McArthur v. State Farm Mut. Auto. Ins. Co.

• Decision Date: 03 April 2012
• Docket Number: No. 20100847.,20100847.
• Citation: 2012 UT 22,274 P.3d 981
• Parties: Tavis McARTHUR, Plaintiff and Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant and Appellee.
• Court: Utah Supreme Court

2012 UT 22

274 P.3d 981

Tavis McARTHUR, Plaintiff and Appellant,

v.STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant and Appellee.

No. 20100847.

Supreme Court of Utah.

April 3, 2012.

A. Bryce Dixon, St. George, for appellant.

Stuart H. Schultz, Andrew D. Wright, Andrew B. McDaniel, Salt Lake City, for appellee.

Justice LEE, opinion of the Court:

¶ 1 After sustaining injuries in an auto accident, Tavis McArthur filed this suit in federal district court to recover underinsured motorist (UIM) benefits under his State Farm automobile insurance policy. Soon thereafter, State Farm filed a motion for summary judgment, arguing that McArthur had failed to exhaust the liability limits of the tortfeasor's insurance, a precondition of his UIM benefits policy. The district court granted the motion, upholding this exhaustion provision against McArthur's claim that it was void on public policy grounds.

¶ 2 McArthur appealed to the Tenth Circuit Court of Appeals. In its review, the Tenth Circuit certified two questions to us: (1) whether an exhaustion clause like State Farm's is generally unenforceable in the State of Utah as contrary to public policy; and (2) if not, whether the enforceability of such a clause is contingent on the insurer establishing actual prejudice to its economic interest. We agree in large part with the decision of the federal district court, but take this opportunity to clarify the judicial role under Utah law in assessing the enforceability of the terms of automobile insurance policies.

¶ 3 We first conclude that exhaustion clauses that require the liability insurer to pay out its full policy limits before permitting payment of UIM benefits are not generally unenforceable in the State of Utah. Second, we hold that the enforceability of UIM exhaustion provisions is not contingent upon an insurer's showing of actual prejudice because they are not covenants but rather conditions precedent.

I

¶ 4 On August 5, 2007, McArthur was hit by a car while riding his motorcycle on the streets of St. George. McArthur subsequently settled with the driver's liability carrier for $90,000 of the driver's $100,000 policy limit. McArthur later demanded $100,000 in UIM coverage under his own State Farm policy to cover the balance of the $200,000 of damage he allegedly sustained. State Farm denied the claim on the ground that McArthur had not exhausted the full $100,000 limit of the driver's liability policy, a precondition for UIM coverage under his policy.

¶ 5 McArthur's UIM clause purported to begin coverage only when “1. The limits of liability of all bodily injury liability bonds and policies that apply have been used up by payment or judgments or settlements to other persons; or 2. Such limits of liability or remaining part of them have been offered to the insured.”

¶ 6 McArthur sued State Farm in federal court for breach of contract and breach of the implied covenant of good faith and fair dealing. Sometime later, both parties filed cross motions for summary judgment. The federal district court granted summary judgment for State Farm, holding that McArthur's settlement with the liability insurer precluded coverage under his UIM policy. The court concluded that the language of the subrogation statute in Utah Code section 31A–22–305.3(5) was a legislative endorsement of exhaustion clauses, and that since McArthur's exhaustion provision was “both clear and unambiguous,” it could be voided only on public policy grounds. McArthur v. State Farm Mut. Auto. Ins. Co., No. 2:09–CV–416, 2009 WL 4884382, at *3 (D.Utah Dec. 9, 2009). The court resolved that it could not void the statute absent “clear language from the legislature” as it was not “its role ... to make policy” in light of the statute's contemplation of exhaustion provisions. Id.

¶ 7 In so deciding, the district court also distinguished our decision in State Farm Mutual Automobile Insurance Company v. Green, 2003 UT 48, 89 P.3d 97, concluding that the enforceability of McArthur's exhaustion provision did not depend on an insurer's showing of actual prejudice to an economic interest. McArthur, 2009 WL 4884382, at *3. The court premised this conclusion on two distinctions between exhaustion and consent-to-settle provisions. First, the court concluded that the UIM statute specifically contemplates exhaustion provisions, whereas it does not contemplate consent-to-settle provisions. Id. at *4–5. Second, the court held that, unlike a consent-to-settle provision, McArthur's exhaustion clause was not a covenant “capable of being breached,” but rather a condition precedent that had not yet been fulfilled. Id. Because McArthur's settlement prevented that condition from being met, the court concluded that there was no contract to breach and thus no requirement of proof of prejudice.

¶ 8 McArthur appealed to the Tenth Circuit Court of Appeals, which certified to us the questions whether exhaustion clauses are generally unenforceable in Utah on public policy grounds and, if not, whether the enforceability of such clauses is contingent on the insurer establishing actual prejudice to its economic interest. We have jurisdiction over certified questions of state law under Utah Code section 78A–3–102(1).

II

¶ 9 McArthur first asks us to find the exhaustion clause unenforceable on public policy grounds. He relies on (A) precedent in a “majority of states” purportedly vitiating exhaustion clauses on public policy grounds; (B) a legislative policy in the Utah Code favoring the availability of UIM coverage; and (C) a series of policy concerns regarding the harsh consequences and questionable benefits of exhaustion provisions.

¶ 10 We find no basis for striking down exhaustion clauses under Utah law. The cited precedent is distinguishable or unpersuasive. And McArthur's policy grounds ignore countervailing considerations and confuse our role with that of the legislature in making policy in the insurance arena.

A

¶ 11 McArthur first lays claim to a “majority rule” purportedly striking down UIM exhaustion provisions on public policy grounds. Yet although the cited cases cut across as many as twenty-three jurisdictions, we find them largely unhelpful. Some of the cited cases vindicate statutes expressly proscribing exhaustion.¹ Others turn on peculiarities of state statutes that bear little relation to Utah's.² These cases are of little relevance to our decision here. Our role in this area is to advance the public policies enshrined in Utah statutes, not to advance others that we might find controlling if we had a policymaking role in the automobile insurance field. ³

¶ 12 The remaining cases supporting the “majority rule” advocated by McArthur seem to us to ignore this important point about the role of the judiciary. Although courts in other jurisdictions have struck down exhaustion requirements by wielding policymaking authority like that which we exercise in common law fields,⁴ this court holds no such power in the field of insurance law. The law governing automobile insurance in Utah is comprehensively regulated by statute. That leaves for the courts the role of interpreting and implementing the policies enacted into law by the legislature. We have no power to make policy choices of our own.⁵

B

¶ 13 That predicate requires our careful examination of the legislative UIM scheme enacted by our legislature. As we read that scheme, it provides no basis for McArthur's overarching policy position—that the legislature deemed UIM coverage too “important” to allow its vitiation by a requirement of exhaustion. We have no doubt that our legislature attached a measure of importance to UIM coverage. It undeniably did, as evidenced by the requirement that insurers make such coverage available and allow its waiver only through a form that includes an express explanation of its purpose. Utah Code § 31A–22–305.3(2)(g). But we cannot leap from there to the conclusion that such coverage is so important that it cannot be limited by the condition of exhaustion.

¶ 14 The statutory text, in fact, suggests otherwise, as the legislative endorsement of an outright waiver of coverage would seem to encompass the lesser power to condition that coverage on the satisfaction of a preliminary condition. See Green, 2003 UT 48, ¶ 16, 89 P.3d 97. And the UIM provisions of the Code, like most all others, represent an attempt by the legislature to balance competing policy considerations, not to “advanc[e] a single objective at the expense of all others.” Myers v. Myers, 2011 UT 65, ¶ 27, 266 P.3d 806.⁶ Thus, we do not understand the legislature to have elevated the goal of ensuring UIM coverage above all others and at all costs. And because there are countervailing policies at stake that are at least arguably consistent with the statutory scheme, we decline McArthur's invitation to deem the statutory endorsement of UIM coverage “too important” to allow any incursion by an exhaustion clause.

¶ 15 We do not mean to suggest that the legislature has expressly considered and affirmatively endorsed the exhaustion requirement. Unlike the federal district court, we do not read the statute to expressly sanction the use of exhaustion clauses as preconditions to UIM coverage. See McArthur v. State Farm Mut. Auto. Ins. Co., No. 2:09–CV–416, 2009 WL 4884382, at *3 (D.Utah Dec. 9, 2009). The statute does, however, contemplate the idea of exhaustion in its mandate to insurers to either waive their subrogation claims or pay the insured within five days after being notified that “all liability insurers have tendered their liability policy limits.” Utah Code § 31A–22–305.3(5)(a). But although the subrogation statute does not expressly prescribe the use of exhaustion clauses in UIM policies, we do not see this as a legislative blind spot. To the contrary, the legislature's consideration of exhaustion without a proscription or endorsement suggests that it has left the matter to the negotiation and consideration of...