96-506

 No. 96-506

 No. 96-507

 No. 96-508

 IN THE SUPREME COURT OF THE STATE OF MONTANA

 

1997

 ______________________________________________________

TRACY AUGUSTINE,

 Plaintiff and Appellant,

 v.

SUSAN SIMONSON, and FARMERS INSURANCE EXCHANGE, 

 Defendants and Respondents.

__________________________________________________________________

JAY AUGUSTINE as GUARDIAN AD LITEM for CHASE AUGUSTINE,

 Plaintiff and Appellant,

 v.

SUSAN SIMONSON, and FARMERS INSURANCE EXCHANGE,

 Defendants and Respondents.

__________________________________________________________________

TRAVIS GRAY,

 Plaintiff and Appellant,

 v.

SUSAN SIMONSON, and FARMERS INSURANCE EXCHANGE,

 Defendants and Respondents.

 ______________________________________________________

APPEAL FROM: District Court of the Eighth Judicial District,

 In and for the County of Cascade,

 The Honorable John Warner, Judge presiding.

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COUNSEL OF RECORD:

 For Appellants:

 Channing J. Hartelius (argued); Hartelius, Ferguson, 

 Baker & Kazda; Great Falls, Montana

 For Respondents:

 William J. Gregoire (argued) and Robert J. Vermillion; 

 Smith, Walsh, Clarke & Gregoire; Great Falls, Montana

 Submitted: April 1, 1997

 Decided: June 24, 1997

Filed:

 __________________________________________

 Clerk

Justice Jim Regnier delivered the opinion of the Court.

 Tracy Augustine, Jay Augustine, as guardian ad litem for Chase Augustine, and

Travis Gray (collectively referred to herein as "the Augustines") filed three 

complaints

against Susan Simonson and Farmers Insurance Exchange in the Eighth Judicial District

Court. The complaints, arising out of an automobile accident, alleged that Simonson 

was

liable for their personal injuries and that Farmers was liable for the damages in 

excess

of the insurance proceeds available from Simonson pursuant to their underinsured

motorist (UIM) coverage. On December 20, 1995, at a court-ordered mediation

conference, the Augustines settled with Simonson. As a result, each claimant signed 

a

release reserving their underinsured motorist claim against Farmers. The claims 

against

Simonson were dismissed. Farmers filed a Rule 12(b)(6), M.R.Civ.P., motion to 

dismiss

on January 25, 1996, based on the exhaustion clause contained in its UIM policy. The

District Court issued an order granting the motion to dismiss on June 24, 1996. The

Augustines appeal from this order. We reverse.

 The issue on appeal is whether the District Court erred in holding that the

exhaustion clause in Farmers' underinsurance policy was a valid contractual 

provision and

thereby granting Farmers' motion to dismiss.

FACTUAL BACKGROUND

 On July 28, 1992, a vehicle driven by Susan Simonson rear ended a vehicle driven

by Travis Gray. Tracy Augustine, Chase Augustine, and Cole Davison were passengers

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in Gray's vehicle. Claims against Simonson and Farmers were made by Travis Gray,

Tracy Augustine, and Jay Augustine on behalf of Chase Augustine. Cole Davison was

a minor, age nine, at the time of the collision. No claim has been made on Cole's 

behalf

as of this date. 

 Simonson was insured by an American States insurance policy with an aggregate

combined single limit of $100,000. On December 20, 1995, the Augustines settled with

Simonson, reserving their claims against Farmers. Travis Gray's claim was settled 

for

$20,000. Tracy Augustine's claim was settled for $16,875, and Chase Augustine's 

claim

was settled for $16,875. Approximately $1,100 was paid for property damage. 

Therefore, with one potential claim still outstanding, approximately $54,600 has been

paid out on the American States policy, leaving approximately $45,400 remaining on 

the

policy limits.

 After the settlement, Farmers filed a motion to dismiss pursuant to Rule 12(b)

(6),

M.R.Civ.P., for failure to state a claim upon which relief could be granted. Farmers

asserted that the Augustines failed to comply with the exhaustion clause in their

underinsurance policy by entering into settlements which were less than the tortfeasor's

policy limits of liability. The District Court heard argument on the motion and 

ordered

supplemental briefing by the parties. On June 20, 1996, the District Court issued an

order in which the court recognized public policy reasons for invalidating exhaustion

clauses, but declined to hold the clause invalid, reasoning that "it would be unwise 

to

encroach on the legislative function in this area." The Augustines appeal.

 DISCUSSION

 Did the District Court err in holding that the exhaustion clause in Farmers'

underinsurance policy was a valid contractual provision and thereby granting Farmers'

motion to dismiss?

 The District Court's order on the motion to dismiss was based in part upon facts

outside of the pleadings. If a court considers matters outside of the pleadings on a

Rule 12(b)(6), M.R.Civ.P., motion to dismiss, that motion is constructively converted

into a motion for summary judgment regardless of how the order was phrased. See Rule

12(b), M.R.Civ.P.; American Medical Oxygen Co. v. Montana Deaconess Medical Ctr.

(1988), 232 Mont. 165, 168, 755 P.2d 37, 39. This Court reviews a district court's

grant of summary judgment de novo applying the same evaluation as the district court

based on Rule 56, M.R.Civ.P. Motarie v. Northern Montana Joint Refuse Disposal Dist.

(1995), 274 Mont. 239, 242, 907 P.2d 154, 156; Bruner v. Yellowstone County (1995),

272 Mont. 261, 264, 900 P.2d 901, 903. Summary judgment is proper when there is no

genuine issue as to any material fact and the moving party is entitled to a judgment 

as a

matter of law. Rule 56(c), M.R.Civ.P. 

 The interpretation of an insurance contract in Montana is a question of law. 

Wellcome v. Home Ins. Co. (1993), 257 Mont. 354, 356, 849 P.2d 190, 192. This Court

reviews questions of law to determine whether the lower court's application or

interpretation of the law is correct. Hollister v. Forsythe (1995), 270 Mont. 91, 

93, 889

P.2d 1205, 1206; McGregor v. Madsen (1992), 253 Mont. 210, 212, 832 P.2d 779, 780.

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 The Augustines argue on appeal that the District Court erred when it determined

that they must exhaust the tort-feasor's insurance policy limits in order to make a 

claim

for UIM coverage. They further assert that the term "exhaust" is ambiguous and 

therefore

unenforceable. Farmers argues that the term "exhaust" is not ambiguous and that this

Court should not rewrite the insurance policy by declaring the exhaustion clause 

invalid

as violative of public policy.

 We have previously held that if a contract's terms are clear and unambiguous, 

the

contract language will be enforced. Youngblood v. American States Ins. Co. (1993), 

262

Mont. 391, 395, 866 P.2d 203, 205; Keller v. Dooling (1991), 248 Mont. 535, 539, 813

P.2d 437, 440; 28-3-401, MCA. This Court has further held that the only exception

to enforcing an unambiguous contract term is if that term violates public policy or 

is

against good morals. Youngblood, 866 P.2d at 205; Amsterdam Lumber, Inc. v.

Dyksterhouse (1978), 179 Mont. 133, 140, 586 P.2d 705, 709; 28-2-701, MCA.

 The Farmers policy at issue contains a standard exhaustion clause which 

provides:

"We will pay under this coverage only after the limits of liability under any 

applicable

bodily injury liability bonds or policies have been exhausted by payment of judgments

or settlements." We do not find the Augustines' argument persuasive that the term

"exhaust" in this clause is ambiguous. We conclude that there is only one reasonable

interpretation of the clause in light of its purpose. Leibrand v. National Farmers 

Union

Prop. and Cas. Co. (1995), 272 Mont. 1, 6, 898 P.2d 1220, 1223. The term requires

that the insured entirely exhaust the limits of all existing bodily injury liability 

bonds or

policies before he or she is entitled to proceed against the underinsured motorist 

carrier. 

We shall, therefore, examine the validity of the clause in light of public policy

considerations.

 Neither the Montana Legislature nor this Court have specifically addressed the

issue of whether an exhaustion clause in an underinsurance policy is enforceable 

under

public policy. This Court has, however, spoken generally as to the purpose of

underinsurance. In Sorenson v. Farmers Ins. Exch. (Mont. 1996), 927 P.2d 1002, 53 

St.

Rep. 1155, we adopted a "no prejudice" rule as a matter of public policy and stated 

that

"[t]he purpose of underinsured motorist insurance is to provide a source of

indemnification for accident victims when the tortfeasor does not provide adequate

indemnification." Sorenson, 927 P.2d at 1005 (citing State Farm Mut. Auto. Ins. Co. 

v.

Estate of Braun (1990), 243 Mont. 125, 130, 793 P.2d 253, 256). In Sorenson, the

plaintiff settled with the tort-feasor and provided a release without obtaining the 

consent

of her own underinsurance carrier. The insurer argued that when she settled and 

provided

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a release without the insurer's consent, she was precluded from receiving her

underinsured motorist coverage. In reversing the district court, we held that there 

was

no prejudice to the insurer where the tort-feasor was judgment proof and, 

consequently,

the insured's actions would not compromise the insurer's ability to subrogate. We

explained the meaning of this no prejudice rule as "absent some showing of material

prejudice to the underinsurance carrier, a claim for underinsured motorist coverage 

may

not be precluded on a technicality." Sorenson, 927 P.2d at 1004.

 In its order on the motion to dismiss, the District Court devoted considerable

attention to specific public policy reasons for not requiring adherence to exhaustion

clauses. The court noted that not requiring the insured to fully exhaust the tortfeasor's

insurance serves a dual purpose of discouraging prolonged litigation and promoting 

early

settlements, thereby providing the injured party with the relief when it is most 

needed. 

Numerous jurisdictions have agreed that these are important public policy reasons and

that exhaustion clauses violate public policy. For instance, Justice Holmes of the 

Ohio

Supreme Court observed:

There are of course a number of considerations which militate in favor of

settlement between the underinsured tortfeasor's insurer and the injured

party. Obviously, settlement avoids litigation with its attendant expenses

and resultant burden upon the legal system. Where the amount of

settlement is less than the policy limits, the unpaid amount may well

represent the savings in litigation costs for both sides. More importantly,

settlement hastens the payment to the injured party who obviously needs

compensation soon after the injuries when the medical expenses begin to

amass and when the anxiety level is probably quite high. Additionally,

there are many situations where litigation would not be a preferred course

of action because, while the injuries are certain, there may remain other

problems of proof. Thus, the public policy considerations, apart from the

contract of the parties, generally favor settlements.

Bogan v. Progressive Cas. Ins. Co. (Ohio 1988), 521 N.E.2d 447, 451, modified in part

on other grounds, McDonald v. Republic-Franklin Ins. Co. (Ohio 1989), 543 N.E.2d

456.

 The Supreme Court of Nevada also determined that exhaustion clauses violate

public policy because

they unnecessarily promote litigation costs, increase the number of trials,

and unreasonably delay the recovery of underinsured motorist benefits. 

Specifically, these cases point out that an insured may have valid reasons

for accepting less than the tortfeasor's policy limit, that an "underinsured

motorist carrier" can compute its payments to the insured as if the insured

had exhausted the tortfeasor's policy limit, and that if an "exhaustion

clause" is in effect, the tortfeasor's carrier can force the plaintiff to go to

trial by offering less than the tortfeasor's policy limit, thereby greatly

increasing litigation costs and expenses and promoting delay. See

Mulholland v. State Farm Mutual Auto Ins. Co., 171 Ill.App.3d 600, 122

Ill.Dec. 657, 527 N.E.2d 29 (1988); Schmidt v. Clothier, 338 N.W.2d 256

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(Minn.1983) (superseded by statute); Longworth v. Van Houten, 223

N.J.Super. 174, 538 A.2d 414 (App.Div.1988); Hamilton v. Farmers Ins.

Co. of Washington, 107 Wash.2d 721, 733 P.2d 213 (1987). 

 

Mann v. Farmers Ins. Exch. (Nev. 1992), 836 P.2d 620, 621.

 In sum, the policy reasons for not enforcing exhaustion clauses include the

following rationales. Exhaustion clauses promote litigation expenses which lessen 

the

insured's net recovery. The time involved in litigation serves to delay payment of 

UIM

benefits to the insured. Furthermore, such clauses fail to recognize that the 

insured may

have a legitimate and valid reason for accepting less than the tort-feasor's policy 

limits,

i.e., the cost and risk of litigation and issues of proof. They fail to consider 

that the

underinsured carrier can compute its payments to the insured as if the insured had

exhausted the tort-feasor's policy, thereby not prejudicing the UIM carrier. 

Finally,

under an exhaustion clause the tort-feasor's carrier can force the injured party to 

go to

trial by offering less than the policy limits, thereby increasing costs, litigation, 

and delay.

 We conclude that this reasoning is consistent with the public policy of this 

State.

It is also consistent with the purpose of underinsurance, to provide indemnification 

for

accident victims when the tort-feasor does not provide adequate indemnification.

Sorenson, 927 P.2d 1002. Furthermore, it is consistent with the declared public 

policy

of this State to encourage settlement and avoid unnecessary litigation. Holmberg v. 

Strong

(1995), 272 Mont. 101, 106, 899 P.2d 1097, 1100. Therefore, we conclude that the

provision requiring that the tort-feasor's liability insurance be entirely exhausted 

as a

prerequisite to securing indemnification from the underinsured motorist coverage is

contrary to the public policy of the State of Montana and is unenforceable to the 

extent

that it violates public policy. 

 Jurisdictions which have held exhaustion clauses to be unenforceable as against

public policy have resolved the exhaustion requirement using different methods. Some

jurisdictions have held that exhaustion clauses can be fulfilled when the claimant 

settles

with the tort-feasor's insurance company and leaves only a reasonable amount on the 

table

which could be said to represent a savings for both parties as costs of avoided 

litigation. 

See, e.g., Bogan, 521 N.E.2d 447; Leuchtenmacher v. Farm Bureau Mut. Ins. Co. (Iowa

1990), 461 N.W.2d 291. This determination often requires an evidentiary hearing to

determine if the amount left on the table does represent a savings for both parties 

as

avoided costs of litigation. It also requires representative counsel to provide 

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depositions

or testify as to potential litigation costs. This process then requires the lower 

court to

apply a subjective test to determine what comprises a reasonable amount left on the 

table.

This determination becomes even more complex when the factual situation involves

multiple claimants, some of whom might have outstanding claims at the time one

settlement is reached. 

 Requiring additional litigation to determine whether an exhaustion clause has 

been

substantially fulfilled would only further frustrate our previously stated public 

policy of

encouraging settlement, and not delaying the payment of claims and increasing the 

costs

and burdens borne by the insured in obtaining compensation. A more prudent 

approach,

and the one we hereby adopt today, does not prejudice the underinsurance carrier, nor

does it place additional burdens of time and litigation costs on insureds seeking to 

recover

on their underinsurance policies.

 To prevent unnecessary litigation and yet fulfill the contract made between the

insurer and its insured, the insured may proceed to bring his or her claim against 

their

UIM carrier whether or not they have fully exhausted the tort-feasor's insurance 

policy

limits. A claim must first be made with the tort-feasor's insurance company. This 

claim,

however, does not have to be finally disposed of before proceeding against the

underinsurer. In the case of an individual claimant, the underinsurance coverage 

liability

then commences only when the insured's damages exceed the stated limit of the tortfeasor's liability insurance, thus making the insured responsible for any gap 

between the

amount of settlement and the tort-feasor's liability limits. The underinsurer shall 

receive

credit, however, for the full amount of the tort-feasor's policy limits. 

 In a situation where multiple claimants seek to recover the proceeds of a single

policy, such as we have here, there are additional considerations. In most 

instances, the

nature and extent of the injuries suffered by the individual claimants will 

differ. As a

workable solution, we adopt the following procedure. The limits of the tort-feasor's

policy shall be divided among the claimants, in an equal pro rata share, for the 

purpose

of considering exhaustion. This share, or the amount of the tort-feasor's insurance

actually received by the claimant, whichever is greater, shall then be credited to 

their

individual underinsurers as being the "limits" of the tort-feasor's policy.

 We can foresee some instances where the claimant may nevertheless want to

proceed to exhaust the policy. In a multiple claim-single limit situation, a 

claimant may

receive a minimal settlement because the other claimants may have comparatively more

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serious injuries. The amount received may be significantly less than the value of 

the

claim, but considerably under the pro rata set off. There is nothing to prevent 

such a

claimant from fully "exhausting" the policy under traditional methods and then 

proceeding

against the underinsurer. 

 In sum, the underinsurer is not prejudiced by allowing a claim for 

underinsurance

to proceed regardless of whether the tort-feasor's policy limits have not been fully

exhausted because the underinsurer receives a credit for the policy limits. This 

procedure

still provides protection to an insurance company against a demand by its insured to 

fill

the gap after a weak claim has been settled for an unreasonably small amount, yet it

provides prompt payment to the insured and does not lessen the insured's recovery by

requiring him or her to pay additional litigation costs and delay the payment of 

claims. 

Furthermore, this method bypasses the necessity of litigating the determination of 

whether

a policy has been exhausted by a settlement leaving only a reasonable amount on the 

table

reflecting saved costs of avoided litigation.

 Although we agree with the District Court's statement of public policy, we 

reverse

the District Court's decision and remand for further proceedings consistent with this

opinion.

 /S/ JIM REGNIER 

We Concur:

/S/ J. A. TURNAGE

/S/ KARLA M. GRAY

/S/ W. WILLIAM LEAPHART

/S/ JAMES C. NELSON

/S/ WILLIAM E. HUNT, SR.

/S/ TERRY N. TRIEWEILER

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