Arizona Property & Cas. Ins. Guar. Fund v. Herder

• Decision Date: 25 February 1988
• Docket Number: No. CV-87-0081-PR,CV-87-0081-PR
• Parties: The ARIZONA PROPERTY & CASUALTY INSURANCE GUARANTY FUND, a subdivision of the Department of Insurance of the State of Arizona, Plaintiff-Appellant, v. Charles M. HERDER, Defendant-Appellee.
• Court: Arizona Supreme Court

Page 519

751 P.2d 519

156 Ariz. 203

The ARIZONA PROPERTY & CASUALTY INSURANCE GUARANTY FUND, a subdivision of the Department of Insurance of the State of Arizona, Plaintiff-Appellant, v. Charles M. HERDER, Defendant-Appellee.

No. CV-87-0081-PR.

Supreme Court of Arizona, In Banc.

Feb. 25, 1988.

Holloway & Thomas, P.C. by Benjamin C. Thomas and Jennings, Kepner & Haug by Randy L. Sassaman, Phoenix, for plaintiff-appellant.

G. David Gage, Ltd. by G. David Gage, Phoenix, for defendant-appellee.

FELDMAN, Vice Chief Justice.

Petitioner, Charles Herder (Herder), seeks review of a court of appeals' opinion holding that, under A.R.S. § 20-673, Herder's recovery from his host driver's insurance carrier effectively offset and reduced the limits of coverage provided by cross-petitioner, the Arizona Property & Casualty Insurance Guaranty Fund (Fund). We granted review to examine and interpret the statute. Rule 23, Ariz.R.Civ.App.P., 17A A.R.S. We have jurisdiction under Ariz. Const. art. 6, § 5(3) and A.R.S. § 12-120.24.

STATEMENT OF FACTS

The operative facts are undisputed. Herder was a passenger in an automobile owned and driven by Michael Dubois when it was hit by an uninsured motorist. Apparently the accident was due entirely to the negligence of the uninsured motorist. The parties stipulated that Herder's damages exceeded $30,000.

At the time of the accident, Herder was covered by Dubois's uninsured motorist coverage from State Farm Insurance Company. Herder also had uninsured motorist coverage on his own policy with Ambassador Insurance Company. Both policies had limits of $15,000 per person.

Herder recovered $15,000 from State Farm under Dubois's policy. Because his damages exceeded this recovery, he then filed a claim with Ambassador for the $15,000 limit available under his own uninsured motorist coverage. Ambassador subsequently became insolvent and was placed in receivership. Pursuant to A.R.S. § 20-661 et seq., it was succeeded by the Fund, which was established by statute to assume the liability of insolvent insurers. See Arizona Property & Casualty Insurance Guaranty Fund v. Helme, 153 Ariz. 129, 735 P.2d 451 (1987).

The Fund brought an action for declaratory relief against Herder, arguing that it had no obligation to pay Herder's claim because, under the terms of the Ambassador policy, the $15,000 uninsured motorist coverage was reduced by the $15,000 Herder recovered from State Farm. Alternatively, the Fund argued that even if Ambassador was liable to Herder for $15,000, A.R.S. § 20-673(C) extinguished the Fund's liability.

The trial court granted summary judgment for Herder, and the Fund appealed. In reversing, the court of appeals held that Ambassador would have been obligated to pay Herder $15,000 under its policy, but also held that the obligation did not continue when it was assumed by the Fund. Rather, § 20-673(C) required that the $15,000 limit otherwise available from the Fund be reduced by the $15,000 recovery from State Farm. Arizona Property & Casualty Guaranty Fund v. Herder, 1 CA-CIV 8697 (Ariz.Ct.App. Sept. 9, 1986) (Memorandum Decision).

On Herder's petition and the Fund's cross-petition, we accepted the following issues for review:

1. Does A.R.S. § 20-673(C) operate as a statutory "other insurance"-escape clause to prevent Herder's recovery from the Fund of amounts he would otherwise be entitled to recover under Ambassador's "other insurance"-excess clause?

2. Was A.R.S. § 20-673(C) repealed by implication as it relates to uninsured/underinsured coverage by the 1981-82 amendments to A.R.S. § 20-259.01?

3. Does the Ambassador policy effectively state an escape clause?

4. If so, is the clause enforceable?

Our resolution of issues 1 and 3 is dispositive.

THE FUND'S STATUTORY OFFSET

The resolution of this case primarily depends upon the meaning of A.R.S. § 20-673(C), which is the functional equivalent of an "other insurance" clause. Such clauses are intended to reduce an insurer's liability and prevent double recovery by an insured when there is another policy covering the same loss. State Farm Mutual Automobile Insurance Co. v. Bogart, 149 Ariz. 145, 717 P.2d 449 (1986).

Subsection (C) of the statute reads as follows:

Where more than one policy may be applicable, a policy issued by the insolvent insurer shall be deemed to be excess coverage. The claimant shall be required to exhaust all rights under other applicable coverage or coverages. Any amount payable on a covered claim shall be reduced by the amount of such recovery under other applicable insurance.

(Emphasis added.)

The Fund construes the language of the third sentence as effectively requiring that the limits available on the insurance provided by the Fund, as successor to Ambassador, be reduced by the amount recovered from State Farm. Because both policies had limits of $15,000, State Farm's payment would accordingly reduce the limits of the Ambassador policy to zero, with the Fund providing no coverage at all. The court of appeals agreed with the Fund's construction, relying entirely upon its previous holding in Arizona Property & Casualty Insurance Guaranty Fund v. Ueki, 150 Ariz. 451, 724 P.2d 70 (App.1986). Review was not sought in Ueki. We believe that Ueki interpreted the statute incorrectly.

1. The Text and Legislative Intent of the Statute

We note at the outset that the statute does not provide for any offset or reduction in limits payable. Language accomplishing the interpretation advanced by the Fund and adopted in Ueki is commonly used in the industry. ¹ It is easy to understand why the legislature would not choose such a provision: it creates harsh results in the many instances involving automobile insurance where limit-against-limit offset produces a complete escape for the excess carrier. 1 A. WIDISS, UNINSURED AND UNDERINSURED MOTORIST INSURANCE § 13.3, at 387-88 (2d ed. 1987). In light of this reality, many courts have refused to enforce such provisions in "other insurance" clauses, deeming them contrary to the legislative objectives expressed in various statutes, including financial responsibility and uninsured motorist laws. Id. § 13.6, at 397-402. The fact that our legislature did not use the word "limit" in the provision requiring offset of the claimant's recovery from the other insurer militates against the construction adopted in Ueki.

The legislative scheme generally provides that the Fund shall be "deemed the insurer" and have all the "rights" as well as all the "obligations of the insolvent insurer." A.R.S. § 20-667(C). ² In general, the legislative objective was to make the Fund liable to the same extent that the insolvent insurer would have been liable under its policy. ³ Treffenger v. Arizona

[156 Ariz. 206] Insurance Guaranty Association, 22 Ariz.App. 153, 524 P.2d 1326 (1974). Given this objective, and an understanding of "other insurance" clauses, we believe that A.R.S. § 20-673(C) can be interpreted to give each part a meaning that furthers the legislative purpose.

2. "Other Insurance" Clauses

There are three types of "other insurance" provisions: prorata or sharing clauses, excess clauses, and escape clauses. Bogart, 149 Ariz. at 147, 717 P.2d at 451 (citing Comment, Double Insurance Coverage in Automobile Insurance Policies--The Problem of "Other Insurance" Clauses, 47 TUL.L.REV. 1039 (1973)); 8A J.A. APPLEMAN & J. APPLEMAN, INSURANCE LAW AND PRACTICE § 4906, at 345-52 (1981).

A prorata provision in an "other insurance" clause requires both insurers to prorate the loss, usually in proportion to the limits each policy bears to the total available limits. Bogart, 149 Ariz. at 147, 717 P.2d at 451; 8A APPLEMAN, supra § 4908. If such a provision were applied to the two policies here, which have equal limits, any loss would be divided equally between State Farm and Ambassador, though, of course, neither would pay more than the limits of its respective policy. Thus, under a prorata clause, if Herder's loss were $10,000, State Farm and Ambassador would each be responsible to pay $5,000. If the loss were $30,000 or above, each would pay its $15,000 limit.

An excess coverage provision in an "other insurance" clause provides that the policy will cover a loss only after the limits of the other (primary) policy covering the same risk have been exhausted. Bogart, 149 Ariz. at 147, 717 P.2d at 451; 8 P. KELLY, BLASHFIELD, AUTOMOBILE LAW AND PRACTICE § 323.11, at 262-63 (3d ed. 1987); 8A APPLEMAN, supra § 4909. Under an excess provision, if Herder's loss were $10,000, State Farm, the primary carrier, would pay it all and Ambassador would pay nothing. If the loss were $20,000, State Farm would pay $15,000 and Ambassador $5,000. Of course, if the loss were $30,000 or more, State Farm would pay the first $15,000 and Ambassador, as excess carrier, would pay the next $15,000. ⁴

Escape-type "other insurance" provisions have a contrary effect; they allow an insurer to escape liability altogether. In effect, an escape-type provision states that if there is other insurance, the insurance afforded by "this policy" shall not apply at all. ⁵ Bogart, 149 Ariz. at 147, 717 P.2d at 451; 8A APPLEMAN, supra § 4910. Of course, a limit-against-limit reduction provides a full escape when, as in this case, the limits of the two policies are the same, and provides a partial escape when the limits of the second policy exceed those of the first. Thus, in this case where Ambassador's policy contained an excess clause, if State Farm's had contained an escape clause and Herder's loss were $10,000, Ambassador would be responsible for the entire loss. If Herder's loss were $30,000, Ambassador would be responsible for its full $15,000 limit. State Farm would totally escape liability, providing its escape clause was invoked and enforced.

3. Resolution

The clear meaning of the first sentence of subsection (C) is that where "other insurance" applies to the same risk covered by the insolvent insurer, the latter's...