South Dakota Supreme Court Rules Auto Exclusion Invalid

A ruling recently handed down by the Supreme Court of South Dakota establishes that the state’s auto insurers’ “owned-but-not-insured” exclusions included in their uninsured motorist (UM) policies may not hold up in court.

Owned-but-not-insured exclusions are designed to make it so that an insurer doesn’t have to distribute benefits in certain situations. Specifically, they are used in situations where the policy providing the coverage did not include the car involved in the accident.

The decision, which was handed down in December 2012, was the result of an appeal from a South Dakota woman named Megan Wheeler.

In 2011, Wheeler was driving a Honda Accord jointly owned by her divorced parents when a drunk motorist ran a red light and crashed into her, according to court documents. The accident left her severely injured, and since the driver responsible for the accident had no auto insurance coverage at the time, she had to rely on uninsured motorist coverage to pay for her medical bills.

First, she turned to her father’s insurer, Progressive, which had issued a policy covering Megan and the Accord. This policy had $100,000 worth of UM coverage, but Megan’s medical costs exceeded that limit.

In order to take maximum advantage of the benefits available to her, Megan also filed a UM claim with her mother’s insurer, Farmers. Farmers had issued her mother a policy that covered Megan but did not specifically include the Accord that she had been driving in the crash.

In response to the claim, according to court documents, Farmers contested that an owned-but-not-insured exclusion included in the policy made her ineligible for coverage.

Farmers’ UM owned-but-not-insured exclusion included the condition that there would be no coverage if the injury occurred while the person filing the claim was driving or riding in a vehicle that was owned by a relative but not insured under the same policy that provided the UM coverage. And since the injury took place while Megan was riding in a car that was partly owned by her mother but not insured under her mother’s policy, this applied to her claim, and she was denied coverage.

After the denial, Megan took Farmers to court over the coverage issue, which ended with the circuit court’s upholding Farmer’s exclusion. According to the Supreme Court, the lower court had mostly relied on a previous case that dealt with an owned-but-not-insured exclusion that had been used to deny a driver underinsured motorist (UIM) policy benefits.

Both coverages are similar and are applied similarly, and the circuit court “found that the case law dealing with uninsured motorist coverage and underinsured motorist coverage could be applied interchangeably,” according to the Supreme Court decision.

As a result, the circuit court relied on the similar, previous ruling in which the UIM policy’s owned-but-not-insured exclusion was upheld.

But the Supreme Court, in reversing the lower court’s decision, noted that the lower court was wrong to treat UM and UIM specifications interchangeably. The reason was that UM and UIM coverage have been addressed by the Legislature in separate statutes with distinct language. An important distinction between the two that the Supreme Court pointed out was that the statute specifying the legal requirements of UIM coverage includes the following phrase: “Subject to the terms and conditions of such underinsured motorist coverage,” which allows an insurer to set limits on when benefits are available.

There was no such phrase in the UM statute.

The Supreme Court concluded that the Legislature’s inclusion of the phrase in the UIM statute but not in the UM statute was likely meaningful.

“The exclusion of such language from the uninsured motorist statute indicates that although the Legislature contemplated insurers placing limitations on the terms and conditions of underinsured motorist coverage, it did not intend for such limitations to be placed upon the terms and conditions of uninsured motorist coverage,” the Supreme Court wrote.

As a result, the court concluded that since the Legislature did not explicitly state that South Dakota insurance companies could place limitations on UM coverage, Farmers’ owned-but-not-insured exclusion was void.

The court noted in its decision that one reason the Legislature may have allowed for restrictions on UIM coverage but not UM coverage is that UIM coverage only applies in cases where the person who caused the accident didn’t have enough coverage, so it basically acts as supplemental coverage. On the other hand, UM coverage applies when the responsible driver did not have any coverage at all, leaving the victim exposed to higher personal expenses.

Industry officials say that the decision could have implications for other court decisions involving UM/UIM disputes in South Dakota.

“We’ve seen the case, and our members are concerned about it,” Robert Passmore, senior director for personal lines at the Property Casualty Insurance Association of America (PCI), told Online Auto Insurance News. “It’s something that broadens exposure for UM/UIM in South Dakota. Ultimately, it will have an impact on lawsuits, which would ultimately affect premiums for consumers.”

Another PCI representative, vice president of state affairs Kelly Campbell, says the decision could have broad ramifications if it is handled in the Legislature and coverage parameters are changed.

“We’re in wait-and-see mode on what the impact of this decision is,” Campbell said. “UM coverage is litigated a lot.”

About Ben Zitney
Benjamin Zitney has been covering the auto insurance industry for the past 2.5 years. Before coming to Online Auto Insurance News, he produced an extensive company history of the 30-year-old California Joint Powers Insurance Authority and worked at the Cal State Long Beach Daily Forty-Niner as a reporter, copy editor and news editor.

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