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

Citation162 Ariz. 251,782 P.2d 727
Decision Date12 October 1989
Docket NumberNo. CV-89-0071-PR,CV-89-0071-PR
Parties, 58 USLW 2251 STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Plaintiff-Appellant, v. Patricia WILSON and John Doe Wilson, her husband; and Michael Wilson, son of Patricia Wilson, Defendants-Appellees.
CourtSupreme Court of Arizona

Jones, Skelton & Hochuli by Ronald W. Collett and Kevin D. Neal, Phoenix, for plaintiff-appellant.

Kunz & Waugh, Ltd. by Richard M. Waugh, Phoenix, for defendants-appellees.

Tully & Wezelman, P.C. by John L. Tully, Tucson, for amicus curiae Arizona Trial Lawyers Association.

FELDMAN, Vice Chief Justice.

Michael Wilson (Wilson) petitions us to review a court of appeals' opinion holding the underinsured motorist provisions (UIM) in his automobile policy did not cover a punitive damage award. See State Farm Mut. Auto. Ins. Co. v. Wilson, 162 Ariz. 247, 782 P.2d 723 (Ct.App.1989). Wilson claims a conflict in Arizona law exists on this issue because division two of the court of appeals had previously construed an identical clause in an uninsured motorist (UM) provision to extend such coverage. See State Farm Fire & Cas. Co. v. Wise, 150 Ariz. 16, 721 P.2d 674 (Ct.App.1986). We granted review to resolve the conflict. See Rule 23, Ariz.R.Civ.App.P., 17B A.R.S. We have jurisdiction pursuant to Ariz. Const. art. 6, § 5(3) and A.R.S. § 12-120.24.


The facts are undisputed. On June 12, 1983, Wilson was injured in a collision with a drunk driver. He sued the driver and obtained a judgment for $5,000 compensatory and $20,000 punitive damages. The driver's insurance company paid the compensatory damages award but refused to pay punitive damages, claiming the policy expressly excluded punitive damages from its liability coverage.

Wilson then demanded that State Farm Mutual Automobile Insurance Co. (State Farm), his insurer, pay the punitive damage award under the UIM coverage contained in his policy. State Farm sought The UIM endorsement provides:

[162 Ariz. 252] declaratory relief, requesting that the court find its policy did not provide such coverage.

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

(Emphasis in original).

The policy states bodily injury "means bodily injury to a person and sickness, disease or death which results from it." (Emphasis in original). The policy also contains the following provisions:

Deciding Fault and Amount

Two questions must be decided by agreement between the insured and us:

1. Is the insured legally entitled to collect damages from the owner or driver of an underinsured motor vehicle; and

2. If so, in what amount?

Payment of Any Amount Due

We will pay any amount due:

1. to the insured; ...

(Emphasis in original). A separate section of the policy specifically outlines when UIM coverage does not apply; there is no exclusion for payment of punitive damages.

Thus, the applicable insuring portion of the policy covers only damages "for bodily injury," while the provision governing damage assessment provides for payment of all damages that may be due the insured. The words used do, indeed, present us with two apparently reasonable but conflicting interpretations. See Restatement (Second) of Contracts §§ 207 and 208. Wilson argued that the ambiguity in the policy language required judgment against State Farm and, furthermore, that Wise controlled. On cross-motions for summary judgment, the trial court ruled that State Farm, Wilson's insurer, was liable to pay the punitive damages award assessed against the tortfeasor. State Farm appealed and the court of appeals reversed.

Having granted the petition for review, we must thus decide whether coverage for punitive damages assessed against the tortfeasor is within the protection afforded by Wilson's UIM coverage.

A. Court of Appeals Decision

Viewing ambiguity as the dispositive question, the court of appeals found the UIM policy unambiguous and stated that it therefore must "be construed according to its ordinary meaning." 162 Ariz. at 248, 782 P.2d at 724. The court thus determined the policy provision insuring against "damages for bodily injury" did not include punitive damages because a lay person would not so construe it. The court discounted Wilson's argument that the clause was ambiguous when compared to other language in State Farm's policy. --- Ariz. at ----, 782 P.2d at 724.

The court acknowledged that when faced with an almost identical clause, division two of the court of appeals had come to a different conclusion in Wise. In Wise, division two held that arbitrators were correct to award punitive damages as part of a UM claim in the absence of an express exclusion. 150 Ariz. at 17, 721 P.2d at 675. In the present case, the court did not find Wise controlling because it believed division two improperly interpreted Price v. Hartford Accident & Indem. Co., 108 Ariz. 485, 502 P.2d 522 (1972) 1 as authority for the proposition that an insurer's failure to specifically exclude punitive damages was tantamount to an agreement to pay them under all circumstances. 162 Ariz. at 248, 782 P.2d at 724.

On review, Wilson urges us to hold that coverage exists because the policy is ambiguous and because such a construction would fulfill the expectations of the consumer. Given the nature of the insurance

[162 Ariz. 253] industry, we are well aware many of its customers expect maximum return for the premium dollar. In that light, the coverage in question might be expected. To be enforceable, however, the specific expectation must be reasonable. See Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 140 Ariz. 383, 389-90, 682 P.2d 388, 394-95 (1984). In interpreting the language of the agreement in question to determine if Wilson had a reasonable expectation of coverage for punitive damages, we must examine the purpose of the clause in question, public policy considerations, and the purpose of the transaction as a whole. Arizona Prop. & Cas. Ins. Guar. Fund v. Helme, 153 Ariz. 129, 135, 735 P.2d 451, 457 (1987). We proceed to do so, looking first at public policy as evidenced by legislative enactments and relevant case law.

B. Interpretation of the Policy in Light of Statutory Law and Other Public Policy Considerations

Because both UM and UIM insurance are creatures of statute (see A.R.S. § 20-259.01), we turn first to consider whether the legislature has required the coverage in question or whether the legislative goals would be served by resolving any doubt in policy language in favor of coverage.

1. Statutory Genesis

State Farm offered UIM coverage to comply with the requirements of Arizona law. See Petition for Review, App. B (State Farm Mutual Car Policy, "New Law Adds Coverage W To Your Policy"). UM coverage was similarly offered in response to statutory enactments. Thus, we analyze the purpose of the coverages provided by the contract with the statutory mandate in mind. Jenkins v. Mayflower Ins. Exch., 93 Ariz. 287, 291, 380 P.2d 145, 148 (1963) (statutory omnibus clause is part of every motor vehicle liability policy); see also Laird v. Nationwide Ins. Co., 243 S.C. 388, 134 S.E.2d 206, 209 (1964) (under South Carolina law, all statutes relating to the insurance contract are parts of the contract).

a. The Legislative History of UIM

The legislature adopted the Financial Responsibility Act (currently, the Safety Responsibility Act) in 1951. See A.R.S. §§ 28-1101 to 28-1225, 1951 Ariz.Sess.Laws ch. 122. In requiring all owners or operators of motor vehicles in Arizona to obtain liability insurance coverage, the legislature sought to protect drivers in the state against losses engendered by financially irresponsible owners or operators of motor vehicles. Id.; see also Cassel v. Schacht, 140 Ariz. 495, 683 P.2d 294 (1984) (citing Schecter v. Killingsworth, 93 Ariz. 273, 380 P.2d 136 (1963) and Jenkins )). In spite of the act's mandate, many automobile owners failed to purchase insurance. Therefore in 1965, UM coverage became the subject of legislation. 2 Bills were introduced in both the house and senate to require vehicle liability policies to provide coverage for injuries resulting from accidents with uninsured or unknown vehicles. See SB 42, Twenty-seventh Legislature (1965); Minutes of Meeting of Committee on Banking, Insurance and Corporations, March 16, 1965; Minutes of Meeting of Committee on County Affairs, March 23, 1965.

As enacted, the statute provided that insurers offer protection to persons "legally entitled to recover damages from owners or operators of uninsured motor vehicles because of bodily injury, sickness or disease, including death, resulting therefrom." See Laws 1965, ch. 34. The insured had the right to reject UM coverage until 1972 when the legislature made such coverage mandatory. See Laws 1972, ch. 157.

In 1981, the legislature perceived inadequacies in UM insurance. See A. Widiss, UNINSURED AND UNDERINSURED MOTORIST INSURANCE § 31.4 (2d ed. 1987) (UIM coverage developed in response to the public concern about the shortcom coverage for a person if the sum of the limits of liability under all bodily injury or death liability bonds and liability insurance policies applicable at the time of the accident is less than the total damages for bodily injury or death resulting from the accident. To the extent that the total damages exceed the total applicable liability limits, underinsurance motorist coverage provided in ... this section is applicable to the difference.

[162 Ariz. 254] ings of UM insurance, which only applied to accidents caused by uninsured motorists). Serious injuries are often caused by insured drivers with inadequate liability limits. Therefore, there was an obvious need for first party coverage to provide a...

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