Friday, January 7, 2011

Idaho Supreme Court-- Hill v. American Family Mutual Insurance Company


Hill v. American Family Mutual Insurance Co. is a fairly landmark decision in the realm of Idaho insurance law. It is a 3-2 decision authored by Justice Warren Jones reversing the district judge.

The facts involve a car-wreck in November 2005. Hill was involved in a car accident with Andrea Hamilton. Andrea was 15 years old, talking on a cell phone and drifted into oncoming traffic, hitting Hill's car. Hill suffered some significant injuries.

Andrea's insurance policy had a bodily-injury coverage limit of $25,000. Hill had a underinsured-motorist (UIM) policy of $100,000/person. Hill's policy with American Family included an "exhaustion" clause, requiring her to deplete the bodily-injury policy of a tortfeasor before being able to collect UIM benefits.

Hill filed suit against Hamilton and eventually settled for $24,000. She then went to American Family and sought $18,000, an amount crediting the difference between the settlement amount and Andrea's policy limit. American Family denied Hill's claim because she had not exhausted the bodily-injury policy of the tortfeasor. Hill then sued American Family.

American Family moved for summary judgment. Judge Stephen Dunn, of Bannock County, granted American Family's motion, finding that the exhaustion clause was unambiguous and barred recovery since Hill had not exhausted the bodily-injury policy of the tortfeasor.

The Idaho Supreme Court reverses Judge Dunn on the basis that exhaustion clauses violate Idaho public policy. This case constitutes a dramatic change. The Idaho Supreme Court bases its rationale on the fact that the Idaho legislature recently passed Idaho Code Section 41-2502, requiring insurance companies to offer UIM coverage with insurance policies. The Idaho Supreme Court finds that this enactment implements a public policy with regard to the exhaustion clauses and voids the clauses as against that new policy.

So, the realities of the Court's decision is that plaintiffs are no longer required to fully-exhaust the bodily-injury policies of the tortfeasor. Instead, plaintiffs can settle with the tortfeasors and then seek payment from their own UIM policy. Of course, the Idaho Supreme Court states that plaintiffs must "absorb the gap", if any, between the settlement with the tortfeasor and the recovery from the UIM policy. So, in the subject case, since Hill settled for $24,000 out of a $25,000 bodily-injury policy, her recovery from the UIM policy is going to be credited $1,000. She has to absorb the gap of her decision to settle for less than the full policy.

The Court also considers the "when" of public policy. Idaho has not clearly stated how a court should evaluate public policy in terms of timing. In this case, the accident happened in 2005. The new law governing UIM insurance was passed in 2008. The statute is not retroactive and it is widely held that contracts are interpreted based on the law at the time the contract is entered into. However, the Court clearly states that a contemporary change to public policy can have the effect of "eviscerating" a contract. The Court states that it will not enforce contracts "at any stage" of litigation in which it contravenes public policy.

This is a substantial decision for the Idaho Supreme Court because it does not just affect insurance contracts. For example, prior to 2008, the public policy in Idaho disfavored non-competition agreements. They were rarely enforced, if ever. In 2008, the legislature passed a new statute stating that non-competes are presumptively enforceable. This changed the public policy of the state. Under the logic in the Hill decision, non-competition agreements entered into before 2008 cannot be voided on the basis that they are against public policy. This is because the public policy changed in 2008. Even though the Court uses the public policy concept to void a contractual provision, the inverse should also be true in order for there to be any consistency to the Court's ruling. That is to say that contracts previously void for public policy reasons can now be found to be enforceable if there is a subsequent change in public policy.

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