Opinion ID: 874182
Heading Depth: 2
Heading Rank: 1

Heading: The Exhaustion Clause Is Void as Contrary to Public Policy

Text: The dispositive issue here is whether American Family may rely on an exhaustion clause to deny Hill's UIM benefits solely because she settled for just under the tortfeasor's policy limits. The thrust of Hill's appeal is that the exhaustion clause contravenes Idaho's public policy of requiring UIM coverage, which is embodied in I.C. § 41-2502(1). Section 41-2502(1) requires all insurance carriers to offer UIM coverage with their policies. [1] Hill argues that this Court should adopt the doctrine of constructive exhaustion to allow her to collect UIM benefits above the tortfeasors' policy limits even if she settles for less than those limits. American Family responds that Idaho case law creates no public policy with respect to UIM claims.
A preliminary issue is to determine the legal effect of the exhaustion clause. A contract must be interpreted according to the plain meaning of the words used if the language is clear and unambiguous. Cascade Auto Glass, Inc. v. Idaho Farm Bureau Ins. Co., 141 Idaho 660, 663, 115 P.3d 751, 754 (2005). An insurance policy is ambiguous if it is reasonably susceptible to different interpretations. Armstrong v. Farmers Ins. Co., 143 Idaho 135, 137, 139 P.3d 737, 739 (2006). This Court freely reviews the question of whether an insurance contract is ambiguous. Clark v. Prudential Prop. & Cas. Ins. Co., 138 Idaho 538, 541, 66 P.3d 242, 245 (2003). Hill does not dispute that the UIM provision is clear. It reads: We will pay compensatory damages for bodily injury which an insured person is legally entitled to recover from the owner or operator of an underinsured motor vehicle.. . . . . . . We will pay under this coverage only after the limits of liability under any bodily liability bonds or policies have been exhausted by payment of judgments or settlements. This language is boilerplate in the insurance industry, and a number of other jurisdictions have found virtually identical wordings to be unambiguous. E.g. Robinette v. Am. Liberty Ins. Co., 720 F.Supp. 577, 579 (S.D.Miss. 1989); Birchfield v. Nationwide Ins., 317 Ark. 38, 875 S.W.2d 502, 503 (1994). The clause explicitly creates a condition precedent to UIM benefits, entitling Hill to coverage only if she settles or receives a payment for the tortfeasor's policy limits. See Maroun v. Wyreless Sys., Inc., 141 Idaho 604, 614, 114 P.3d 974, 984 (2005) (A condition precedent is an event not certain to occur, but which must occur, before performance under a contract becomes due. (quotation omitted)).
Next, this Court must determine whether the exhaustion clause violates public policy, which is a question of law. Quiring v. Quiring, 130 Idaho 560, 566, 944 P.2d 695, 701 (1997). The liberty of contract is not an absolute and unlimited right, but upon the contrary is always subservient to the public welfare. J.F. v. D.B., 116 Ohio St.3d 363, 879 N.E.2d 740, 741 (2007) (citation omitted). [T]he courts will not hesitate to declare void as against public policy contractual provisions which clearly tend to the injury of the public in some way. 17A C.J.S. Contracts § 218 (2010). The usual test applied by courts in determining whether a contract offends public policy and is antagonistic to the public interest is whether the contract has a tendency toward such an evil. Stearns v. Williams, 72 Idaho 276, 283, 240 P.2d 833, 837 (1952) (emphasis added). Public policy may be found and set forth in the statutes, judicial decisions or the constitution. Bakker v. Thunder Spring-Wareham, L.L.C., 141 Idaho 185, 189, 108 P.3d 332, 336 (2005). Whether an insurance contract is against public policy is to be determined from all the facts and circumstances of each case. Foremost Ins. Co. v. Putzier, 100 Idaho 883, 887, 606 P.2d 987, 991 (1980). In addition, analogous cases involving the same general principles may be looked to by the court in arriving at a satisfactory conclusion. Smith v. Idaho Hosp. Serv., 89 Idaho 499, 504, 406 P.2d 696, 699 (1965). American Family is correct in that, as of yet, Idaho case law has only held that [n]either the Idaho legislature nor the courts have declared that there exists a public policy applicable to underinsured motorist coverage. Meckert v. Transamerica Ins. Co., 108 Idaho 597, 600, 701 P.2d 217, 220 (1985); accord Erland v. Nationwide Ins. Co., 136 Idaho 131, 133, 30 P.3d 286, 288 (2001). The Court repeatedly indicated, however, that the sole reason there was no clear public policy regarding UIM coverage was because Idaho statutes do not regulate underinsured motorist coverage. Andrae v. Idaho Counties Risk Mgmt. Prog. Underwriters, 145 Idaho 33, 36, 175 P.3d 195, 198 (2007) (citing Meckert, 108 Idaho at 600, 701 P.2d at 220). We have rejected public policy challenges related to UIM policies only because our statutes do not require an automobile insurer to include underinsured vehicle coverage in its policies or even to offer this coverage to its insureds. Farmers Ins. Co. v. Buffa, 119 Idaho 345, 347, 806 P.2d 438, 440 (1991); see also Nationwide Mut. Ins. Co. v. Scarlett, 116 Idaho 820, 822, 780 P.2d 142, 144 (1989) (same). In 2008, however, the Legislature did begin to require insurers to offer UIM coverage. It amended I.C. § 41-2502(1) to expressly require insurance companies to offer such provisions with automobile policies. Act of March 5, 2008, ch. 69, § 1, 2008 Idaho Sess. Laws 183, 183. Insureds now may only refuse this coverage if they do so in writing. Id. (codified at I.C. § 41-2502(2)). The amendment requires insurers to offer protection against underinsured motor vehicles, defined as vehicles insured with limits at least at the statutory minimum for bodily injury or death. [2] § 2, 2008 Idaho Sess. Laws at 184 (codified at I.C. § 41-2503(2)). The Legislature accordingly intends to protect Idaho's citizens from drivers carrying policies above the statutorily required policy levels but who have insurance insufficient to compensate their tort victims. The Legislature apparently enacted the amendment for two reasons. First, the most obvious is the threat that underinsured motorists pose to public safety. Idahoans suffering catastrophic injuries from drivers carrying insufficient coverage could find themselves without redress if they have no UIM policy. Second, without UIM coverage, Idahoans injured by a totally uninsured driver sometimes recover more than those injured by underinsured drivers. Many drivers in Idaho injured by underinsured motorists had little recourse if they purchased uninsured-motorist (UM) policies but had no UIM coverage, since those policies provided no benefits if the underinsured tortfeasor had at least the minimum required amount of insurance coverage. As this Court observed before the Legislature implemented the UIM mandate, many drivers in this state may well be in a better position if a tortfeasor carries no insurance whatsoever rather than carrying the minimum coverage mandated by the statute, and that the matter deserves legislative attention. Blackburn v. State Farm Mut. Auto. Ins. Co., 108 Idaho 85, 90, 697 P.2d 425, 430 (1985); see also Longworth, 538 A.2d at 424 (stating that there is no reason why UM claimants should have immediate recourse against their insurer but not UIM claimants). The Legislature has addressed this anomaly by mandating insurers to at least offer UIM coverage in all insurance policies. Before analyzing the public-policy issue further, however, it is necessary to note that the Director of the Department of Insurance presumably approved the terms in Hill's insurance policy. Absent an assertion to the contrary, this Court presumes that the insurance policy was submitted to the Director and was found to comport with public policy. Am. Foreign Ins. Co. v. Reichert, 140 Idaho 394, 399, 94 P.3d 699, 704 (2004). The Legislature has empowered the Director to invalidate an insurance policy for a number of reasons, including because it contains any inconsistent, ambiguous, or misleading clauses, or exceptions and conditions which deceptively affect the risk purported to be assumed in the general coverage of the contract, or which are unfairly prejudicial to the policy holder. I.C. § 41-1813(2). Hill does not contend that the Director failed to review or disapproved her policy with American Family. The Dissent contends that the Court should simply defer to the Director and hold that the policy comports with public policy, but the fact that the Director may have approved these contract terms merely creates a presumption that they are valid and is not conclusive. Hansen v. State Farm Mut. Auto. Ins. Co., 112 Idaho 663, 667-68, 735 P.2d 974, 978-79 (1987). Of course, even if the Director has reviewed the terms in this case, the insurance policy here was executed before the Legislature amended the Code to require insurers to offer UIM coverage. The Director could not have known about the Legislature's new public-policy decisions at that time. Nearly every jurisdiction with a statutory UIM mandate similar to Idaho's has found exhaustion clauses to be contrary to public policy. E.g. Country Mut. Ins. Co. v. Fonk, 198 Ariz. 167, 7 P.3d 973, 978 (Ariz.Ct. App.2000); Taylor v. Gov't Employees Ins. Co., 90 Hawai`i 302, 978 P.2d 740, 746, 751 (1999); Buzzard v. Farmers Ins. Co., 824 P.2d 1105, 1112 (Okla.1992); Aetna Cas. & Sur. Co. v. Faris, 27 Mass.App.Ct. 194, 536 N.E.2d 1097, 1099-100 (1989); Chambers v. Aetna Cas. & Sur. Co., 442 Pa.Super. 155, 658 A.2d 1346, 1348 (1995); Rutgers Cas. Ins. Co. v. Vassas, 139 N.J. 163, 652 A.2d 162, 166 (1995); Mann v. Farmers Ins. Exch., 108 Nev. 648, 836 P.2d 620, 621 (1992) overruled on other grounds by White v. Cont'l Ins. Co., 119 Nev. 114, 65 P.3d 1090, 1092 (2003). But see Ploen v. Union Ins. Co., 253 Neb. 867, 573 N.W.2d 436, 443 (1998) (rejecting a public policy challenge). [3] These cases comport with the overall majority position nationwide that exhaustion clauses are void and, under the constructive-exhaustion doctrine, [4] do not prevent an insured from exhausting the tortfeasor's policy by settling for an amount less than the policy limits. Farmers Ins. Exch. v. Hurley, 76 Cal.App.4th 797, 90 Cal. Rptr.2d 697, 700 (1999); Horace Mann Ins. Co. v. Adkins, 215 W.Va. 297, 599 S.E.2d 720, 729 n. 12 (2004); e.g. New Hampshire Ins. Co. v. Knight, 506 So.2d 75, 77 (Fla.Dist.Ct. App.1987); Metcalf v. State Farm Mut. Auto. Ins. Co., 944 S.W.2d 151, 153 (Ky.Ct. App.1997). To prevent the UIM carrier from paying extra-contractual benefits, however, the underinsurer always is allowed to credit the full amount of the tortfeasor's liability coverage against the insured's damages. Hamilton v. Farmers Ins. Co. of Washington, 107 Wash.2d 721, 733 P.2d 213, 217 (1987); accord Sorber v. Am. Motorists Ins. Co., 451 Pa.Super. 507, 680 A.2d 881, 882 (1996). Conversely, nearly every state that has rejected the constructive-exhaustion doctrine has done so because a statute either expressly allowed or expressly required UIM coverage to be conditioned on an exhaustion clause like the one at issue here. [5] The Idaho statute, by comparison, simply requires insurance policies delivered or issued in Idaho to contain underinsurance coverage unless expressly rejected in writing by the insured. I.C. § 41-2502(1), (2). [6] The Idaho Code neither requires nor expressly permits exhaustion clauses. This Court must therefore carefully evaluate whether requiring insureds to comply with UIM exhaustion clauses would thwart the Legislature's goal of protecting motorists from underinsured drivers. Because I.C. § 41-5202(1) is designed to remedy the public-safety problem created by underinsured drivers, it is a remedial statute. It is a well-known canon of statutory construction that remedial legislation is to be liberally construed to give effect to the intent of the legislature. State v. Hobby Horse Ranch Tractor & Equip. Co., 129 Idaho 565, 567, 929 P.2d 741, 743 (1996). Other courts invalidating exhaustion clauses also observe that UIM statutes are remedial in nature. They reason that the insured's ability to recover UIM benefits should be scrupulously guarded because UIM coverage is intended to provide excess coverage to compensate an insured against losses for which there would otherwise be no coverage. [7] Horace Mann, 599 S.E.2d at 725-26. Consequently, [t]he exhaustion clause must be construed as it was intended, i.e., a threshold requirement and not a barrier to underinsured motorist insurance coverage. Bogan v. Progressive Cas. Ins. Co., 36 Ohio St.3d 22, 521 N.E.2d 447, 453 (1988) overruled on other grounds by McDonald v. Republic-Franklin Ins. Co., 45 Ohio St.3d 27, 543 N.E.2d 456 (1989). There might be reasons for a claimant to settle below policy limits that are unrelated to the amount of damages the claimant has suffered. Because it may be necessary or advantageous for insureds to accept a settlement, [t]he insured should have the right to accept what he or she considers the best settlement available against the tortfeasor without relinquishing under-insurance protection. Rucker v. Nat'l Gen. Ins. Co., 442 N.W.2d 113, 117 (Iowa 1989). The insured might wish to settle if the insurance limits are too low to justify trial. Olivas v. State Farm Mut. Auto. Ins. Co., 850 S.W.2d 564, 567 (Tex.App.1993). The insured might also have immediate financial or medical reasons for needing to settle the UIM claim below policy limits. Cobb v. Benjamin, 325 S.C. 573, 482 S.E.2d 589, 597 (S.C.Ct.App.1997). If the insured has to exhaust the policy limits to keep his or her UIM coverage, the tortfeasor's insurance company could force the insured to go to court by offering just less than the policy limits. In effect then, the victim is denied the perfectly reasonable choice of saving months, if not years, of delay, trial preparation expense, and all the ensuing wear and tear by simply accepting the offer. Longworth v. Van Houten, 223 N.J.Super. 174, 538 A.2d 414, 423 (N.J.Super.Ct.App.Div.1988). The litigation would also likely reduce the insured's net recovery. Id. There would be many instances where the claimant receives a greater recovery by settling than by paying a lawyer to pursue a lengthy and contentious trial for only a small amount more than the settlement offer. Litigation would create drastic delays for litigants who may have suffered serious injuries and desperately need to collect benefits. These delays would be exacerbated by the fact that the claimant may have to undergo further arbitration against the UIM carrier after obtaining a judgment from the tortfeasor. See Harper v. Providence Washington Ins. Co., 753 A.2d 282, 284-85 (Pa.Super.Ct.2000) (permitting arbitration against a UIM carrier while the insured's claim against the tortfeasor was still pending). UIM claimants in Idaho subject to exhaustion clauses like this one would have even greater difficulty collecting UIM benefits in collisions caused by more than one defendant. Although this particular issue is not presently before this Court, it highlights another reason for which many other jurisdictions have refused to enforce exhaustion clauses. In such a case, the claimant would still have to exhaust any bodily injury liability bonds or policies before being able to collect UIM payments. The claimant might not be able to exhaust one of the tortfeasors' policy limits, especially if that tortfeasor was less liable relative to the other defendants. See I.C. § 6-802 (permitting the court to apportion damages among defendants). As a New York court reasoned, requiring the insured to exhaust all the insurance applicable to all vehicles involved in an accident would emasculate the endorsement's intended effect. . . to provide coverage over and above the limits of the tortfeasor's insurance. Colonial Penn Ins. Co. v. Salti, 84 A.D.2d 350, 446 N.Y.S.2d 77, 79 (N.Y.App.Div.1982). Due to the inequity that UIM claimants might face when confronted with multiple tortfeasors, other courts have permitted UIM insureds to pursue arbitration against the insurer at the same time claims are pending against multiple tortfeasors. Leslie v. W.H. Transp. Co., 338 F.Supp.2d 684, 689 (S.D.W.Va.2004); see also Gen. Accident Ins. Co. v. Wheeler, 221 Conn. 206, 603 A.2d 385, 387 (1992) (requiring the claimant to exhaust only one tortfeasor's policy even though a statute expressly required exhaustion of all policies). UIM claimants, in other words, are better equipped than their UIM carriers to most efficiently resolve claims against the tortfeasor. They are in the best position to determine whether it is worth the time and expense to litigate. The Dissent asserts that the Legislature's 2008 UIM amendment does not in any way purport to address the procedures for making a claim under such coverage, and therefore does not indicate that there is a legislative policy aimed at protecting Idahoans from underinsured motorists. The Legislature clearly enacted the UIM amendments to protect the citizens of this State from being undercompensated for their injuries, and exhaustion clauses impose a substantive, not merely procedural, obstacle in front of accident victims seeking UIM benefits. Requiring victims to actually exhaust the tortfeasor's policy limits is not the kind of UIM coverage the Legislature contemplated. [8] Apart from the remedial nature of the UIM-mandate statute is the entirely separate public interest in judicial economy. Public policy favors the resolution of controversies and uncertainties through compromise and settlement rather than through litigation. 15A Am.Jur.2d Compromise & Settlement § 5. Exhaustion clauses harm the public interest in judicial economy in two ways. First, they encourage tortfeasors' insurers to litigate against UIM claimants. As previously mentioned, the tortfeasor's insurer could use an exhaustion clause to compel litigation by offering to settle for only just under the policy limits. The injured collision victim could have to endure needless delay and expense litigating or lose his/her benefits. Second, Idaho's courts will have to contend with unnecessary litigation merely so that UIM claimants can preserve their benefits. Schmidt v. Clothier, 338 N.W.2d 256, 260 (Minn.1983) (superseded by statute); Augustine v. Simonson, 283 Mont. 259, 940 P.2d 116, 120 (1997). As this Court and the U.S. Supreme Court have held in cases discussing collateral estoppel and res judicata, reducing repetitive or unnecessary litigation is a legitimate goal, as it frees up judicial resources for legitimate disputes. Allen v. McCurry, 449 U.S. 90, 94, 101 S.Ct. 411, 415, 66 L.Ed.2d 308, 313 (1980) (stating that both collateral estoppel and res judicata conserve judicial resources); Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326, 99 S.Ct. 645, 649, 58 L.Ed.2d 552, 559 (1979) (similar); Brown v. Felsen, 442 U.S. 127, 131, 99 S.Ct. 2205, 2209, 60 L.Ed.2d 767, 771 (1979) (holding that res judicata frees the courts to resolve other disputes); Maroun v. Wyreless Sys., Inc., 141 Idaho 604, 617, 114 P.3d 974, 987 (2005) (collateral estoppel); Hindmarsh v. Mock, 138 Idaho 92, 94, 57 P.3d 803, 805 (2002) (res judicata); Anderson v. City of Pocatello, 112 Idaho 176, 183, 731 P.2d 171, 178 (1986) (collateral estoppel); see also Pines, Inc. v. Bossingham, 131 Idaho 714, 717, 963 P.2d 397, 400 (Ct.App.1998) (collateral estoppel). Promoting an efficient judiciary ultimately benefits the public. Given all the potential reasons that a UIM claimant may need to settle for just under policy limits, it would be contrary to principles of judicial economy to require full exhaustion by litigation or settlement. Cobb, 482 S.E.2d at 596-97. For the foregoing reasons, we now hold exhaustion clauses in UIM automobile policies to be void, unenforceable, and severable in Idaho. To collect against his or her insurer, a UIM insured may proceed against the UIM carrier, who must investigate and attempt to resolve the claim in good faith regardless of whether the insured settled with the tortfeasor's insurer or, if so, for how much. Taylor, 978 P.2d at 751. The UIM carrier will receive credit for the full amount of the tortfeasor's policy, regardless of the insured's actual recovery. We decline to implement the constructive-exhaustion doctrine or to otherwise replace exhaustion clauses with any other judicially created language. This is primarily to prevent any confusion over how much settlement the insured must extract from the tortfeasor before approaching the UIM carrier for benefits. Hill suggested that courts should require the settlement amount to be reasonable in relationship to the tortfeasor's policy limits. A reasonableness requirement is unnecessary for three reasons. First, the UIM claimant, not his or her insurer, has to absorb the gap between the settlement and the tortfeasor's policy limits. So long as there is no prejudice resulting from the settlement, there is simply no need for courts to determine whether the amount was reasonable. Second, the UIM claimant is in the best position to efficiently resolve a claim by weighing the provable facts of the case, the financial or medical need for quick settlement, and the potential costs of litigation. A reasonableness requirement might obstruct otherwise efficient claim resolution or prolong the process by calling on the courts to evaluate whether the settlement amount was reasonable. Third, asking judges to determine whether settlements are reasonable would draw the parties back into court and undermine the goal of promoting swift claim resolution and judicial economy. Although Hill's exhaustion clause is void, the rest of her policy remains intact. To the extent that a term requiring the occurrence of a condition is unenforceable [for public-policy reasons], a court may excuse the non-occurrence of the condition unless its occurrence was an essential part of the agreed exchange. Restatement (Second) of Contracts § 185 (1981); see also Nelson v. Armstrong, 99 Idaho 422, 426, 582 P.2d 1100, 1104 (1978) (Where a transaction is composed of both benign and offensive components and the different portions are severable, the unobjectionable parts are generally enforceable.). Hill will not receive a better deal than she bargained for if she can show that an underinsured tortfeasor is liable to her for an amount exceeding his policy limits and then sets off those policy limits against her UIM recovery. Augustine, 940 P.2d at 121; Rucker, 442 N.W.2d at 117; see also Bethlehem Steel Corp. v. Gorsuch, 742 F.2d 1028, 1036 (7th Cir.1984) (stating that the court will not enforce the remainder of the contract if the result will be to give the promisee a substantially better deal than he had bargained for).
American Family contends that since the Legislature only began requiring insurers to offer UIM coverage in 2009, no statutory public policy aimed at protecting the public from underinsured drivers existed when Hill entered into her insurance contract in July of 2005. See § 1, 2008 Idaho Sess. Laws at 183-84 (amending I.C. § 41-2502 effective January 1, 2009). American Family reasons that this Court would be applying the statute retroactively if it allowed Hill to collect UIM benefits without having settled for the tortfeasors' policy limits. It is true that § 41-2502 is not retroactive. No statute is retroactive unless the Legislature expressly declares that it is. I.C. § 73-101; Henderson v. Smith, 128 Idaho 444, 448, 915 P.2d 6, 10 (1996). A statute will not be given a retroactive construction by which it will impose liabilities not existing at the time of its passage. Doe v. Boy Scouts of Am., 148 Idaho 427, 431, 224 P.3d 494, 498 (2009) (quoting Ford v. City of Caldwell, 79 Idaho 499, 509, 321 P.2d 589, 594 (1958)). The Legislature did not expressly provide for its amendment to § 41-2502 to apply to preexisting insurance policies. In addition, there is plenty of authority holding that contracts are interpreted according to the law at the time the contract is executed. E.g. Smith v. Idaho Hosp. Serv., Inc., 89 Idaho 499, 503, 406 P.2d 696, 698 (1965); Northland Ins. Co. v. Boise's Best Autos & Repairs, 132 Idaho 228, 231, 970 P.2d 21, 24 (Ct.App.1997), rev'd on other grounds, 131 Idaho 432, 958 P.2d 589 (1998) (applying the rule specifically to insurance contracts). Nonetheless, regardless of when I.C. § 41-2502(1) was enacted, it is the Court's responsibility not to enforce a contract provision that is contrary to public policy. Public policy is not static, but may change as the relevant factual situation and the thinking of the times change. Brown v. Snohomish Cnty. Phys. Corp., 120 Wash.2d 747, 845 P.2d 334, 338 (1993). The duty to avoid enforcing an invalid contract term is so strong that Idaho's courts must raise the public policy issue sua sponte if necessary. Quiring, 130 Idaho at 567, 944 P.2d at 702. The Court does not invalidate a contract only if it was void at the time it was entered. Instead, the Court must not enforce any contract at any stage in the litigation in which it becomes apparent that the provision contravenes public policy. Id. Thus, whenever the Court discovers that a provision is invalid, the Court must refuse to enforce it. It is widely accepted that contracts can be eviscerated by a subsequent change in public policy. E.g. Pittsburgh Plate Glass Co. v. Jarrett, 42 F.Supp. 723, 730 (M.D.Ga. 1942); V. & S. Bottle Co. v. Mountain Gas Co., 261 Pa. 523, 104 A. 667, 667 (1918) (per curiam); Dorr v. Chesapeake & Ohio Ry. Co., 78 W.Va. 150, 88 S.E. 666, 667 (1916); see also Bd. of Educ. v. Emp. Ass'n of Willingboro Sch., 178 N.J.Super. 477, 429 A.2d 429, 430 (N.J.Super.Ct.App.Div.1981) (noting that contracts should be interpreted according to the law existing when they are formed but also that changes in the law may make a contract illegal). Courts have broadly articulated this rule. The U.S. Supreme Court has stated that no contract can properly be carried into effect . . . which, being made consistently with the rules of law at the time, has become illegal in virtue of some subsequent law. Louisville & Nashville R.R. Co. v. Mottley, 219 U.S. 467, 485, 31 S.Ct. 265, 271, 55 L.Ed. 297, 304 (1911) (quotation omitted). Although there is expansive language in many cases, a rule permitting any change in public policy to eviscerate preexisting contracts would not serve Idaho well. Such a rule does not account for private agreements between parties that are unlikely to endanger the public welfare. A more refined approach is to nullify only those agreements that violate state policies designed to protect the public good, either because the object of the agreement is inherently harmful or because a condition in the agreement would, in the aggregate, tend to harm the public. See Chicago, Burlington, & Quincy R.R. Co. v. McGuire, 219 U.S. 549, 570, 31 S.Ct. 259, 263, 55 L.Ed. 328, 339-40 (1911) (holding that the state legislatures may nullify existing contracts where the parties do not stand upon an equality, or where the public health demands that one party to the contract shall be protected against himself); 17A C.J.S. Contracts § 29 (stating that legislation in exercise of a state's police power, or by subsequent statute announcing new public policy can avoid preexisting contracts). This approach prevents relatively unforeseeable changes in public policy from undermining otherwise legitimate business arrangements. See Wasserman's Inc. v. Township of Middletown, 137 N.J. 238, 645 A.2d 100, 105 (1994) (upholding municipal-land leases that had not undergone public bidding as required by a new statute). For example, New York limits the situations in which a shift in public policy can nullify contract terms. The rule there only applies to acts of the Legislature which are strictly measures of public policy, not to those which are intended primarily to establish or affect the rights of parties to each other. Goldfarb v. Goldfarb, 450 N.Y.S.2d 212, 214, 86 A.D.2d 459, 461 (N.Y.App.Div. 1982). New York's courts have considered voiding contract terms only when upholding them would harm the public or would be enforced at public expense. Compare CKC Chiropractic v. Republic W. Ins. Co., 5 Misc.3d 492, 784 N.Y.S.2d 350, 352 (N.Y.Civ. Ct.2004) (discussing whether an insurer had to pay benefits to an unlicensed medical provider), Bloomfield v. Bloomfield, 97 N.Y.2d 188, 738 N.Y.S.2d 650, 764 N.E.2d 950, 953 (2001) (discussing whether a woman could agree to waive support from an ex-spouse), and Glengariff Corp. v. Snook, 122 Misc.2d 784, 471 N.Y.S.2d 973, 977-79 (N.Y.Sup.Ct. 1984) (refusing to enforce a contract to pay a medical provider more than what the provider could collect under a new Medicaid law), with Rotodyne, Inc. v. Consol. Edison Co. of New York, 55 A.D.2d 600, 389 N.Y.S.2d 387, 388 (N.Y.App.Div.1976) (refusing to invalidate a subcontractor's waiver of mechanics-lien rights against a general contractor). [9] Although we decline to adopt New York law on this subject, these cases are instructive. As explained above, Idaho's UIM mandate was designed to protect the public from underinsured motorists, and not merely to govern private relations between parties. The Legislature has required that insurers offer UIM coverage to all motorists, not UIM coverage conditioned on totally depleting the tortfeasor's policy. Exhaustion clauses have no purpose but to dilute Idahoans' protection against underinsured drivers and to prevent insureds from collecting legitimate claims. They are a product of the insurance company's sophistication and bargaining power. See Hettwer v. Farmers Ins. Co. of Idaho, 118 Idaho 373, 377, 797 P.2d 81, 85 (1990) (quotation omitted) (explaining that insurance companies enjoy a significant bargaining advantage over insureds). They also impose additional litigation demands on the court system, which directly impedes public access to the courtroom. These threats to public safety and demands on the justice system occur regardless of when the parties executed the insurance contract. Because exhaustion clauses impinge on a state public policy designed to protect the public welfare, they are void in the State of Idaho. [10] In summary, the exhaustion clause is void based on Idaho's declared public policy aimed at protecting its citizens from underinsured drivers and on the doctrine of judicial economy, which here includes shielding parties from excessive litigation and preventing unnecessary demands on the judicial system. Claimants need not exhaust the limits of the tortfeasor's policy, but instead must credit to the UIM insurer the gap between the settlement with the tortfeasor's insurer, if any, and the policy limits. Because Hill settled with the Hamiltons for just under their policy limits and is ready to credit the gap to American Family, the summary judgment in favor of American Family is vacated.