Leibrand v. National Farmers Union Property & Casualty Co.

No. 94-416 and 94-503

IN THE SUPREME COURT OF THE STATE OF MONTANA
1995

LESLIE LEIBRAND and LOIS LEIBRAND, individually, and as
the parents and next friends of GORDON LEIBRAND, a minor,
Plaintiffs,

v.
NATIONAL FARMERS UNION PROPERTY AND CASUALTY CO., a corporation,

Defendant.

~~~~~r{~~~s a~~ ~6s~$ ggt~: !n~l~~~~allY and I:':
Plaintiffs,

v. JUL 06 '1995
TRUCK INSURANCE EXCHANGE,

Defendant.

CERTIFIED QUESTION FROM THE UNITED STATES DISTRICT COURT,
THE HONORABLE JACK D. SHANSTROM, JUDGE PRESIDING.

COUNSEL OF RECORD:

For Plaintiffs:

Ira D. Eakin, Lynaugh, Fitzgerald, Eiselein &
Eakin, Billings, Montana (for Plaintiffs Leibrands)
Steven J. Harman, Brown, Gerbase, Cebull,
Fulton, Harman & Ross, Billings, Montana
(for Plaintiffs Coles)
For Defendants:
Don M. Hayes, Herndon, Hartman, Sweeney
& Halverson, Billings, Montana
(for Defendant National Farmers Union)

Shelton C. Williams and Richard Ranney,
Williams & Ranney, Missoula, Montana
(for Defendant Truck Insurance Exchange)

Submitted: April 25, 1995
;1 Decided: July 6, 1995
Filed:
I, i'l~""
l,'./V~
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Justice Terry N. Trieweiler delivered the opinion of the Court.

These combined claims were either filed in or removed to the

United States District Court for the District of Montana by the

plaintiffs to recover the limits of liability coverage provided by

the defendants pursuant to contracts of automobile liability

insurance. The defendants denied that policy limits were

recoverable, based on exclusions within each of the respective

policies which limited recovery by a household member to the

"limits of liability required by law." Pursuant to Rule 44,
M.R.Civ.p., the United States District Court, in each case,

certified the following question to this Court:

Is the amendatory endorsement at issue here and set forth
in the agreed facts below, valid and enforceable?

We accepted certification of this issue and ordered that the

certified cases be consolidated. After considering the issue

presented, we conclude that the amendatory endorsements at issue

are not valid and enforceable.

FACTUAL BACKGROUND

Leibrand v. National Farmers Union
Property and Casualty Company

The following facts have been agreed upon by the parties:
Leslie Leibrand and Lois Leibrand are husband and wife and are
the parents of Gordon Leibrand. At all times relevant, they

resided together as a family unit at their home in Scobey, Montana.

The Leibrands have been continuously insured pursuant to an

automobile liability insurance policy issued by the defendant,

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National Farmers Union Property and Casualty Company, since 1975.

The "liability coverage" portion of that policy provided as

follows:

We will pay damages for which any insured person is
legally liable because of bodily injury and property
damage arising out of the ownership, maintenance or use
of a car or a utility trailer.

"Insured person" was defined to include the named insureds

(Leslie and Lois) or a relative. The limit of liability coverage

available per occurrence for each individual injured was specified

to be $100,000. The record does not indicate that there was any

change in these general liability provisions during the term of the

Leibrands' policy.

The Leibrands' policy originally included the following

exclusion: "This coverage does not apply to . (10) bodily

injury to any insured person."

In 1983, we decided Transamericalns. v. Royle (1983), 202 Mont. 173,

656 P.2d 820. In that case, we held that household exclusion

clauses, like the one included in the Leibrand policy, were void

and unenforceable, based on § 61-6-301(1), MCA, which requires that
motorists carry insurance against loss resulting from liability
suffered by any person. In 1991, when the Leibrands renewed their

automobile insurance policy, they were provided with an "amendatory

endorsement" which provided that:

1. Exclusion (10) under part 1, Liability, is
replaced by the following:

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(10) bodily injury to you or any relative to the
extent the limits of liability of this policy exceed the
limits of liability required by law.

At the time of subsequent policy renewals, the Leibrands were

provided with a declarations page which stated that" [l]iability

payments to household members are limited to the Financial

Responsibility limits of the policy state."

On November 22, 1992, Gordon Leibrand was injured while riding

in an insured vehicle being driven by his mother, Lois. He

suffered injuries, which are alleged to be serious, and has

sustained substantial damages. He has alleged that his damages

resulted from Lois Leibrand's negligence. The Leibrands have made

demand for payment to Gordon pursuant to their liability policy for

the full $100,000 of coverage provided pursuant to the policy's

general liability provisions. National Farmers Union has paid the

sum of $25,000, but pursuant to its amendatory endorsement, has

refused to pay any additional amount.

Cole v. Truck Insurance Exchange

In this case, the parties have stipulated to the following

facts:
The plaintiffs, Eugene Cole and Mary Jo Cole, are husband and

wife and are the parents of Lindsey Cole. At all times relevant to

their claim, the Coles have lived together as a family at their

residence in Manhattan, Montana.

Prior to 1991, the Coles were insured by an automobile

liability insurance policy issued by Truck Insurance Exchange. In

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1991, they were issued a new policy by the same company which

included the following language:

We shall pay damages for which any insured is
legally liable because of bodily injury or property
damage caused by an occurrence arising out of the
ownership, maintenance or use of any automobile.

Insureds were defined to include the policy holder, any family

member, or any person under the age of 21 who was a resident of the

policy holders· household.

The following exclusion was included in the 1991 policy:

We do not cover Bodily Injury:

2. Arising out of the liability of any insured for
bodily injury to you or a family member unless the law of
the state where the insured resides specifically
prohibits this exclusion.

Included with the 1991 policy was a document entitled

IIEndorsement S 7016, Montana First Edition. II That endorsement

provided that:

Under Section II--Liability and Medical Coverage--
Exclusions--Coverage D1--Automobile Liability, Item 2
under IIwe do not cover bodily injuryll is deleted and
replaced as follows:

2. Arising out of the liability of any insured for
bodily injury to you or a family member to the extent the
limits of liability of this policy exceed the limits of
liability required by law.
During each subsequent year, at the time of policy renewal,

the Coles were provided with a IIdeclarations page ll which provided

for bodily injury and property damage liability coverage in the

amount of $500,000 for each occurrence.

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 On November 20, 1993, while the aforementioned policy was in

effect, Lindsey Cole drove an insured vehicle into her mother and

caused bodily inj ury which has resulted in medical expense in

excess of $43,000. The Coles, on behalf of Mary Jo, have demanded

that Truck Insurance Exchange pay her damages in the amount of the

policy limits of $500,000. Truck Insurance Exchange has paid

$25,000 to Mary Jo, but has denied further coverage based on the

language in its endorsement S 7016.

Is the amendatory endorsement at issue here and set forth in

the agreed facts valid and enforceable?

SUMMARY OF POSITIONS

When discussed collectively, the Leibrands and the Coles will

hereafter be referred to as "insureds." National Farmers Union

Property and Casualty and Truck Insurance Exchange will be referred

to as "insurers."

The insureds contend that the language in both policies which

limi ts coverage for claims made by household members to the "limits

of liability required by law," rather than the liability limits

provided for on their declaration pages, is void and unenforceable

because (1) the language is unclear and ambiguousi (2) given the

effect claimed by the insurers, the provisions would violate their

reasonable expectationsi and (3) limiting coverage for claims by

household members, as opposed to other persons inj ured by an

insured, violates the public policy of this state.

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The insurers contend that (1) the language of the policy is

not unclear because all Montana drivers are charged with the

responsibility of knowing the limits of liability coverage they are

required to carry by law; (2 ) any expectations contrary to the

plain language of the policy were not reasonable; and (3) the

public policy of this state is as set forth in Montana's mandatory

liability protection statutes which only require that insurance

policies provide coverage to household claimants in the minimum

amount provided by statute.

Since we conclude that the provisions in question are unclear

and ambiguous, we decline to reach the issues of whether the

provisions would violate the insureds' reasonable expectations, or

are void because contrary to the public policy of this state.

DISCUSSION

We have held that "the interpretation of an insurance contract

is a question of law." TruckIns.Exchangev.Nelson (1987), 228 Mont. 233,

236, 743 P.2d 572, 574.

Ambiguities in an insurance policy are construed against the

insurer and exclusions or words of limitation in a policy must be
strictly construed against the insurer. Bauer Ranch, Inc. v. Mountain West

FarmBureau (1985), 215 Mont. 153, 156, 695 P.2d 1307, 1309.

An insurance policy clause is ambiguous when different persons

looking at the clause in light of its purpose cannot agree upon its

meaning. Bauer Ranch, 695 P. 2d at 1309 (citing Walker v. Firemans Fund Ins.

CO. (D. Mont. 1967), 268 F. Supp. 899).

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The insureds contend that the amendments to their policies

which attempted to limit the amount of recovery by household

members were unclear and ambiguous because no purchaser or consumer

of insurance could determine from the four corners of the policy

the extent of coverage being provided. They contend that in

contrast to the specific dollar amounts of liability coverage

provided for on the declaration pages of their policies, the

average consumer would not know what "financial responsibility

limits" or "limits of liability required by law" refer to. The

Coles further argue that there is a structural ambiguity in their

policy based on inconsistent coverage provisions on the

declarations page, the exclusions page, and the 1991 endorsement to

their policy. They note that the general provisions in their

policy provide coverage for injury to "any person"; that the

household exclusion purports to apply except where invalid; and

that the endorsement limits claims by household members to the

amount provided by law. They contend that to determine the amount

provided by law would require a trip to a lawyer or a law library,
but that the policy does not even provide any reference to a
statute from which the "amount provided for by law" could be

ascertained.
The insurers respond that Montana1s financial responsibility

laws require that licensed drivers be familiar with the minimum

amount of liability coverage required by law; the policy language

in question is not subject to more than one interpretation; and

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that in Sagenv. Prudential Ins. (1993), 259 Mont. 506, 857 P.2d 719, this

Court interpreted an insurance policy to include a statutory

requirement.

We initially note that Sagen is not on point factually and does

not raise a comparable legal issue.

We have never previously addressed the specific issue

presented by certification from the United States District Court--

nor have most other jurisdictions. However, in both Shook v. State Farm

Mutual Ins. Co. (D. Mont. 1994), 872 F. Supp. 768, and Worldwide Underwriters

Ins. Co. v. Brady (3d Cir. 1992), 973 F. 2d 192, nearly identical

exclusions in other policies have been found void because those

courts concluded that they were either unclear or ambiguous.

In Shook, the insured couple was involved in a motor vehicle

collision. The husband was driving and his wife was a passenger.

They were insured at the time by an automobile liability policy

issued by State Farm with bodily injury liability limits of

$100,000 per individual. However, that policy, like the ones at

issue, had a "household exclusion" which limited State Farm's
liability for claims by a family member to "the limits of liability
required by law." The wife filed a claim against her husband,
claiming he was responsible for the accident. However, State Farm

took the position, as the insurers do in this case, that the limit

of their responsibility was $25,000 pursuant to the exclusion in

the policy.

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The Shooks filed a declaratory judgment action to resolve the

issue, and State Farm moved to dismiss. The district court denied

State Farm's motion and concluded that based on the ambiguity of

the exclusionary language, the effect of the policy did not fulfill

the insureds' reasonable expectation. First, however, the district

court repeated the following relevant consideration in determining

whether an ambiguity in the policy existed:

[T]he determination of whether an ambiguity exists in an
insurance policy requires an examination of the language
utilized from the viewpoint of a consumer of average
intelligence, not trained in the law or in the insurance
business. See, e.g., Whispering Creek Condominium Owner Assoc. v. Alaska
National Co., 774 P.2d 176 (Ala. 1989) i Sparksv. Republic National
Life Ins. Co., 132 Ariz. 529, 657 P.2d 1127 (1982), cert. denied,
459 U.S. 1070, 103 S.Ct. 480, 74 L.Ed.2d 632 (1982).
Second, "exclusions and words of limitation in a policy
must be strictly construed against the insurer regardless
of whether or not they are ambiguous." Aetna Ins. Co. v.
Cameron, 194 Mont. 219, 633 P. 2d 1212, 124 (1981) i see also,
Farmers Union Mutual Ins. Co. v. Oakland, 251 Mont. 352, 825 P. 2d
554 (1992).

Shook, 872 F. Supp at 773 -74.

Based on these rules of construction, and taking into

consideration the policy's provisions regarding general liability

coverage, the court arrived at the following conclusion:
Read from the perspective of the Shooks, the
language employed in the liability provisions of the
subject policy establishes that the coverage was
purchased for the purpose of providing a source of
indemnification for damages that either of the Shooks
would become legally liable to pay because of bodily
injury to others and property damage "caused by accident
resulting from the ownership . . . " of their car. Based
upon this language, standing alone, it would be
objectively reasonable for the Shooks to have expected
each of them would be indemnified, to the stated limits,
for any liability that would accrue to, or be imposed

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 upon them for damages emanating from bodily injury to any
person that was caused by either of the Shooks' operation
of the insured vehicle.

While the court is not persuaded by the argument of
structural ambiguity presented by Shook, it does agree
that the positioning of the exclusion, in relation to the
general coverage provision, lends itself to the creation
of the ambiguity in the exclusion.

Shook, 872 F. Supp. at 775 (footnote omitted) Based on this

observation, State Farm's motion to dismiss was denied. The Shook

decision appears to reverse the same district court's prior

conclusion in the unreported case of Yardley v. State Farm Mutual Automobile

Ins. Co. (D. Mont. Aug. 29, 1988), CV-87-194-GF.

In Worldwide, 973 F. 2d at 192, the Third Circuit Court of

Appeals concluded that nearly identical language was "so unclear

that an insured could not understand the liability limitations

imposed upon its family members."

In Worldwide, Robert Brady, the insured, was sued by the cous in

with whom he lived for damages arising from Brady's negligent

operation of a motor vehicle in which his cousin was a passenger.

At the time of his motor vehicle collision, Brady's vehicle was

insured by Worldwide Underwriters Insurance Company. It provided

for bodily injury liability limits of $100, 000 per person in

language similar to the liability provisions of these policies, but

also included the following amendatory endorsement:

We do not provide Liability Coverage for any person for
bodily injury to you or any family member to the extent

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that the limits of liability for this coverage exceed the
limits of liability required by the Pennsylvania Motor
Vehicle Financial Responsibility Law of 1984.

Worldwide, 973 F. 2d at 193.

On the basis of the quoted exclusionary language, Worldwide

advised Brady that coverage for his cousin's claim was limited to

$15, 000, which was the minimum amount of coverage required by

Pennsylvania's Motor Vehicle Financial Responsibility Law.

Worldwide then brought an action in Federal District Court in

Pennsylvania for a declaratory judgment confirming its

interpretation of the policy. The Court of Appeals first noted

that, under Pennsylvania law, an insurance policy provision had to

be clear in order to be enforced. It also pointed out that while

the terms "clear" and "unambiguous" are sometimes used

interchangeably in the decisions of various courts, there is "a

distinction, however subtle," between the two terms. Worldwide, 973

F.2d at 195. It pointed out that:

While ambiguity has been described as "the condition of
admi t t ing to two or more meanings," see Mellon Bank v. Aetna,
619 F.2d at 1011, the question of clarity is slightly
more simplistic, i. e., is the wording "easily under-
stood?"

Worldwide, 973 F. 2d at 195.

Based on that distinction, the Court of Appeals did not reach

the issue of ambiguity. However, it concluded that the policy

exclusion was unenforceable based on its lack of clarity for the

following reasons:

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The imprecise wording of the clause renders it
undiscernible by the insured. Considering, as we should,
the document as a whole, seeSmithv. Cassida, 403 Pa., 404,
169 A.2d 539, 541 (1961) ("policy. . must be read in
entirety and the intent gathered from a consideration of
the entire instrument"), we find that the exclusion does
not inform the insured that full coverage for his family
members was compromised. In order to be informed of the
limitation imposed by this clause as the insurer
intended, Brady would be compelled to travel beyond the
four corners of the policy, presumably to the nearest law
library or lawyer, to realize that the language of the
policy, citing to the Motor Vehicle Financial
Responsibility Law, imposed a $15,000 recovery of
benefits cap on injuries received by family members.
Pennsylvania does not place such an affirmative burden on
purchasers of insurance--rather the insurer has the duty
to write its policies in a clear and intelligible
fashion. Because the Worldwide policy failed to
explicitly inform Brady of the elements of its limited
coverage, Brady is entitled to full policy benefits for
the injuries incurred by his family member, Morros.

Worldwide, 973 F. 2d at 196.

While the Shook decision is based upon the insureds' reasonable

expectations, and the Worldwide decision is based on the policy's

lack of clarity, we find the reasoning in Worldwide persuasive and

applicable to our consideration of whether the provision at issue

in the cases before us is ambiguous.

As pointed out in Shook, the question of ambiguity is examined

from the viewpoint of a consumer with average intelligence but not

trained in the law or insurance business. Based upon the general

liability provisions in each of the insurers' policies, and based

on the figures provided on the declaration pages for each policy,

we conclude that the policies in question are subject to more than

one interpretation regarding the extent of coverage for damage to

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a household member, and that a person of average intelligence could

not determine from the four corners of the insurance policy the

dollar amount of coverage provided. The endorsements and

declaration page limit coverage to family members to either" limits

of liability required by law," or to "the financial responsibility

limits of the policy state." There is no dollar amount set forth.

There is no identification of the "policy state," nor is there any

citation to the state law on which the liability limit is based.

No lay person could determine from the face of the policy whether

claims by family members were the same or less than the limits of

coverage provided under the general liability provision of each

policy.

Furthermore, the language "limits of liability required by

law" could be interpreted to mean the limit of liability imposed by

a court of law pursuant to the law of damages.

For these reasons, in answer to the question certified to us,

we conclude that the amendatory endorsements at issue are

ambiguous, and therefore, unenforceable. Based on this conclusion,

the Leibrands and the Coles are entitled to recover the full amount

of general liability coverage provided for in their policies if

damages in at least those amounts can be proven.

Citing our decision in HoraceMannlns.v.Hampton (1989) ,235 Mont.

354, 767 P.2d 343, and numerous decisions from other jurisdictions,

the insurers argue that if the endorsements at issue are invalid,

the result is the same because both policies otherwise contain a

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..
total exclusion of coverage for claims by household members, and

those provisions are only invalid to the extent that coverage is

required under Montana's mandatory liability protection laws.

Those laws only require coverage in the amount of $25,000 per

individual. Section 61-6-301, MCA. However, Horace Mann is

distinguishable, as are the cases relied on by the insurers from

other jurisdictions. In Horace Mann, 767 P.2d at 345, we simply held

that:

When an insurer fails to provide a policy in compliance
with the requirements of a statute mandating insurance
protection, the courts are forced to reform the policy so
that it is in compliance, 12A Couch on Insurance 2d
(Rev. ed.) § 45:692.

The decisions relied on from other jurisdictions are based on

similar principles. However, in this case we have not rejected the

endorsement language based on statutory requirements. We have held

that the language is unenforceable because it is ambiguous. In

this Court's decision, which held that blanket household exclusions

are unenforceable based on statutory law (Transamerica v. Royle (1983),

202 Mont. 173, 656 P.2d 820), we did not hold that coverage is then

limited to the statutory amount required. Furthermore, we find

that line of cases more persuasive which hold that when insurance

policy exclusions are unenforceable, the policy should be enforced

according to the remainder of its terms. For example, in Meyer v. State

Farm Mutual Auto Ins. Co. (Colo. 1984), 689 P.2d 585, the Colorado Supreme

Court, after invalidating household exclusions in insurance

policies based on the terms of its financial responsibility act,

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rej ected a similar insurer's argument regarding the extent of

coverage available. That court held that:

[W]e are more persuaded by the insured's argument. The
Act specifically provides that insurance policies may
provide greater coverage than the minimum specified in
the Act. § 10-4-710, 4 C.R.S. (1973). This provision is
consistent with the legislative intent to avoid
inadequate compensation to victims of automobile
accidents. § 10-4-702, 4 C.R.S. (1973). Here, the
insured purchased more coverage than required by the Act.
We hold that where the household exclusion clause has
been held invalid because it violates the Act, the limits
of the carrier's liability are those provided by the
policy and not the lesser limits required by the
statutory standard. Kishv. Motor Club of America Insurance Co., 108
N.J.Super. 406, 261 A.2d 662 (1970). . In our view,
the second approach is more consistent with the
legislative intent and policy which is to maximize rather
than minimize insurance coverage. Moreover, our choice
of rules is supported by the well-established principle
of contract law that where a provision in a contract is
void because it is contrary to public policy, the
remaining portions of the agreement are enforceable to
the extent the illegal provision can be separated from
the val id promises. See, e.g., Reilly v. Korholz, 137 Colo. 20,
320 P. 2d 756 (1958) . . . Restatement (Second) of Contracts §§ 178,
184 (1979). See generally J. Calamari & J. Perillo, The Law of
Contracts § 22-4 (d) (2d ed. 1977).

Meyer, 6 8 9 P. 2 d at 5 92 - 93 .

In accord with Meyer are State Farm Mutual Auto Ins. Co. v. Waggeman (Del.

1988), 541 A.2d 557, Kish v. Motor Club ofAmerica Ins. Co. (N. J. Super. 1970),

261 A.2d 662, and Hughes v. State Farm Mutual Auto Ins. Co. (N.D. 1975), 236

N.W.2d 870. Courts have arrived at the contrary conclusion in

Arceneaux v. State Farm Mutual Auto Ins. Co. (Ariz. 1976), 550 P. 2 d 87, De Witt v.

Young (Kan. 1981), 625 P.2d 478, State Farm Mutual Automobile Ins. Co. v.

Nationwide Mutual Ins. Co. (Md. 1986), 516 A. 2 d 586, and State Farm Mutual

Automobile Ins. Co. v. Mastbaum (Utah 1987), 748 P. 2d 1042.

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While we decide this case on the basis of the ambiguity in the

policy language, we are not unmindful of the insureds' arguments

that these contracts are contracts of adhesion; that full coverage

for damages suffered by family members is not available on the open

insurance market, and that to arbitrarily preclude full coverage

for family members, as opposed to all other persons, is
unconscionable and void as a matter of public policy, and

therefore, unenforceable, regardless of the future clarity of such

an exclusion. We acknowledge that conscionability may be a factor

in any future consideration of that issue, however, conclude that

based on the record before us, we have an insufficient factual

basis for addressing that issue. A similar issue was raised in the

Worldwide case. That court declined to address the issue for similar

reasons. The Third Circuit Court of Appeals stated that:

Unconscionability in a contract is a concept introduced
under the Uniform Commercial Code and it has been applied
to insurance contracts. See Bishop v. Washington, 331 Pa.Super.
387, 480 A. 2 d 1088 (1984); Ferguson v. Lakeland Mutual Insurance Co. ,
408 Pa.Super. 332, 596 A.2d 883 (1991). Unconscion-
ability requires a two-fold determination: that the
contractual terms are unreasonably favorable to the
drafter and that there is no meaningful choice on the
part of the other party regarding acceptance of the
provisions. Koval v. Liberty Mutual Insurance Co., 366 Pa. Super.
415, 531 A.2d 487, 491 (1987). Here, although the record
suggests that this contract was one of adhesion, i.e.,
Brady's ability to procure a policy without a family
member exclusion is doubtful, we are not confident that
the undisputed facts, sparsely assembled here, would
require such a determination. We will, therefore, not
rest our decision today based upon the unconscionable
resul t exception to the Standard Venetian rule.

Worldwide, 973 F. 2d at 196.

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... "

For the reasons set forth in this opinion, we answer the

certified question as follows: No. The amendatory endorsements in

both policies at issue in these cases are not valid and

enforceable. For that reason, the insureds are provided with

coverage under each policy in the full amount provided for under

the general liability provision of their respective policies.

We concur:

k/;/~~ Justices

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