Frey v. United Services Auto. Ass'n

• Decision Date: 08 January 2008
• Docket Number: No. A06-2445.,A06-2445.
• Citation: 743 N.W.2d 337
• Parties: Patricia A. FREY, as trustee for the heirs and next of kin of Stephen J. Frey, and Aven Frey, et al., Respondents, v. UNITED SERVICES AUTOMOBILE ASSOCIATION, et al., Appellants.
• Court: Minnesota Court of Appeals

743 N.W.2d 337

Patricia A. FREY, as trustee for the heirs and next of kin of Stephen J. Frey, and Aven Frey, et al., Respondents, v. UNITED SERVICES AUTOMOBILE ASSOCIATION, et al., Appellants.

No. A06-2445.

Court of Appeals of Minnesota.

January 8, 2008.

Timothy P. McCarthy, Jeffrey D. Bores, Chestnut & Cambronne, P.A., Minneapolis, MN, for respondents.

Robert W. Kettering, Jr., Douglas D. McGhee, Arthur, Chapman, Kettering, Smetak & Pikala, PA, Minneapolis, MN, for appellants.

Considered and decided by HALBROOKS, Presiding Judge; STONEBURNER, Judge; and MINGE, Judge.

OPINION

MINGE, Judge.

Appellant insurer challenges the district court summary judgment determination that reduced-liability (drop-down) limit provisions in automobile insurance coverage for resident family members is ambiguous, unenforceable, and inapplicable to respondent claimant. Although we agree with appellant that the drop-down limit for resident family members are enforceable, we conclude that the drop-down limit set forth in this policy does not apply to respondent. Accordingly, we affirm.

FACTS

On November 27, 2004, seventeen-year old appellant Nathan Frey was involved in a one-vehicle accident while driving on Interstate 35 in Lakeville. The passengers in the car were Nathan's father (Stephen Frey), Nathan's mother (Patricia Frey), Nathan's sister (Aven Frey), and Aven's fiancé, Thomas Alexander. Aven's fiancé and Stephen Frey were killed in the accident. Aven Frey, who was a college student in Iowa at the time of the accident, and her mother Patricia sustained injuries.

Stephen Frey owned the vehicle, which was covered under a Minnesota automobile insurance policy issued to Stephen and Patricia (the Freys) by appellant United Services Automobile Association (USAA). The policy contained bodily injury liability limits of $300,000 per person or $500,000 per accident. The exclusions section of the policy contained a drop-down limit for bodily-injury liability coverage to $30,000 per person or $60,000 per accident when a "covered person" was legally liable to pay "a member of that covered person's family residing in that covered person's household." It is undisputed in this case that Nathan Frey was a covered person under the insurance policy. USAA denied coverage to Aven Frey for amounts above the policy's drop-down limits because USAA claimed Aven was residing with her brother Nathan.

Upon denial of coverage, respondents Aven Frey and Patricia Frey, individually and on behalf of the estate of Stephen Frey, filed suit against USAA and Nathan Frey seeking to have the drop-down limits on coverage for resident family members declared invalid under Minnesota law and to have Aven declared eligible to receive compensation within the remaining $500,000 policy limits. The parties moved for summary judgment. The district court granted respondents' motion. This appeal follows. For convenience, the parties are referred to in the singular as USAA and Aven.

ISSUES

I. Is reduction of bodily-injury coverage for resident family members in an automobile insurance policy valid and enforceable?

II. On the undisputed facts in this case, was Aven a family member residing with Nathan and subject to the reduced limit under the policy?

ANALYSIS

I.

The first issue is whether an automobile insurance policy that provides for reduced-liability (drop-down) limits on bodily-injury coverage for resident family members is valid and enforceable. This is a matter of first impression in this court. Whether an insurance policy exclusion is valid and enforceable is a question of law that this court reviews de novo. Lobeck v. State Farm Mut. Auto. Ins. Co., 582 N.W.2d 246, 249 (Minn.1998). The district court found the drop-down limit unenforceable because it contravenes coverage required by law, is ambiguous, and violates reasonable expectations of the insured.

A. Compliance with the Law

Minnesota courts have a well-settled two-part test for determining the legal enforceability of insurance contract provisions. If the policy provisions (1) do not omit coverage required by law and (2) do not contravene applicable statutes, then the extent of the insurer's liability is governed by the terms of the contract entered into by the parties. Am. Family Mut. Ins. Co. v. Ryan, 330 N.W.2d 113, 115 (Minn.1983).

As for the first prong, the USAA policy purchased by Stephen Frey does not omit coverage required by Minnesota's automobile insurance laws. See Minn. Stat §§ 65B.001-84 (2006). The provision at issue is listed in the exclusion section of the liability portion of the policy and reads as follows:

C. There is no coverage for [bodily injury] for which a covered person becomes legally responsible to pay a member of that covered person's family residing in that covered person's household. This exclusion applies only to the extent that the limits of liability for this coverage exceed $30,000 for each person or $60,000 for each accident.

By statute, policies must include a minimum of $30,000 of bodily-injury coverage to one person in any one accident and a minimum of $60,000 of bodily-injury coverage to two or more persons in any one accident. Minn.Stat. § 65B.49 subd. 3(1) (2006). Because the drop-down exclusion provides the required minimum coverage, we conclude that USAA's policy satisfies the first prong of the test for an enforceable insurance contract.

The second prong of the test for an enforceable insurance contract is that the policy provisions not otherwise contravene applicable statutes. Ryan, 330 N.W.2d at 115. The district court concluded that USAA's policy was invalid and unenforceable because USAA's reduction of coverage for family members (i.e. a status-based exclusion) is not one of the enumerated grounds for cancellation or reduction of liability coverage under Minnesota's law. See Minn.Stat. § 65B.15 (2006). But section 65B.15 deals with cancellation or reduction in limits during the policy period. Id. The statute enumerates eight grounds whereby an insurer may cancel or reduce liability coverage "during the policy period of any policy." Minn.Stat. § 65B.15, subd. 1 (2006) (emphasis added). Because the statute only governs changes in coverage during the policy's term, it is not applicable to the drop-down provision at issue here. See Royal Ins. Co. v. W. Cas. Ins. Co., 444 N.W.2d 846, 848 (Minn.App.1989) (holding statutory requirements of Minn. Stat. § 65B.15, subd. 1 inapplicable because insurer did not cancel policy during the term of policy). Because Minn.Stat. § 65B.15 does not apply in this case, the district court erred in finding that the drop-down provision in USAA's policy is invalid and unenforceable under that statute.

We also note that although there is no explicit statutory prohibition on drop-down coverage, the Minnesota Department of Commerce's 2005 procedure manual had disapproved of drop-down limits on bodily-injury coverage of resident family members. Minn. Dep't of Commerce, Private Passenger (Personal) Automobile Insurance, 7 (2005). That disapproval was withdrawn and there is no claim that this policy provision violates or violated a regulation of the Minnesota Department of Commerce or other state agency. We conclude that USAA's policy does not contravene applicable Minnesota law.

B. Ambiguity

We next consider Aven's claim that the phrase "resident of your household" in USAA's insurance policy is ambiguous. Whether the language of an insurance policy is ambiguous is a question of law. St. Paul Fire & Marine Ins. Co. v. Nat'l Computer Sys., Inc., 490 N.W.2d 626, 631 (Minn.App.1992), review denied (Minn. Nov. 17, 1992). Interpretation of insurance policy language and application of the policy to the facts in a case are also questions of law that this court reviews de novo. Franklin v. W. Nat'l Mut. Ins. Co., 574 N.W.2d 405, 406 (Minn.1998). Any ambiguity is to be resolved against the insurer and in accordance with the reasonable expectations of the insured. St. Paul Fire & Marine Ins. Co., 490 N.W.2d at 631.

The Minnesota Supreme Court has previously adjudicated the ambiguity of phrases regarding household residents in insurance policies. In Lott v. State Farm Fire & Cas. Co., 541 N.W.2d 304, 307 (Minn. 1995), the court held that the undefined phrase "resident of your household" in a homeowner's insurance policy was unambiguous. The Lott court arrived at its decision simply by comparing the language in Lott to that considered in two prior decisions and concluding that the language at issue was very similar. Id. One of the prior decisions relied on by the Lott court was Firemen's Ins. Co. v. Viktora, 318 N.W.2d 704, 706 (Minn.1982), where the court concluded that the phrase "residents of the Named Insured's household" in a homeowner's insurance policy was clear and unambiguous. The second was Tollefson v. Am. Family Ins. Co., 302 Minn. 1, 5, 226 N.W.2d 280, 283 (1974), where the court held that the phrase "residents of the same household" in an automobile insurance policy was unambiguous.

Because the Minnesota Supreme Court has previously held that the phrase "resident of your household" and similar phrases are unambiguous in insurance policies, we conclude that the language "resident of your household" in USAA's policy is likewise unambiguous. Therefore, the policy language is sufficiently clear to be enforceable.

C. Reasonable-Expectations Doctrine

The third issue is whether the drop-down provision so violates the reasonable expectations of the insured as to render the provision unenforceable.

The doctrine of reasonable expectations protects the objectively reasonable expectations of the insured even if close study of the insurance policy would negate those expectations. Jostens, Inc. v. Northfield Ins. Co., 527 N.W.2d 116, 118 (Minn.App.1995), review denied (Minn. Apr. 27, 1995). The insurance policy need not be ambiguous for the doctrine to apply. Atwater Creamery Co. v. W. Nat'l Mut. Ins. Co., 366 N.W.2d 271, 278 (...