Opinion ID: 1253894
Heading Depth: 3
Heading Rank: 4

Heading: The Penningtons' UIM coverage

Text: Against this background, the district court in the present case determined that the Penningtons' per-driver UIM premium did not give rise to stacking. The court first found that [t]he insurance company obviously charged `separate' premiums in the guise of one lump sum because it multiplied the premium based on the number of insured. Pennington, 2007 WL 2029501, at . Nonetheless, the court determined that stacking was inappropriate in light of State Farm's per-driver pricing structure. The court noted that [p]remiums calculated based on the number of insured differ from premiums calculated based on the number of vehicles because UIM coverage is personal to the insured. Id. In other words, the court reasoned that stacking is appropriate only where an insured has paid additional money without receiving additional coverage. It therefore determined that stacking was inappropriate in the present case because the Penningtons received additional coverage for each driver in their household in exchange for the higher premium. As the Penningtons point out, however, the district court erred in describing how the UIM coverage was allocated in a single accident. In its opinion, the district wrote that a $300,000 per accident coverage limit is meaningless if an individual is insured up to only $100,000 per person. See infra n. 1. Therefore, the Penningtons (and other similarly-situated insureds) effectively received greater per accident coverage in return for the increased premiums. If the Penningtons were entitled to three separate units of 100/300 UIM coverage, they would receive a windfall. To wit, if the entire family was involved in one accident and was entitled to three separate units of coverage, they would be entitled to recover up to $900,000, nine times more than one individual with one unit of coverage could receive under the $100,000 per person limitation. This would be a windfall because the Pennington's premium was only 2.7 times greater than what the individual would have paid. Pennington, 2007 WL 2029501, at  (emphasis added). In an earlier footnote, referenced in the text above, the court stated that the $300,000 per accident limit is meaningless unless there are at least three drivers on the policy, since the coverage limits are $100,000 per person. Id. at  n. 1. Both sides agree that the district court was mistaken in its observation that the $300,000 per accident limit is meaningless unless there are three insured drivers on the policy. That observation was inaccurate because uninsured motorist coverage can extend to individual insureds who are not covered as drivers. See, e.g., Midwestern Indem. Co. v. Craig, 106 Ohio App.3d 158, 665 N.E.2d 712, 714 (1995) (describing an uninsured motorist policy that, by its terms, extended to a person living in your household, related to you by blood. (emphasis in original)). So if, for example, an insured parent and his or her three nondriving minor children were all injured in one accident, the parent's UIM policy might define the children as insureds and cover all four people in the accident. See id. In that situation, the $300,000 cap would be meaningful because the four injured individuals could cumulatively collect no more than that amount from the UIM insurer. The error in the district court's understanding of how the per-accident limits applied to the Penningtons, however, does not diminish the correctness of its ultimate determination that the Penningtons received additional UIM coverage for their higher premium. To determine whether the Penningtons' UIM policy is one that is subject to stacking, as in Swartz, or one that is not subject to stacking, such as in Marcum, it is necessary to understand the distinction between the two pricing methods that underlie the determination of the premiums. And, to do that, one needs to first understand how State Farm formerly priced its policies per vehicle (as in Swartz ) and currently prices its policies based on risk (as in Marcum ). As explained in the deposition of Jay Hieb, Vice President in Actuary with State Farm, the price for covering each vehicle under a per-vehicle UIM policy was first determined based on the number of drivers in a household. While a single driver paid $33.60 for one unit of UIM coverage for one vehicle, a household of three or more drivers paid $90.72 for that one unit of coverage. To add an additional vehicle to a UIM policy, the insurance company would then multiply the per-vehicle rate by a set predetermined factor. That resulting additional charge was added to the price of the insureds' UIM coverage on a per-vehicle basis. This pricing structure gave rise to stacking because the additional premiums that the insurance companies charged on a per-vehicle basis provided no additional UIM coverage to the insured. No Kentucky court that has addressed stacking under a per-vehicle policy, however, has ever suggested that anything is wrong with an insurance company's per-vehicle pricing practice of charging a higher premium to households with multiple drivers when setting the original rate for covering one vehicle (i.e. charging a family with three or more drivers $90.72 for UIM coverage versus $33.60 for a single driver). What gave rise to stacking under the per-vehicle pricing structure was the practice of effectively double-charging the insured for covering both drivers and vehicles. Under the per-driver policy at issue here, however, the $90.72 paid by the Penningtons as a higher premium extended UIM coverage to additional drivers. The Penningtons therefore got what they paid for: namely, one unit of UIM coverage for four drivers. Per-driver policies are therefore distinguishable from per-vehicle policies and stacking is inappropriate. Further evidence that the UIM policy in question does not expose the insurance company to stacking can be found in State Farm's pricing structure. As explained earlier, the record demonstrates that State Farm's premium was structured to charge more for the increased risk borne by the company as a result of providing personal coverage to additional drivers. Although the Penningtons received UIM coverage for four drivers, their premium was not simply a multiplier of coverage (e.g., multiplying the base premium rate by the number of drivers). Rather, if a multiplier of coverage had been used, the family would have been charged four times the base premium for the four drivers in the household. Instead, the Penningtons' UIM premium was determined based on a rating factor of only 2.7. State Farm arrived at the 2.7 multiplier after an actuary calculated the increased risk associated with adding more drivers to a single UIM policy. The practice of setting premiums based on an assessment of risk was expressly approved by the Kentucky Supreme Court in Marcum v. Rice, 987 S.W.2d 789 (Ky. 1999). There the Court held that an insurance company may permissibly alter its premium structure based on an actuarial projection of the company's risk and potential loss. Id. at 791. The Marcum decision made clear that insurance companies could use risk-rating factors without being exposed to stacking because such factors are not a multiplier of units of coverage, but rather allow insurance companies to calculate and price the additional risk incurred by extending coverage to additional insureds. Id. In the present case, the 2.7 multiplier used by State Farm to account for the additional risk presented by insuring a three-plus driver household for UIM coverage is akin to the kind of rating factors explicitly approved of in Marcum. The Penningtons make much of the Court's statement in Marcum that the premium in that case stayed the same regardless of the number of vehicles or insureds on a particular policy. Id. (emphasis added). They argue that Marcum clearly establishes that per-driver UIM policies require stacking. But as the Penningtons conceded in their motion to certify the legal question in this case to the Kentucky Supreme Court, the issue of whether UIM units of coverage may be stacked based on the increased risk of additional drivers is a question of first impression under Kentucky law. Marcum addressed only the question of whether stacking was appropriate under a per-vehicle premium; any reference to a per-driver premium was nothing more than dicta. The argument that the question before this court is foreclosed by Marcum therefore has no merit. Furthermore, the Marcum decision provides tacit approval of price increases for UIM coverage based on the number of drivers. There, the insurance company charged a single premium of $14 for one unit of UIM coverage on a per-person basis. Id. at 790. The Court took no issue with the fact that the price for a unit of UIM coverage changed based on the number of individuals added to the policy. Rather, it approved the pricing structure on the basis that it did not vary according to the number of vehicles covered by the policy. Id. at 791. Insurance companies are therefore permitted to account for additional risk incurred by providing UIM coverage to additional drivers. In the present case, by attesting to the fact that it had determined the price of the UIM premium based on actuarial calculations of risk, State Farm established that it was entitled to extra compensation for the risk it incurred by covering additional drivers on the Penningtons' UIM policy. The policy thereby satisfied Kentucky law, as declared in Swartz and Marcum, and was not subject to stacking. These circumstances obviate the merit of the Penningtons' stacking argument.