Augustine v. Simonson

Decision Date31 July 1997
Docket NumberNos. 96-506,s. 96-506
PartiesTracy AUGUSTINE, Plaintiff and Appellant, v. Susan SIMONSON, and Farmers Insurance Exchange, Defendants and Respondents. Jay AUGUSTINE as Guardian Ad Litem for Chase Augustine, Plaintiff and Appellant, v. Susan SIMONSON, and Farmers Insurance Exchange, Defendants and Respondents. Travis GRAY, Plaintiff and Appellant, v. Susan SIMONSON, and Farmers Insurance Exchange, Defendants and Respondents. to 96-508.
CourtMontana Supreme Court

Channing J. Hartelius (argued); Hartelius, Ferguson, Baker & Kazda; Great Falls, for plaintiffs and appellants.

William J. Gregoire (argued) and Robert J. Vermillion; Smith, Walsh, Clarke & Gregoire; Great Falls, for defendants and respondents.

REGNIER, Justice.

Tracy Augustine, Jay Augustine, as guardian ad litem for Chase Augustine, and Travis Gray (collectively referred to herein as "the Augustines") filed three complaints against Susan Simonson and Farmers Insurance Exchange in the Eighth Judicial District Court. The complaints, arising out of an automobile accident, alleged that Simonson was liable for their personal injuries and that Farmers was liable for the damages in excess of the insurance proceeds available from Simonson pursuant to their underinsured motorist (UIM) coverage. On December 20, 1995, at a court-ordered mediation conference, the Augustines The issue on appeal is whether the District Court erred in holding that the exhaustion clause in Farmers' underinsurance policy was a valid contractual provision and thereby granting Farmers' motion to dismiss.

settled with Simonson. As a result, each claimant signed a release reserving their underinsured motorist claim [283 Mont. 262] against Farmers. The claims against Simonson were dismissed. Farmers filed a Rule 12(b)(6), M.R.Civ.P., motion to dismiss on January 25, 1996, based on the exhaustion clause contained in its UIM policy. The District Court issued an order granting the motion to dismiss on June 24, 1996. The Augustines appeal from this order. We reverse.

FACTUAL BACKGROUND

On July 28, 1992, a vehicle driven by Susan Simonson rear ended a vehicle driven by Travis Gray. Tracy Augustine, Chase Augustine, and Cole Davison were passengers in Gray's vehicle. Claims against Simonson and Farmers were made by Travis Gray, Tracy Augustine, and Jay Augustine on behalf of Chase Augustine. Cole Davison was a minor, age nine, at the time of the collision. No claim has been made on Cole's behalf as of this date.

Simonson was insured by an American States insurance policy with an aggregate combined single limit of $100,000. On December 20, 1995, the Augustines settled with Simonson, reserving their claims against Farmers. Travis Gray's claim was settled for $20,000. Tracy Augustine's claim was settled for $16,875, and Chase Augustine's claim was settled for $16,875. Approximately $1,100 was paid for property damage. Therefore, with one potential claim still outstanding, approximately $54,600 has been paid out on the American States policy, leaving approximately $45,400 remaining on the policy limits.

After the settlement, Farmers filed a motion to dismiss pursuant to Rule 12(b)(6), M.R.Civ.P., for failure to state a claim upon which relief could be granted. Farmers asserted that the Augustines failed to comply with the exhaustion clause in their underinsurance policy by entering into settlements which were less than the tortfeasor's policy limits of liability. The District Court heard argument on the motion and ordered supplemental briefing by the parties. On June 20, 1996, the District Court issued an order in which the court recognized public policy reasons for invalidating exhaustion clauses, but declined to hold the clause invalid, reasoning that "it would be unwise to encroach on the legislative function in this area." The Augustines appeal.

DISCUSSION

Did the District Court err in holding that the exhaustion clause in Farmers' underinsurance policy was a valid contractual provision and thereby granting Farmers' motion to dismiss?

The District Court's order on the motion to dismiss was based in part upon facts outside of the pleadings. If a court considers matters outside of the pleadings on a Rule 12(b)(6), M.R.Civ.P., motion to dismiss, that motion is constructively converted into a motion for summary judgment regardless of how the order was phrased. See Rule 12(b), M.R.Civ.P.; American Medical Oxygen Co. v. Montana Deaconess Medical Ctr. (1988), 232 Mont. 165, 168, 755 P.2d 37, 39. This Court reviews a district court's grant of summary judgment de novo applying the same evaluation as the district court based on Rule 56, M.R.Civ.P. Motarie v. Northern Montana Joint Refuse Disposal Dist. (1995), 274 Mont. 239, 242, 907 P.2d 154, 156; Bruner v. Yellowstone County (1995), 272 Mont. 261, 264, 900 P.2d 901, 903. Summary judgment is proper when there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. Rule 56(c), M.R.Civ.P.

The interpretation of an insurance contract in Montana is a question of law. Wellcome v. Home Ins. Co. (1993), 257 Mont. 354, 356, 849 P.2d 190, 192. This Court reviews questions of law to determine whether the lower court's application or interpretation of the law is correct. Hollister v. Forsythe (1995), 270 Mont. 91, 93, 889 P.2d 1205, 1206; McGregor v. Madsen (1992), 253 Mont. 210, 212, 832 P.2d 779, 780.

The Augustines argue on appeal that the District Court erred when it determined that they must exhaust the tortfeasor's insurance policy limits in order to make a claim for UIM coverage. They further assert that the term "exhaust" is ambiguous and therefore unenforceable. Farmers argues that the term "exhaust" is not ambiguous and that this Court should not rewrite the insurance policy by declaring the exhaustion clause invalid as violative of public policy.

We have previously held that if a contract's terms are clear and unambiguous, the contract language will be enforced. Youngblood v. American States Ins. Co. (1993), 262 Mont. 391, 395, 866 P.2d 203, 205; Keller v. Dooling (1991), 248 Mont. 535, 539, 813 P.2d 437, 440; § 28-3-401, MCA. This Court has further held that the only exception to enforcing an unambiguous contract term is if that term violates public policy or is against good morals. Youngblood, 866 P.2d at 205; Amsterdam Lumber, Inc. v. Dyksterhouse (1978), 179 Mont. 133, 140, 586 P.2d 705, 709; § 28-2-701, MCA.

The Farmers policy at issue contains a standard exhaustion clause which provides: "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." We do not find the Augustines' argument persuasive that the term"exhaust" in this clause is ambiguous. We conclude that there is only one reasonable interpretation of the clause in light of its purpose. Leibrand v. National Farmers Union Prop. and Cas. Co. (1995), 272 Mont. 1, 6, 898 P.2d 1220, 1223. The term requires that the insured entirely exhaust the limits of all existing bodily injury liability bonds or policies before he or she is entitled to proceed against the underinsured motorist carrier. We shall, therefore, examine the validity of the clause in light of public policy considerations.

Neither the Montana Legislature nor this Court have specifically addressed the issue of whether an exhaustion clause in an underinsurance policy is enforceable underpublic policy. This Court has, however, spoken generally as to the purpose of underinsurance. In Sorensen v. Farmers Ins. Exch. (1996), 279 Mont. 291, 927 P.2d 1002, 53 St.Rep. 1155, we adopted a "no prejudice" rule as a matter of public policy and stated that "[t]he purpose of underinsured motorist insurance is to provide a source of indemnification for accident victims when the tortfeasor does not provide adequate indemnification." Sorensen, 927 P.2d at 1005 (citing State Farm Mut. Auto. Ins. Co. v. Estate of Braun (1990), 243 Mont. 125, 130, 793 P.2d 253, 256). In Sorenson, the plaintiff settled with the tortfeasor and provided a release without obtaining the consent of her own underinsurance carrier. The insurer argued that when she settled and provided a release without the insurer's consent, she was precluded from receiving her underinsured motorist coverage. In reversing the district court, we held that there was no prejudice to the insurer where the tortfeasor was judgment proof and, consequently, the insured's actions would not compromise the insurer's ability to subrogate. We explained the meaning of this no prejudice rule as "absent some showing of material prejudice to the underinsurance carrier, a claim for underinsured motorist coverage may not be precluded on a technicality." Sorensen, 927 P.2d at 1004.

In its order on the motion to dismiss, the District Court devoted considerable attention to specific public policy reasons for not requiring adherence to exhaustion clauses. The court noted that not requiring the insured to fully exhaust the tortfeasor's insurance serves a dual purpose of discouraging prolonged litigation and promoting early settlements, thereby providing the injured party with the relief when it is most needed. Numerous jurisdictions have agreed that these are important public policy reasons and that exhaustion clauses violate public policy. For instance, Justice Holmes of 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. ...

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