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Appeals Court Affirms Household Exclusion to Limit UIM Claim

The Court of Appeals for the Eastern District of Missouri recently upheld the use of a “household exclusion” in an insurance policy to drastically limit the recovery available in claim made against a member of the same household.

The case of Mendelson v. Bankers Standard Insurance Company involved a single car accident wherein the driver, Paul Mendelson, was killed and his wife, Betty Mendelson, was injured. The Mendelsons had an insurance policy with Bankers Standard Insurance Company (“Bankers Standard”) that included both liability and underinsured motorist (UIM) coverage in the amounts of $500,000 each. However, both portions of the policy included a “household exclusion” that limited coverage in instances of bodily injury to an insured or a family member. In such cases, the policy limits for both coverages would be limited to the amount of the state-mandated minimum liability coverage under the Missouri Financial Responsibility Law, which was $25,000. After the accident, Mrs. Mendelson made a claim for liability coverage based on the alleged negligence of Mr. Mendelson, as well a claim for underinsured motorist coverage, arguing that Mr. Mendelson’s liability coverage of $500,000 was insufficient to fully cover her damages. Bankers Standard filed for summary judgment, arguing that the above limits applied. The trial court granted Bankers Standard’s motion for summary judgment, applying the household exclusions and limiting recovery to $25,000 for both the liability and UIM coverages.

On appeal, Mendelson first argued that the UIM household exclusion violated Missouri public policy. In so doing, she contended that courts allow the “stacking” of uninsured (UM) and UIM coverages where UM and UIM coverages were treated identically. In those cases, the courts noted that Missouri law requires a minimum UM coverage, and further allows an insured with UM coverage on multiple vehicles to add them together, or “stack” them, to increase the amount of coverage available. However, Missouri law does not mandate UIM coverage. Mendelson argued that since insureds may stack their mandated UM coverages, in instances where insurance policy language functionally treats UM and UIM coverages as the same, courts have stopped insurers from attempting to block stacking of UIM benefits as well. Here, Mendelson sought to apply this rationale to suggest that, to the extent that her policy treats UM and UIM coverage the same, and non-statutory exclusions cannot reduce UM coverage, the Court should prevent Bankers Standard from applying the household exclusion in a UIM claim.

The Appeals Court was not persuaded, noting that Mendelson’s case had little in common with the issues involved in stacking cases. Even though this policy may lump UM and UIM coverages together in some areas, the court found the policy considerations in UM stacking cases did not apply here. To the contrary, Missouri courts have repeatedly upheld household exclusions limiting coverage to the minimum amount required by law ($25,000), and in the absence of any applicable public policy, the language of the contract in those instances prevails.

Mendelson next argued that the household exclusion was unenforceable because the policy is ambiguous in the way it seemingly grants $500,000 of coverage in one part of the policy, but elsewhere purports to reduce the coverage to $25,000 by way of an exclusion. The Court acknowledged that an ambiguity may exist if contractual language is reasonably open to reasonably different interpretations or uncertainty, including instances where a contract seemingly promises something at one point but later takes it away. However, it notes that insurance contractual provisions must be read in the context of the policy as a whole, and in doing so, did not find any ambiguity in Bankers Standard’s policy.

Indeed, the Court noted that exclusions are common in insurance policies and do not automatically create an ambiguity. Rather, as in this case, a policy may provide coverage subject to clear, applicable limitations appearing later in the policy. Here, the declarations page noted $500,000 in UIM coverage, and clearly indicates that it contemplates both the language of the policy itself and any endorsements. An introductory section of the policy further describes how it will note the specific losses that it will not pay for using exclusions. Then, as suggested, the policy notes how UIM coverage is available, but specifically lists the household exclusion under “damages we won’t pay.” Upholding summary judgment and a cap on the applicable coverage, the Court determined that an ordinary consumer would understand and anticipate that his/her coverage is subject to limitations stated later in the policy. As such, the policy was not ambiguous. The appeal was denied, and the household exclusion was upheld, limiting the otherwise $500,000 in UIM coverage to $25,000.

This Opinion reiterates the importance of analyzing a policy in its entirety. One must note how UM and UIM coverages are differentiated in the policy, and the context they are applied. Insurance contracts often spend just as much time detailing what is not covered as what is, and when clearly worded, the effects can be significant. In Mendelson, the Court of Appeals reinforces the importance of determining coverage through careful cross-referencing of the stated limits within the policy and all applicable endorsements. Failure to appreciate not only the coverages, but the limits, can lead to shocking outcomes for insureds. However, for insurance companies, this case reinforces that clear language and reiterating to the insured the application of the entire policy, coverages and limitations, will have a better chance of leading to the intended application of coverage as written.