State Farm Mutual Automobile Insurance Co. v. Marley , 2004 Ky. LEXIS 326 ( 2004 )

WINTERSHEIMER, Justice.

This appeal is from an opinion of the Court of Appeals which determined that the household exclusion contained in the personal liability umbrella policy is void against the public policy of the Commonwealth of Kentucky.

The questions presented are whether the household exclusion in the personal liability umbrella policy should be upheld as valid; whether the personal liability umbrella policy is optional coverage that is not governed by the Motor Vehicle Reparations Act; and whether decisions from courts in foreign jurisdictions support the validity and enforceability of such clauses and should be followed.

On December 17, 1999, Larry Marley, the insured, a resident of Indiana, was en route to Florida in the family van when he fell asleep at the wheel and lost control of the vehicle. One child, Heather, was killed. Sixteen-year-old Rachel received injuries resulting in paraplegia, and her mother, Carma, was seriously injured. David, a 12-year-old twin of Heather, was also injured. Carma, Rachel and David are all residents of Indiana and filed an action for damages against the father in Simpson Circuit Court in Kentucky. A separate declaratory judgment action was brought to determine the amount of liability insurance coverage available to Larry under the automobile policy with limits of $100,000 per person/$300,000 per accident, issued in Indiana by State Farm Mutual Automobile Insurance Company, and a personal liability umbrella policy with limits of $1 million issued in Indiana by State Farm Fire & Casualty Company.

Applying Kentucky law in interpreting both policies, the trial judge found that the household exclusion in the primary automobile policy was unenforceable in Kentucky. That decision has never been appealed. The trial judge also found that the automobile policy contained an “out-of-state” coverage provision, which reduced the amount of Larry Marley’s liability coverage to the minimum policy limits required by the Kentucky Motor Vehicle Reparations Act, KRS 304.39-110. Finally, the trial judge determined that pursuant to Kentucky Farm Bureau Mut. Ins. Co. v. Thompson, Ky., 1 S.W.3d 475 (1999), the household exclusion in Larry Marley’s umbrella policy is valid and enforceable.

The Court of Appeals reversed on the two issues appealed. Distinguishing Thompson, supra, it held that the household exclusion in the umbrella policy as applied to automobile liability coverage was void as against the public policy of this Commonwealth and was unenforceable. It also held that the out-of-state coverage provision does not limit the plaintiffs’ recovery to the minimum liability amount contained in the MVRA. The insurance company sought discretionary review in this Court. While that motion was pending, the parties filed a joint motion stating that all claims relating to the automobile policy had been settled and were now moot, and asked this Court to consider only the issue relating to the household exclusion in the umbrella policy. This Court granted discretionary review and also the joint motion.

I. Enforceability of Policy

The critical issue is whether a household exclusion in the personal liability umbrella policy as it applies to automobile liability coverage violates Kentucky public policy. In Lewis v. West American Ins. Co., Ky., 927 S.W.2d 829 (1996), household exclusions in automobile liability policies were held to be unenforceable regardless of the policy limits because they violate Kentucky public policy. In Thompson it was held that the public policy of the state only precludes household exclusions in automobile liability policies, not other types of liability policies such as farm owner policies.

State Farm argues that Kentucky courts have consistently recognized the freedom to contract, and the unambiguous household exclusion in this personal liability umbrella policy should be upheld. In effect, State Farm relies on Thompson in support of the contention that Lewis, supra, is limited to automobile policies and the personal liability insurance policy is not an automobile insurance policy. The Marley family responds that Kentucky courts have consistently recognized that insurance policy provisions which violate the public policy of this State are not enforceable.

The parties stipulated that under Indiana law the household exclusion clauses in both policies are valid and enforceable. The Marleys were all residents of Indiana. The policies were issued in Indiana and the vehicle was primarily garaged in Indiana. The only contact the Marley family had with Kentucky is that the accident occurred while driving through the Commonwealth on their way to Florida. It could be said that under traditional choice of law principles, the law of Indiana is applicable. However, Kentucky courts have traditionally refused to apply the law of another state if that state’s law violates a public policy as declared by the Kentucky legislature or courts. See R.S. Barbee & Co. v. Bevins, Hopkins & Co., 176 Ky. 113, 195 S.W. 154 (1917). It is no longer contested by either party that Kentucky law applies in this case.

We recognize that family exclusion provisions were once common in the automobile insurance industry and served to protect the company from lawsuits where there was a family relationship between the tortfeasor and the injured party. See Orange v. State Farm Mut. Auto. Ins. Co., Ky., 443 S.W.2d 650 (1969). One of the first cases to consider the validity of a family exclusion clause in an automobile insurance contract since the adoption of the MVRA held that family or household exclusion clauses that dilute or eliminate the minimum requirement of basic reparations benefits or tort liability coverage of the MVRA were void and unenforceable. Bishop v. Allstate Ins. Co., Ky., 623 S.W.2d 865 (1981). The Bishop court reasoned that the stated purpose of the MVRA was to ensure that a driver be insured to a minimum level. Any exclusion provision that contravenes the purpose and policy of the compulsory insurance act was essentially unenforceable and void. Fifteen years after Bishop was rendered, this Court in Lewis held that all family exclusion clauses in liability insurance policies are repugnant to the public policy of Kentucky and are, therefore, void and unenforceable. Three years after that decision, this Court in Thompson considered the application of the Lewis doctrine to non-automobile liability insurance policies. In that case, Thompson had in effect a farm-owners policy of liability insurance that contained a household exclusion. His underage daughter was injured while riding on a tractor he owned and was operating. She subsequently filed an action against him for negligent operation. Thompson held that the unenforceable aspects of the exclusionary provisions were limited to automobile policies.

The practical issue here is whether the umbrella policy is an automobile policy as required by Thompson. Clearly, Thompson is different from this case because it involved a farm tractor covered under a farm policy. Both by statute and case law, a farm tractor is not an automobile within the meaning of the MVRA. See KRS 187.290(4) and Kentucky Farm Bureau Mut. Ins. Co. v. Vanover, Ky., 506 S.W.2d 517 (1974). The insurance policy in this case covers automobile accidents. The mere fact that the policy is labeled as an umbrella policy and written separately from the underlying automobile policy, or that it covers claims other than automobile accidents, does not validate an exclusion provision of this nature.

The MVRA uses the term “security.” The Act does not use the word “automobile insurance.” Although Thompson limited the Lewis opinion to .an automobile insurance policy only, we must conclude that it was not the intention of this Court to permit household exclusions in umbrella policies when the underlying claim arose from a motor vehicle accident.

II. Optional/Mandatory Coverage

State Farm contends that umbrella coverage is optional and is not governed by the directions of the MVRA and that accordingly there is no public policy question involved. We disagree.

This Court finds no reason to discriminate between those with minimum coverage required by law and those with higher, optional coverage. See Lewis at 833. An umbrella insurance policy must be considered in accordance with the nature of the claims that it is called upon to cover. An umbrella policy was purchased to serve as an extension of the automobile policy limits and any distinction between the automobile liability and an umbrella liability policy is a distinction without a difference.

We determine that there is no difference between the security provided by an optional umbrella policy and the security provided by mandatory minimum liability coverage. It is clear that the public policy of Kentucky is to ensure that victims of motor vehicle accidents on Kentucky highways are fully compensated. The household exclusion in the umbrella policy as it applies to automobile liability coverage violates that public policy and is void and unenforceable.

III. Foreign Authorities

State Farm argues that the question of whether a household exclusion contained in a personal liability umbrella policy is valid and enforceable is an issue of first impression in Kentucky. The insurance company contends that the majority of courts in other states presented with this issue have upheld the validity and enforceability of such exclusions in umbrella policies. State Farm cites eight cases from six different states in support of its contention. We are not persuaded.

The essential rationale in Thompson and Lewis is based on the fact that automobile liability insurance policies come within the ambit of MVRA. This claim arises from the ownership, operation and use of a motor vehicle within Kentucky and, consequently, the automobile liability provisions of the umbrella policy come within the purview of the MVRA. It is interesting to note that State Farm recognizes that the Washington Court of Appeals in Safeco Ins. Co. of Illinois v. Automobile Club Ins. Co., 108 Wash.App. 468, 31 P.3d 52 (2001), found the household exclusion in an umbrella policy to be unenforceable as a violation of the public policy of the State of Washington.

It is the decision of this Court that pursuant to Kentucky law, the household exclusion in the personal liability umbrella policy as applied to automobile liability coverage is void and unenforceable.

The opinion of the Court of Appeals is affirmed.

LAMBERT, C.J., GRAVES and STUMBO, JJ., concur. COOPER, J., dissents by separate opinion and is joined by JOHNSTONE and KELLER, JJ.