Opinion ID: 874182
Heading Depth: 3
Heading Rank: 2

Heading: Exhaustion Clauses in UIM Insurance Contracts Are Void Because They Violate Idaho State Public Policy

Text: 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).