N. PATRICK CROOKS, J.
¶ 1 This case is before this court on certification by the court of appeals, pursuant to Wis. Stat. § (Rule) 809.61 (2009-10). It concerns the proper measure of damages in an action to recover under an injured party's underinsured motorist (UIM) coverage. We resolve this question in the context of the limited scope of review of an arbitration panel's decision.
¶ 3 Orlowski petitioned the circuit court for modification of the arbitration award pursuant to Wis. Stat. § 788.11 (2007-08),
¶ 4 We reaffirm what our prior precedent has clearly established: an injured party is entitled to recover the reasonable value of medical services, which, under the operation of the collateral source rule, includes written-off medical expenses. We overrule Graser to the extent that it holds that the collateral source rule has no application in cases involving UIM coverage. The arbitration panel's decision in this case was properly modified by the circuit court pursuant to Wis. Stat. § 788.10 and § 788.11 because the arbitrators exceeded their authority by failing to fully review and apply this court's decisions on the collateral source rule and the law of damages. Such review and application was required by the questions submitted from the policy language directing the panel to award Orlowski the amount that she was "legally entitled to collect" from the underinsured motorist.
¶ 5 Therefore, we affirm the circuit court's decision modifying the arbitration panel's award to include the reasonable value of Orlowski's medical services.
¶ 6 On December 30, 2004, Orlowski was involved in a motor vehicle accident caused by an underinsured driver. Orlowski recovered damages up to the limits of the underinsured driver's insurance. Orlowski had health insurance coverage with United Healthcare, which paid a portion of Orlowski's medical expenses as a result of the accident. She also had an automobile insurance policy with State Farm including UIM coverage.
¶ 8 The arbitration panel awarded Orlowski $11,498.55 for medical services provided to her as a result of the accident: $9,498.55 for the medical lien claimed by United Healthcare and $2,000 for Orlowski's out-of-pocket medical expenses.
¶ 9 Orlowski petitioned the Milwaukee County Circuit Court for modification of the arbitration award pursuant to Wis. Stat. § 788.11.
¶ 10 The circuit court, the Honorable Dennis P. Moroney presiding, modified the arbitration decision to award Orlowski the full reasonable value of medical expenses, $72,985.94.
¶ 11 State Farm appealed and the court of appeals certified the case to this court for review. The court of appeals was concerned that the way in which the arbitration panel applied Graser was in conflict with this court's precedent and the questions asked of the panel from the UIM coverage portion of Orlowski's policy with State Farm. The court of appeals specifically asked this court to resolve "how Wisconsin Supreme Court law in collateral source cases such as Koffman v. Leichtfuss, 2001 WI 111, 246 Wis.2d 31, 630 N.W.2d 201, and Leitinger v. DBart, Inc., 2007 WI 84, 302 Wis.2d 110, 736 N.W.2d 1, [affects] our holding in Heritage Mut. Ins. Co. v. Graser, 2002 WI App 125, 254 Wis.2d 851, 647 N.W.2d 385, where we held that collateral source law is inapplicable to any UIM policy." We accepted the certification.
¶ 12 This court must address two issues to resolve this case. The first is whether the collateral source rule allows the recovery of written-off medical expenses in a claim under an insured's UIM coverage. This presents a question of law that this court reviews de novo. See Leitinger, 302 Wis.2d 110, ¶ 20, 736 N.W.2d 1.
¶ 13 The second question we must answer is whether the arbitration panel's award must be modified in this case. The scope of judicial review of an arbitration decision is very limited. Racine Cnty. v. Int'l Ass'n of Machinists and Aerospace Workers Dist. 10, AFL-CIO, 2008 WI 70, ¶11, 310 Wis.2d 508, 751 N.W.2d 312.
¶ 14 "If the panel exceeded its power, we must modify or vacate the award." Emp'rs Ins. of Wausau, 202 Wis.2d at 680, 552 N.W.2d 420. "An arbitrator exceeds his or her powers when the arbitrator demonstrates either `perverse misconstruction' or `positive misconduct,' when the arbitrator manifestly disregards the law, when the award is illegal, or when the award violates a strong public policy." Racine Cnty., 310 Wis.2d 508, ¶ 11, 751 N.W.2d 312. Whether an arbitration decision must be modified or vacated presents a question of law that this court reviews de novo. Id.
¶ 15 Because the scope of the arbitration panel's authority is informed by the arbitration clause in the UIM coverage portion of Orlowski's policy, we also interpret that policy language. The interpretation of an insurance contract is a question of law that this court reviews de novo. State Farm Mut. Auto. Ins. Co. v. Gillette, 2002 WI 31, ¶ 24, 251 Wis.2d 561, 641 N.W.2d 662.
¶ 16 We begin by examining the central question certified to this court by the court of appeals, whether the holding in Graser, that the collateral source rule has no application in actions to recover under UIM coverage, is sound. There are several legal doctrines and policies at play that we must examine to determine how they operate in UIM cases.
¶ 17 In Wisconsin, our well-established rule of damages regarding the recovery of medical expenses allows an injured plaintiff to recover "the reasonable
¶ 18 Within our law on damages we have adopted the collateral source rule, which provides that "a plaintiff's recovery cannot be reduced by payments or benefits from other sources." Koffman, 246 Wis.2d 31, ¶ 29, 630 N.W.2d 201; accord Fischer, 333 Wis.2d 503, ¶ 30, 797 N.W.2d 501; Leitinger, 302 Wis.2d 110, ¶ 26, 736 N.W.2d 1; Ellsworth, 235 Wis.2d 678, ¶¶ 6-7, 611 N.W.2d 764. The policy justifications for the collateral source rule have been summarized in a number of ways. Each case emphasizes the policies relevant in that particular case. In this case, we highlight three policies central to the collateral source rule. First, is to deter a tortfeasor's negligent conduct "by placing the full cost of the wrongful conduct on the tortfeasor." Fischer, 333 Wis.2d 503, ¶ 30, 797 N.W.2d 501; accord Leitinger, 302 Wis.2d 110, ¶33, 736 N.W.2d 1. Second, is to fully compensate the injured party. Leitinger, 302 Wis.2d 110, ¶ 31, 736 N.W.2d 1 ("The collateral source rule protects plaintiffs by guarding against the potential misuse of collateral source evidence to deny the plaintiff full recovery to which he is entitled."); see also Fischer, 333 Wis.2d 503, ¶ 34, 797 N.W.2d 501. Third, is to allow the insured to receive the benefit of the premiums paid for coverage that he or she had the foresight to purchase. Voge v. Anderson, 181 Wis.2d 726, 733, 512 N.W.2d 749 (1994); Koffman, 246 Wis.2d 31, ¶ 40, 630 N.W.2d 201; Leitinger, 302 Wis.2d 110, ¶¶ 44-45, 736 N.W.2d 1; Fischer, 333 Wis.2d 503, ¶ 30, 797 N.W.2d 501.
¶ 19 In Graser, 254 Wis.2d 851, 647 N.W.2d 385, the court of appeals was confronted with the interplay of the collateral source rule, the law on damages and the subrogation doctrine in the context of a claim to recover under UIM coverage. Galina Graser (Graser) brought suit against her UIM insurer to recover damages for injuries that her son received when his bicycle was struck by an underinsured motorist. Id., ¶¶ 1-5. Graser sought to recover medical damages under her UIM coverage, including the value of medical services paid by her health insurer for which that insurer waived its subrogation right. Id.
¶ 20 At issue in Graser was whether Graser could recover from her UIM insurer the value of her health insurer's waived subrogation claim based on the collateral source rule. The court of appeals examined the policy basis of the collateral source rule and distinguished this court's decision in Koffman and its own precedent in Anderson v. Garber, 160 Wis.2d 389, 466 N.W.2d 221 (Ct.App.1991), both negligence cases, from UIM cases on this basis. Graser, 254 Wis.2d 851, ¶¶ 13-16, 647 N.W.2d 385. In distinguishing Graser from negligence actions, the court of appeals relied heavily on its conclusion that the policy of deterring negligent conduct, obviously relevant in negligence actions against the tortfeasor, is not present in UIM cases against the injured party's own insurer. Id., ¶ 16. The court of appeals also noted
¶ 21 State Farm argues that the above language in Graser explicitly precludes the operation of the collateral source rule to a recovery under UIM coverage, and thus, precludes an insured from recovering written-off medical expenses from his or her UIM insurer. State Farm asserts that there is no conflict between Graser and this court's precedent. According to State Farm, Graser properly distinguished this court's case law in the negligence context and concluded that the public policy rationale behind the collateral source rule, to deter tortfeasors, is not relevant where an injured party seeks to recover from his or her UIM insurer.
¶ 22 Orlowski argues that Graser was wrongly decided and must be overruled because it ignored this court's precedent, the UIM policy language here and the reasonable expectations of an insured in purchasing UIM coverage. Further, Orlowski asserts that Graser is internally inconsistent because the court of appeals stated that the collateral source rule does not apply in UIM cases, despite the fact that part of Graser's recovery that was upheld by the court of appeals included written-off medical expenses. Orlowski directs us to other public policies underlying the collateral source rule—giving an insured the benefit from premiums paid and fully compensating the injured party—that she argues justify its application in UIM cases. State Farm's position on the public policy rationale behind the collateral source rule is too narrow, Orlowski argues.
¶ 23 We conclude that the policy distinction between negligence and UIM cases upon which the court of appeals relied does not justify diverging from our case law and limiting the collateral source rule. The holding in Graser that was addressed to the specific factual scenario in that case is not implicated here, where the dispute centers on written-off medical expenses and not a waived subrogation right.
¶ 24 We have explained that the proper measure of medical damages is "the reasonable value of medical services rendered." Koffman, 246 Wis.2d 31, ¶ 27, 630 N.W.2d 201. In Koffman, this court held that a plaintiff could recover the reasonable value of medical services, which was the amount billed for medical services related to the tortious conduct, including the written-off medical expenses, and not limited to what was paid for those services. Id., ¶ 2. In Leitinger, decided after Graser, we explained the import of Koffman: "[T]he collateral source rule is specifically designed to prevent a discount received by
¶ 25 As we explained above, the collateral source rule furthers several public policy considerations, including the deterrence of negligent conduct, fully compensating injured parties and giving the insured the benefit of premiums he or she paid. See supra ¶ 18. It appears that the court of appeals in Graser, 254 Wis.2d 851, ¶¶ 15-16, 647 N.W.2d 385, gave too much weight to the deterrence rationale, at the expense of the other public policies served by the collateral source rule that are still relevant in the UIM context.
¶ 26 Ensuring that a person injured by tortious conduct is fully compensated is no less important in a UIM case than it is in a negligence action. We reiterated in a significant UIM case the importance of compensating those injured by tortious conduct. Gillette, 251 Wis.2d 561, ¶¶ 64-65, 641 N.W.2d 662. In reaching our conclusion in Gillette that the Wisconsin law of damages should control in a UIM case where choice-of-law was at issue, we noted that "[a]lthough the deterrent purpose of tort law is not furthered by applying the Wisconsin law of damages to the present case, the compensatory purpose of tort law is furthered by applying the Wisconsin law of damages." Id., ¶¶ 64, 67 (footnote omitted)(emphasis added). We noted that this result furthered "Wisconsin's significant interests in fully compensating victims of ordinary negligence." Id., ¶ 65.
¶ 27 Allowing an insured to reap the benefits of the premiums he or she paid is particularly relevant to the recovery of written-off medical expenses under UIM coverage. To ensure full coverage, the injured party has paid two premiums: (1) to a health insurer for coverage for medical expenses including the benefit of having some of those medical expenses written off by the medical provider, and (2) to an automobile insurer to be indemnified for damages, including medical expenses, caused by an underinsured motorist. State Farm asserts that applying the collateral source rule in this case, where Orlowski seeks to recover under her UIM coverage, would give her a "windfall" or double recovery. To the contrary, Orlowski has paid a premium to United Healthcare for the benefit of coverage for medical expenses, and to State Farm to recover the reasonable value of her medical expenses under her UIM coverage. Since Orlowski has paid a premium for both of these policies, she should receive the benefit from both.
¶ 28 State Farm argues that we should uphold Graser because "the foundation for the court's holding [in Graser] was public policy considerations." Such an argument is too narrow and thus unsound, and we now overrule Graser to the extent that it created a blanket rule that the collateral
¶ 29 We next address whether the arbitration panel's award must be modified in this case. The circuit court modified Orlowski's award to include the full reasonable value of medical expenses, including those written off by her medical provider. State Farm argues that the circuit court exceeded the limited scope of judicial review of arbitration decisions by modifying the panel's award. State Farm emphasizes that reviewing courts may not substitute their judgment for that of the arbitration panel and asserts that the arbitration panel correctly interpreted the law in a manner consistent with its UIM policy. State Farm further argues that a reduction clause, specifically subsection 2.b. in the limits of liability section of Orlowski's UIM coverage, allows the recovery of damages "sustained, but not recovered," which State Farm contends excludes written-off medical expenses.
¶ 30 Orlowski argues that the arbitrators exceeded the scope of their authority because the questions asked of the panel from the UIM policy directed the arbitrators to award her what she was "legally entitled to collect" from the tortfeasor, which includes all damages available under Wisconsin tort law. Additionally, Orlowski asserts that the arbitrators' interpretation of Graser was a manifest disregard of the law because Graser is factually and legally distinguishable. Finally, Orlowski argues that subsection 2.b. in the limits of liability of her UIM coverage does not preclude her recovery of written-off medical expenses. According to Orlowski, if this subsection were interpreted as such it would be an invalid reducing clause as it is not authorized by Wis. Stat. § 632.32(5)(i).
¶ 31 Arbitrators' authority is circumscribed by the terms of the contractual agreement to arbitrate and any other issues that the parties agree to submit to arbitration. Maryland Cas. Co. v. Seidenspinner, 181 Wis.2d 950, 956, 512 N.W.2d 186 (Ct.App.1994); Emp'rs Ins. of Wausau, 202 Wis.2d 673, 680-81, 552 N.W.2d 420. State Farm asked the arbitration panel to exclude written-off medical expenses from the award based on Graser. Orlowski disputed that Graser applied and argued that even if it did, Graser permitted the recovery of written-off medical expenses.
Deciding Fault and Amount
(Italics and bolding in original omitted.)
¶ 33 We interpret the arbitration clause in Orlowski's insurance policy as we would any other contract, and the objective is to give effect to the parties' intent. State Farm Mut. Auto. Ins. Co. v. Bailey, 2007 WI 90, ¶ 22, 302 Wis.2d 409, 734 N.W.2d 386. Courts interpret a policy consistent with the common, ordinary meaning of the language—in other words, "what the reasonable person in the insured's position would understand it to mean." Id. As we stated previously, our review is de novo. Gillette, 251 Wis.2d 561, ¶ 24, 641 N.W.2d 662.
¶ 34 The arbitration clause in Orlowski's policy directed the arbitration panel to decide, first, whether Orlowski was "legally entitled to collect damages from" an underinsured motorist. If so, the award is governed by the second question: "in what amount?" The second question clearly refers to the first. Thus, a reasonable insured would read the arbitration clause to require the panel, if it answers the first question in the affirmative, to award the "amount" that the injured insured is "legally entitled to collect" from the underinsured motorist. The common, ordinary meaning of the amount that an insured is legally entitled to collect from the underinsured motorist is the amount that he or she could recover in a tort action against the underinsured motorist. In Gillette, we interpreted the same language—"legally entitled to collect"—in the context of the UIM policy at issue in that case to mean that "an insurance company will compensate an insured for damages for bodily injury that the insured actually incurs up to the amount of damages for which a driver of an underinsured motor vehicle is liable under the applicable law up to the policy's liability limits." Id., ¶ 48. Similarly, in this case, the amount that the insured is legally entitled to collect from the driver of an underinsured motor vehicle is based on the policy language construed in conformity with Wisconsin's tort law on damages including the collateral source rule.
¶ 35 Our relevant precedent is outlined above in greater detail, but we reiterate a few central principles. In Leitinger we explained that "[t]he proper measure of damages for medical treatment rendered in a personal injury action is the reasonable
¶ 36 Contrary to the questions submitted to the arbitrators and extensive precedent from this court that guides how those questions should be answered, the arbitration panel did not award the reasonable value of medical expenses. The arbitration panel concluded "that the collateral source rule does not apply as per the case of Heritage Mut. Ins. Co. v. Graser," and on that basis did not award Orlowski the full reasonable value of medical services, which it determined in a supplemental decision was $72,985.94. Instead, the panel awarded Orlowski $11,498.55 for medical services provided to her as a result of the accident. The panel excluded $61,487.39 from the award, the amount of the written-off medical expenses.
¶ 37 The arbitration panel's decision to exclude written-off medical expenses from Orlowski's award was based almost entirely on its interpretation of Graser. The only reasonable conclusion to draw from the panel's reliance on Graser and its refusal to award Orlowski the reasonable value of medical expenses as case law requires is that the panel failed to review and apply our case law to resolve the specific, limited questions that the policy's arbitration clause directed it to answer. While our review of arbitration decisions is very limited, it is not meaningless; "arbitration awards are ultimately subject to the governing law." Lukowski v. Dankert, 184 Wis.2d 142, 151, 515 N.W.2d 883 (1994). We will reverse the decision of the arbitrators when the arbitrators fail to examine and apply the relevant law. We have done so recently when an arbitrator made her decision without considering the relevant case law and statutes. Racine Cnty., 310 Wis.2d 508, ¶¶ 33-37, 751 N.W.2d 312.
¶ 38 We are mindful that the purpose of our review is "to ensure that the parties received what they bargained for when they agreed to resolve their disputes through final and binding arbitration." Baldwin-Woodville, 317 Wis.2d 691, ¶ 20, 766 N.W.2d 591. As we have previously explained, in agreeing to binding arbitration "the parties had a legitimate expectation that the governing law would be followed and applied properly." Lukowski, 184 Wis.2d at 152, 515 N.W.2d 883. "When there is no contractual language that would allow for the arbitrator's construction, there is no reasonable foundation for the award." Baldwin-Woodville, 317 Wis.2d 691, ¶ 23, 766 N.W.2d 591.
¶ 39 In this case, the arbitrators exceeded their authority and manifestly disregarded the law without a reasonable foundation by not fully reviewing and applying this court's decisions on the collateral source rule. The panel's seemingly exclusive reliance on Graser, resulting in a failure to award written-off medical expenses, cannot be reconciled with its obligation to answer the questions submitted to the arbitration panel that required it to examine tort law on the collateral source rule and medical damages. Given our case law and the questions submitted to the panel, there is no reasonable foundation upon which the
¶ 40 We reaffirm what our prior precedent has clearly established: an injured party is entitled to recover the reasonable value of medical services, which, under the operation of the collateral source rule, includes written-off medical expenses. We overrule Graser to the extent that it holds that the collateral source rule has no application in cases involving UIM coverage. The arbitration panel's decision in this case was properly modified by the circuit court pursuant to Wis. Stat. § 788.10 and § 788.11 because the arbitrators exceeded their authority by failing to fully review and apply this court's decisions on the collateral source rule and the law of damages. Such review and application was required by the questions submitted from the policy language directing the panel to award Orlowski the amount that she was "legally entitled to collect" from the underinsured motorist.
¶ 41 Therefore, we affirm the circuit court's decision modifying the arbitration panel's award to include the reasonable value of Orlowski's medical services.
The order of the circuit court is affirmed.
(Emphasis added and italics in original omitted.)
