American Nat. Fire Ins. Co. v. Farmers Ins. Exchange

• Decision Date: 19 November 1996
• Docket Number: No. 950076,950076
• Citation: 927 P.2d 186
• Parties: 304 Utah Adv. Rep. 3 AMERICAN NATIONAL FIRE INSURANCE CO. and Dan Marsters, Plaintiffs and Appellee, v. FARMERS INSURANCE EXCHANGE, Defendant and Appellant.
• Court: Utah Supreme Court

Page 186

927 P.2d 186

304 Utah Adv. Rep. 3

AMERICAN NATIONAL FIRE INSURANCE CO. and Dan Marsters Plaintiffs and Appellee, v. FARMERS INSURANCE EXCHANGE, Defendant and Appellant.

No. 950076.

Supreme Court of Utah.

Nov. 19, 1996.

N. Brett Jones, Salt Lake City, for National.

G. Steven Sullivan, Salt Lake City, for Marsters.

John M. Chipman, J. Benjamin Tyler, Salt Lake City, for Farmers.

HOWE, Justice:

Farmers Insurance Exchange (Farmers) appeals from the trial court's declaratory judgment in favor of American National Fire Insurance Company (National), ruling that Utah law applies to invalidate a step-down provision limiting insurance coverage in an Idaho automobile liability insurance policy.

FACTS

Early in 1994, an automobile driven by National's insured Robert Root and owned by Farmers' insured Bernice Larson, both Idaho residents, was involved in an accident with a motorcycle on Interstate 80 in Utah just east of the Nevada border. The motorcycle rider, Colorado resident Dan Marsters, was injured. He has settled his claims against Root and is not a party to this appeal. Larson, who was a passenger in her automobile at the time of the accident, owned a $500,000 automobile liability insurance policy issued in Idaho by Farmers. Root owned a $250,000 personal liability policy issued by National which would cover any deficit up to that amount in the coverage provided by Larson's policy. Larson's Farmers policy contained a step-down provision limiting liability coverage for guest drivers to the amount required by the Idaho Financial Responsibility Law, which is $25,000. The dollar amount does not appear in the policy itself but is contained in the Idaho Code.

The Utah law in effect at the time of the accident provided, "No insurance policy may contain any agreement or incorporate any provision not fully set forth in the policy or in an application or other document attached to and made a part of the policy at the time of its delivery." Utah Code Ann. § 31A-21-106 (1994). ¹ Idaho law, however, contains no parallel provision. National brought this action for a declaratory judgment that the Idaho step-down provision is unenforceable in Utah. Both parties moved for summary judgment on the issue. The trial court granted National's motion, concluding that the step-down provision is unenforceable in Utah, that there is no conflict between Utah and Idaho law, and that since the accident occurred in Utah, Utah law should apply, giving the permissive driver the same coverage as the owner. Farmers appeals.

STANDARD OF REVIEW

A grant of summary judgment is proper when there are no disputed issues of material fact and the moving party is entitled to judgment as a matter of law. Utah R. Civ. P. 56(c); Perrine v. Kennecott Mining Corp., 911 P.2d 1290 (Utah 1996). Since the facts are undisputed here, we examine only issues of law. We review the trial court's conclusions of law for correctness, granting them no deference. Harline v. Barker, 912 P.2d 433 (Utah 1996).

ANALYSIS

A. Conflict

National seeks to avoid full performance of its Idaho personal liability contract with Root by applying Utah law. It first contends that there is no conflict between Utah and Idaho law and hence no choice of law question is involved and that thus the law of Utah, the forum state, should apply. However, according to Restatement (Second) Conflict of Laws, "a choice-of-law problem arises whenever a contract has a substantial relationship to two or more states with different local law rules on the subject." § 205 cmt. a (1971) [hereinafter Restatement of Conflict].

Since Utah Code Ann. § 31A-21-106 prohibits the inclusion of any provision in an insurance policy that does not appear on the face of the policy itself or an accompanying document, Farmers' liability for a permissive driver becomes potentially $475,000 greater under Utah law than the $25,000 for which it bargained under Idaho law. National, which has an obligation to cover the difference between the amount of Farmers' liability and the damages, benefits by the elimination or reduction of its liability. This is by definition a conflict. Indeed, were it not for the "different rules of local law" on the subject of insurance policy coverage, there would be no issue before us.

B. Choice of Law

1. Arguments in the Instant Case

Having established that a conflict exists, we must determine what law applies. Under Restatement of Conflict, § 205 cmt. b, "questions involving the extent of contractual obligations are determined by the law chosen by the parties if they have made an effective choice .... Otherwise, these questions are determined by the law selected by application of the rule of § 188." Section 188 provides:

(1) The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6.

(2) In the absence of an effective choice of law by the parties ..., the contacts to be taken into account in ... [determining] the law applicable to an issue include:

(a) the place of contracting,

(b) the place of negotiation of the contract,

(c) the place of performance,

(d) the location of the subject matter of the contract, and

(e) the domicile, residence, nationality, place of incorporation and place of business of the parties.

(Emphasis added.) The insurance contract between Larson and Farmers clearly has a significant relationship with Idaho, having been negotiated and executed there and involving an Idaho resident and an automobile which is registered and garaged in that state. National argues that the contract also has a substantial relationship to Utah since the accident occurred here and therefore Utah law should apply. National relies on Watson v. Employers Liability Assurance Corp., 348 U.S. 66, 75 S.Ct. 166, 99 L.Ed. 74 (1954), for the proposition that in a tort action involving an insurance contract, the law of the forum state should be applied. In Watson, the Court applied Louisiana law to a Massachusetts insurance contract involving product liability, reasoning that persons injured or killed in Louisiana are likely to be Louisiana residents and Louisiana may have to care for them or that treatment may involve Louisiana doctors and hospitals or Louisiana welfare resources. Watson, 348 U.S. at 72, 75 S.Ct. at 169-70. However, Watson involved the right to bring a direct action against an insurer--strictly a procedural issue--rather than the substantive content of the contract or the rights of the parties to damages. In the instant case, by contrast, National asks us to alter the terms of the contract between Farmers and Larson and thus impose greater liability upon Farmers than the parties to that contract bargained for. Therefore, Watson is inapposite to the case before us.

National also cites Clay v. Sun Insurance Office Ltd., 377 U.S. 179, 84 S.Ct. 1197, 12 L.Ed.2d 229 (1964), in support of applying the law of the state where the injury occurred rather than the state where the contract was made. In Clay, however, the plaintiff was living in the foreign state, not merely traveling through, and the issue involved a statute of limitations. The statute of limitations, again, is a procedural issue which deals, not with the substance of the bargain, but simply with time restraints on its enforcement. The court in Clay was not required to recast the terms of the contract in order to apply the law of the forum state.

2. Other Jurisdictions

The Idaho court in Unigard Insurance Group v. Royal Globe Insurance Co., 100 Idaho 123, 594 P.2d 633 (1979), adopted the Restatement position in applying Idaho law to an accident that occurred in Oregon. The court stated, "What is involved here is not an action in tort to establish liability, but rather a declaratory judgment action involving interpretation of written contracts of insurance ...." Id. 594 P.2d at 636. Relying on the factors of Restatement of Conflict section 6, referred to in section 188, especially (2)(d)--"the protection of justified expectations"--and (2)(f)--"certainty, predictability and uniformity of result,"--the court stated:

Regarding the accident which occurred in Oregon, the needs of the interstate system require that persons who travel from their residence into another state have protection of the laws equal to that afforded to persons who have not crossed state lines.... In negotiating and executing the respective insurance contracts, both appellant and respondent justifiably expected that the laws of Idaho would apply. The combined weight of all these circumstances leads us to the conclusion that Idaho has the most significant relationship with the transaction and parties here involved. We therefore hold that the district court was correct in applying Idaho law to this action.

Id. at 636-37.

Other jurisdictions have also rejected the site of the accident as the determining factor in choice of law questions. Both the Kansas Supreme Court and the Kansas Court of Appeals have found that the mere fact that an accident occurred in one state does not give that state the most significant relationship in an insurance contract dispute. See Wilds v. Mid-Century Ins. Co., 231 Kan. 124, 642 P.2d 567, 569 (1982); State Farm Mut. Auto. Ins. Co. v. Baker, 14 Kan.App.2d 641, 797 P.2d 168, 171 (1990). In Washington state, the supreme court and the court of appeals have applied the law of the state where the policy was issued rather than the law of the state where the accident occurred. See Van Vonno v. Hertz Corp., 120 Wash.2d 416, 841 P.2d 1244, 1246 (1992); Dairyland Ins. Co. v. State Farm Mut. Auto. Ins. Co., 41 Wash.App. 26, 701 P.2d 806, 808 (1985). Courts in Colorado, Arizona, Nevada, and Oregon have all held that the location of the accident, standing alone, is not sufficient to outweigh the location of the vehicle, the place ...