Shook v. State Farm Mut. Ins. of Bloomington, Ill.

Decision Date06 September 1994
Docket NumberNo. CV-92-154-GF.,CV-92-154-GF.
Citation872 F. Supp. 768
PartiesLois Jean SHOOK, Plaintiff, v. STATE FARM MUTUAL INSURANCE COMPANY OF BLOOMINGTON, ILLINOIS, a Corporation, Defendant.
CourtU.S. District Court — District of Montana

Ross W. Cannon, Cannon & Sheehy, Helena, MT, for plaintiff.

William P. Conklin, Conklin, Nybo, LeVeque & Murphy, PC, Great Falls, MT, for defendant.

MEMORANDUM AND ORDER

HATFIELD, Chief Judge.

This declaratory judgment action places in issue both the validity of, and the interpretation to be afforded a "household exclusion" contained in an automobile liability policy issued by the defendant, State Farm Mutual Insurance Company, to Terry Evan Shook and Lois Jean Shook, husband and wife. State Farm has presented the court with a motion, pursuant to Fed.R.Civ.P. 12(b)(6), requesting the court to declare the exclusion valid and dismiss the action upon the ground it fails to state a claim upon which relief can be granted. The motion is appropriately DENIED.

BACKGROUND

In late 1991, Terry was driving the Shook family vehicle with Lois as a passenger, when the vehicle was involved in an accident. At the time of the accident, the Shooks were the named insureds on an automobile liability policy issued to them by State Farm. The policy had a provision for bodily injury liability coverage with limits of $100,000/$300,000. Subsequent to the accident, Lois, asserting Terry was responsible for the accident, presented a claim to State Farm seeking $100,000 for the injuries she sustained in the accident.

Relying upon a "household exclusion" contained in the liability policy, State Farm tendered $25,000 to Lois, the maximum amount of coverage State Farm contended Lois was entitled to under the terms of the policy.1 State Farm adopted the position the exclusion operated to limit the coverage available to Terry, for any liability that would accrue to him for any bodily injuries Lois may have sustained, to $25,000, the minimum liability limits required under Montana's mandatory insurance law.2 This declaratory judgment action ensued.

Lois obviously disputes State Farm's construction of the liability provisions of the insurance contract. Her challenge to State Farm's position is two-fold. First, Lois argues the exclusion must be declared invalid and unenforceable because it violates the public policy of the State of Montana of providing adequate compensation to the insured victims of automobile accidents.3 Second, Lois contends State Farm's interpretation of the household exclusion must be rejected as contrary to the reasonable expectations of the insured.

The issues presented for determination may be succinctly stated as follows:

(i) is a typical "household exclusion" provision in an automobile liability policy, which operates to exclude coverage for bodily injury sustained by any insured or any member of the insured's household, void as against the public policy of the State of Montana?
(ii) does the "household exclusion" contained in the subject policy operate to defeat the "reasonable expectations" of the insured?
DISCUSSION

Title 61, Chapter 6, Part 3, Mont.Code Ann., "Mandatory Liability Protection", and more particularly section 61-6-301 requires "every owner of a motor vehicle registered and operated in Montana by the owner or with his permission is to provide insurance for liability caused by maintenance or use of the motor vehicle." With minimum liability limits as follows:

(i) $25,000 because of bodily injury to or death of any one person in any one accident and subject to said limit for one person; (ii) $50,000 because of bodily injury to or death of two or more persons in any one accident.

Enactment of this statutory law requiring mandatory liability protection is of singular importance in determining the validity of any exclusion contained in a motor vehicle liability insurance policy, since an exclusion may not operate in a fashion which is "repugnant to the State of Montana's interest in protecting innocent victims of automobile accidents." Iowa Mutual Ins. Co. v. Davis, 231 Mont. 166, 752 P.2d 166, 171 (1988).

Prior to the 1979 enactment of Mont.Code Ann. § 61-6-103 establishing mandatory liability protection, "household exclusions" contained in ordinary automobile liability insurance policies — policies carried voluntarily by automobile owners — were not viewed as contravening the public policy of the State of Montana. See, Mid-Century Ins. Co. v. American Casualty Co., 152 Mont. 328, 449 P.2d 679 (1969). However, subsequent to the enactment of section 61-6-103, the Montana Supreme Court declared that the "Montana Legislature has expressly outlawed the `household exclusion'." Transamerica Ins. Co. v. Royle, 202 Mont. 173, 656 P.2d 820, 823 (1983).4 The court viewed its conclusion as necessarily consistent with the requirement embodied in the mandatory insurance law, i.e., that every liability insurance policy certified under the law protect against bodily injury and damage to "any person". 656 P.2d at 823.5 In concluding its opinion, the court stated: "We must hold that a family exclusion clause is void and unenforceable because section 61-6-301(1) M.C.A., requires motorists to carry insurance against loss resulting from liability imposed by law for injuries suffered by any person." 656 P.2d at 824.

More recently, in Iowa Mutual Ins. Co. v. Davis, 231 Mont. 166, 752 P.2d 166 (1988), the Montana Supreme Court had occasion to address the effect of Montana's mandatory insurance protection laws upon the validity of a liability insurance policy exclusion, more particularly, a "named driver" exclusion. Emphasizing that insurance policy provisions which "countermand or diminish the requirements of section 61-6-301(1) would be considered, notwithstanding their express language, to provide the statutory requirements", the court held that section 61-6-301 prohibited the exclusion of named drivers from statutory minimum coverage under a motor vehicle liability policy. 752 P.2d at 169-171. The court, however, hastened to make the following statement:

Our ruling does not, however, prohibit an insurer from entering into agreements with their insureds to limit coverage to the statutory minimum amounts as set forth in section 61-6-103, M.C.A.

752 P.2d at 170.

The rationale underlying the Montana Supreme Court's decisions in Royle and Davis establishes that an exclusionary endorsement contained in a motor vehicle liability insurance policy is not per se void and unenforceable. Rather, the endorsement is unenforceable to the extent the endorsement attempts to exclude the minimum liability coverage mandated by Mont.Code Ann. § 61-6-301.

Montana's mandatory insurance law was designed to protect the public from uncompensated losses arising from the operation of a motor vehicle. Guaranty National Ins. Co. v. Kemper Financial Services, 667 F.Supp. 714 (D.Mont.1987). The public concern is satisfied where the motor vehicle owner provides liability coverage to the extent required by law. Id., citing, Ins. Co. of North America v. Avis Rent-a-Car System, Inc., 348 So.2d 1149 (Fla.1977); Cailson v. Nationwide Ins. Co., 243 S.E.2d 429 (No.Car. 1977); Balboa Ins. Co. v. State Farm Mutual Automobile Ins. Co., 17 Ariz.App. 157, 496 P.2d 147 (1972); but see, Smith v. National Indemnity Co., 57 Wis.2d 706, 205 N.W.2d 365 (1973).6 Having satisfied, through the terms of a motor vehicle liability insurance policy, the minimum statutory requirements, an insurer and its insured are free to enter agreements limiting coverage under a liability insurance policy, to the extent the agreements are otherwise valid under the law. See, Davis, 752 P.2d at 170; Mid-Century Ins. Co. v. American Casualty Co., 449 P.2d at 682.7 Consequently, an exclusionary endorsement which operates to limit coverage to the statutory minimum amounts established by Mont.Code Ann. § 61-6-301 is not violative of the public policy inherent in Montana's mandatory insurance law.8

The court now turns to consider the second issue presented for determination, i.e., whether the "household exclusion" at issue is invalid due to its failure to honor the "reasonable expectations" of the named insureds under the policy.

One of the major concerns which led to the evolution of the "reasonable expectations" doctrine was a desire to protect an insured, unfamiliar with the technical terms utilized in most insurance policies, from having insurance coverage diluted by application of technical and confusing policy provisions. See, n. 1, supra. Although the Montana Supreme Court in Royle, acknowledged the vitality of the "reasonable expectations" doctrine in Montana, it never undertook to define its precise dimensions. 656 P.2d at 824. A limited number of jurisdictions have extended the doctrine to all questions of insurance coverage, whether or not ambiguities exist in the language of the contract. See, e.g., Corgatelli v. Globe Life Ins. Co., 96 Idaho 616, 533 P.2d 737 (1975). This extension, however, appears to be the minority view. Auto-Owners Ins. Co. v. Jensen, 667 F.2d 714, 721, n. 9 (8th Cir.1981). In the majority of jurisdictions, the doctrine has been utilized to resolve ambiguities in insurance policies in order that the policies comport with the insureds' "reasonable expectations". See, Auto-Owners Ins. Co. v. Jensen, 667 F.2d at 721; Progressive Casualty Ins. Co. v. Marnel, 587 F.Supp. 622 (D.Conn. 1983); Wilson v. Ins. Co. of No.Am., 453 F.Supp. 732 (N.D.Cal.1978). Well established precedent indicates Montana follows the majority position.

Construction of insurance contracts in Montana is governed by the general law of contract interpretation contained in Title 28, Chapter 3, Montana Code Annotated, and the case law which has developed thereunder in the context of insurance. The Montana Supreme Court has stated that the intention of the parties to the contract is not to be inquired into unless there is ambiguity on the face of...

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