With the South Dakota Supreme Court’s decision in Wheeler v. Farmers Mut. Ins. Co. of Neb., 2012 S.D. 83, the state joined a number of other states in invalidating “owned-but-not-insured” exclusions in uninsured motorist policies. The court held that South Dakota law does not allow an insurer to limit uninsured motorist coverage by an “owned-but-not-insured” exclusion.
Auto insurance policies generally provide uninsured and underinsured motorist coverage, which cover an insured when another driver is liable for an accident but either has no insurance or has insufficient insurance to cover the full extent of the loss or injury. Many insurers have attempted to limit uninsured motorist coverage by including an “owned-but-not-insured” exclusion in the policy. This exclusion states that uninsured motorist coverage will not apply if an insured person is occupying a vehicle he or she owns and that vehicle is not insured under the policy. In the interest of protecting their citizens, many states have refused to enforce “owned-but-not-insured” exclusions in order that innocent people injured by negligent drivers will be compensated. The issue had not been addressed in South Dakota until this case.
In Wheeler, a young woman was driving a vehicle owned by her father when she was struck by a drunk driver and severely injured. The driver did not have insurance. The woman’s parents were divorced and the vehicle was insured by her father. The father’s insurer paid the limits of its uninsured motorist coverage, which did not fully compensate the woman for her injuries. The woman then turned to her mother’s insurer seeking recovery of additional uninsured motorist benefits. The woman qualified as an insured under her mother’s policy but the policy covered only the mother’s vehicle, not the father’s car involved in the accident. The mother’s insurer denied the claim for uninsured motorist benefits on the basis of the “owned-but-not-insured” exclusion, noting that the vehicle was owned by the woman but was not insured under the policy and therefore no uninsured motorist benefits should be paid. The woman sued the insurer arguing that the “owned-but-not-insured” exclusion was void under South Dakota law.
South Dakota’s statutes include requirements for uninsured motorist coverage and a separate provision for underinsured motorist coverage. The underinsured motorist coverage statute states that such coverage is, “Subject to the terms and conditions of [the policy].” The uninsured motorist coverage statute, however, does not include any similar language subjecting the uninsured motorist coverage to the terms and conditions of the policy. The question presented to the Court was whether the uninsured motorist statute allows an insurer to limit coverage with an “owned-but-not-insured” exclusion.
Standard rules of statutory interpretation provide that every word in a statute is presumed to have been included for a purpose and every word excluded must be presumed to have been excluded for a purpose. Applying these standards, the Supreme Court determined that the inclusion of the phrase “subject to the terms and conditions of such coverage” in the underinsured motorist statute and the absence of the phrase from the uninsured motorist statute was intentional and must be given effect. Accordingly, the Court held that the legislature intended to allow insurers to limit underinsured motorist coverage, but did not intend for insurers to be able to limit uninsured motorist coverage. Therefore, an “owned-but-not-insured” exclusion limiting the recovery of uninsured motorist benefits was found by the majority of the Court to be void and unenforceable in South Dakota.
The decision tracks with a number of other states that also found “owned-but-not-insured” exclusions unenforceable. As the Arizona Supreme Court previously held, “because of the strong public policy mandating coverage for innocent victims from tragic negligent acts of uninsureds, we will not construe the uninsured motorist statute to reduce coverage when it is silent on ‘other vehicle’ exclusions.” Calvert v. Farmers Ins. Co., 697 P.2d 684, 687 (Ariz. 1985). The Supreme Court of Kentucky came to a similar conclusion in Chaffin v. Kentucky Farm Bureau Ins. Co., 789 S.W.2d 754 (Ky. 1990). These courts view the policy as personal, with the uninsured motorist benefits attaching to the insured person not the insured vehicle.
Other states, however, have supported the exclusion. The court in Clark v. State Farm Mut. Auto. Ins. Co., 743 P.2d 1227 (1987), found that Utah’s law did not prohibit exclusionary language for uninsured motorist benefits because “the coverage was intended to rest with the vehicle and not with the named insured.” In Employers’ Fire Insurance Co. v. Baker, 383 A.2d 1005 (1978), the Rhode Island Supreme Court upheld an “owned-but-not-insured” exclusion, finding that the statute did not mandate the extension of the policy to all other vehicles that may be owned by a person but that are not insured. This position adheres more closely to an insurer’s right to contract with its policyholder and define the terms of coverage.
A few states’ legislatures have responded to court decisions and modified their uninsured motorist statutes so as to allow for “owned-but-not-insured” exclusions. See, e.g., Baughman v. State Farm Mut. Auto. Ins. Co., 2000-Ohio-397; Wintz v. Colonial Ins. Co., 542 N.W.2d 625 (Minn. 1996).
South Dakota’s inclusion of limiting language in underinsured motorist coverage statute and exclusion of such language from the uninsured motorist coverage statute is curious, and the statute is not clear as to the legislature’s intent. One concurring justice, Justice Zinter, agreed with the majority’s interpretation of the law, noting that the court was obligated to apply the statute against the “owned-but-not-insured” exclusion, but he also recognized the inconsistencies that stemmed from the decision and openly encouraged the legislature to add clarity to the statute. According to Justice Zinter, “Applying the reasoning we utilized today, one would expect that other exclusions and limitations in uninsured motorist policies would not be permitted under [South Dakota statute]”—a result that clearly worried the justice and is presumably contrary to the legislature’s intent.
Some states have already addressed the difficulties presented by such statutes and courts in others have established firm positions on either side of the debate. Consumers and insurers should take note of their state’s approach to exclusionary language in uninsured and underinsured motorist policies, and states would do well to ensure that their statutes reflect public policy while remaining logically and legally consistent.