Opinion ID: 1647455
Heading Depth: 1
Heading Rank: 4

Heading: The Prejudgment Interest Issue.

Text: Like the first issue this one is also narrow: whether the prejudgment interest under section 535.3 is subject to the policy limits of the underinsured motorist policies. The relevant language in the policies provides: We will pay damages which a covered person is legally entitled to recover from the owner or operator of an underinsured motor vehicle because of bodily injury: 1) sustained by a covered person; and 2) caused by an accident. . . . . THE LIMIT OF LIABILITY. The limit of liability shown in the schedule for this coverage is our maximum limit of liability for all damages resulting from any one accident. (Emphasis added.) LeMars' position is that the prejudgment interest here is an element of damages and therefore subject to the Limits of Liability provision of the policies. We would agree had this been a case in which an insurer had been called upon to pay the judgment against the insured pursuant to a policy indemnifying the insured. In those circumstances the prejudgment interest is an element of damages. See Farm Bureau Mut. Ins. Co. v. Milne, 424 N.W.2d 422, 425 (Iowa 1988). In Milne a case LeMars heavily relies ona third-party claimant sued the insured. The insurer settled with the claimant and paid the damages in accord with the indemnity provision in the policy with the insured. The insurer also paid the claimant prejudgment interest that exceeded the policy limits. The insurer then brought a declaratory judgment action against the insured to determine whether the insurer was legally or contractually obligated to pay such prejudgment interest. We said there was no such obligation because interest on unliquidated claims constitutes an element of compensatory damages. Milne, 424 N.W.2d at 425 (citing with approval Guin v. Ha, 591 P.2d 1281, 1291 (Alaska 1979)). In this context, prejudgment interest is necessary to make the third-party claimant whole because the third-party claimant has lost the use value of the damages eventually awarded. Guin v. Ha, 591 P.2d 1281, 1287 (Alaska 1979). Here the judgment did not come about as a result of a third-party claimant suing the insured. As we said earlier, this is a breach of contract action filed by the insured against his insurer. It is not a tort action brought by a third-party claimant against the insured. This fact distinguishes the present case from Milne. The policies limit LeMars' liability to  damages ... a covered person is legally entitled to recover from the owner or operator of an underinsured motor vehicle because of bodily injury sustained by a covered person and caused by the accident.  The district court did not award the prejudgment interest as an element of damages because of bodily injuries sustained by a covered person. Rather the court awarded such interest simply because of LeMars' breach of the policy provisions to pay the underinsured limits. The prejudgment interest here constitutes damages because of LeMars' failure to discharge a debt when it should have been paid. See Prudential Ins. Co. v. Goldsmith, 239 Mo.App. 188, 196, 192 S.W.2d 1, 3 (1945) (The general rule is that, in the absence of an agreement to pay interest, it is implied by law as damages for not discharging a debt when it ought to be paid.); 22 Am.Jur.2d Damages § 649, at 710-11 (1988). But that is far different from saying the prejudgment interest constitutes damages because of bodily injuries. We hold that the prejudgment interest here is not an element of damages subject to The Limit of Liability provision in the policies. The district court was correct in determining that the prejudgment interest awarded under section 535.3 is not subject to the combined limits of the policies. One commentator makes a strong policy argument for such a result in the context of an uninsured motorist claim: Once it is established that a claimant is entitled to compensation provided by an uninsured motorist insurance coverage, there is little, if any, justification for the insurer to derive economic benefits from having forced the insured to seek an adjudication of the claim. To allow insurers the benefit of the time value due the insured from the time of the accident to the date of payment following an adjudication of the funds is to encourage insurers to delay payments. Once it is determined that payments were due the insured on the basis of injuries caused by an uninsured tortfeasor, the benefits of having delayed payment should not be retained by the insurer. Thus, a persuasive argument can be made that a claimant should be entitled to interest on a compensation payment when it has been necessary for the claimant to seek an adjudication by an arbitration or a court that the insurer is obligated to pay the insured. Furthermore, it also follows that the insurer should be liable for such interest even when the award or judgment itself is equal to the company's maximum coverage limits. Widiss, Uninsured and Underinsured Motorist Insurance, § 20.6, at 131 (2d ed. 1990) (emphasis added). We find this reasoning persuasive and it supports the result we reach. It is also consistent with the underlying purpose of the 1980 amendment to section 535.3.