Lindy Orlowski v. State Farm Mutual Automobile Insurance Company

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Appeal No. 2009AP2848 Cir. Ct. No, 2008CV2601
WISCONSIN COURT OF APPEALS

DISTRICT I

LINDY ORLOWSKI,

PETITIONER-RESPONDENT, FI LED

V. JAN 11, 2011
STATE FARM MUTUAL AUTOMOBILE INSURANCE A. John Voel ker
COMPANY, Acting Clerk of
Suprene Court
RESPONDENT-APPELLANT.

CERTIFICATION BY WISCONSIN COURT OF APPEALS

Before Cunley, PJ., Kessler and Brennan, JJ.

Pursuant to WIS. STAT. RULE 809.61 (2007-08) ! this court certifies
the appeal in this case to the Wisconsin Supreme Court for its review and
determination.

ISSUE

In order to determine what the language of an underinsured motorist (UIM)
policy requires, and thus whether an arbitration panel* exceeded its authority and
issued an award that must be modified under WIS. STAT. § 788.11, we must

' All references to the Wisconsin Statutes are to the 2007-08 version unless otherwise
noted.

* The arbitrators found the reasonable value of medical services to Lindy Orlowski;
however, they reduced the award by the amount billed by the service providers but not paid by
Orlowski, her health insurance carier, the underinsured motorist or his insurance company.

No. 2009AP2848
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consider 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, effects 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.3 If Graser is incompatible with controlling supreme court law, we
have no power to withdraw or modify language in Graser to resolve the conflict.
See Cook v. Cook, 208 Wis. 2d 166, 189-90, 560 N.W.2d 246 (1997).
BACKGROUND
Lindy Orlowski sustained injuries in a motor vehicle accident arising out of
the negligence of an underinsured motorist. After recovering the policy limit from
the underinsured motorist’s liability carrier, she brought a claim under her UIM
policy against State Farm Mutual Automobile Insurance Company. Orlowski and
State Farm submitted the claim to arbitration under the terms of the UIM policy.4
The UIM policy, as relevant to this appeal, provides:
3 Since the release of Heritage Mut. Ins. Co. v. Graser, 2002 WI App 125, 254 Wis. 2d
851, 647 N.W.2d 385, the apparent conflict between its holding and those of 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, has been arising with some frequency in Wisconsin trial
courts. Resolving this apparent conflict would be of assistance to trial courts and would have
important statewide impact. The Wisconsin Association for Justice, as amicus curiae in this case,
attached public documents from three separate cases presently or formerly pending in the trial
courts in Milwaukee County. Each case involves the impact of Graser on what the trial courts
have found to be contrary language in the UM/UIM policies involved. We appreciate the amicus
curiae bringing the apparently recurring nature of this issue to our attention.
4 The Wisconsin legislature has recently amended the minimum requirements provided
by WIS. STAT. § 632.32(4) for UM/UIM insurance in 2009 Wis. Act 28, §§ 3158, 3159. The
parties have not argued that the changes have any impact on the issues presented here, and our
independent review of the Act has suggested none.

No. 2009AP2848
3
UNDERINSURED MOTOR VEHICLE—COVERAGE W
We will pay damages for bodily injury an insured is legally
entitled to collect from the owner or driver of an underinsured
motor vehicle.
(Emphasis and bolding in original omitted.)
Limits of Liability
Coverage W
2. The most we will pay is the lesser of:
a. The limits of liability of this coverage reduced by
any of the following that apply:
(1) the amount paid to the insured by or on behalf of
any person … that may be legally responsible for the
bodily injury; or
(2) the amount paid or payable under any worker’s
compensation or disability benefits law; or
b. the amount of damage sustained, but not recovered.
Deciding Fault and Amount
Two questions must be decided by agreement between the
insured and us:
1. Is the insured legally entitled to collect damages from
the owner or driver of the uninsured motor vehicle or
underinsured motor vehicle; and
2. If so, in what amount?
If there is no agreement, these questions shall be decided by
arbitration upon written request of the insured or us…
State court rules governing procedure and admission of evidence
shall be used.
(Bolding in original omitted; emphasis in original altered; some emphasis
added.)

No. 2009AP2848
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In its initial decision, the arbitration panel found that there was “no
negligence on the part of [Orlowski]” and:
[T]hat the collateral source rule does not apply as per the case of
Heritage Mut. Ins. Co v. Graser, 254 Wis. 2d 821 (2002) and,
therefore we award $2,325.00 for unreimbursed wage loss;
$9,498.55 for the claimed medical lien for the medical bills paid
and we also award the plaintiff $2,000 for the out of pocket
medical expenses paid by the claimant.
The panel also awards the plaintiff $42,500 for past and
future pain, suffering and disability.
The “claimed medical lien” of $9,498.55 was the subrogation claim by
Orlowski’s health insurance carrier, United Healthcare. Orlowski asked for a
supplemental finding of the full reasonable value of her medical expenses. The
arbitrators issued a supplemental decision, noting that there was no challenge to
the reasonableness and necessity of the medical services. The supplemental
decision concluded that:
[T]he necessary and reasonable value of the medical
services provided to Mrs. Orlowski as a result of the
accident is Seventy-two Thousand Nine Hundred Eighty-
five and 94/100 Dollars ($72,985.94).
The difference between the reasonable value of the medical services
($72,985.94) and the arbitration award for medical expenses ($9,498.55 + $2,000
= $11,498.55) is $61,487.39. The parties stipulated that the difference between
the amounts billed and the amount paid by Orlowski and her health insurance was
due to insurance company write-offs or reductions, and that Orlowski was no
longer responsible for payment of these bills. However, the parties did not
stipulate that these damages were not “sustained” as that term is used in the State
Farm policy.

No. 2009AP2848
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Orlowski filed a petition in Milwaukee County Circuit Court asking for
modification of the arbitration award pursuant to WIS. STAT. § 788.11 to conform
the award to the UIM policy by including the full reasonable value of the
necessary medical services she received.5 The circuit court found that under the
UIM policy, Orlowski was legally entitled to collect the full reasonable value of
medical expenses from the tortfeasor, thus the arbitrator’s refusal to award that
amount of the medical expenses was a refusal to apply the plain language of the
UIM policy and constituted a manifest disregard of the law. The circuit court
modified the award. State Farm appealed.
5 WISCONSIN STAT. § 788.11 provides:
Modification of award. (1) In either of the following cases the
court in and for the county wherein the award was made must
make an order modifying or correcting the award upon the
application of any party to the arbitration:
(a) Where there was an evident material miscalculation of
figures or an evident material mistake in the description of any
person, thing or property referred to in the award;
(b) Where the arbitrators have awarded upon a matter not
submitted to them unless it is a matter not affecting the merits of
the decision upon the matters submitted;
(c) Where the award is imperfect in matter of form not affecting
the merits of the controversy.
(2) The order must modify and correct the award, so as to effect
the intent thereof and promote justice between the parties.

No. 2009AP2848
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State Farm argues on appeal that under Graser, collateral source law is
inapplicable to UIM policies, such as Orlowski’s. Therefore, the arbitration
panel’s application of Graser was not a manifest disregard of the law.6
Orlowski responds that the arbitration panel failed to award the amount she
is “legally entitled to collect” from the underinsured tortfeasor under the plain
language of the UIM policy. Orlowski reasons that the arbitration panel
manifestly disregarded the law by ignoring Wisconsin Supreme Court collateral
source law when the arbitration panel adopted a lower court holding in Graser,
contrary to both the plain language of the UIM policy and to collateral source law.
DISCUSSION
How does collateral source law effect application of this policy?
“Generally, ‘language in an insurance contract is given its common,
ordinary meaning, that is, what the reasonable person in the position of the insured
would have understood the words to mean.’” Froedtert Mem’l Lutheran Hosp.,
Inc. v. National States Ins. Co., 2009 WI 33, ¶41, 317 Wis. 2d 54, 765 N.W.2d
251 (citation omitted). If an insurance contract is ambiguous as to coverage, “it
will be construed in favor of the insured.” State Farm Mut. Auto. Ins. Co. v.
Langridge, 2004 WI 113, ¶15, 275 Wis. 2d 35, 683 N.W.2d 75. “An insurance
policy is a contract. A claim against the insurance company for underinsured
6 Alternatively, State Farm argues that under its policy the disputed amount of unpaid
medical bills was not damage “sustained” by Orlowski because she will never be responsible for
paying the reduced amount. The totality of the policy limitation is damages “sustained but not
recovered.” State Farm focuses only on the word “sustained.” State Farm does not explain how
part of the medical costsas an element of the damage caused by an injury that has clearly
occurredare not “sustained” because Orlowski will never have to pay anyone for them, while
future pain, suffering and disabilityalso elements of the damage from the injurywere damages
“sustained” under the policy, awarded by the arbitration panel here and not challenged by State
Farm, yet are also damages for which Orlowski will never have to pay anyone.

No. 2009AP2848
7
motorist coverage is ‘an action on the policy and sounds in contract,’ although an
underlying tortious injury is also involved.” State Farm Mut. Auto. Ins. Co. v.
Gillette, 2002 WI 31, ¶25, 251 Wis. 2d 561, 641 N.W.2d 662 (citation and
footnote omitted).
Wisconsin Supreme Court cases consistently explain the collateral source
rule as a principle of damage law. Without limiting the type of collateral source,
Koffman held that a plaintiff “is entitled to seek recovery of the reasonable value
of the medical services, without limitation to the amounts paid.” Id., 246 Wis. 2d
31, ¶2. Later, the court in Leitinger held “that the collateral source rule prohibits
parties in a personal injury action from introducing evidence of the amount
actually paid by the injured person’s health insurance company, a collateral
source, … to prove the reasonable value of the medical treatment.” Id., 302 Wis.
2d 110, ¶7. Leitinger, relying on Koffman, also observed that “[t]he reasonable
value of the medical services is just one component of what makes the injured
plaintiff ‘whole.’ Other damages include lost wages, future lost wages, loss of
earning capacity, etc.” Leitinger, 302 Wis. 2d 110, ¶23 n.15 (citations omitted).
In this matter, State Farm promised to pay, up to the stated limits of its
policy, “damages for bodily injury an insured is legally entitled to collect” from
the underinsured tortfeasor. This amount is limited to the lesser of (1) “payments
by or on behalf of” the underinsured tortfeasor, and payments under “any workers
compensation or disability benefits law” or (2) “the amount of damage sustained,
but not recovered.”
The policy repeats the original coverage promise by requiring the
arbitrators to answer two questions: (1) whether the insured is legally entitled to
collect damage from the underinsured tortfeasor; and (2) if so, in what amount.

No. 2009AP2848
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The policy further instructs the arbitrators that “[s]tate court rules governing
procedure and admission of evidence shall be used.”7 The collateral source rule
prohibits evidence of payments by Orlowski’s health insurance carrier as a
measure of the reasonable value of her medical expenses. See Leitinger, 302 Wis.
2d 110, ¶7. Enforcing the unambiguous policy language as written required the
arbitration panel to award Orlowski the reasonable value of her medical expenses
because that is what she is “legally entitled to collect” from the underinsured
tortfeasor.
Is Graser consistent with supreme court collateral source law?
State Farm argues that our holding in Graser means the collateral source
rule does not apply to any UIM policy.
Without discussion of any of the insurance policy language involved in
Graser, we concluded that the collateral source rule “is inapplicable to claims
made by an insured under his or her UIM policy.” Id., 254 Wis. 2d 851, ¶1. Thus,
we decided Graser without describing how we performed our obligation to apply
an insurance contract as written. See Froedtert, 317 Wis. 2d 54, ¶41. Rather than
discuss the language of the policy at issue, we analyzed the Koffman decision, as
well as one of our decisions, Anderson v. Garber, 160 Wis. 2d 389, 466 N.W.2d
221 (Ct. App. 1991). Much of our discussion in Graser focused on language in
Koffman considering whether the tortfeasor benefited from the collateral source
rule, but we did not consider whether the injured party could collect the full
reasonable value of medical expenses from the tortfeasor. Graser, 254 Wis. 2d
851.
7 See supra p. 3.

No. 2009AP2848
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In Koffman, State Farm insured the tortfeasor. Id., 246 Wis. 2d 31, ¶1.
State Farm argued that the only medical expenses recoverable by the injured party
were those paid by the injured party’s health insurance carrier. Id. The focus of
the opinion was the extent of the tortfeasor’s responsibility to the injured party,
not, as here, the insurer’s contractual responsibility to its insured. In Graser, we
relied on the Koffman policy explanation of the collateral source rule in the
context of the tortfeasor’s responsibility to the injured party:
“Under the collateral source rule a plaintiff’s recovery
cannot be reduced by payments or benefits from other
sources. The collateral source rule prevents any payments
made on the plaintiff’s behalf or gratuitous benefits
received by the plaintiff from inuring to the benefit of a
defendant-tortfeasor. The rule is grounded in the long-
standing policy decision that should a windfall arise as a
consequence of an outside payment, the party to profit from
that collateral source is ‘the person who has been injured,
not the one whose wrongful acts caused the injury.’”
Graser, 254 Wis. 2d 851, ¶8 (quoting Koffman, 246 Wis. 2d 31, ¶29). We
rephrased the quoted statement as: “In other words, the policy basis for the
collateral source rule is that the legally responsible tortfeasor should not be
relieved of his or her obligation to the victim simply because the victim had the
foresight to arrange benefits from a collateral source for injuries and expenses.”
Id.8
We further relied on Koffman for discussion of the purpose of subrogation.
“By virtue and to the extent of payments made on behalf of
another, a subrogated party obtains a right of recovery in an
action against a third-party tortfeasor and is a necessary
8 The UIM policy could be viewed as evidence of the same type of foresight exhibited by
Orlowski when she purchased health insuranceshe arranged for payment for injuries and
expenses she might sustain from a source other than a tortfeasor with limited or no resources. We
did not separately discuss in Graser the purpose of UIM coverage from the perspective of an
insured.

No. 2009AP2848
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party in an action against such a tortfeasor.” In a personal
injury action, the purpose of subrogation is to ensure that
the loss is ultimately placed with the wrongdoer and to
prevent the insured plaintiff from becoming unjustly
enriched through a double recovery, i.e., a recovery from
the insurer and the liable third party.
Graser, 254 Wis. 2d 851, ¶9 (quoting and referring to Koffman, 246 Wis. 2d 31,
¶33). The Koffman reference to preventing double recovery “from the insurer and
the liable third party,” is a reflection of established law that the injured party does
not recover both payments which are the subject of an existing subrogation interest
and the benefits already received because of the subrogated payment. Graser, 254
Wis. 2d 851, ¶9.
The plaintiff’s health insurance carrier in Graser had waived its
subrogation rights. See id., 254 Wis. 2d 851, ¶11. We then discussed our holding
in Anderson, a medical malpractice claim where two insurance companies had
each paid medical expenses. Graser, 254 Wis. 2d 851, ¶13; see also Anderson,
160 Wis. 2d at 392, 397. These companies were not properly joined in the suit
against the tortfeasor. Anderson, 160 Wis. 2d at 398. The jury awarded the full
amount of medical expenses. Id. at 392. The trial court reduced the award by the
amount paid by the insurers. Id. at 392-93. The question on appeal was whether
Anderson was entitled to a judgment which included the medical expenses paid by
the two absent subrogees. Id. at 400. As we noted in Graser, and held in
Anderson, “medical expenses paid by an insurer are properly awarded where the
insurer either waives or properly exercises its subrogation rights.” Anderson, 160
Wis. 2d at 402. Because the subrogation rights in Anderson had not been properly
exercised, or had been waived, we reinstated the full jury award for medical
expenses. Id. We added a footnote in Anderson, which we partially quoted in
Graser, stating that “[w]here an insurer waives its subrogation rights … no

No. 2009AP2848
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subrogation exists, and the collateral source rule applies.” Anderson, 160 Wis. 2d
at 401 n.5; see also Graser, 254 Wis. 2d 851, ¶11.
Both Koffman and Anderson were distinguished in Graser as cases
addressing claims against a tortfeasor and his/her insurance company while Graser
involved an injured party’s claim against her UIM insurance company. See id.,
254 Wis. 2d 851, ¶12. In making that distinction, we did not take into account
Gillette, filed a few weeks prior to Graser, in which our supreme court explained
that “[a] claim against the insurance company for underinsured motorist coverage
is ‘an action on the policy and sounds in contract,’ although an underlying tortious
injury is also involved.” Gillette, 251 Wis. 2d 561, ¶25 (citation and footnote
omitted). Gillette also explains that the two purposes of underinsured motorist
coverage are “to put an insurance company in the shoes of an underinsured
motorist and to compensate an insured fully for damages incurred up to the policy
liability limits.” Id., ¶47. The State Farm insurance policy language cited in
Gillette appears virtually identical to the policy here. See id., ¶11.
When we decided Graser, we also could not have considered the purpose
and function of a UIM policy, explained by our supreme court in Badger Mut.
Ins. Co. v. Schmitz, 2002 WI 98, 255 Wis. 2d 61, 647 N.W.2d 223.9 The court
stated:
There are two conflicting theories regarding the
purpose and function of UIM coverage. 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). … The second theory is that “the purpose of
underinsured motorist coverage is solely to put the insured
9 State Farm Mut. Auto. Ins. v. Gillette, 2002 WI 31, 251 Wis. 2d 561, 641 N.W.2d
662, was filed on March 29, 2002; Graser was filed on April 17, 2002; Badger Mut. Ins. Co. v.
Schmitz, 2002 WI 98, 255 Wis. 2d 61, 647 N.W.2d 223, was filed July 10, 2002.

No. 2009AP2848
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in the same position as he [or she] would have occupied
had the tortfeasor’s liability limits been the same as the
underinsured motorist limits purchased by the insured.”
Id., ¶¶17, 18 (some formatting altered; citations omitted; brackets in Badger
Mutual).
Under either theory of the purpose or function of UIM coverage, the plain
language of the State Farm policy appears to require that Orlowski recover the full
reasonable value of her medical expenses. The policy reducing language does not
abrogate collateral source damage law.10
We are likewise unable to reconcile Graser with the collateral source
holdings in Leitinger. In Leitinger, the health care provider billed $154,818.51
for Leitinger’s treatment. Id., 302 Wis. 2d 110, ¶3. The health care provider
accepted $111,394.73 from Leitinger’s health insurance company. Id. This left a
difference of $43,424.78 to which the health insurance company asserted no
subrogation rights. Id. Acuity, the tortfeasor’s insurance company, sought to
introduce evidence of the amount actually paid by the health insurance company to
prove the reasonable value of the medical care provided. Id., ¶5. Our supreme
court explained:
The collateral source rule, as a rule of damages and
as a rule of evidence, is premised on certain policy goals.
The collateral source rule is designed to protect plaintiffs.
Thus courts have allowed plaintiffs to recover the
reasonable value of medical services even when those
services have been paid for entirely by a collateral source
and the plaintiff has made no out-of-pocket payments at all.
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.
10 This rule has been abrogated by statute only in the case of medical malpractice
litigation. See WIS. STAT. § 893.55(7).

No. 2009AP2848
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Id., ¶31 (footnotes omitted).
It is “[t]he injured person, not the tortfeasor, [who] benefits from the
collateral source.” Id., ¶34. The Leitinger court, explaining its reasoning in
Koffman, stated that the collateral source rule “is specifically designed to prevent
a discount received by a plaintiff’s insurance company from affecting the
plaintiff’s recovery of the reasonable value of medical services rendered.”
Leitinger, 302 Wis. 2d 110, ¶44. We are unable to reconcile the explanation of
the reasoning in Koffman, as provided by Leitinger, with our analysis of the same
reasoning in Graser.
The parties essentially agree that the standard of review of an arbitration
award is de novo, and is described in Lukowski v. Dankert, 184 Wis. 2d 142, 152,
515 N.W.2d 883 (1994):
[A]rbitration awards will be vacated when they exceed
what is permissible in the contract providing for arbitration.
An arbitrator obtains authority only from the contract of the
parties and therefore is confined to the interpretation of that
contract and cannot ignore that contract when making an
award.
Our supreme court also explained that “[c]ourts will vacate an award when
arbitrators exceeded their powers through ‘perverse misconstruction,’ positive
misconduct, a manifest disregard of the law, or when the award is illegal or in
violation of strong public policy.” Baldwin-Woodville Area Sch. Dist. v. West
Cent. Educ. Ass’n, 2009 WI 51, ¶21, 317 Wis. 2d 691, 766 N.W.2d 591 (citation
and footnotes omitted). “When there is no contractual language that would allow
for the arbitrator’s construction, there is no reasonable foundation for the award.”
Id., ¶23. Here, the plain language of the contract requires State Farm to pay the
damages which Orlowski “is legally entitled to collect” from the underinsured

No. 2009AP2848
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tortfeasor. Under existing supreme court law, Orlowski appears entitled to collect
from the tortfeasor the fair value of her medical expenses, without reduction for
any difference between the amount paid by her health insurance company (which
has a subrogation right) and the fair value of her medical expenses. The
arbitration panel did not make its award based on that standard, as the UIM policy
requires.
In Graser, the arbitration panel found that the reasonable value of the
medical expenses totaled $79,983.57 and that the plaintiff’s health insurance
carrier had paid $45,217.52 of those expenses. Id., 254 Wis. 2d 851, ¶¶1, 4, 5.
We noted that the plaintiff’s health insurance carrier settled its subrogation claim
with the underinsured tortfeasor’s insurance company for $20,000 and waived its
remaining subrogation claim. Id., ¶3. Thus, the subrogation claim for the
additional $20,000 no longer existed. The arbitration panel awarded the insured
the UIM policy limit of $200,000, reduced by the $45,217.52 paid by the insured’s
health insurance (to satisfy the $79,983.57 medical expenses), for a net award of
$154,782.48. Id., ¶¶4-5. We sustained the arbitration award of $154,782.48. Id.,
¶16. The effect of the award was to allow the insured to recover from her UIM
carrier the approximately $35,700 “discount” on the billed medical expenses while
denying recovery of the amount attributable to the waived subrogation claim. This
result was simultaneously consistent and inconsistent with collateral source law.
See Koffman, 246 Wis. 2d 31, ¶2 (A “plaintiff is entitled to seek recovery of the
reasonable value of the medical services, without limitation to the amount paid.”);
see also Anderson, 160 Wis. 2d at 401 n.5 (“Where an insurer waives its
subrogation rights … no subrogation exists, and the collateral source rule
applies.”) (internal citation omitted).

No. 2009AP2848
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To apply the plain language of the contract here, it would be necessary to
modify, overrule or withdraw language from Graser. We are unable to reconcile
our holding based on public policy in Graser with our obligations to apply the
plain language of the insurance contract to the facts and to follow substantive
collateral source law as explained in Koffman and Leitinger. We have no power
to overrule, modify or withdraw language from Graser. See Cook, 208 Wis. 2d at
189-90 (“[O]nly the supreme court, the highest court in the state, has the power to
overrule, modify or withdraw language from a published opinion of the court of
appeals.”).
For all of the foregoing reasons, we certify this case to the Wisconsin
Supreme Court for resolution.

No. 2009AP2848
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