Court Opinion

ID: 9583692
Source: CourtListenerOpinion
Date Created: 2023-08-21 22:41:15.632833+00
Date Added: 2024-06-11T14:58:36.186876
License: Public Domain

White, C.J.,
concurring in part, and in part dissenting.
The majority determined Shelter’s provision was not an exhaustion clause and Union’s exhaustion clause was consistent with public policy. I concur because the majority correctly *878determined Shelter’s policy was not an exhaustion clause, but it failed to address the ambiguity of the provision. However, I also dissent because the majority failed to identify the ambiguity in Union’s exhaustion clause, failed to construe the provision against Union, and failed to determine the exhaustion clause was void as against public policy.
Shelter’s underinsured motorist policy provides:
[T]he limits of liability of this coverage shall be reduced by the total limits of all bodily injury liability insurance policies and bonds applicable to the person or persons legally responsible for such damages. Our obligation hereunder shall apply only to such damages as are in excess of the total limits of all bodily injury liability insurance policies and bonds applicable to the person or persons legally responsible for such damages and available to cover the insured’s damages.
The majority concluded that Shelter’s policy did not require Ploen to exhaust the tort-feasor’s liability policy to assert a claim for underinsured motorist benefits. The majority reached the correct conclusion, yet failed to determine exactly how the provision operates or to identify the ambiguity in the provision.
For example, in Gust v. Otto, 147 Wis. 2d 560, 433 N.W.2d 286 (Wis. App. 1988), the Wisconsin Court of Appeals addressed an underinsured motorist provision with language virtually identical to that in Shelter’s policy and concluded the provision in question was a reduction clause rather than an exhaustion clause. The provision in Gust provided:
“The company will pay all sums . . . because of bodily injury . . . provided
“(1) that the limits of liability for Underinsured Motorists coverage shall be reduced by the total limits of all Bodily Injury Liability insurance policies applicable to the person or persons legally responsible for such damages;
“(2) that the company’s obligation hereunder shall apply only to such damages that are in excess of the total limits of all Bodily Injury Liability insurance policies applicable to the person or persons legally responsible for *879such damages and available to cover the insured’s damages . . . .”
Gust, 147 Wis. 2d at 563-64, 433 N.W.2d at 287.
The issue on appeal was whether the underinsured motorist coverage began at the level of the insured’s underlying recovery or at the level of the major liability carrier’s policy limit. The court initially stated that, when read together, subparagraphs (1) and (2) create an ambiguity which must be construed against the insurer. Subparagraph (1) reduces the insurer’s underinsured motorist coverage by the total limits of all bodily injury insurance policies. Subparagraph (2), however, reduces the insurer’s underinsured motorist coverage by the total limits of all bodily injury insurance policies and the damages available to cover the insured’s damages. Thus, the court determined that subparagraph (2) qualified subparagraph (1) by limiting the reduction to the insured’s damages, be it the policy limit or an amount available to cover the insured’s damages.
In Gust, Verlyn Otto, while driving with a passenger, struck an oncoming car containing Harold Gust, Gust’s wife, and the Newmier family. Otto, who was found 100 percent negligent, had a $300,000 liability insurance policy. All claims for the Gusts and Newmiers totaled $479,000. Their total recovery from Otto’s insurer was $248,184, the remaining portion of Otto’s $300,000 liability coverage being paid to Otto’s passenger. The insurer contended that coverage began at Otto’s policy limit, of $300,000. The Gusts contended that coverage began with the underlying recovery of $248,184. The court determined the amount available for the insured’s damages did not amount to Otto’s policy limit of $300,000, but, rather, the underlying recovery of $248,184. The court found that the insurer was entitled to reduce the underinsured motorist coverage only by the portion of the total bodily injury limit specifically available to cover the insured’s damages. The court reasoned that the insurer’s interpretation would allow insurance companies to benefit from a credit not received by the insured. As such, the court held that subparagraph (2) established the scope of the insurer’s reducing clause, and thus, the insurer could reduce its coverage by the amount of the insured’s underlying recovery, $248,184.
*880Based on the ruling in Gust, supra, and the factually similar situations, the majority in the instant case correctly determined Shelter’s policy did not contain an exhaustion clause. However, the majority failed to address exactly how Shelter’s provision operates or to identify the ambiguity in the clauses. Therefore, I concur in the majority’s conclusion, but not the rationale.
Union’s provision stated, “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.” (Emphasis supplied.) The majority determined the exhaustion clause was consistent with public policy and, thus, valid and enforceable. In turn, the majority affirmed the district court’s grant of summary judgment and did not consider whether Ploen’s settlement with the tort-feasor adversely affected Union’s rights under the policy. However, I dissent because Union’s exhaustion clause (1) contains an ambiguity and (2) is inconsistent with public policy.
The phrase “any applicable” in Union’s policy is ambiguous. For example, in Tate v. Secura Ins., 587 N.E.2d 665, 669 (Ind. 1992), the Indiana Supreme Court addressed an underinsured motorist coverage clause which provided coverage would occur “ ‘only after the limits of liability under any applicable bodily injury liability bonds or policies have been exhausted by payment or judgments or settlements.’ ” (Emphasis in original.) The insurer interpreted the clause to refer to all potential policies that may be alleged, and, as such, the insured failed to satisfy the policy language if the insured did not assert claims against every possible liability insurance policy applicable. The court rejected this interpretation and stated, “The phrase ‘any applicable’ in the exhaustion provision is at best ambiguous.” Tate, 587 N.E.2d at 669. The court construed the ambiguous phrase against the insurer and determined the phrase meant only one policy providing bodily injury liability coverage for a tort-feasor from whom the policyholder may be legally entitled to recover.
In interpreting a contract, a court must first determine, as a matter of law, whether the contract is ambiguous. Moller v. State Farm Mut. Auto. Ins. Co., 252 Neb. 722, 566 N.W.2d 382 (1997). When confronted with ambiguous language, this court has stated:
*881Insurance companies in drafting their policies formulate language which may either prevent or create ambiguity. In such draftsmanship, precision provides certainty, while the absence of articulation accounts for ambiguity. As expressed in Peony Park v. Security Ins. Co., 137 Neb. 504, 508, 289 N.W. 848, 851 (1940): “It is consistent with both reason and justice that any fair doubt as to the meaning of the words of a policy should be resolved against the one who prepares it, for if the terms of a policy are capable of two meanings, that is, where the true meaning is doubtful, the law favors such construction as will protect the insured, and not avoid the policy.” See Farm Bureau Ins. Co. v. Pedlow, 3 Mich. App. 478, 142 N.W.2d 877 (1966).
Denis v. Woodmen Acc. & Life Co., 214 Neb. 495, 498, 334 N.W.2d 463, 465 (1983). In the instant case, Union’s exhaustion clause contains the same ambiguous phrase as that found in Tate, supra; yet, the majority failed to determine the phrase was ambiguous or to construe the provision against the drafting party. See, Moller, supra\ Denis, supra. Moreover, as also witnessed in Tate, supra, we have multiple insurance policies which the underinsured motorist coverage carrier, Union, could allege must be exhausted before the insured, Ploen, satisfies the underinsured policy language. As a consequence, Union could argue that both Keller’s policy with American Family Insurance Company and Ploen’s father’s policy with Union must have been exhausted before Ploen satisfies the underinsured policy language. However, the majority failed to address this ambiguity, and Union is now obligated to pay Ploen and/or any other person carrying Union insurance “only after the limits of liability under any applicable bodily injury liability bonds or policies have been exhausted . . . .” (Emphasis supplied.)
Union’s exhaustion clause is also void as against public policy. Those states that have held exhaustion provisions to be valid and enforceable have done so based on statutory authority. See, Connecticut Gen. Stat. § 38a-336 (1992); Kentucky Rev. Stat. Ann. § 304.39-320 (Michie 1996); S.D. Codified Laws § 58-11-9 (Michie 1996). The majority in Ploen relied on a Connecticut case, Ciarelli v. Commercial Union Ins. Cos., 234 *882Conn. 807, 663 A.2d 377 (1995), but failed to mention Connecticut’s controlling statute. The majority of other courts who have addressed this issue have ruled that exhaustion clauses are void as against public policy. See, Leal v. Northwestern Nat. County Mut., 846 S.W.2d 576 (Tex. App. 1993); Brown v. USAA Cas. Ins. Co., 17 Kan. App. 2d 547, 840 P.2d 1203 (1992); Shaw v. Continental Ins. Co., 108 Nev. 928, 840 P.2d 592 (1992); Mann v. Farmers Insurance Exchange, 108 Nev. 648, 836 P.2d 620 (1992); Matter of Estate of Rucker, 442 N.W.2d 113 (Iowa 1989); Mulholland v. State Farm Auto. Ins., 171 Ill. App. 3d 600, 527 N.E.2d 29 (1988); Longworth v. Van Houten, 223 N.J. Super. 174, 538 A.2d 414 (1988); Bogan v. Progressive Cas. Ins. Co., 36 Ohio St. 3d 22, 521 N.E.2d 447 (1988), modified on other grounds, McDonald v. Republic-Franklin Ins. Co., 45 Ohio St. 3d 27, 543 N.E.2d 456 (1989); Aetna Cas. & Sur. Co. v. Farrell, 855 F.2d 146 (3d Cir. 1988); Hamilton v. Farmers Insurance, 107 Wash. 2d 721, 733 P.2d 213 (1987); Schmidt v. Clothier, 338 N.W.2d 256 (Minn. 1983), superseded by statute, Onasch v. Auto-Owners Ins. Co., 444 N.W.2d 587 (Minn. App. 1989); Weinstein v. Am. Mut. Ins. Co. of Boston, 376 So. 2d 1219 (Fla. App. 1979). Cf., Cobb v. Benjamin, 325 S.C. 573, 482 S.E.2d 589 (S.C. App. 1997); Boyle v. Erie Ins. Co., 441 Pa. Super. 103, 656 A.2d 941 (1995); Adkinson v. State Farm Mut. Auto. Ins. Co., 856 F. Supp. 637 (M.D. Ala. 1994); Buzzard v. Farmers Ins. Co., Inc., 824 P.2d 1105 (Okla. 1991); Vogt v. Schroeder, 129 Wis. 2d 3, 383 N.W.2d 876 (1986). See, also, 3 Alan I. Widiss, Uninsured and Underinsured Motorist Insurance § 44.2 (2d ed. 1997 Supp.). For example, 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 *883expenses 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, 36 Ohio St. 3d at 25-26, 521 N.E.2d at 451. Similarly, the Nevada Supreme Court 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.
(Emphasis in original.) Mann, 108 Nev. at 650, 836 P.2d at 621. However, the majority of the aforementioned authorities have noted that the insurers had notice of the settlement negotiations and that the underinsurance coverage started at the limits of the tort-feasor’s liability coverage, not the settlement amount. See Neb. Rev. Stat. § 44-6412 (Cum. Supp. 1996) (newly amended Nebraska consent-to-settle statute). Nonetheless, neither issue affects the outcome of the instant case because Ploen gave Union notice of the settlement negotiations and the majority denied Ploen underinsurance coverage before reaching the issue of the amount of coverage.
In Augustine v. Simonson, 940 P.2d 116 (Mont. 1997), the Montana Supreme Court addressed a situation with fact and reasoning nearly identical to those in Ploen and ruled that the exhaustion clause was against public policy. In Augustine, Susan Simonson collided with Travis Gray’s automobile. Tracy Augustine, Chase Augustine, and Cole Davison were passen*884gers in Gray’s vehicle. Simonson was insured, with an aggregate combined single limit of $100,000. Gray settled for $20,000, Tracy Augustine settled for $16,875, Chase Augustine settled for $16,875, and approximately $1,100 was paid for property damage. As such, with one potential claim outstanding, approximately $54,600 had been paid out and approximately $45,400 remained. The Augustines then sought to obtain the remaining damages from their underinsured motorist carrier, Farmers Insurance Exchange. Farmers denied the Augustines’ claim and alleged the Augustines failed to comply with the exhaustion clause by entering into settlements for less than the tort-feasor’s policy limits. The exhaustion clause provided: “ ‘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.’ ” (Emphasis in original.) Augustine, 940 P.2d at 119. At trial, the district court recognized public policy reasons for invalidating exhaustion clauses but declined to hold the clause invalid because “ ‘it would be unwise to encroach on the legislative function in this area.’ ” Id. at 118.
On appeal, the Montana Supreme Court initially determined the exhaustion clause required the insured to entirely exhaust the limits of all existing bodily injury liability bonds or policies before proceeding against the underinsured motorist carrier. The Montana Supreme Court overruled the district court’s judgment, noting the general purpose of underinsurance and specifically the aforementioned passages from Bogan, supra, and Mann, supra. The court stated that the holding in Bogan was consistent with Montana public policy; the purpose of underinsurance, to provide indemnification for accident victims when the tort-feasor does not provide adequate indemnification; and the declared public policy of encouraging settlement and avoiding unnecessary litigation. Therefore, the court concluded the exhaustion provision was contrary to public policy and unenforceable to the extent the provision violates public policy.
This court has stated that the purpose of underinsured motorist insurance is to “provide a means to make the victims of less than adequately insured motorists whole, or as nearly so as reasonably possible . . . .” Muller v. Tri-State Ins. Co., 252 *885Neb. 1, 8, 560 N.W.2d 130, 135-36 (1997). We have also recognized that settlements are looked upon with favor. See Delicious Foods Co. v. Millard Warehouse, 244 Neb. 449, 507 N.W.2d 631 (1993). Moreover, Neb. Rev. Stat. § 44-6409 (Supp. 1997), although not yet effective at the date of trial, provides that “[t]he maximum liability of the insurer under the ... underinsured motorist coverage shall be the amount of damages for bodily injury . . . sustained by the insured less the amount paid to the insured ...” (Emphasis supplied.) The language in § 44-6409 contradicts the notion that exhaustion clauses are consistent with Nebraska public policy. Considering the stated purpose of underinsured motorist coverage, the general tenor toward settlements, and the greater weight of authority, Union’s exhaustion clause should have been found void as against public policy. I dissent.
Gerrard, J.,
concurring in part, and in part dissenting.
I join that portion of Chief Justice White’s dissent concluding that the exhaustion clause in the underinsured motorist section of Union’s insurance contract is void as against public policy. Such a clause that requires entire exhaustion of a tort-feasor’s liability insurance as a prerequisite to asserting an underinsured motorist claim is contrary to sound public policy for the reasons set forth in the Chief Justice’s dissent. This is particularly true when, as here, the injured party seeks only the difference between the tort-feasor’s liability policy limit and the damages sustained by the injured party.
In all other respects, I concur in the opinion of the court.
McCormack, J., joins in this concurrence and dissent.