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Public policy no bar to underinsured coverage

Author / Coordinator: Michelle Lore
Minnesota Lawyer
July 2000

The public policy against coverage conversion alone was insufficient to prevent distribution of underinsured motorist (UIM) benefits to an insured when the insurance contract plainly provided UIM coverage and did not contain a provision excluding such coverage, ruled the Court of Appeals.

A minor child who was seriously injured while riding in a van borrowed from a neighbor and driven by his mother sought UIM benefits from his father’s insurance carrier. The insurance company denied benefits, claiming that the plaintiff was seeking to improperly use the UIM policy as a liability policy.

Granting summary judgment to the insurer, a Hennepin County District Court judge determined that allowing the injured minor to collect UIM benefits would convert the UIM coverage into more expensive third-party liability protection, which is disfavored in the law.

But the Court of Appeals disagreed.

“Recognizing the unique facts of this case, we conclude that the insurance policy, by its plain language, provides UIM coverage to the [plaintiff],” wrote Judge Roland C. Amundson. “In the absence of an applicable exclusionary provision, [the plaintiff] is entitled to such coverage when he had no control over the amount of direct coverage.”

The 11-page decision is Lynch v. American Family Mutual Insurance Co., Minnesota Lawyer No. CA-693-00.

Minneapolis attorney Sharon Van Dyck, who represented the insured views the decision as a reaffirmation of the age-old concept that “courts won’t re-write [an insurance] contract.”

Noting that courts typically uphold exclusions contained in insurance policies, Van Dyck observed that what is unique about the present case was that there was no exclusion in the policy.

“My argument ... [was that] you get what you contract for. The insurance company could have included an exclusion, but didn’t,” said Van Dyck.

The attorney for the insurance company, Katherine A. McBride, claims that the decision “cannot be reconciled with [the court’s] decision a little over a year ago in the [West Bend Mutual Insurance Co. v. American Family Mutual Insurance Co.].”

Contemplating an appeal, McBride noted that “I think that the Supreme Court might possibly be interested in this case to resolve the conflict between [it and West Bend].”

UIM request

On Feb. 23, 1993, the mother of plaintiff Ian Lynch borrowed a van that had been leased to her neighbor. While driving, the mother lost control of the van, crossed over the centerline, went into oncoming traffic and collided with another vehicle. The plaintiff, a passenger in the van, sustained injuries that caused paraplegia.

The plaintiff brought a negligence action against his mother, the neighbor, the leasing company and the driver of the other vehicle. The parties proceeded to voluntary binding arbitration on the issue of liability only. The arbitration panel found the mother to be solely liable for the accident.

Western National Insurance Company — which insured the van — paid the policy limit of $100,000 to the plaintiff. The plaintiff’s father was the named insured on two automobile insurance policies issued by defendant American Family Mutual Insurance Company for his own two vehicles.

The defendant paid the plaintiff’s liability policy limit of $100,000, but denied underinsured motorist (UIM) coverage. The plaintiff, through his father, brought a claim for the UIM benefits against the defendant. The parties filed cross-motions for summary judgment.

The District Court judge granted the defendant’s motion for summary judgment.

Amundson began by noting that the insurance policy, by its plain language, provides for UIM coverage for the plaintiff’s injuries. The policy states that the defendant will pay “compensatory damages for bodily injury to an insured person who is legally entitled to recover from the owner or operator of an underinsured motor vehicle,” explained the judge.

The policy refers to an insured person as the policyholder or “a relative” of the policyholder. The plaintiff “is the son of the policyholder — clearly a relative under the policy,” wrote Amundson.

Further, an underinsured motor vehicle is one “which is insured by a liability ... policy at the time of the accident ... [but] does not mean a vehicle ... [o]wned by or furnished for the regular use of [the policyholder] or any resident of [the policyholder’s] household,” continued the judge. “Here, the claim for coverage is based on the underinsured status of the van, making it the underinsured motor vehicle under the language of the policy.”

The defendant conceded that the plaintiff’s mother borrowed the van for a one-time use, and the parties stipulated that she had not driven it before the day of the accident, Amundson noted. “Thus, the van satisfies the ... policy’s definition of an underinsured motor vehicle because it was not available for [the mother’s] regular use, and therefore, [the plaintiff] meets the plain requirement for UIM coverage under the policy.”

Observing that many UIM cases cited by the parties involve the validity of similar “family owned vehicle” exclusions to the definition of underinsured motor vehicle, Amundson stressed that “this exception does not apply here because the van was not a vehicle owned by or regularly used by any member of the [plaintiff’s] family.”

Coverage conversion

The defendant argued, however, that the plaintiff seeks to improperly use the UIM policy as a liability policy, and notes that in Minnesota, the public policy is against such “coverage conversion.” This “conversion” refers to turning UIM coverage into third-party insurance, making it essentially third-party liability coverage, explained the judge.

“To illuminate this concern, it is important to understand the policies behind liability and UIM coverage,” wrote Amundson. “Unlike liability coverage, which is purchased to protect passengers in an insured vehicle from the negligent driving of the owner or another driver of the vehicle, UIM coverage is intended to protect against ... the risk that a negligent driver of another vehicle will have failed to purchase adequate liability insurance.”

The judge observed that courts upholding denial of UIM coverage pursuant to conversion questions note that an insured wishing to provide greater protection from his own negligence for himself and his passengers should purchase additional liability insurance coverage.

Furthermore, “[t]he cases addressing coverage conversion have all addressed and relied on the validity of a family-owned vehicle exclusion,” wrote Amundson. “But here, the district court’s decision to grant summary judgment was not based on a policy exclusion. Instead, the district court found that [the plaintiff] was not entitled to coverage based on the public policy against coverage conversion alone, even though ... there was no exclusionary provision specifically preventing coverage.”

The defendant, citing West Bend Mut. Ins. Co. v. American Family Mut. Ins. Co., argued that even in the absence of a specific exclusion, a claimant cannot collect first-party benefits under a policy covering the at-fault driver because that would be equivalent to an improper conversion.

The Court of Appeals responded that in addition to being factually dissimilar, the case at bar does not present the same coverage conversion issue present in West Bend.

“Here, [the plaintiff] is seeking UIM benefits because the liability coverage under the neighbor’s policy was insufficient to cover his damages; it was the neighbor’s van that was underinsured, not one of the [plaintiff’s] family vehicles. [The plaintiff], through his father — the holder of the policy under which UIM benefits are sought — in no way had control over the amount of liability coverage available under the neighbor’s insurance policy,” wrote Amundson.

“This appears to be just the situation for which UIM coverage is intended, namely, that the owner of another vehicle will have failed to purchase adequate liability insurance,” observed the judge.

Just dictum

Finally, the defendant argued that Lahr v. American Family Auto Ins. Co. holds that even in the absence of an exclusion, where only one car is involved or at fault, an injured passenger cannot obtain UIM benefits from the driver’s insurer.

In rejecting this argument, Amundson noted that this is dictum and that the Lahr court was not faced with a case of a one-vehicle accident, but instead a two-car collision.

This dictum flows from the court’s observation that the Minnesota Supreme Court has held that “a person cannot convert first-party UIM insurance into third-party liability insurance because such conversion would allow an insured to purchase less expensive UIM coverage in lieu of additional liability coverage,” Amundson observed. “But again, the court in Lahr presumed that in a one-vehicle accident, the driver would be covered by only one policy. Here, there were two policies from which [the plaintiff] could recover.”