U.S. Fidelity and Guar. Co. v. Sandt, 900601

• Decision Date: 28 May 1993
• Docket Number: No. 900601,900601
• Citation: 854 P.2d 519
• Court: Utah Supreme Court
• Parties: UNITED STATES FIDELITY & GUARANTY COMPANY, Plaintiff and Appellant, v. Robert SANDT, Linda Sandt, and Sean Sandt, Defendants and Appellees.

Page 519

854 P.2d 519

UNITED STATES FIDELITY & GUARANTY COMPANY, Plaintiff and Appellant, v. Robert SANDT, Linda Sandt, and Sean Sandt, Defendants and Appellees.

No. 900601.

Supreme Court of Utah.

May 28, 1993.

Gregory J. Sanders, Salt Lake City, for plaintiff and appellant.

Robert B. Sykes, James D. Vilos, Eugene C. Miller, Salt Lake City, for defendants and appellees.

STEWART, Justice.

United States Fidelity & Guaranty Company (USF & G) appeals from a summary judgment awarding Robert and Linda Sandt $300,000 under their underinsured motorist coverage.

In July 1989, fifteen-year-old Sean Sandt was one of several passengers riding in a pickup truck owned by Pamela Sturgis and driven by Tony Holder. When Holder lost control of the truck, it rolled over, severely injuring Sean. Sean died several months later from his injuries. His medical expenses exceeded $400,000.

The Sturgis vehicle was insured against public liability claims by Farmers Insurance Company (Farmers). Farmers paid the Sandts the policy limit of $100,000. The Sandts then sought to recover $300,000 from their underinsured motorist coverage with USF & G. USF & G refused to pay the $300,000 claim and filed a declaratory judgment action.

USF & G argued to the trial court that the language of the policy excluded Sean Sandt from coverage because he was using the Sturgis vehicle without a "reasonable belief that [he was] entitled to do so." USF & G also asserted that under the terms of the policy, USF & G was entitled to reduce its payment by the amount of the liability insurance that Farmers paid the Sandts. The trial court ruled that Sean was not excluded from coverage and that under the terms of the policy the Sandts were entitled to the full $300,000 of underinsured motorist coverage.

On appeal, USF & G attacks only the trial court's holding that the Sandts were entitled to the full underinsured motorist coverage of $300,000. USF & G asserts that under the language of its underinsured motorist coverage, it is liable for only $200,000 because the $100,000 Farmers paid to the Sandts must be deducted from the $300,000 limit. It relies on a paragraph in the underinsured motorist section entitled "Limit of Liability," which states, "[T]he limit of liability shall be reduced by all sums paid because of the bodily injury by or on behalf of persons or organizations who may be legally responsible." The Sandts rely on a paragraph labeled "Other Insurance" that states, "[A]ny insurance [i.e., underinsured motorist coverage] we provide with respect to a vehicle you do not own shall be excess over any other collectible insurance." (Emphasis added.) We note that if entitled to the full $300,000, the Sandts will not receive a double recovery because their damages exceeded $400,000.

Underinsured motorist coverage provides first-party insurance protection for damages that exceed the limits of the tort-feasor's bodily injury coverage. Underinsured motorist coverage is a facet of uninsured motorist coverage; its purpose is to provide insurance protection to the insured against damages caused by a negligent motorist as if the motorist had another liability policy in the amount of the underinsured policy. See 8C John A. Appleman & Jean Appleman, Insurance Law & Practice § 5071.45, at 102-03 (1981); Higgins v. Fireman's Fund Ins. Co., 160 Ariz. 20, 770 P.2d 324, 326 (1989).

The extent of USF & G's liability in this case turns on the language of USF & G's policy and the rules of construction that apply to insurance policies. Since 1921 this Court has expressed its commitment to the principle that "insurance policies should be construed liberally in favor of the insured and their beneficiaries so as to promote and not defeat the purposes of insurance." Richards v. Standard Acc. Ins. Co., 58 Utah 622, 200 P. 1017, 1020 (1921); Colovos v. Home Life Ins. Co., 83 Utah 401, 28 P.2d 607, 610 (1934); see also Browning v. Equitable Life Assur. Soc., 94 Utah 570, 80 P.2d 348, 352 (1938) [hereinafter Browning II ] ("In construing a policy of life insurance, that interpretation is to be placed upon the words of the policy which is most favorable to the insured."). This fundamental rule is based on the fact that an insurance policy is a classic example of an adhesion contract.

Insurance contracts are typically drafted by insurance company attorneys who are duty-bound to protect the interests of their clients. The terms of a typical insurance policy are not negotiated by the insurer and the insured. A policy is usually offered on a take-it-or-leave-it basis. In 1937, this Court described the one-sided manner in which insurance contracts are drafted:

Insurance policies, while in the nature of written contracts, are not prepared after negotiations between the parties, to embrace the terms at which the parties have arrived in their negotiations. They are prepared beforehand by the insurer, and the company solicitors then sell the insurance idea to the applicant. Normally, the details and provisions of the policy are not discussed, except that the particular form of policy is best suited to give the applicant the protection he seeks. If he reads the policy he is generally not in a position to understand its details, terms, and meaning except that, in the event against which he seeks insurance, the company will pay the stipulated sums. He seldom sees the policy until it has been issued and is delivered to him. He signs an application blank in which the policy sought is described either by form number or by a general designation, pays his premium, and in due course thereafter receives, either from the agent or through the mails, his policy. Many of its terms and all of its defenses and super-refinements he has never heard of and would not understand them if he read them. Such fact is evident from the fact that cases like this arise where lawyers and courts disagree as to what such provisions mean. In fact, there are about as many different constructions by the courts of terms such as those involved here as there are insurance companies issuing such policies. For this reason the rule of strictissimi juris has been applied almost universally to insurance contracts, and this jurisdiction, like many others, has declared in favor of a liberal construction in favor of the insured to accomplish the purpose for which the insurance was taken out and for which the premium was paid.

Browning v. Equitable Life Assur. Soc., 94 Utah 532, 72 P.2d 1060, 1073 (1937) (Larson, J., concurring in part, joined by Folland, C.J., Hanson, J., and Moffat, J.) [hereinafter Browning I ] (emphasis added); see also Gibson v. Equitable Life Assur. Soc., 84 Utah 452, 36 P.2d 105, 109 (1934).

Thirty years after Browning I, this Court reaffirmed the proposition that insurance policies should be strictly construed against the insurer and in favor of the insured because they are adhesion contracts drafted by the insurance companies. DiEnes v. Safeco Life Ins. Co., 21 Utah 2d 147, 150, 442 P.2d 468, 471 (Utah 1968). In DiEnes, the Court quoted the paragraph from Browning I set out above and characterized it as "[t]he rule for interpreting an insurance policy." Id. at 150, 442 P.2d at 471. In Whitlock v. Old American Insurance Co., 21 Utah 2d 131, 135, 442 P.2d 26, 28 (Utah 1968), the Court reiterated this rule, stating,

"We have heretofore held that the insured is entitled to the broadest coverage he could reasonably understand from the policy."

(Emphasis added.) See also P.E. Ashton Co. v. Joyner, 17 Utah 2d 162, 164, 406 P.2d 306, 308 (Utah 1965), where the Court stated, "[T]he insured is entitled to the broadest protection that he could reasonably believe the commonly understood meaning of its terms afforded him."

It follows that ambiguous or uncertain language in an insurance contract that is fairly susceptible to different interpretations should be construed in favor of coverage. American Casualty Co. v. Eagle Star Ins. Co., 568 P.2d 731, 734 (Utah 1977); Williams v. First Colony Life Ins Co., 593 P.2d 534, 536 (Utah 1979); Moore v. Prudential Ins. Co., 26 Utah 2d 430, 491 P.2d 227, 229 (1971); Christensen v. Farmers Ins. Exch., 21 Utah 2d 194, 443 P.2d 385, 386 (1968); DiEnes, 21 Utah 2d at 150, 442 P.2d at 471; Joyner, 17 Utah 2d at 164-65, 406 P.2d at 308; Jorgensen v. Hartford Fire Ins. Co., 13 Utah 2d 303, 373 P.2d 580, 581 (1962). It also follows that if an insurance contract has inconsistent provisions, one which can be construed against coverage and one which can be construed in favor of coverage, the contract should be construed in favor of coverage. Farm Bureau Mut. Ins. Co. v. Winters, 248 Kan. 295, 806 P.2d 993, 996 (1991); 43 Am.Jur.2d Insurance § 283 (1982).

A corollary to these rules is that provisions that limit or exclude coverage should be strictly construed against the insurer. LDS Hospital v. Capital Life Ins. Co., 765 P.2d 857, 858 (Utah 1988); Browning II, 94 Utah 570, 80 P.2d 348, 352 (1938); see also Aetna Casualty & Sur. Co. v. Haas, 422 S.W.2d 316, 321 (Mo.1968); Boswell v. Travelers Indem. Co., 38 N.J.Super. 599, 120 A.2d 250, 253 (App.Div.1956); Harris, Jolliff & Michel, Inc. v. Motorists Mut. Ins. Co., 21 Ohio App.2d 81, 255 N.E.2d 302, 305 (1970); Phil Schroeder, Inc. v. Royal Globe Ins. Co., 99 Wash.2d 65, 659 P.2d 509, 511 (1983).

Because insurance policies are intended for sale to the public, the language of an insurance contract must be interpreted and construed as an ordinary purchaser of insurance would understand it. Fuller v. Director of Finance, 694 P.2d 1045, 1047 (Utah 1985); Hoffman v. Life Ins. Co. of North Am., 669 P.2d 410, 416 (Utah 1983); Whitlock, 21 Utah 2d at 135, 442 P.2d at 28 (an insured is entitled to the broadest coverage he could reasonably understand from the policy); Jorgensen v. Hartford Fire Ins. Co., 13 Utah 2d 303, 373 P.2d 580, 581 (1962); Handley v. Mutual Life Ins. Co. of New York, 106 Utah 184, 147 P.2d 319, 322 (1944); Richards...