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

• Decision Date: 30 May 2012
• Docket Number: No. A10–2090.,A10–2090.
• Citation: 813 N.W.2d 921
• Parties: Tammy PEPPER, Respondent, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY a/k/a State Farm Fire and Casualty Company a/k/a State Farm Insurance Companies, Appellant.
• Court: Minnesota Supreme Court

813 N.W.2d 921

Tammy PEPPER, Respondent,

v.STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY a/k/a State Farm Fire and Casualty Company a/k/a State Farm Insurance Companies, Appellant.

No. A10–2090.

Supreme Court of Minnesota.

May 30, 2012.

Syllabus by the Court

An insurer may enforce an insurance policy exclusion that prevents coverage conversion without violating the No–Fault Act, Minn.Stat. §§ 65B.41–71(2010).

Coverage conversion arises when an insured recovers liability benefits and underinsured motorist benefits under separate policies issued by the same insurer to one tortfeasor.

Alan B. Fish, Alan B. Fish, P.A., Roseau, MN, for respondent.

Kay Nord Hunt, Lommen, Abdo, Cole, King & Stageberg, P.A., Minneapolis, MN; and Karen R. Cote, Brett W. Olander & Associates, Saint Paul, MN, for appellant.

OPINION

ANDERSON, PAUL H., Justice.

Tammy Pepper suffered serious injuries in a single-vehicle accident when she was struck by a pickup truck owned by her sister and driven by her stepfather.Following the accident, Pepper sought insurance benefits under three policies.First, Pepper sought and recovered liability benefits from her sister's insurer.Second, Pepper sought and recovered liability benefits from her stepfather's insurer, State Farm Mutual Insurance Company(State Farm).Third, Pepper sought, but did not recover, underinsured motorist coverage under a separate State Farm policy held by her stepfather.State Farm denied that it owed Pepper underinsured motorist coverage under the stepfather's policy on the ground that the terms of that policy excluded the sister's truck from its definition of vehicles eligible for underinsured motorist coverage.The Roseau County District Court granted summary judgment to State Farm, concluding that the exclusion in the stepfather's policy was valid because the exclusion was designed to prevent coverage conversion.A divided panel of the court of appeals reversed the district court.We reverse the court of appeals.

On September 3, 2009, respondentTammy Pepper suffered injuries when a 1994 Ford pickup truck, owned by Pepper's sisterTracie Drew, and driven by Pepper's stepfather, Frank Matlachowski, backed into Pepper and pressed her against an exterior wall of her home.Just before the accident, Pepper had been standing in the yard of the home she shared with her mother and Matlachowski, while she watched Matlachowski prepare to unload a dishwasher from the back of the truck.To make unloading easier, Matlachowski wanted to back up the truck to a set of steps leading into the house.He began to back up the truck by pressing on the accelerator while the truck was in reverse gear.When Matlachowski pressed on the truck's accelerator, the accelerator stuck “wide open” and the truck shot backward toward Pepper and pinned her against the exterior wall of the house.Following the accident, Pepper required hospitalization and surgery.As of February 2010 Pepper had incurred medical expenses in excess of $170,000.

Drew insured the truck through State Farm.Pepper sought liability benefits under Drew's State Farm policy.State Farm eventually paid Pepper the policy's liability limit of $100,000.

Because $100,000 from Drew's policy did not adequately compensate Pepper for her injuries, she sought additional liability benefits under two policies owned by Matlachowski.Matlachowski insured two vehicles through State Farm under separate policies.Even though Matlachowski was not the owner of Drew's truck, his liability coverage in each policy extended to the accident.More specifically, the policies provided liability coverage for the “use, by [Matlachowski], of a ... a non-owned car,”¹ including Drew's truck.(Emphasis omitted.)

The terms of Matlachowski's two policies with State Farm contained a provision that required State Farm to pay on Matlachowski's behalf only the limits of the policy with the “highest limit of liability.”The specific provision in the policies stated that:

If There Is Other Liability Coverage

1.Policies Issued by Us to You, Your Spouse, or Any Relative

If two or more vehicle liability policies issued by us to you, your spouse, or any relative apply to the same accident, the total limits of liability under all such policies shall not exceed that of the policy with the highest limit of liability.

Both policies had a liability limit of $100,000 per person, so State Farm paid $100,000 to Pepper in liability benefits.Pepper then signed releases of all claims against Drew and Matlachowski.In both of those releases, however, Pepper “specifically reserve[d]” a “claim for underinsured motorist benefits against State Farm Insurance.”

Pepper next sought underinsured motorist (UIM) benefits from State Farm under Matlachowski's policies.²UIM coverage “protect[s insured persons] who are legally entitled to recover damages for bodily injury from owners or operators” of motor vehicles insured by a liability policy with a “limit for bodily injury liability ... less than the amount needed to compensate the insured for actual damages.”Minn.Stat. § 65B.43, subds. 17, 19(2010).Matlachowski's policies in particular provide:

UNDERINSURED MOTOR VEHICLE–COVERAGE

....

We will pay damages for bodily injury an insured is legally entitled to collect from the owner or driver of an underinsured motor vehicle.The bodily injury must be sustained by an insured and caused by accident [sic] arising out of the operation, maintenance or use of an underinsured motor vehicle.

Matlachowski's policies define an underinsured motor vehicle as a vehicle

insured or bonded for bodily injury liability in amounts that:

(1) meet the requirements of the laws of the state where your car is mainly garaged; and

(2) are less than the amount needed to compensate the insured for damages.

The policies each have a $100,000 UIM coverage limit per person.But the policies exclude from underinsured motor vehicles any vehicle “insured under the liability coverage of this policy”(hereinafter referred to as the insured-vehicle exclusion).

Pepper asserted to State Farm that as an “insured” under Matlachowski's policies, she was entitled to UIM coverage because the at-fault vehicle, Drew's truck, was an underinsured motor vehicle.State Farm denied UIM coverage on the ground that Drew's truck did not qualify as an underinsured motor vehicle because of the insured-vehicle exclusion in the policies.State Farm argued that Drew's truck was “insured under the liability coverage” of Matlachowski's policies by virtue of Matlachowski's operation of the truck.³

On January 14, 2010, Pepper commenced an action against State Farm in Roseau County District Court, alleging that she was entitled to UIM coverage under the Matlachowski policy that did not pay out liability benefits.State Farm moved for summary judgment, arguing that Pepper was not entitled to UIM benefits because Drew's truck did not qualify as an underinsured motor vehicle because of the insured-vehicle exclusion.The court granted summary judgment to State Farm.The court found the policy exclusions in Matlachowski's policies to be similar to other insured-vehicle exclusions that have been “consistently upheld” because the exclusions “prevent an insured from using their own UIM coverage ... to compensate for their failure to purchase sufficient liability coverage.”The court concluded that an exception to this reasoning—which allows an injured person to recover UIM benefits from an at-fault driver when another at-fault vehicle provided insufficient liability coverage—did not apply because the exception requires two vehicles, and Pepper's accident involvedonly one vehicle.The court also concluded that the insured-vehicle exclusion did not violate the No–Fault Act.Based on these conclusions, the court held that Pepper was not entitled to recover UIM benefits under either of Matlachowski's policies and granted State Farm's motion for summary judgment.

Pepper appealed.A divided panel of the court of appeals reversed the district court, noting that this case presented a “matter of first impression.”Pepper v. State Farm Mut. Auto. Ins. Co.,806 N.W.2d 94, 98(Minn.App.2011).The court of appeals recognized that the No–Fault Act permits insurers to deny UIM coverage when allowing UIM coverage would result in coverage conversion.Id. at 97.But the court concluded that the insured-vehicle exclusion was “overbroad” and “omitt[ed] coverage required by law.”Id. at 98.The court held that “when both the underinsured owner of the vehicle and the policyholder-driver are at fault, UIM benefits to an injured person who is an insured under the driver's policy do not constitute conversion of the driver's coverage and cannot be denied.”Id. at 95.The dissent disagreed, stating that the court of appeals“has repeatedly noted that, where only one car is involved or at fault, an injured passenger may not obtain UIM benefits from the driver's insurer.”Id. at 100(Toussaint, J., dissenting).Thus, the dissent concluded that the insured-vehicle exclusion “neither omits coverage required by law nor violates applicable statutes.”Id. at 101.

State Farm appealed and we granted review.On appeal, State Farm argues that allowing Pepper to recover both liability benefits and UIM benefits under Matlachowski's policies results in coverage conversion.State Farm further argues that policy exclusions that prevent coverage conversion are enforceable under the No–Fault Act.Following State Farm's appeal, Pepper filed a motion to strike references by State Farm to the sheriff's report of the accident, arguing that the report is not properly part of the record on appeal in this case.

I.

As a preliminary matter, on December 19, 2011, Pepper filed a motion to strike certain references made by State Farm to the sheriff's report of the accident.Pepper argues that neither party filed the report with the district court or introduced the report as an exhibit, and thus under Minn....