USCA1 Opinion
November 24, 1992
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 92-1360
CANAL INSURANCE COMPANY,
Plaintiff, Appellee,
v.
DARRELL A. BENNER, ET AL.,
Defendants, Appellees,
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GARY LEBRETON
Defendant, Appellant.
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No. 92-1420
CANAL INSURANCE COMPANY,
Plaintiff, Appellee,
v.
DARRELL A. BENNER,
Defendant, Appellant.
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APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. Morton A. Brody, U.S. District Judge]
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Before
Torruella, Circuit Judge,
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Aldrich, Senior Circuit Judge,
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and Boudin, Circuit Judge.
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Valerie Stanfill, with whom Paul F. Macri, Berman & Simmons,
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P.A., Peter B. Bickerman and Lipman & Katz, P.A., were on brief
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for appellants LeBreton and Benner.
John W. Ballou, with whom Mitchell & Stearns, was on brief
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for appellee Canal Insurance Company.
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Per Curiam. On this appeal, we review the district
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court's interpretation of a motor vehicle liability insurance
policy. The district court initially found an "occupant hazard"
exclusion clause in the policy void as contrary to public policy.
It then held that the amount of coverage under the policy would
be limited to the minimum amount required by Maine's Financial
Responsibility Law, rather than the full and greater amount of
liability coverage provided by the policy. The insured appeals
the latter determination. We affirm.
I
Darrell Benner was the named insured in a motor vehicle
liability insurance policy issued by Canal Insurance Company
("Canal"). The policy contained an endorsement entitled
"Occupant Hazard Excluded," which reads as follows:
It is agreed that such insurance as is
afforded by the policy for Bodily Injury
Liability does not apply to Bodily Injury
including death at any time resulting
therefrom, sustained by any person while
in or upon, entering or alighting from
the automobile.
It is further agreed that, in the event
the company shall, because of provision
of the Federal or State statutes become
obligated to pay any sum or sums of money
because of such bodily injury or death
resulting therefrom, the insured agrees
to reimburse the company for any and all
loss, costs and expense incurred by the
company.
On August 30, 1990, Gary LeBreton was a passenger in a
tractor trailer owned by Benner and driven by Keith Whitney on
State Highway Route 137 in the Town of Knox, Waldo County, Maine.
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The tractor left the road, overturned and LeBreton was injured.
LeBreton brought suit against Benner and Whitney in
Waldo County Superior Court seeking damages for his injuries. In
that action, LeBreton alleges that Whitney's negligent operation
of the tractor trailer caused the injuries he sustained and that
Benner is liable because Whitney was acting as Benner's employee
at the time of the accident.
Benner called upon Canal to defend him in the
litigation and to indemnify him up to the policy limit. In
response, Canal brought this declaratory judgment action in the
District Court for the District of Maine seeking a determination
that it was not obligated under the policy to defend either
Benner, or his employee, Whitney, nor to indemnify Benner or
Whitney for any damages that they may have to pay to LeBreton.
The parties filed cross-motions for summary judgment.
The district court granted summary judgment in favor of
appellants Benner, Whitney and LeBreton finding that the Occupant
Hazard Exclusion was contrary to public policy because it
conflicted with Maine's Financial Responsibility Law.1
Regarding the amount of coverage to be paid by the insurer, the
court concluded that Canal was obligated to pay to its insured
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1 Section 780 of that law requires that "[e]very operator or
owner of a motor vehicle, trailer, or semitrailer registered in
this State shall maintain at all times the amounts of motor
vehicle liability insurance or financial responsibility specified
in Section 787." 29 M.R.S.A. 780. Section 787 requires a
minimum $20,000 for one person and $40,000 for two or more
persons injured in the same accident and $10,000 of coverage for
property damage.
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the minimum amount required by Maine's financial responsibility
statute -- $20,000 for any one person injured -- rather than the
full amount of liability coverage of $750,000 provided by the
policy. The district court's determination to limit coverage to
the minimum amount required by Maine's financial responsibility
Law was premised on two "facts":
First, the premium paid for the policy
was undoubtedly based on the inclusion of
the occupant exclusion. Second, and more
importantly, even though the exclusion is
contrary to public policy the insurer
would still have the opportunity to limit
its policy to the minimum amount required
by the statute, and limit excess coverage
by an occupant exclusion.
Unsatisfied with this result, appellants Benner and
LeBreton appeal claiming that the district court should have
awarded the full amount of liability coverage provided by the
policy.2
II
Rule 56(c) of the Federal Rules of Civil Procedure
mandates the entry of summary judgment "if the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party
is entitled to judgment as a matter of law." See also Celotex
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Corp. v. Catrett, 477 U.S. 317, 323 (1986). We review the
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district court's grant of summary judgment de novo. FDIC v.
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2 Canal has not appealed the district court's holding that the
occupant hazard exclusion is void.
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World University Inc., No. 92-1389, slip. op. at 4 (1st Cir.
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October 22, 1992) ("Our review of a summary judgment ruling is
plenary.").
III
The issue of whether, if an endorsement in an insurance
policy is held void as contrary to the State's public policy, the
limit of liability under the policy will apply (in this case,
$750,000) or whether the limits should be those contained in
State law ($20,000) has divided courts. Some courts have
concluded that the liability limit is the full and generally
greater amount of coverage. E.g., State Farm Mut. Auto. Ins. Co.
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v. Wagamon, 541 A.2d 557 (Del. 1988); Meyer v. State Farm Mut.
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Auto. Ins. Co., 689 P.2d 585 (Colo. 1984); Missouri Medical
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Insurance Co. v. Wong, 676 P.2d 113 (Kan. 1984). Other courts
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limit the liability to the minimum statutory requirements. E.g.,
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Collins v. Farmers Ins. Co., 822 P.2d 1146 (Or. 1991); Walther v.
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Allstate Ins. Co., 575 A.2d 339 (Md. App. 1990); State Farm
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Mutual v. Nationwide Mut., et al, 566 P.2d 81 (Md. 1986); Tibbs
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v. Johnson, 632 P.2d 904 (Wash. 1981); De Witt v. Young, 625 P.2d
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478 (Kan. 1981); Estate of Neal v. Farmers Ins. Exchange, 566
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P.2d 81 (Nev. 1977); State Farm Mutual Auto Ins. Co. v. Shelly,
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231 N.W.2d 641 (Mich. 1975).
Maine's Supreme Judicial Court has not decided this
issue. Not surprisingly, both parties contend that the Maine
courts would follow their respective interpretation of the effect
of finding the endorsement void. Appellants assert that the
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district court's decision was contrary to the clear language of
the policy because the policy provided coverage of $750,000.
They argue that Canal could have drafted its occupant hazard
endorsement so that if the exclusion were held invalid, coverage
would be limited to the minimum amount of the relevant state's
financial responsibility statute. Appellants' argument has a
superficial appeal, but no real substance. Absent bad faith on
the insurer's part, why should a state requirement for a
mandatory minimum impose not only the minimum, but an additional
amount on this particular insurer simply because, in another
connection, it had undertaken additional coverage? Without
reaching constitutional questions, this would be an exaggerated
application of public policy.
Appellants further argue that public policy concerns
should have led the district court to apply the policy limit.
The district court's decision limits recovery available to
injured parties to the minimum amount which the Legislature
established was necessary even though the legislative intent was
to maximize insurance coverage.
Finally, appellants argue that there is no evidence in
the record to support the district court's finding that "the
premium paid for the policy was undoubtedly based on the
inclusion of the occupant exclusion." This last argument defies
common sense because the premium that one pays for an insurance
policy is based on the amount of risk.
In Nichols v. Anderson, 837 F.2d 1372 (5th Cir. 1988),
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the Fifth Circuit held that if an exclusion in a motor vehicle
policy is held invalid as against public policy, coverage should
be limited to the extent required to meet the State's public
policy. The motor vehicle insurance policy in Nichols contained
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an endorsement limiting coverage to accidents within 150 miles of
McCrory, Arkansas. The Fifth Circuit found that endorsement
void as against the public policy of Arkansas. Id. at 1374
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(citing Nichols v. Anderson, 788 F.2d 1140 (5th Cir. 1986)). In
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the absence of Arkansas decisions providing guidance, the Fifth
Circuit relied on Section 184 of the Restatement (Second) of
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Contracts. The court found as follows:
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Subsection 184(1) states that if less
than all of a contract violates public
policy, the rest of the contract may be
enforced unless the unenforceable term is
an essential part of the contract.
Clearly in this case we should not void
the entire insurance contract, for such
an action would contravene the [State's]
policy requiring minimum coverages.
Subsection 184(2) expands the
Restatement's rule and applies it to the
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specific term that was found to violate
public policy. According to that
subsection, a court may treat only part
of a term as invalid if the parties acted
in good faith. This rule is intended to
apply when a term is invalid because it
is too broad and a narrower term would be
enforceable.
Nichols, 837 F.2d at 1375 (citing 184 comment b). Based on
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Section 184(2) of the Restatement, the Fifth Circuit held that
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when there is no claim of bad faith, courts should "adjust the
contract as little as possible to enable the parties to have a
contract as close to what they intended as possible." Id. at
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1376. Since the radius exclusion clause was invalid as against
state policy, which required $25,000 of coverage, the Fifth
Circuit found that the insurer should be liable for $25,000 and
not for the $100,000 policy limit.
We find the Fifth Circuit's reasoning persuasive.3
Basic canons of contractual interpretation support the holding
that when an exclusionary clause is invalidated, the effect of
the invalidation is to require the insurer to provide coverage up
to the statutory minimum. Appellant's have made no claim that
Canal acted in bad faith. The district court's determination
that "the premium paid for the policy was undoubtedly based on
the inclusion of the occupant exclusion" is eminently reasonable.
Insurance policies are issued based on risk, and excluded risks
lower the exposure and concomitantly the premium. Since the
exclusion is invalid due to the Financial Responsibility Law, an
insurers' exposure -- particularly when there was no bargaining
process relative to that exposure -- should be limited to the
minimum required by Maine's Financial Responsibility Law.
The judgment of the district court is affirmed.
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3 In their Reply Brief, appellants argue that Nichols is not
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applicable because in Maine ambiguous insurance policies are to
be construed against the drafter. That argument misses the
point. The insurance contract at issue is not ambiguous; it
contained an exclusion that was contrary to the public policy of
Maine.
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