the same. A unambiguous policy is in which different from reducing clause is unambiguous. all a "the policy UIM provisions" are in which the only In any event, the concluding sentence implies that once the reducing clause is found to be unambiguous, because the Dowhower inquiry is at contemplates an end. That consideration of is incorrect the entire policy. ¶43 In 2001, in Estate of Dorschner v. State Farm Mutual Automobile Insurance Co., the court of appeals reinforced the impact of Sukala, stating: In that case the court found the reducing clause, which mimicked the language of the authorizing statute, was clearly unambiguous. . . . The court concluded that under Dowhower and the declared public policy of the legislature in Wis. Stat. § 632.32(5)(i), reducing clauses that comply with the statute cannot render UIM coverage illusory. "Once we have concluded that the UIM provisions of a policy are unambiguous, as we have here, then our inquiry is at an end." 17 No. 00-2682 Dorschner v. State Farm Mut. Auto. Ins. Co., 2001 WI App 117, ¶11, 244 Wis. 2d 261, 628 N.W.2d 414 (quoting Sukala, 2000 WI App 266, ¶20). ¶44 However, emphasized the in Taylor, Dowhower 2001 WI requirement 93, that this the court policy again must be unambiguous in its relevant language for a reducing clause to be valid. In Dowhower, we held that a reducing clause in an UIM policy is valid so long as 'the policy clearly sets forth that the insured is purchasing a fixed level of UIM recovery that will be arrived at by combining payments made from all sources.' We reached this conclusion after considering the case law regarding UIM coverage in conjunction with the statute that authorizes reducing clauses in UIM policies, Wis. Stat. § 632.32(5)(i)1. Id. at ¶24 (citations omitted). that a reducing clause was valid context of the whole policy. ¶45 In her dissent In Taylor, the court decided after examining it in the Id. at ¶¶25-26. in Taylor, Justice Bradley asserted that UIM coverage, as authorized by Wis. Stat. § 632.32(5)(i), does not meet the expectations of a reasonable insured. ¶35 (Bradley, J., dissenting). question the validity of a Id. at She added that, "While I do not statutorily authorized reducing clause, I do question the validity of a policy crafted around the reducing clause in such a way as to defeat the reasonable expectations of the insured." ¶46 Id. at ¶45 (emphasis added). Although Justice Bradley's statement was not part of the majority opinion, it reflects the reasoning in Dowhower that reducing clauses must be crystal clear in the context of the 18 No. 00-2682 whole policy. Otherwise, insureds are not likely to understand what they are purchasing. F. Application of Dowhower and Wis. Stat. § 632.32(5)(i) ¶47 In this case, the circuit court declared that the reducing clause contained in the policy issued to Schmitz was void and unenforceable. Bayorgeon wrote The court relied on Sweeney. that Wis. Stat. § 632.32(5)(i) reducing clauses. he to be did a not "blanket Judge interpret endorsement" of He viewed the reducing clause in the context of the entire policy and determined that the policy failed to clearly set forth that UIM payments would be reduced by sums paid by others, "so that there is no mistake, confusion or illusion with respect to what is being provided for the premium being paid." He concluded that, "The contract is illusory and therefore unenforceable." ¶48 The court of appeals reversed, determining that the UIM coverage was not illusory. It reasoned that the "provision is not fairly susceptible to an interpretation that would allow Schmitz to recover the full $250,000 policy limit over and above the $100,000 injuries." received See from Schmitz, the party unpublished responsible slip op. at for ¶5. concluded by quoting Sukala to the effect that: [U]nder Dowhower and the declared public policy of the legislature in Wis. Stat. § 632.32(5)(i), UIM reducing clauses complying with § 632.32(5)(i) cannot render UIM coverage 'illusory.' Once we have concluded that the UIM provisions of a policy are unambiguous, as we have here, then our inquiry is at an end. Id. at ¶7. 19 his It No. 00-2682 ¶49 In fact, the teaching of Dowhower and Taylor is quite the contrary. an These cases direct a reviewing court to examine unambiguous reducing clause policy to determine understandable and in whether clear. the the If the context of coverage the entire provided coverage is provided is misleading and unclear, the policy is ambiguous, or worse, and the clause reducing UIM coverage is not enforceable. 2000 WI 73, ¶33; Taylor, 2001 WI 93, ¶¶24, 26. Dowhower, With this principle in mind, we will examine the UIM policy issued by American Merchants to Schmitz. 1. Standard of Review ¶50 The construction or interpretation of an insurance policy presents a question of law to which we apply de novo review. Hull v. State Farm Mut. Auto. Ins. Co., 222 Wis. 2d 627, 636, 586 N.W.2d 863 (1998); Gen. Cas. Co. v. Hills, 209 Wis. 2d 167, 175, 561 N.W.2d 718 (1997). ¶51 We first must determine whether the insurance contract is ambiguous. Words or phrases of an insurance contract are ambiguous if they are susceptible to more than one reasonable construction. Dowhower, 2000 WI 73, ¶34. Unambiguous language in an insurance contract must not be rewritten by construction. Smith, 155 Wis. 2d at 811. However if the policy is ambiguous, we construe such ambiguities against the insurer. Brunson v. Ward, 2000 WI 89, ¶12, 245 Wis. 2d 163, 629 N.W.2d 140. To construe ambiguous language in an insurance policy, we attempt to determine "what a reasonable person in the position of the insured would have understood the words of the policy to mean." 20 No. 00-2682 Taylor, 2001 WI 93, ¶10 (quoting Dowhower, 2000 WI 73, ¶35). We are conscious that our interpretation of ambiguous language in an insurance policy "should expectations of coverage." Employers Ins. Co., advance the insured's reasonable Id. (citing Kremers-Urban Co. v. Am. 119 Wis. 2d 722, 735, 351 N.W.2d 156 (1984)). 2. The Policy Language ¶52 The "Personal Auto Policy" Merchants to Schmitz is 29 pages long.6 issued by American The second page is a "Quick Reference Index Sheet" that lists, among other things, the declarations page and Parts A through F of the policy. "Quick Reference Index Sheet" Coverage is in Part C. shows that Uninsured The Motorists Underinsured Motorists Coverage is not mentioned. ¶53 The third page, the declarations page, lists the type of coverages the policy provides: Liability, Medical Payments, Uninsured Motorists, and Damage To Your Auto. For each of these four coverages, the liability limits, deductible, and cost are included. endorsements The and third page forms also made includes, part of under this "Additional policy," "See Endorsement 3-4044." 6 The policy is presented as Exhibit A in the circuit court record. In Exhibit A, the pages appear in a different order than in Schmitz's appendix. The court understands that the policy is accurately presented in the appendix. The pages of the policy are not numbered sequentially. We therefore refer to the pages in the order in which they appear. 21 No. 00-2682 ¶54 The fourth page "3-4044" states and then lists the "Forms on this Policy." follow. form the policy number Eleven form numbers The last of the 11 form numbers is "PP0428 1295." number later appears under the heading This "Underinsured Motorists Coverage-Wisconsin." ¶55 The fifth page is entitled Underinsured Motorists Coverage Wisconsin." "Availability Of The text on the page reads in its entirety: Wisconsin Insurance Law (Section 632.32) require [sic] we notify you of the availability of underinsured motorists coverage. The law does not require you purchase this coverage; however, the law does require we offer you the opportunity to purchase this coverage. If you have purchased this coverage, please disregard this notice. What is underinsured motorists coverage? If you are involved in an accident in which the other driver is legally at-fault, the at-fault driver's insurance policy has the obligation to pay for your bodily injury damages and bodily injury damages to passengers in your car. The at-fault driver may not have enough liability insurance to pay all the bodily injury damages you and your passengers have sustained. To protect yourself and others in your car, underinsured motorists coverage is available to you. This coverage will pay the remainder of the bodily injury damages up to the limit of liability you select for underinsured motorists coverage. For additional information, or if you desire to purchase this coverage, please contact your sales representative (emphasis added). ¶56 The sixth page is the definitions page. define "underinsured motorist" or "reducing clause." 22 It does not No. 00-2682 ¶57 The twenty-third page of the policy is entitled "Split Underinsured Motorists Limits." It states that the policy provides "$250,000 each person," and "$500,000 each accident." Under "Underinsured Motorists Coverage," the schedule states: The first paragraph of the Limit of Liability provision in the Underinsured Motorists Coverage Endorsement is replaced by the following: LIMIT OF LIABILITY The limit of liability shown in the Schedule or in the Declarations for each person for Underinsured Motorists Coverage is our maximum limit of liability for all damages, including damages for care, loss of services or death, arising out of "bodily injury" sustained by any one person in any one accident. Subject to this limit for each person, the limit of liability shown in the Schedule or in the Declarations for each accident for Underinsured Motorists Coverage is our maximum limit of liability for all damages for "bodily injury" resulting from any one accident (emphasis added). ¶58 "This At the top of the twenty-seventh page are the words: Endorsement Carefully." "Underinsured Changes Underneath Motorists the this Policy. advisory Coverage-Wisconsin." Please are Read the Under It words "Insuring Agreement," paragraph "C" states in part: "Underinsured motor vehicle" means a land motor vehicle or trailer of any type to which a bodily injury liability bond or policy applies at the time of the accident but its limit for bodily injury liability is less than the limit of liability for this coverage. ¶59 On the next page, the twenty-eighth page, under "Limit of Liability," paragraph "B" reads: The limit of liability shall be reduced by all sums: 23 No. 00-2682 1. Paid because of the "bodily injury" by or on behalf of persons or organizations who may be legally responsible. This includes all sums paid under Part A; and 2. Paid or payable because of the "bodily injury" under any of the following or similar law: a. Workers' compensation law: or b. Disability benefits law. C. No one will be entitled to receive duplicate payments for the same elements of loss under this coverage and Part A, Part B or Part C of this policy. D. We will not make a duplicate payment under this coverage for any element of loss for which payment has been made by or on behalf of persons or organizations who may be legally responsible. E. We will not pay for any element of loss if a person is entitled to receive payment for the same element of loss under any of the following or similar law: 1. Workers' compensation law: or 2. Disability benefits law. The material on the twenty-seventh, twenty-eighth, and twentyninth pages of the policy makes up Form "PP 04 28 12 95," which we believe is the same as "PP0428 1295" referred to on the fourth page of the policy. 3. The Ambiguity of the UIM provisions ¶60 In interpreting the policy language, we begin with the reducing clause on the twenty-eighth page, which provides that: B. The limit of liability sums: shall be reduced by all 1. Paid because of the "bodily injury" by or on behalf of persons or organizations who may be 24 No. 00-2682 legally responsible. under Part A; and This includes all sums paid 2. Paid or payable because of the "bodily injury" under any of the following or similar law: a. Workers' compensation law; or b. Disability benefits law. ¶61 There is no dispute that this reducing clause is in conformity with Wis. Stat. § 632.32(5)(i). Thus, the reducing clause itself is not ambiguous or contrary to public policy. Dowhower, 2000 WI 73, ¶20. If we looked only at the reducing clause and not at the policy as a whole, our inquiry would be at an end. an See Sukala, 2000 WI App 266, ¶20. insurance policy may be entire insurance contract. ambiguous in However, language in the context of the See Taylor, 2001 WI 93, ¶26 (citing Dowhower, 2000 WI 73, ¶35). Here, the policy as a whole, and the "Availability of Underinsured Motorists Coverage Wisconsin" form in particular, create ambiguity. ¶62 generally First, we note that the declarations page, which is the portion of which the insured looks first, does not mention UIM coverage at all. It mentions only UM coverage. an insurance policy to One consequence is that there is no place on the declarations page to explain that the policy's UIM liability will be reduced by payments from other sources. There is no place to alert the insured that although the insured could receive the full limit of uninsured motorists coverage from the insurer, there is no possibility of receiving the full limit of underinsured motorists coverage from the insurer. The reasonable insured would look to the declarations page for the 25 No. 00-2682 total premium coverage. and the breakdown of the premium by type of There is no separately-listed cost for underinsured motorist coverage on the declarations page or any other page. ¶63 Second, there is no reference to Underinsured Motorists Coverage on the "Quick Reference Index Sheet." a hunch, the insured turned to Part C "Uninsured If, on Motorists Coverage" anticipating a discussion of Underinsured Motorists Coverage under the subheading "Other Insurance," the insured the "Split would be disappointed. ¶64 Third, the twenty-third page contains Underinsured Motorists Limits," which might be characterized as a declarations page for underinsured motorists liability limits. This page states limits of $250,000 for each person capped by $500,000 for each accident. The schedule reads in relevant part: The limit of liability shown in the Schedule or in the Declarations for each person for Underinsured Motorists Coverage is our maximum limit of liability for all damages . . . . This is the most we will pay regardless of the number of: 1. "Insureds;" 2. Claims made; 3. Vehicles or premiums shown in the Declarations; or 4. Vehicles involved in the accident ¶65 The "Schedule" on the twenty-third page fails to inform that these dollar limits represent combined payments from all sources and will never be paid by the insurer because of the 26 No. 00-2682 policy's reducing clause. Because the "maximum" limits of liability are described as the "most" American Merchants will pay, they imply that these limits are attainable. ¶66 Finally, "Availability we of examine Underinsured the document Motorists which is located on the fifth page. entitled Coverage Wisconsin," The document states that the insurer must notify the insured of the availability of UIM coverage, but that the insured does not have to buy it. It states "If you have purchased this coverage, please disregard this notice." It also explains that "This coverage will pay the remainder of the liability you bodily select injury for damages up underinsured to the motorists limit of coverage." American Merchants asserts that this document is not part of the policy and does not modify the policy as an endorsement would. It also claims that UIM coverage purchased a "disregard this notice." reasonable would do insured what who the had already document says The court of appeals agreed with this argument, noting that this page was not part of the policy's terms" and coverage, "specifically such provided." ¶67 as Schmitz, informed to policyholders disregard the with UIM information it See Schmitz, unpublished slip op. at ¶6. Schmitz, on the other hand, asserts that a reasonable insured would read the definition of UIM coverage and assume that the policy he or she had purchased that the notice utilized the same definition. ¶68 We note of availability document, #511-8822 0996, is specifically listed on the fourth page of the 27 No. 00-2682 policy, under "Forms on this policy." form. It is the second listed We think that a reasonable insured, reading the fourth page, would expect the notice of availability to be part of the policy. ¶69 As to the portion of the notice reading "If you have purchased this coverage, please disregard this notice," we note that pursuant to Wis. Stat. § 632.32(4m)(a)1, the notice must contain "written notice of availability of underinsured motorist coverage, including a brief description of the coverage." We think the words "If you have purchased this coverage, please disregard this notice" clearly means to inform the insured to disregard the notice in terms of the availability coverage, not the description of the coverage. of coverage description is of relevant the to coverage prospective is relevant UIM The availability insureds, to of both but the prospective insureds and current insureds. ¶70 We believe a reasonable insured, reading the notice, would understand that he or she should disregard the notice if he or she has already purchased UIM coverage. However, the explanation in the notice is the most readily understandable definition of UIM coverage in the policy. It appears to tell a prospective insured that if he or she purchases UIM coverage, the coverage will pay the remainder of the bodily injury damages up to the limit of liability the person selects. ¶71 We do not see why an insured would think that the UIM coverage being offered to persons who do not have UIM coverage will be different from the UIM coverage the insured has already 28 No. 00-2682 purchased. Moreover, the definition of UIM coverage in the notice of availability form is likely to be what an average insured understands. dissenting) See Taylor, 2001 WI 93, ¶35 (Bradley, J., ("reasonable insureds believe they are purchasing coverage for their damages in a set dollar amount above and beyond the liability limits of the at-fault driver"). ¶72 To sum up, the American Merchants policy is a maze that is organizationally complex and plainly contradictory. sends several false signals to the insured. friendly. It It is not user- The notice of availability of UIM coverage, together with the "maximum of liability" listed on the declarations page and on the split UIM limits page, combine to create confusion, ambiguity, and illusory coverage in the context of the entire policy. This renders an otherwise unambiguous, although poorly labeled, reducing clause unenforceable. Under the circumstances, the circuit court performed the correct analysis and properly granted Schmitz against American Merchants. summary judgment in his case This determination was necessary to advance the insured's reasonable expectation of coverage. III. ¶73 second SUMMATION The Dowhower decision recognizes the validity of the theory of underinsured motorists coverage and assumes that it will be written into most Wisconsin automobile insurance policies. It upholds a reducing clause that conforms to Wis. Stat. § 632.32(5)(i), "provided that the policy [in which the reducing clause appears] clearly sets forth that the insured is purchasing a fixed level of UIM recovery that will be arrived 29 No. 00-2682 at by combining payments made from all sources." WI 73, ¶33. This examination. formulation opens the Dowhower, 2000 entire policy to When the policy as a whole fails to set forth a clear, understandable description of the underinsured motorists coverage being purchased, "a reducing clause may be ambiguous within the context of the insurance contract." ¶74 The Dowhower decision creates a Id. at ¶35. quandary for the judiciary because it does not provide a bright line rule for courts to apply. As a practical matter, every automobile insurance policy with an underinsured motorists reducing clause becomes a potential battleground This prospect is disheartening. served that by interminable could be over ambiguity. The public interest will not be litigation at resolved contextual easily by great cost over conspicuous issues forthright explanations from insurers. The public interest will be served when given insurance buyers are materials to make informed choices about the desired limit of their underinsured motorists coverage. The burden should be on insurers to show that insureds have been put in a position to make informed choices. Wisconsin courts should not be expected to become parties to consumer deception by enforcing reducing clauses that have not been fully and fairly explained. IV. CONCLUSION ¶75 UIM We conclude that although the reducing clause in the provisions of the insurance policy issued by American Merchants to Dennis Schmitz comports with the requirements of Wis. Stat. § 632.32(5)(i), it does 30 not, when viewed in the No. 00-2682 context of the entire policy, clearly set forth that the insured is purchasing a fixed level of UIM recovery combining payments from all sources. therefore ambiguous coverage illusory. and arrived at by The reducing clause is unenforceable, and renders the UIM Accordingly, we reverse the decision of the court of appeals and reinstate the judgment of the circuit court granting Schmitz's motion for summary declaratory judgment. By the Court. The decision reversed. 31 of the court of appeals is No. ¶76 the N. PATRICK CROOKS, J. majority's contract as opinion a (dissenting). I cannot join in the because whole, the decision because examining majority unambiguous UIM reducing clause. appeals' 00-2682.npc completely insurance ignores the I would affirm the court of when the unambiguous UIM reducing clause is read together with the rest of the policy, I conclude that the reducing clause is not susceptible to more than one Accordingly, I respectfully dissent.7 interpretation. ¶77 In one breath the majority concludes that the UIM reducing clause here is unambiguous and not contrary to public policy since it complies Majority op. at ¶61. concludes that, unenforceable with In the next breath, however, the majority although because it unambiguous, creates context of the entire policy. majority's analysis whole, completely clause. other it because The majority portions of Wis. Stat. § 632.32(5)(i). the reducing illusory Id. at ¶72. when ignores draws the examining the its policy, clause coverage in is the I cannot join the the unambiguous conclusion interpreted policy UIM based on as a reducing several separately and independently from the unambiguous UIM reducing clause at issue. To me, the majority's approach is contrary to Dowhower v. West 7 The majority apparently, but not explicitly, overrules the holding in Sukala v. Heritage Mutual Insurance Co., 2000 WI App 266, ¶20, 240 Wis. 2d 65, 622 N.W.2d 457, that "[o]nce we have concluded that the UIM provisions of a policy are unambiguous . . . then our inquiry is at an end." See also Estate of Dorschner v. State Farm Mut. Auto. Ins. Co., 2001 WI App 117, ¶12, 244 Wis. 2d 261, 628 N.W.2d 414. If the majority intends to overrule or withdraw language from Sukala, it should do so explicitly, or appropriately distinguish Sukala so as not to create confusion. 1 No. Bend Mutual Ins. Co., 2000 WI 73, 236 00-2682.npc Wis. 2d 113, 613 N.W.2d 557, and Taylor v. Greatway Ins. Co., 2001 WI 93, 245 Wis. 2d 134, 628 N.W.2d 916, and violates our rules of contract, including insurance contract, interpretation. ¶78 Beginning at paragraph 62, the majority opinion goes to great length to discuss various pages of the policy as either not referencing UIM coverage, see majority op. at ¶¶62-63, or characterizing UIM coverage in a manner that the majority finds "organizationally user-friendly." complex," "plainly contradictory" Id. at ¶¶64-65, 72. and "not The majority, however, never analyzes those sections together with, or in relationship to, the unambiguous UIM reducing clause. Furthermore, the majority simply concludes that the discussed provisions render an otherwise unambiguous reducing clause unenforceable, see id. at ¶72, but fails to explain how the whole contract is ambiguous or susceptible to more than one construction. ¶79 I agree with the majority that Dowhower and Taylor recognized that language in an insurance policy can be ambiguous within the context of the whole policy. however, hold or even suggest that Those cases do not, when examining the insurance policy as a whole, the unambiguous UIM reducing clause should be completely ignored. To the contrary, in Taylor, we examined the policy as a whole in relation to the definition of underinsured definition vehicle. to other See policy 2001 WI 93, provisions ¶27 and (comparing concluding the that "nothing in the rest of [the] policy [] obscures the unambiguous definition of underinsured vehicle"). 2 No. ¶80 Moreover, focusing on the unambiguous 00-2682.npc UIM reducing clause when examining the context of the insurance policy is consistent with our rules of contract interpretation. The unambiguous UIM reducing clause should be read together with the rest of the susceptible policy, of more to determine than one if the reducing construction. clause Estate See is of Dorschner v. State Farm Mut. Auto. Ins. Co., 2001 WI App 117, ¶12, 244 Wis. 2d 261, 628 N.W.2d 414 ("Nor do we find that the antistacking clause, when read together with the rest of the policy, is susceptible to more than one construction."). In addition, "[W]hen the terms of an insurance policy are plain on their face, the policy must not be rewritten by construction." Smith v. Atlantic Mut. Ins. Co., 155 Wis. 2d 808, 811, 456 N.W.2d 597 (1990). ¶81 Applying the above analysis here, I conclude that the unambiguous reducing clause remains unambiguous, majority requires "understandable and clear." at ¶49. or as the See majority op. Granted, like many insurance contracts, the American Merchants policy issued to Schmitz is long and complex with many clauses and endorsements. Contrary to the majority's conclusion, however, complexity alone does not render the policy ambiguous. See Heater v. Fireman's Fund Ins. Co., 30 Wis. 2d 561, 565, 141 N.W.2d 178 (1966); Hause v. Bresina, No. 01-3041, 2002 Wisc. App. LEXIS 671, *3 (Wis. Ct. App. June 11, 2002); Hinrichs v. American Family Mut. Ins. Co., 2001 WI App 114, ¶15, 244 Wis. 2d 191, 629 N.W.2d 44. 3 No. ¶82 In concluding that the UIM reducing 00-2682.npc clause is unenforceable, the majority finds five areas of the policy where the explanation of UIM coverage could be clearer, see majority op. at ¶¶62-70, but seems to base its conclusion largely on the document entitled "Availability Coverage Wisconsin." the definition readily of of Id. at ¶61. UIM coverage understandable Underinsured Motorists The majority concludes that in definition this of notice UIM is the coverage "most in the policy," and that this definition apparently creates confusion for a reasonable insured because it differs from the actual UIM coverage in the policy. Id. at ¶70. The majority seems to hold that by stating in the notice that "[UIM] coverage will pay the remainder of liability the the bodily person injury selects," damages the up UIM to the reducing limit of clause is rendered ambiguous. ¶83 notice I disagree. is read When the availability of UIM coverage together with the unambiguous UIM reducing clause, it is clear that UIM coverage is reduced by all sums paid by or responsible. is only on behalf of persons or organizations legally The policy unambiguously states that UIM coverage coverage up to the limit of liability the person selects. When examined together, therefore, the unambiguous UIM reducing clause provision Merchants render policy remains the UIM unambiguous, coverage follows the nor does the notice illusory. The American statutory language in Wis. Stat. § 632.32(5)(i), and comports with Dowhower because it "clearly sets forth that the insured is purchasing a fixed level 4 No. 00-2682.npc of UIM recovery that will be arrived at by combining payments made from all sources." 2000 WI 73, ¶33. I conclude that the UIM reducing clause is unambiguous on its face, as well as in the context of the entire policy. The majority errs by on the rewriting the policy through judicial construction. ¶84 Finally, I find it necessary to comment majority's summation that "Dowhower [] creates a quandary for the judiciary because it does not provide a bright line rule for courts to apply." writes, "As a Majority op. at ¶74. practical matter, every The majority further automobile insurance policy with an underinsured motorists reducing clause becomes a potential battleground over contextual ambiguity." Id. Rather, I believe the majority opinion has created exactly what it has criticized here a quandary. subsequently otherwise did unambiguous matter, has the created, not UIM ambiguity exist. reducing majority The majority has searched for, and It clause has has at created in done a so policy by issue. confusion where ignoring As it the a practical for insurers, consumers, and the courts of this state, because now a clear and unambiguous UIM reducing clause has been wholly ignored in order to conclude that such clause is ambiguous in the context of the policy as a whole. I cannot join in this analysis; therefore, I respectfully dissent. ¶85 I am authorized to state that Justices JON P. WILCOX and DIANE S. SYKES join this dissent. 5 No. 6 00-2682.npc No. 1 00-2682.npc

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