Hill v. American Family Mutual Insurance

IN THE SUPREME COURT OF THE STATE OF IDAHO

Docket No. 36311

MARCIE RAE HILL, )
) Boise, May 2010 Term
Plaintiff-Appellant, )
) 2011 Opinion No. 3
v. )
) Filed: January 5, 2011
AMERICAN FAMILY MUTUAL )
INSURANCE COMPANY, dba ) Stephen W. Kenyon, Clerk
AMERICAN FAMILY INSURANCE, a )
foreign insurance corporation licensed to do )
business in the State of Idaho, )
)
Defendant-Respondent. )
_____________________________________ )

Appeal from the District Court of the Sixth Judicial District of the State of Idaho,
Bannock County. Hon. Stephen S. Dunn, District Judge.

The decision of the district court is vacated and this case is remanded to the
district court for further proceedings consistent with this Opinion. Costs to
Appellant.

Johnson Olson Chartered, Pocatello, for Appellant. L. Charles Johnson argued.

Trout, Jones, Gledhill Fuhrman, PA., Boise, for Respondent. Christopher P.
Graham argued.
_____________________________

W. JONES, Justice
I. NATURE OF THE CASE
In this case, an underinsured-motorist claimant asks this Court to invalidate an
“exhaustion clause” requiring her to exhaust the full limits of the tortfeasor’s insurance policy
before being eligible for underinsured-motorist benefits.
II. FACTUAL AND PROCEDURAL BACKGROUND
Marcie Hill, the appellant, was injured in a two-car accident with Andrea Hamilton in
November of 2005. Andrea, who was fifteen years old, was talking on a cell phone when she
unexpectedly turned her vehicle left in front of Hill’s, who was approaching in the opposing lane

1
of traffic. Hill suffered injuries to her back and to her knee. Although she has received medical
treatment, Hill claims that she still suffers from knee pain and loss of mobility for which she
needs arthroscopic surgery.
At the time of the accident, Andrea’s car was covered by an automobile-insurance policy
held by her parents, Joseph and Jacqueline Hamilton. The Hamiltons’ policy provided for up to
$25,000 in bodily-injury coverage. Hill had an underinsured-motorist (“UIM”) policy with
American Family Mutual Insurance Company (“American Family”), the respondent, for up to
$100,000 per person. The policy contained an “exhaustion clause” requiring her to deplete all of
the tortfeasor’s bodily-injury insurance before she could collect underinsurance benefits.
Hill filed suit against the Hamiltons but settled for $1000 less than the Hamiltons’
$25,000 policy limits rather than litigating the case. She then asserted a claim for an additional
$18,000 against American Family, an amount that included credit for the $1000 that she did not
collect from the tortfeasor. American Family nonetheless denied the claim because Hill had not
yet “exhausted” the tortfeasor’s bodily-injury policy. Hill then filed this lawsuit against
American Family alleging breach of contract and fraud and the parties submitted cross-motions
for summary judgment. The district court granted summary judgment to American Family,
finding that the exhaustion clause unambiguously required Hill to exhaust the Hamiltons’ bodily-
injury policy limits before she could receive UIM benefits. The court also found there to be no
countervailing public policy in Idaho that overrides the plain language of the contract and allows
Hill to recover. On appeal, Hill contends that because insurers are now statutorily mandated to
offer UIM coverage in Idaho, the exhaustion clause offends public policy by requiring her to
litigate her claim against the Hamiltons before being eligible to receive benefits.
III. ISSUES ON APPEAL
1. Whether the district court properly granted summary judgment to American Family on
Hill’s claim for UIM benefits.
2. Whether Hill is entitled to attorney fees on appeal.
IV. STANDARD OF REVIEW
This Court applies the same standard as the district court when reviewing a grant of a
motion for summary judgment. Shawver v. Huckleberry Estates, L.L.C., 140 Idaho 354, 360, 93
P.3d 685, 691 (2004). Since filing cross-motions for summary judgment does not change the
standard of review, the Court evaluates each motion on its merits. Stafford v. Klosterman, 134
Idaho 205, 206, 998 P.2d 1118, 1119 (2000). Summary judgment is proper “if the pleadings,

2
depositions, 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 a judgment as a
matter of law.” I.R.C.P. 56(c). “This Court will liberally construe the record in favor of the
party opposing the motion for summary judgment and will draw all reasonable inferences and
conclusions in favor of that party.” Arreguin v. Farmers Ins. Co., 145 Idaho 459, 461, 180 P.3d
498, 500 (2008). The entire record is freely reviewed to determine if either side was entitled to
summary judgment as a matter of law and to determine whether inferences drawn by the district
court are reasonably supported by the record. Potlatch Educ. Ass’n v. Potlatch Sch. Dist., 148
Idaho 630, 634, 226 P.3d 1277, 1281 (2010).
V. ANALYSIS
A. The Exhaustion Clause Is Void as Contrary to Public Policy
The dispositive issue here is whether American Family may rely on an exhaustion clause
to deny Hill’s UIM benefits solely because she settled for just under the tortfeasor’s policy
limits. The thrust of Hill’s appeal is that the exhaustion clause contravenes Idaho’s public policy
of requiring UIM coverage, which is embodied in I.C. § 41-2502(1). Section 41-2502(1)
requires all insurance carriers to offer UIM coverage with their policies. 1 Hill argues that this
Court should adopt the doctrine of “constructive exhaustion” to allow her to collect UIM benefits
above the tortfeasors’ policy limits even if she settles for less than those limits. American
Family responds that Idaho case law creates no public policy with respect to UIM claims.
1. The Exhaustion Clause Unambiguously Requires Hill to Exhaust the Tortfeasor’s
Insurance Policy
A preliminary issue is to determine the legal effect of the exhaustion clause. A contract
must be interpreted according to the plain meaning of the words used if the language is clear and
unambiguous. Cascade Auto Glass, Inc. v. Idaho Farm Bureau Ins. Co., 141 Idaho 660, 663,
115 P.3d 751, 754 (2005). An insurance policy is ambiguous if it is reasonably susceptible to
different interpretations. Armstrong v. Farmers Ins. Co., 143 Idaho 135, 137, 139 P.3d 737, 739
1
This provision provides in relevant part:
[N]o owner’s or operator’s policy of motor vehicle liability insurance . . . shall be delivered or
issued for delivery in this state with respect to any motor vehicle registered or principally garaged
in this state unless coverage is provided therein or supplemental thereto . . . for the protection of
persons insured thereunder who are legally entitled to recover damages from owners or operators
of uninsured and underinsured motor vehicles because of bodily injury, sickness or disease,
including death, resulting therefrom.
I.C. § 41-2502(1) (emphasis added representing the 2008 amendment).

3
(2006). This Court freely reviews the question of whether an insurance contract is ambiguous.
Clark v. Prudential Prop. & Cas. Ins. Co., 138 Idaho 538, 541, 66 P.3d 242, 245 (2003).
Hill does not dispute that the UIM provision is clear. It reads:
We will pay compensatory damages for bodily injury which an insured
person is legally entitled to recover from the owner or operator of an underinsured
motor vehicle. . . .
....
We will pay under this coverage only after the limits of liability under any
bodily liability bonds or policies have been exhausted by payment of judgments
or settlements.
This language is boilerplate in the insurance industry, and a number of other jurisdictions have
found virtually identical wordings to be unambiguous. E.g. Robinette v. Am. Liberty Ins. Co.,
720 F. Supp. 577, 579 (S.D. Miss. 1989); Birchfield v. Nationwide Ins., 875 S.W.2d 502, 503
(Ark. 1994). The clause explicitly creates a condition precedent to UIM benefits, entitling Hill to
coverage only if she settles or receives a payment for the tortfeasor’s policy limits. See Maroun
v. Wyreless Sys., Inc., 141 Idaho 604, 614, 114 P.3d 974, 984 (2005) (“A condition precedent is
an event not certain to occur, but which must occur, before performance under a contract
becomes due.” (quotation omitted)).
2. Exhaustion Clauses in UIM Insurance Contracts Are Void Because They Violate
Idaho State Public Policy
Next, this Court must determine whether the exhaustion clause violates public policy,
which is a question of law. Quiring v. Quiring, 130 Idaho 560, 566, 944 P.2d 695, 701 (1997).
The “liberty of contract is not an absolute and unlimited right, but upon the contrary is always
subservient to the public welfare.” J.F. v. D.B., 879 N.E.2d 740, 741 (Ohio 2007) (citation
omitted). “[T]he courts will not hesitate to declare void as against public policy contractual
provisions which clearly tend to the injury of the public in some way.” 17A C.J.S. Contracts §
218 (2010). “The usual test applied by courts in determining whether a contract offends public
policy and is antagonistic to the public interest is whether the contract has a tendency toward
such an evil.” Stearns v. Williams, 72 Idaho 276, 283, 240 P.2d 833, 837 (1952) (emphasis
added). “Public policy may be found and set forth in the statutes, judicial decisions or the
constitution.” Bakker v. Thunder Spring-Wareham, L.L.C., 141 Idaho 185, 189, 108 P.3d 332,
336 (2005). Whether an insurance contract is against public policy “is to be determined from all
the facts and circumstances of each case.” Foremost Ins. Co. v. Putzier, 100 Idaho 883, 887, 606

4
P.2d 987, 991 (1980). In addition, “analogous cases involving the same general principles may
be looked to by the court in arriving at a satisfactory conclusion.” Smith v. Idaho Hosp. Serv., 89
Idaho 499, 504, 406 P.2d 696, 699 (1965).
American Family is correct in that, as of yet, Idaho case law has only held that “[n]either
the Idaho legislature nor the courts have declared that there exists a public policy applicable to
underinsured motorist coverage.” Meckert v. Transamerica Ins. Co., 108 Idaho 597, 600, 701
P.2d 217, 220 (1985); accord Erland v. Nationwide Ins. Co., 136 Idaho 131, 133, 30 P.3d 286,
288 (2001). The Court repeatedly indicated, however, that the sole reason there was no clear
public policy regarding UIM coverage was because “Idaho statutes do not regulate underinsured
motorist coverage.” Andrae v. Idaho Counties Risk Mgmt. Prog. Underwriters, 145 Idaho 33,
36, 175 P.3d 195, 198 (2007) (citing Meckert, 108 Idaho at 600, 701 P.2d at 220). We have
rejected public policy challenges related to UIM policies only because “our statutes do not
require an automobile insurer to include underinsured vehicle coverage in its policies or even to
offer this coverage to its insureds.” Farmers Ins. Co. v. Buffa, 119 Idaho 345, 347, 806 P.2d
438, 440 (1991); see also Nationwide Mut. Ins. Co. v. Scarlett, 116 Idaho 820, 822, 780 P.2d
142, 144 (1989) (same).
In 2008, however, the Legislature did begin to require insurers to offer UIM coverage. It
amended I.C. § 41-2502(1) to expressly require insurance companies to offer such provisions
with automobile policies. Act of March 5, 2008, ch. 69, § 1, 2008 Idaho Sess. Laws 183, 183.
Insureds now may only refuse this coverage if they do so in writing. Id. (codified at I.C. § 41-
2502(2)). The amendment requires insurers to offer protection against “underinsured motor
vehicles,” defined as vehicles insured with limits at least at the statutory minimum for bodily
injury or death. 2 § 2, 2008 Idaho Sess. Laws at 184 (codified at I.C. § 41-2503(2)). The
Legislature accordingly intends to protect Idaho’s citizens from drivers carrying policies above
the statutorily required policy levels but who have insurance insufficient to compensate their tort
victims.
The Legislature apparently enacted the amendment for two reasons. First, the most
obvious is the threat that underinsured motorists pose to public safety. Idahoans suffering

2
The minimum amount of required insurance is $25,000 per person and $50,000 per accident. I.C. § 49-117(18).
Subject to some limited exceptions, nobody may operate a motor vehicle on public highways in Idaho without
carrying the statutory minimum amount of liability insurance. Id. § 49-1428(1).

5
catastrophic injuries from drivers carrying insufficient coverage could find themselves without
redress if they have no UIM policy.
Second, without UIM coverage, Idahoans injured by a totally uninsured driver sometimes
recover more than those injured by underinsured drivers. Many drivers in Idaho injured by
underinsured motorists had little recourse if they purchased uninsured-motorist (“UM”) policies
but had no UIM coverage, since those policies provided no benefits if the underinsured tortfeasor
had at least the minimum required amount of insurance coverage. As this Court observed before
the Legislature implemented the UIM mandate, many drivers in this state “may well be in a
better position if a tortfeasor carries no insurance whatsoever rather than carrying the minimum
coverage mandated by the statute,” and that “the matter deserves legislative attention.”
Blackburn v. State Farm Mut. Auto. Ins. Co., 108 Idaho 85, 90, 697 P.2d 425, 430 (1985); see
also Longworth, 538 A.2d at 424 (stating that there is no reason why UM claimants should have
immediate recourse against their insurer but not UIM claimants). The Legislature has addressed
this anomaly by mandating insurers to at least offer UIM coverage in all insurance policies.
Before analyzing the public-policy issue further, however, it is necessary to note that the
Director of the Department of Insurance presumably approved the terms in Hill’s insurance
policy. Absent an assertion to the contrary, this Court presumes that the insurance policy was
submitted to the Director and was found to comport with public policy. Am. Foreign Ins. Co. v.
Reichert, 140 Idaho 394, 399, 94 P.3d 699, 704 (2004). The Legislature has empowered the
Director to invalidate an insurance policy for a number of reasons, including because it contains
“any inconsistent, ambiguous, or misleading clauses, or exceptions and conditions which
deceptively affect the risk purported to be assumed in the general coverage of the contract, or
which are unfairly prejudicial to the policy holder.” I.C. § 41-1813(2). Hill does not contend
that the Director failed to review or disapproved her policy with American Family.
The Dissent contends that the Court should simply defer to the Director and hold that the
policy comports with public policy, but the fact that the Director may have approved these
contract terms merely creates a presumption that they are valid and is not conclusive. Hansen v.
State Farm Mut. Auto. Ins. Co., 112 Idaho 663, 667–68, 735 P.2d 974, 978–79 (1987). Of
course, even if the Director has reviewed the terms in this case, the insurance policy here was
executed before the Legislature amended the Code to require insurers to offer UIM coverage.

6
The Director could not have known about the Legislature’s new public-policy decisions at that
time.
Nearly every jurisdiction with a statutory UIM mandate similar to Idaho’s has found
exhaustion clauses to be contrary to public policy. E.g. Country Mut. Ins. Co. v. Fonk, 7 P.3d
973, 978 (Ariz. Ct. App. 2000); Taylor v. Gov’t Employees Ins. Co., 978 P.2d 740, 746, 751
(Haw. 1999); Buzzard v. Farmers Ins. Co., 824 P.2d 1105, 1112 (Kan. 1992); Aetna Cas. & Sur.
Co. v. Faris, 536 N.E.2d 1097, 1099–100 (Mass. App. Ct. 1989); Chambers v. Aetna Cas. & Sur.
Co., 658 A.2d 1346, 1348 (Pa. Super. Ct. 1995); Rutgers Cas. Ins. Co. v. Vassas, 652 A.2d 162,
172 (N.J. 1995); Mann v. Farmers Ins. Exch., 836 P.2d 620, 621 (Nev. 1992) overruled on other
grounds by White v. Cont’l Ins. Co., 65 P.3d 1090, 1092 (Nev. 2003). But see Ploen v. Union
Ins. Co., 573 N.W.2d 436, 443 (Neb. 1998) (rejecting a public policy challenge). 3 These cases
comport with the overall majority position nationwide that exhaustion clauses are void and,
under the constructive-exhaustion doctrine, 4 do not prevent an insured from “exhausting” the
tortfeasor’s policy by settling for an amount less than the policy limits. Farmers Ins. Exch. v.
Hurley, 90 Cal. Rptr. 2d 697, 700 (Cal. Ct. App. 1999); Horace Mann Ins. Co. v. Adkins, 599
S.E.2d 720, 729 n.12 (W. Va. 2004); e.g. New Hampshire Ins. Co. v. Knight, 506 So.2d 75, 77
(Fla. Dist. Ct. App. 1987); Metcalf v. State Farm Mut. Auto Ins. Co., 944 S.W.2d 151, 153 (Ky.
Ct. App. 1997). To prevent the UIM carrier from paying extra-contractual benefits, however,
“the underinsurer always is allowed to credit the full amount of the tortfeasor’s liability coverage
against the insured’s damages.” Hamilton v. Farmers Ins. Co. of Washington, 733 P.2d 213, 217
(Wash. 1987); accord Sorber v. Am. Motorists Ins. Co., 680 A.2d 881, 882 (Pa. Super. Ct. 1996).

3
American Family relies heavily on a Wisconsin case, Danbeck v. American Family Mut. Ins. Co., 629 N.W. 2d 150
(Wis. 2001), as an instance when a court rejected a public-policy challenge and enforced the literal language of an
exhaustion clause. The Wisconsin Supreme Court, however, did not incorporate the state’s statutory UIM mandate
into its public-policy analysis, nor even mention that such a mandate existed, as the public-policy challenge in that
case apparently rested only on common law. Id. at 156 (analyzing only an intermediate court’s ruling on state public
policy). Indeed, jurisdictions in which a UIM statute did not play into the legal analysis have tended to be more
evenly divided on whether to enforce exhaustion clauses. Compare Birchfield, 875 S.W.2d at 504 (enforcing the
exhaustion clause as written), State v. Mummert, 879 S.W.2d 525, 528–29 (Mo. 1994) (same), with Omni Ins. Co. v.
Foreman, 802 So.2d 195, 197 (Ala. 2001) (holding that the UIM claimant did not forfeit her benefits by settling for
less than the policy limits), and Augustine v. Simonson, 940 P.2d 116, 120 (Mont. 1997) (implementing the
constructive-exhaustion doctrine). Here, of course, a statute does directly bear on the public-policy analysis, so
these cases are inapplicable.
4
Although most cases adopt this position, they do not necessarily use the term “constructive exhaustion.” Instead,
many jurisdictions state that the UIM carrier’s payments are “offset” by the tortfeasor’s policy limits. Horace Mann
Ins. Co. v. Adkins, 599 S.E.2d 720, 727 (W. Va. 2004).

7
 Conversely, nearly every state that has rejected the constructive-exhaustion doctrine has
done so because a statute either expressly allowed or expressly required UIM coverage to be
conditioned on an exhaustion clause like the one at issue here. 5 The Idaho statute, by
comparison, simply requires insurance policies delivered or issued in Idaho to contain
underinsurance coverage unless expressly rejected in writing by the insured. I.C. § 41-2502(1),
(2). 6 The Idaho Code neither requires nor expressly permits exhaustion clauses.
This Court must therefore carefully evaluate whether requiring insureds to comply with
UIM exhaustion clauses would thwart the Legislature’s goal of protecting motorists from
underinsured drivers. Because I.C. § 41-5202(1) is designed to remedy the public-safety
problem created by underinsured drivers, it is a remedial statute. “It is a well-known canon of
statutory construction that remedial legislation is to be liberally construed to give effect to the
intent of the legislature.” State v. Hobby Horse Ranch Tractor & Equip. Co., 129 Idaho 565,
567, 929 P.2d 741, 743 (1996).
Other courts invalidating exhaustion clauses also observe that UIM statutes are remedial
in nature. They reason that the insured’s ability to recover UIM benefits should be “scrupulously
guarded” because “UIM coverage is intended to provide excess coverage to compensate an
insured against losses for which there would otherwise be no coverage.” 7 Horace Mann, 599
S.E.2d at 725–26. Consequently, “[t]he exhaustion clause must be construed as it was intended,
i.e., a threshold requirement and not a barrier to underinsured motorist insurance coverage.”
Bogan v. Progressive Cas. Ins. Co., 521 N.E.2d 447, 453 (Ohio 1988) overruled on other
grounds by McDonald v. Republic-Franklin Ins. Co., 543 N.E.2d 456 (Ohio 1989).

5
See Curran v. Progressive Nw. Ins. Co., 29 P.3d 829, 832–33 (Alaska 2001) (citing Alaska Stat. § 28.20.445);
Hurley, 90 Cal. Rptr. 2d at 701 (citing Cal. Ins. Code § 11580.2(p)(3)); Continental Ins. Co. v. Cebe-Habersky, 571
A.2d 104, 106 (Conn. 1990) (citing Conn. Gen. Stat. § 38-175c(b)(1)); Daniels v. Johnson, 509 S.E.2d 41, 43 (Ga.
1998) (citing Ga. Code Ann. §§ 33-7-11(b)(1)(D)(ii), 33-24-41.1); Lemna v. United Servs. Auto. Ass’n, 652 N.E.2d
482, 484 (Ill. App. Ct. 1995) (citing 215 Ill. Comp. Stat. 5/143a-2(7) (1992)); Federal Ins. Co. v. Watnick, 607
N.E.2d 771, 774 (N.Y. 1992) (citing N.Y. Ins. Law § 3420(f)(2)); see also McCrary v. Byrd, 559 S.E.2d 821, 825
(N.C. Ct. App. 2002) (citing N.C. Gen. Stat. § 20-279.21(b)(4) (1999), stating that exhaustion occurs when the
policy limits “have been paid upon the claim”).
6
Oregon, by contrast, has invalidated exhaustion clauses primarily on statutory grounds. Vega v. Farmers Ins. Co.,
918 P.2d 95, 99, 101 (Or. 1996).
7
Some states take this a step further, holding that any attempt to condition, dilute, or limit UM or UIM coverage is
void. Union Ins. Co. v. Houtz, 883 P.2d 1057, 1063 (Colo. 1994); Brown v. USAA Cas. Ins. Co., 840 P.2d 1203,
1205 (Kan. Ct. App. 1992).

8
 There might be reasons for a claimant to settle below policy limits that are unrelated to
the amount of damages the claimant has suffered. Because it may be necessary or advantageous
for insureds to accept a settlement, “[t]he insured should have the right to accept what he or she
considers the best settlement available against the tortfeasor without relinquishing under-
insurance protection.” Rucker v. Nat’l Gen. Ins. Co., 442 N.W.2d 113, 117 (Iowa 1989). The
insured might wish to settle if the insurance limits are too low to justify trial. Olivas v. State
Farm Mut. Auto. Ins. Co., 850 S.W.2d 564, 567 (Tex. App. 1993). The insured might also have
immediate financial or medical reasons for needing to settle the UIM claim below policy limits.
Cobb v. Benjamin, 482 S.E.2d 589, 597 (S.C. Ct. App. 1997). If the insured has to exhaust the
policy limits to keep his or her UIM coverage, the tortfeasor’s insurance company could force
the insured to go to court by offering just less than the policy limits. “In effect then, the victim is
denied the perfectly reasonable choice of saving months, if not years, of delay, trial preparation
expense, and all the ensuing wear and tear by simply accepting the offer.” Longworth v. Van
Houten, 538 A.2d 414, 423 (N.J. Super. Ct. App. Div. 1988). The litigation would also likely
reduce the insured’s net recovery. Id. There would be many instances where the claimant
receives a greater recovery by settling than by paying a lawyer to pursue a lengthy and
contentious trial for only a small amount more than the settlement offer.
Litigation would create drastic delays for litigants who may have suffered serious injuries
and desperately need to collect benefits. These delays would be exacerbated by the fact that the
claimant may have to undergo further arbitration against the UIM carrier after obtaining a
judgment from the tortfeasor. See Harper v. Providence Washington Ins. Co., 753 A.2d 282,
284–85 (Pa. Super. Ct. 2000) (permitting arbitration against a UIM carrier while the insured’s
claim against the tortfeasor was still pending).
UIM claimants in Idaho subject to exhaustion clauses like this one would have even
greater difficulty collecting UIM benefits in collisions caused by more than one defendant.
Although this particular issue is not presently before this Court, it highlights another reason for
which many other jurisdictions have refused to enforce exhaustion clauses. In such a case, the
claimant would still have to exhaust “any bodily injury liability bonds or policies” before being
able to collect UIM payments. The claimant might not be able to exhaust one of the tortfeasors’
policy limits, especially if that tortfeasor was less liable relative to the other defendants. See I.C.
§ 6-802 (permitting the court to apportion damages among defendants). As a New York court

9
reasoned, requiring the insured to exhaust all the insurance applicable to all vehicles involved in
an accident “would emasculate the endorsement’s intended effect . . . to provide coverage over
and above the limits of the tortfeasor’s insurance.” Colonial Penn Ins. Co. v. Salti, 446 N.Y.S.2d
77, 79 (N.Y. App. Div. 1982). Due to the inequity that UIM claimants might face when
confronted with multiple tortfeasors, other courts have permitted UIM insureds to pursue
arbitration against the insurer at the same time claims are pending against multiple tortfeasors.
Leslie v. W.H. Transp. Co., 338 F. Supp. 2d 684, 689 (S.D. W. Va. 2004); see also Gen. Accident
Ins. Co. v. Wheeler, 603 A.2d. 385, 387 (Conn. 1992) (requiring the claimant to exhaust only one
tortfeasor’s policy even though a statute expressly required exhaustion of all policies).
UIM claimants, in other words, are better equipped than their UIM carriers to most
efficiently resolve claims against the tortfeasor. They are in the best position to determine
whether it is worth the time and expense to litigate.
The Dissent asserts that the Legislature’s 2008 UIM amendment “does not in any way
purport to address the procedures for making a claim under such coverage,” and therefore does
not indicate that there is a legislative policy aimed at protecting Idahoans from underinsured
motorists. The Legislature clearly enacted the UIM amendments to protect the citizens of this
State from being undercompensated for their injuries, and exhaustion clauses impose a
substantive, not merely procedural, obstacle in front of accident victims seeking UIM benefits.
Requiring victims to actually exhaust the tortfeasor’s policy limits is not the kind of UIM
coverage the Legislature contemplated. 8
Apart from the remedial nature of the UIM-mandate statute is the entirely separate public
interest in judicial economy. “Public policy favors the resolution of controversies and
uncertainties through compromise and settlement rather than through litigation.” 15A Am. Jur.
2d Compromise & Settlement § 5. Exhaustion clauses harm the public interest in judicial
economy in two ways. First, they encourage tortfeasors’ insurers to litigate against UIM
claimants. As previously mentioned, the tortfeasor’s insurer could use an exhaustion clause to

8
The Dissent also suggests that the Court is simply protecting accident victims who fail to read their insurance
policies before settling for less than the tortfeasor’s policy limits. Nothing in this Opinion should be read to relieve
policyholders from having to read and understand their policies. As discussed throughout this Opinion, however,
exhaustion clauses create myriad problems for insureds regardless of whether they read their policies. Insureds,
aware of their exhaustion clauses, may have to undergo protracted and needless litigation despite needing immediate
medical or financial support.

10
compel litigation by offering to settle for only just under the policy limits. The injured collision
victim could have to endure needless delay and expense litigating or lose his/her benefits.
Second, Idaho’s courts will have to contend with unnecessary litigation merely so that
UIM claimants can preserve their benefits. Schmidt v. Clothier, 338 N.W.2d 256, 260 (Minn.
1983) (superseded by statute); Augustine v. Simonson, 940 P.2d 116, 120 (Mont. 1997). As this
Court and the U.S. Supreme Court have held in cases discussing collateral estoppel and res
judicata, reducing repetitive or unnecessary litigation is a legitimate goal, as it frees up judicial
resources for legitimate disputes. Allen v. McCurry, 449 U.S. 90, 94, 101 S. Ct. 411, 415 (1980)
(stating that both collateral estoppel and res judicata conserve judicial resources); Parklane
Hosiery Co. v. Shore, 439 U.S. 322, 326, 99 S. Ct. 645, 649 (1979) (similar); Brown v. Felson,
442 U.S. 127, 131, 99 S. Ct. 2205, 2209 (1979) (holding that res judicata “frees the courts to
resolve other disputes”); Maroun v. Wyreless Sys., Inc., 141 Idaho 604, 617, 114 P.3d 974, 987
(2005) (collateral estoppel); Hindmarsh v. Mock, 138 Idaho 92, 94, 57 P.3d 803, 805 (2002) (res
judicata); Anderson v. City of Pocatello, 112 Idaho 176, 183, 731 P.2d 171, 178 (1986)
(collateral estoppel); see also Pines, Inc. v. Bossingham, 131 Idaho 714, 717, 963 P.2d 397, 400
(Ct. App. 1998) (collateral estoppel).
Promoting an efficient judiciary ultimately benefits the public. Given all the potential
reasons that a UIM claimant may need to settle for just under policy limits, it would be contrary
to principles of judicial economy to require full exhaustion by litigation or settlement. Cobb,
482 S.E.2d at 596–97.
For the foregoing reasons, we now hold exhaustion clauses in UIM automobile policies to
be void, unenforceable, and severable in Idaho. To collect against his or her insurer, a UIM
insured may proceed against the UIM carrier, who must investigate and attempt to resolve the
claim in good faith regardless of whether the insured settled with the tortfeasor’s insurer or, if so,
for how much. Taylor, 978 P.2d at 751. The UIM carrier will receive credit for the full amount
of the tortfeasor’s policy, regardless of the insured’s actual recovery.
We decline to implement the constructive-exhaustion doctrine or to otherwise replace
exhaustion clauses with any other judicially created language. This is primarily to prevent any
confusion over how much settlement the insured must extract from the tortfeasor before
approaching the UIM carrier for benefits. Hill suggested that courts should require the
settlement amount to be “reasonable” in relationship to the tortfeasor’s policy limits. A

11
“reasonableness” requirement is unnecessary for three reasons. First, the UIM claimant, not his
or her insurer, has to absorb the gap between the settlement and the tortfeasor’s policy limits. So
long as there is no prejudice resulting from the settlement, there is simply no need for courts to
determine whether the amount was “reasonable.” Second, the UIM claimant is in the best
position to efficiently resolve a claim by weighing the provable facts of the case, the financial or
medical need for quick settlement, and the potential costs of litigation. A reasonableness
requirement might obstruct otherwise efficient claim resolution or prolong the process by calling
on the courts to evaluate whether the settlement amount was “reasonable.” Third, asking judges
to determine whether settlements are reasonable would draw the parties back into court and
undermine the goal of promoting swift claim resolution and judicial economy.
Although Hill’s exhaustion clause is void, the rest of her policy remains intact. “To the
extent that a term requiring the occurrence of a condition is unenforceable [for public-policy
reasons], a court may excuse the non-occurrence of the condition unless its occurrence was an
essential part of the agreed exchange.” Restatement (Second) of Contracts § 185 (1981); see
also Nelson v. Armstrong, 99 Idaho 422, 426, 582 P.2d 1100, 1104 (1978) (“Where a transaction
is composed of both benign and offensive components and the different portions are severable,
the unobjectionable parts are generally enforceable.”). Hill will not receive a better deal than she
bargained for if she can show that an underinsured tortfeasor is liable to her for an amount
exceeding his policy limits and then sets off those policy limits against her UIM recovery.
Augustine, 940 P.2d at 268; Rucker, 442 N.W.2d at 117; see also Bethlehem Steel Corp. v.
Gorsuch, 742 F.2d 1028, 1036 (7th Cir. 1984) (stating that the court “will not enforce the
remainder of the contract if the result will be to give the promisee a substantially better deal than
he had bargained for”).
3. Subsequent Changes in State Law That Are Designed to Protect the Public
Welfare Can Invalidate a Contract Provision on Public Policy Grounds
American Family contends that since the Legislature only began requiring insurers to
offer UIM coverage in 2009, no statutory public policy aimed at protecting the public from
underinsured drivers existed when Hill entered into her insurance contract in July of 2005. See §
1, 2008 Idaho Sess. Laws at 183–84 (amending I.C. § 41-2502 effective January 1, 2009).
American Family reasons that this Court would be applying the statute retroactively if it allowed
Hill to collect UIM benefits without having settled for the tortfeasors’ policy limits.

12
 It is true that § 41-2502 is not retroactive. No statute is retroactive unless the Legislature
expressly declares that it is. I.C. § 73-101; Henderson v. Smith, 128 Idaho 444, 448, 915 P.2d 6,
10 (1996). “A statute will not be given a retroactive construction by which it will impose
liabilities not existing at the time of its passage.” Doe v. Boy Scouts of Am., 148 Idaho 427, ---,
224 P.3d 494, 498 (2009) (quoting Ford v. City of Caldwell, 79 Idaho 499, 509, 321 P.2d 589,
594 (1958)). The Legislature did not expressly provide for its amendment to § 41-2502 to apply
to preexisting insurance policies. In addition, there is plenty of authority holding that contracts
are interpreted according to the law at the time the contract is executed. E.g. Smith v. Idaho
Hosp. Serv., Inc., 89 Idaho 499, 503, 406 P.2d 696, 698 (1965); Northland Ins. Co. v. Boise’s
Best Autos & Repairs, 132 Idaho 228, 231, 970 P.2d 21, 24 (Ct. App. 1997), rev’d on other
grounds, 131 Idaho 432, 958 P.2d 589 (1998) (applying the rule specifically to insurance
contracts).
Nonetheless, regardless of when I.C. § 41-2502(1) was enacted, it is the Court’s
responsibility not to enforce a contract provision that is contrary to public policy. “Public policy
is not static, but may change as the relevant factual situation and the thinking of the times
change.” Brown v. Snohomish Cnty. Phys. Corp., 845 P.2d 334, 338 (Wash. 1993). The duty to
avoid enforcing an invalid contract term is so strong that Idaho’s courts must raise the public
policy issue sua sponte if necessary. Quiring, 130 Idaho at 567, 944 P.2d at 702. The Court
does not invalidate a contract only if it was void at the time it was entered. Instead, the Court
must not enforce any contract “at any stage in the litigation” in which it becomes apparent that
the provision contravenes public policy. Id. Thus, whenever the Court discovers that a provision
is invalid, the Court must refuse to enforce it.
It is widely accepted that contracts can be eviscerated by a subsequent change in public
policy. E.g. Pittsburg Plate Glass Co. v. Jarrett, 42 F. Supp. 723, 730 (M.D. Ga. 1942); V. & S.
Bottle Co. v. Mountain Gas Co., 104 A. 667, 667 (Pa. 1918) (per curiam); Dorr v. Chesapeake &
Ohio Ry. Co., 88 S.E. 666, 667 (W. Va. 1916); see also Bd. of Educ. v. Emp. Ass’n of
Willingboro Sch., 429 A.2d 429, 430 (N.J. Super. Ct. App. Div. 1981) (noting that contracts
should be interpreted according to the law existing when they are formed but also that changes in
the law may make a contract illegal). Courts have broadly articulated this rule. The U.S.
Supreme Court has stated that “no contract can properly be carried into effect . . . which, being
made consistently with the rules of law at the time, has become illegal in virtue of some

13
subsequent law.” Louisville & Nashville R.R. Co. v. Mottley, 219 U.S. 467, 485, 31 S. Ct. 265,
271 (1911) (quotation omitted).
Although there is expansive language in many cases, a rule permitting any change in
public policy to eviscerate preexisting contracts would not serve Idaho well. Such a rule does
not account for private agreements between parties that are unlikely to endanger the public
welfare. A more refined approach is to nullify only those agreements that violate state policies
designed to protect the public good, either because the object of the agreement is inherently
harmful or because a condition in the agreement would, in the aggregate, tend to harm the public.
See Chicago, Burlington, & Quincy R.R. Co. v. McGuire, 219 U.S. 549, 570, 31 S. Ct. 259, 263
(1911) (holding that the state legislatures may nullify existing contracts “where the parties do not
stand upon an equality, or where the public health demands that one party to the contract shall be
protected against himself”); 17A C.J.S. Contracts § 29 (stating that “legislation in exercise of a
state’s police power, or by subsequent statute announcing new public policy” can avoid
preexisting contracts). This approach prevents relatively unforeseeable changes in public policy
from undermining otherwise legitimate business arrangements. See Wasserman’s Inc. v.
Township of Middletown, 645 A.2d 100, 105 (N.J. 1994) (upholding municipal-land leases that
had not undergone public bidding as required by a new statute).
For example, New York limits the situations in which a shift in public policy can nullify
contract terms. The rule there only applies to “acts of the Legislature which are strictly measures
of public policy, not to those which are intended primarily to establish or affect the rights of
parties to each other.” Goldfarb v. Goldfarb, 450 N.Y.S.2d 212, ---, 86 A.D.2d 459, 461 (N.Y.
App. Div. 1982). New York’s courts have considered voiding contract terms only when
upholding them would harm the public or would be enforced at public expense. Compare CKC
Chiropractic v. Republic W. Ins. Co., 784 N.Y.S.2d 350, 352 (N.Y. Civ. Ct. 2004) (discussing
whether an insurer had to pay benefits to an unlicensed medical provider), Bloomfield v.
Bloomfield, 764 N.E.2d 950, 953 (N.Y. 2001) (discussing whether a woman could agree to waive
support from an ex-spouse), and Glengariff Corp. v. Snook, 471 N.Y.S.2d 973, 977–79 (N.Y.
Sup. Ct. 1984) (refusing to enforce a contract to pay a medical provider more than what the
provider could collect under a new Medicaid law), with Rotodyne, Inc. v. Consol. Edison Co. of
New York, 389 N.Y.S.2d 387, 388 (N.Y. App. Div. 1976) (refusing to invalidate a

14
subcontractor’s waiver of mechanics-lien rights against a general contractor). 9 Although we
decline to adopt New York law on this subject, these cases are instructive.
As explained above, Idaho’s UIM mandate was designed to protect the public from
underinsured motorists, and not merely to govern private relations between parties. The
Legislature has required that insurers offer UIM coverage to all motorists, not UIM coverage
conditioned on totally depleting the tortfeasor’s policy. Exhaustion clauses have no purpose but
to dilute Idahoans’ protection against underinsured drivers and to prevent insureds from
collecting legitimate claims. They are a product of the insurance company’s sophistication and
bargaining power. See Hettwer v. Farmers Ins. Co. of Idaho, 118 Idaho 373, 377, 797 P.2d 81,
85 (1990) (quotation omitted) (explaining that insurance companies enjoy a significant
bargaining advantage over insureds). They also impose additional litigation demands on the
court system, which directly impedes public access to the courtroom. These threats to public
safety and demands on the justice system occur regardless of when the parties executed the
insurance contract. Because exhaustion clauses impinge on a state public policy designed to
protect the public welfare, they are void in the State of Idaho. 10
In summary, the exhaustion clause is void based on Idaho’s declared public policy aimed
at protecting its citizens from underinsured drivers and on the doctrine of judicial economy,
which here includes shielding parties from excessive litigation and preventing unnecessary

9
Notably, California does not allow public-policy changes to affect preexisting contracts. Bovard v. Am. Horse
Enter., 247 Cal. Rptr. 340, 344 n.3 (Cal. Ct. App. 1988). Nonetheless, like New York, the cases in which California
courts refuse to invalidate contracts due to changed public policy apparently always involve private rights between
two arms-length parties. E.g. Stephens v. S. Pac. Co., 41 P. 783, 786 (Cal. 1895) (refusing to invalidate a warehouse
lease agreement where leaseholder indemnified landowner for the landowner’s own negligence); Whitmire v. H.K.
Ferguson Co., 68 Cal. Rptr. 78, 82 (Cal. Ct. App. 1968) (refusing to invalidate an agreement in which a construction
subcontractor indemnified the general contractor for its negligence).
10
The Dissent argues that exhaustion clauses do indeed have a legitimate purpose, stating that our opinion today
simply indulges in “a belief in a grand conspiracy among evil insurance companies.” This assertion is hyperbole, as
exhaustion clauses are only a matter between one insurer and its insured—we need not find a “conspiracy” to hold
that this kind of clause violates public policy. In any event, the Dissent offers no legitimate alternative reason why
an insurer would insert such a clause into its policies. It is possible that exhaustion clauses are useful to ensure that
the tortfeasor actually could not fully compensate the accident victim, but they are not necessary to accomplish this
purpose if insurance carriers receive credit for the full limits of the tortfeasor’s policy, as we hold today.
The Dissent also refuses to suggest a legitimate purpose for exhaustion clauses because the clauses’ purpose “was
not an issue litigated below,” and the factual record on the matter is undeveloped. This position misunderstands
how a public-policy analysis works. Whether a contract term is illegal is not a factual inquiry but a legal one.
Farrell v. Whiteman, 146 Idaho 604, 608, 200 P.3d 1153, 1157 (2009). Since neither American Family nor the
Dissent can come up with any legitimate reason to allow insurance companies to condition UIM coverage in this
way, exhaustion clauses are illegal as a matter of law.

15
demands on the judicial system. Claimants need not exhaust the limits of the tortfeasor’s policy,
but instead must credit to the UIM insurer the gap between the settlement with the tortfeasor’s
insurer, if any, and the policy limits. Because Hill settled with the Hamiltons for just under their
policy limits and is ready to credit the gap to American Family, the summary judgment in favor
of American Family is vacated.
B. Hill Is Not Entitled to Attorney Fees on Appeal
Hill has also not established that American Family actually owes her any amount under
the policy and is still therefore not entitled to fees on appeal. The Idaho Code provides:
Any insurer issuing any policy, certificate or contract of insurance, surety,
guaranty or indemnity of any kind or nature whatsoever, which shall fail for a
period of thirty (30) days after proof of loss has been furnished as provided in
such policy, certificate or contract, to pay to the person entitled thereto the
amount justly due under such policy, certificate or contract, shall in any action
thereafter brought against the insurer in any court in this state for recovery under
the terms of the policy, certificate or contract, pay such further amount as the
court shall adjudge reasonable as attorney’s fees in such action.
I.C. § 41-1839(1) (emphases added). If Hill prevails on appeal, she has only succeeded in having
the summary judgment against her vacated. Although the exhaustion clause would not bar her
recovery, under I.C. § 41-1839(1) she still must establish the “amount justly due under [her]
policy,” if any. She therefore shall not receive attorney fees on appeal.
VI. CONCLUSION
Because the exhaustion clause in Hill’s UIM policy with American Family violates
public policy, it cannot bar her recovery. The district court’s grant of summary judgment in
favor of American Family is therefore vacated and this case is remanded to the district court for
further proceedings consistent with this Opinion. Hill is not entitled to attorney fees on appeal
because she has not yet established that an amount, if any, is justly due under the policy. Costs
to Appellant.
Justices BURDICK and J. JONES CONCUR.

Chief Justice EISMANN, dissenting.
Because the majority usurps the authority of the legislature and the director of the
Department of Insurance to strike a provision from an insurance contract that the majority simply
happens to dislike, I respectfully dissent.

16
 This case revolves around a policy provision which provides, with respect to
underinsured motorist (UIM) coverage, “We will pay under this coverage only after the limits of
liability under any bodily injury liability bonds or policies have been exhausted by payment of
judgements or settlements.” (Bold type in original.) This provision, an exhaustion clause, is
concededly unambiguous. The majority strikes it from the insurance policy on the ground that it
allegedly violates public policy and the newly created doctrine of judicial economy. As will be
shown, there is no recognized public policy in Idaho that it violates and the doctrine of judicial
economy is nonsensical. In actuality, it is the majority opinion that violates public policy as
expressly declared by statute.
Before addressing Idaho’s public policy, I will address the majority’s assertion that
“[n]early every jurisdiction with a statutory UIM mandate similar to Idaho’s has found
exhaustion clauses to be contrary to public policy.” We would not condone our children’s
misconduct based upon the excuse that other kids were doing it too, and such an argument does
not validate the majority opinion. Whatever may be the authority of courts in other jurisdictions
to modify insurance contracts, in Idaho “[c]ourts do not possess the roving power to rewrite
contracts in order to make them more equitable.” Lovey v. Regence BlueShield of Idaho, 139
Idaho 37, 41, 72 P.3d 877, 881 (2003); accord Losee v. Idaho Co., 148 Idaho 219, 223, 220 P.3d
575, 579 (2009). The exhaustion clause must violate the public policy of Idaho, not that of some
other state.
“Public policy may be found and set forth in the statutes, judicial decisions or the
constitution.” Bakker v. Thunder Spring-Wareham, LLC, 141 Idaho 185, 189, 108 P.3d 332, 336
(2005). Thus, the question is what statute, judicial decision, or constitutional provision declares
a public policy that is violated by the exhaustion clause. Each of the three sources of public
policy will be addressed separately.
1. Constitutional provision. Public policy may be found in the Constitution. Id. The
majority does not contend that the exhaustion clause violates any constitutional provision.
2. Statute. The majority cites Idaho Code § 41-2502 as amended in 2008, but it is clear
that the exhaustion clause does not expressly or implicitly violate any public policy declared by
that statute. First, that statute does not even apply to the insurance policy in this case. It only
applies to “the issuance of any new policy or the first renewal or replacement of any existing
policy of motor vehicle liability insurance with an effective date on or after January 1, 2009.”

17
Idaho Code § 41-2502(3) (2010) (emphasis added). 11 The insurance policy in this case had an
effective date of July 19, 2005, almost three and one-half years prior to January 1, 2009. 12 The
majority’s assertion that the exhaustion clause in this policy violates some public policy declared
by the 2008 amendment to the statute is directly contrary to the legislature’s expressly declared
public policy regarding the insurance policies to which the amendment applies.
Second, the statute requires insurance companies to offer UIM coverage, but Idaho Code
§ 41-2502(2) grants the named insured “the right to reject either or both uninsured motorist
coverage or underinsured motorist coverage.” Because the insured has the right to reject UIM
coverage entirely, it is difficult to see how there is a public policy prohibiting an insured from
entering into an insurance contract that requires exhaustion of the limits of the tortfeasor’s
liability policy before the insured can collect UIM benefits.
Third, even if the 2008 amendment had applied to the policy in this case, the statute does
not expressly or implicitly address exhaustion clauses or any of the procedures applicable to
making a claim under UIM coverage. The majority concedes, “The Idaho Code neither requires
nor expressly permits exhaustion clauses,” and the majority does not identify any statutory
provision even allegedly implicitly violated by the exhaustion clause. The 2008 amendment
merely requires insurance companies to offer underinsured motorist (UIM) coverage in their
motor vehicle liability policies. It does not in any way purport to address the procedures for
making a claim under such coverage. The majority cannot explain how a requirement that an
insured establish that the tortfeasor was in fact underinsured as a precondition to recovering UIM
benefits violates the public policy requiring insurance companies to merely offer UIM coverage
in their motor vehicle liability policies. It states, “The Legislature clearly enacted the UIM
amendments to protect the citizens of this State from being undercompensated for their injuries .
. . .” It also refers to “Idaho’s UIM mandate [that] was designed to protect the public from

11
This subsection provides:

Prior to the issuance of any new policy or the first renewal or replacement of any existing
policy of motor vehicle liability insurance with an effective date on or after January 1, 2009, a
named insured shall be provided a standard statement approved by the director of the department
of insurance, explaining in summary form, both uninsured and underinsured motorist coverage,
and the different forms of underinsured motorist coverage that might be available from insurers in
Idaho.
12
The policy stated that it was “EFFECTIVE FROM 07-19-2005 TO 12-22-2005.” (Bold type in original.)

18
underinsured motorists . . . .” The majority seems to think that UIM coverage is mandatory,
rather than coverage that the insured has the option to purchase. The majority’s hyperbole
indicates it believes that a statute simply requiring insurance companies to offer UIM coverage
will somehow magically reduce accidents caused by underinsured motorists.
In fact, it is the majority opinion, not the exhaustion clause, that violates public policy as
expressly declared by statute. Idaho Code § 41-2502(1) requires that insurers offer uninsured
and underinsured coverage in their motor vehicle liability insurance policies “under provisions
approved by the director of the department of insurance, for the protection of persons insured
thereunder who are legally entitled to recover damages from owners or operators of uninsured
and underinsured motor vehicles because of bodily injury, sickness or disease, including death,
resulting therefrom.” (Emphasis added.) The public policy declared by statute is that the
director of the Department of Insurance, not this Court, has the authority to determine whether
provisions of an insurance policy that do not conflict with any express statutory requirement are
consistent with public policy. There was a time when this Court correctly refused to usurp the
authority granted by the legislature to the director.
In Hammon v. Farmers Insurance Co. of Idaho, 109 Idaho 286, 707 P.2d 397 (1985), the
insureds were injured when they swerved to avoid an oncoming vehicle that had crossed into
their lane of travel and crashed. The uninsured motorist coverage of their insurance policy
included injury by “hit-and-run” vehicles, but it required that such vehicles have “physical
contact” with the insured or the vehicle the insured was occupying. By swerving, the insureds
had avoided colliding with the oncoming vehicle, so there was no physical contact with that
vehicle. They sued, contending that the physical-contact requirement in their insurance policy
was void as against public policy. In deciding that it was not, we stated, “Because the Idaho
statute neither mandates nor prohibits uninsured motorist coverage in hit-and-run situations, the
physical contact requirement becomes a matter of contract between the insured and the insurer
which we will not disturb.” Id. at 289, 707 P.2d at 400.
We noted, referring to Idaho Code § 41-2502, that “the uninsured motorist statute itself
specifically mentions that automobile insurance policies must be approved by the director.” 13

13
Prior to the 2008 amendment of Idaho Code § 41-2502, it provided that motor vehicle liability policies must
include uninsured motorist coverage, unless the insured rejected that coverage. The statute also stated that the
coverage was to be “under provisions approved by the director of the department of insurance, for the protection of
persons insured thereunder who are legally entitled to recover damages from owners or operators of uninsured motor

19
We then stated, “The director’s construction of insurance policies is entitled to great weight and
will be followed by this Court absent cogent reasons for holding otherwise.” Id.
Justice Bistline dissented in Hammon, making arguments similar to those in the majority
opinion in the instant case. He wrote, “a growing number of courts, like the Court of Appeals,
have found that physical contact requirements violated the intent of these statutes [like Idaho
Code § 41-2502].” Id. at 290, 707 P.2d at 401 (emphasis in original). He contended that this
Court should not “dwell[] on the face value of the words of the statute,” but should “probe
deeper for a statute’s meaning.” Id. at 291, 707 P.2d at 402. He argued, “In reviewing the
uninsured motorist coverage statute, to end all analysis at the surface is to frustrate the statute’s
purpose.” Id. Quoting from the Supreme Court of Hawaii, he called the physical-contact
requirement an “arbitrary barricade erected to eliminate all claims for damages resulting from
one car accidents” and stated that such requirement “unjustifiably impedes effectuation of the
statutory policy of protection for insureds against damage from the negligence of unidentified
drivers.” Id. He concluded by criticizing the director of the Department of Insurance, stating,
“As a final thought, the Director of the Department of Insurance may be elated to discover that
his apparent approval of the defendant carrier’s policy may be the very factor which today has
thrown the scales of justice out of balance.” Id. at 292, 707 P.2d at 403. Fortunately, the
majority in Hammon was not swayed by Justice Bistline’s hyperbole.
In Hanson v. State Farm Mutual Automobile Insurance Co., 112 Idaho 663, 735 P.2d 974
(1987), the insureds brought an action to recover under the uninsured motorist (UM) coverage of
three different motor vehicle policies issued by State Farm for three separate vehicles. Because
the insureds claimed that their damages exceeded the policy limit of the UM coverage in the
policy covering the vehicle they were occupying when it was struck by an uninsured driver, they
contended that they were entitled to stack the uninsured motorist coverages of all three policies.
The policies each had an anti-stacking clause, but the trial court held that such clause violated
public policy. On appeal, we reversed the trial court.
In doing so, we recognized the authority granted by the legislature to the director of the
Department of Insurance to determine whether insurance policy provisions comport with public

vehicles because of bodily injury, sickness or disease, including death, resulting therefore.” Ch. 61, § 1, 1967 Idaho
Sess. Laws 124, 125. Except for adding “and underinsured” before the words “motor vehicle,” that provision
remained unchanged when the statute was amended in 1988 to include underinsured coverage. Ch. 69, § 1, 2008
Idaho Sess. Laws 183, 183.

20
policy. We stated, “The Director of the Department of Insurance is the person entrusted by the
legislature to determine whether or not given policies comport with the public interest. Policies
approved by the Director are thus presumed to be in harmony with public policy.” Id. at 667-68,
735 P.2d at 978-79. We then stated, “In the absence of proof that a policy contains provisions
which conflict with express legislative directives, the Director’s approval of an insurance policy
form is an administrative determination that the policy form is in the ‘public interest.’ ” Id.
(emphasis added).
There is no contention that the exhaustion clause conflicts with any express legislative
directives. Indeed, it is the majority opinion that conflicts with the express legislative directive
that it is the director of the Department of Insurance who is granted the authority to approve of
provisions in underinsured motorist coverage and to determine if they are in accordance with
public policy. As we recently stated, “Policies that are approved by the Director of the
Department of Insurance are presumed to be in accordance with public policy. Absent an
assertion to the contrary, this Court assumes the policy was submitted to and approved by the
Director.” American Foreign Ins. Co. v. Reichert, 140 Idaho 394, 399, 94 P.3d 699, 704 (2004)
(citations omitted).
3. Judicial decision. Prior to 2008, there were no statutes in Idaho dealing with UIM
coverage. In Meckert v. Transamerica Insurance Co., 108 Idaho 597, 701 P.2d 217 (1985), this
Court held that there was no public policy in Idaho regarding UIM coverage. We stated as
follows:
[T]he Idaho statutes do not regulate underinsured motorist coverage. There are no
requirements that insurance carriers offer such underinsured motorist coverage,
nor that motorists have such underinsured coverage. Neither the Idaho legislature
nor the courts have declared that there exists a public policy applicable to
underinsured motorist coverage. While such a policy might be desirable, that
public policy should be enunciated by our legislature and not by this Court.

Id. at 600, 701 P.2d at 220 (italics in original; citations omitted). We reiterated that holding in
Erland v. Nationwide Insurance Co., 136 Idaho 131, 133, 30 P.3d 286, 288 (2001), wherein we
stated, “There exists no public policy in regard to underinsured motorist coverage.”
The majority contends that public policy has somehow changed and that “the exhaustion
clause is void based on Idaho’s declared public policy favoring UIM coverage and on the
doctrine of judicial economy.” Neither of these rationales makes sense.

21
 The majority does not explain where this alleged doctrine of “favoring UIM coverage”
arises, since the legislature only required that insurance companies offer such coverage and
expressly provided that insureds can reject it. Does that mean UIM coverage is more favored
than other types of insurance coverage? Can a court modify to its liking contractual provisions
regarding UIM coverage, but not fire coverage or theft coverage?
This Court has never recognized a “doctrine of judicial economy,” whatever that is. The
majority’s list of examples allegedly supporting this doctrine are totally unsupported by anything
in the record, nor is there anything indicating how often, if at all, they have occurred in Idaho.
We have encouraged court procedures that promote judicial economy and have recognized that
the doctrine of res judicata is based, in part, upon judicial economy, but we have never stricken
or modified a contractual provision on the ground that doing so would promote judicial
economy. If that supposed doctrine trumps contractual provisions, a court presiding over a
breach of contract case should simply declare void the contractual provision(s) allegedly violated
in order to avoid the necessity of further court proceedings and thereby promote judicial
economy. In actuality, in this case following the law and sustaining the exhaustion clause would
promote judicial economy. The case would be ended.
In an attempt to justify its opinion, the majority states, “There might be reasons for a
claimant to settle below policy limits that are unrelated to the amount of damages the claimant
has suffered.” That was certainly true in this case. Plaintiff settled for $1,000 less than the
tortfeasor’s policy limits because prior to settling neither the Plaintiff nor her attorney had ever
read her insurance policy, and neither of them knew she had UIM coverage. During oral
argument, the followed exchanged occurred:
Justice Warren Jones: Do you say that she didn’t think she had underinsured
coverage at the time she settled?

Mr. Johnson: That’s correct, your Honor. She thought that she just had a bare
bones policy and didn’t have underinsured motorist coverage.

Justice Warren Jones: Okay.

Mr. Johnson: She wasn’t aware of the exclusion that I just mentioned on page
nineteen of her policy that states that American Family will pay under coverage
only after the limits of liability under any policy, liability bonds or policies have
been exhausted by payment or judgments or settlement.

22
 The policy states in bold letters at the top of the first page, “PLEASE READ YOUR
POLICY.” Had either the Plaintiff or her attorney read Plaintiff’s insurance policy, they would
have known of the exhaustion clause and undoubtedly would not have settled with the tortfeasor
for $1,000 less than the limits of his liability coverage. Had they refused to settle for less than
the policy limits of $25,000, the tortfeasor’s insurer would undoubtedly have paid the policy
limits rather than incurring thousands of dollars in legal fees in an attempt to save $1,000. We
have previously stated, “It is certainly not the law in Idaho that an insured has no obligation to
read his policy . . . .” Foster v. Johnstone, 107 Idaho 61, 67, 685 P.2d 802, 808 (1984).
Apparently, the public policy underlying the newly created “doctrine of judicial economy” is that
insureds, and their attorneys, should not be burdened with reading insurance policies and that
there should be no consequences from failing to do so. Judicial economy is apparently also
promoted by modifying insurance contracts to avoid malpractice claims against attorneys who
advise their clients to settle claims against tortfeasors with insufficient liability insurance
coverage before determining whether their clients have UIM coverage and, if so, the policy
provisions applicable to such coverage.
In addition, the majority opinion does not merely apply to claimants who choose to settle
for less than the tortfeasor’s policy limits. It would also apply to cases in which the insured’s
claim against the tortfeasor went to trial, and the jury verdict was for less than the tortfeasor’s
policy limits. Under the majority opinion, the insured would be able to still make a claim under
the UIM coverage, hoping to be more successful the second time.
The majority states, “Exhaustion clauses have no purpose but to dilute Idahoans’
protection against underinsured drivers and to prevent insureds from collecting legitimate
claims.” Of course, there is absolutely nothing in the record supporting this hyperbole, and it is
more indicative of a belief in a grand conspiracy among evil insurance companies than any
understanding as to the purpose of an exhaustion clause. The majority faults me for not offering
a “legitimate alternative reason why an insurer would insert such a clause into its policies.” I
have not done so because that was not an issue litigated below, and there is no evidence in the
record regarding it. Although I could hypothesize a reason, I prefer to make decisions based
upon facts in the record rather than upon wild accusations. There is likewise nothing in the
record to support the majority’s claims regarding the difficulties that may be caused by the
exhaustion clause, nor is there any evidence as to how often, if ever, such difficulties have

23
occurred in Idaho. By asserting that the court can void contractual provisions that may possibly,
in some unknown percentage of cases, increase judicial workloads, the majority is confused
about its proper role. It apparently believes it is also the legislative body in this state.
There was a time when this Court recognized its proper role and the limits of its
knowledge and authority. In Blackburn v. State Farm Mutual Automobile Insurance Co., 108
Idaho 85, 697 P.2d 425 (1985), the plaintiff had obtained a judgment for $150,000 against the
driver of a car that collided with a vehicle occupied by his wife and three of his children. She
and one child were killed and the other two children were injured. The tortfeasor’s liability
insurer paid the policy limits of $20,000, of which the plaintiff received $10,000. He then
brought an action against his own insurance company seeking to recover under his uninsured
motorist coverage. He contended that the tortfeasor was an uninsured motorist to the extent that
his liability insurance was insufficient to compensate the plaintiff for his damages. The plaintiff
asked this Court to so hold by following the reasoning of the Arizona and Hawaii Supreme
Courts.
We noted “the anomaly [sic] presented by the circumstances, particularly that a holder of
a policy containing uninsured motorist coverage may well be in a better position if a tortfeasor
carries no insurance whatsoever rather than carrying the minimum coverage mandated by the
statute.” Id. at 90, 697 P.2d at 430. However, we correctly refused to follow the example of the
Arizona and Hawaii courts because “such clearly would be to indulge in judicial legislation
under the guise of statutory interpretation.” Id. We understood that such judicial rewriting of
insurance policies could likely result in an increase of insurance costs to the motoring public. Id.
We recognized that the plaintiff was, in actuality, asking us to make a policy decision, which
“should rest on factors militating for or against that decision.” Id. We held, however, that such
policy decision should be made by the legislature based upon adequate information. We stated,
“However, all of such questions should be dealt with on the basis of adequate information (little
of which is before this Court) by a legislative body equipped and authorized to make such policy
decisions.” Id.
In the instant case, the majority has indulged in judicial legislation under the guise of
some ill-defined public policy and a newly created doctrine of judicial economy. The policy
decision of whether to prohibit exhaustion clauses should be made by the legislature, or by the
director of the Department of Insurance, based upon adequate information, which the majority

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lacks. In Blackburn, this Court “urge[d] legislative attention to the inequitable results which
flow from the language of our statutes.” Id. However, in Blackburn, Hammon, and Hanson, this
Court understood its proper role and had the rectitude to refrain from usurping the authority of
the legislature and the director of the Department of Insurance. We should follow that example.
Justice HORTON concurs.

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