Mann v. Farmers Ins. Exchange
| Decision Date | 20 August 1992 |
| Docket Number | No. 22609,22609 |
| Citation | 108 Nev. 648,836 P.2d 620 |
| Parties | Carolyn Y. MANN, Appellant, v. FARMERS INSURANCE EXCHANGE, Respondent. |
| Court | Nevada Supreme Court |
Appellant, Carolyn Mann, was injured in a two-car accident; the other car was driven by a Las Vegas Metropolitan Police Officer. At the time of the accident, Mann was insured with respondent Farmers Insurance Exchange. Pursuant to a relevant Nevada statute, Mann could recover a maximum payment of $50,000.00 from the police officer/department.
Mann settled with the police officer/department for $35,000.00 and executed a release. Thereafter, she submitted a demand and proof of loss to Farmers in an attempt to recover underinsured motorist benefits. Farmers did not respond to this demand. Mann then filed a complaint against Farmers, stating that her damages exceeded the $50,000.00 statutory cap and that Farmers had, in bad faith, ignored her demand. In response to this complaint, Farmers filed a motion to dismiss; in this motion, Farmers contended that Mann, under the provisions of her policy, was required to exhaust the liability limit of the police officer/department's insurance before she could pursue underinsured motorist benefits. Farmers asserted that since Mann had settled for less than the liability limit, she was not entitled to underinsured motorist benefits. The district court granted Farmers' motion to dismiss.
On appeal, Mann argues that the district court erred in dismissing her complaint because her policy's exhaustion clause violates public policy. 1 We agree. According to the terms of Mann's insurance policy, Mann is required to exhaust the liability limits of any applicable bonds or policies before Farmers will pay underinsured motorist benefits. Specifically, Mann's "E-Z-Reader" policy provides as follows:
Coverage C--Uninsured Motorist Coverage (Including Underinsured Motorist Coverage) We will pay all sums which an insured person is legally entitled to recover as damages from the owner or operator of an uninsured motor vehicle because of bodily injury sustained by the insured person.
....
1. 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 payments of judgments or settlements.
2. The amount of Uninsured Motorist Coverage we will pay ... shall be to the extent the damages exceed the amount of any other bodily injury coverage available to any party held to be liable for the accident.
Cases from other jurisdictions have held 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. See Mulholland v. State Farm Mutual Auto Ins. Co., 171 Ill.App.3d 600, 122 Ill.Dec. 657, 527 N.E.2d 29 (1988); Schmidt v. Clothier, 338 N.W.2d 256 (Minn.1983) (superseded by statute); Longworth v. Van Houten, 223 N.J.Super. 174, 538 A.2d 414 (App.Div.1988); Hamilton v. Farmers Ins. Co. of Washington, 107 Wash.2d 721, 733 P.2d 213 (1987).
We conclude that the exhaustion clause in Mann's insurance policy violates public policy. The Nevada Legislature intended that uninsured and underinsured motorist benefits be available to Nevada citizens. See NRS 687B.145(2). The damaged insured is placed in a difficult situation if he or she must forego all settlement offers and go to trial in order to obtain (or attempt to obtain) compensation up to the tortfeasor's policy limit--just to qualify for underinsured benefits under his or her own policy. For instance, if an insured covered by a policy like Mann's were involved in an accident with three other drivers, each...
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