Oregon Court Decision Forces Insurers to Change Auto Policy Language

The Oregon Supreme Court is at it again, although on a much smaller scale.

Less than two years after the Oregon high court called into question the validity of every ex-clusion in an insurance policy with its decision in the Fleming case, the court recently struck down “intra-family” exclusionary language in the auto liability sections of two insurers.

While the Fleming ruling sent insurers scurrying for a legislative fix, the decisions in North Pacific v. Hamilton and Wright v. State Farm will force those insurers, and most likely others, to alter language in auto policies sold in Oregon preventing family members of the insured from collecting liability benefits of more than the state’s minimum financial responsibility limit ($25,000).

“We haven’t made a decision about how we’re going to address the court’s ruling,” said Jeff Aeschliman, public affairs specialist for State Farm. “I think it’s clear we have to respond.”

Bill Atkins, vice president of personal lines underwriting for CGU North Pacific, said his company is in the midst of reworking its policy language.

The language tweaking may become almost universal among carriers that sell personal auto insurance in Oregon. Jim Masek, Western regional manager in the Insurance Services Office’s (ISO) San Francisco office, said ISO “almost certainly” will amend its forms.

Like the Fleming decision, the Oregon Supreme Court’s two recent rulings have insurer officials scratching their heads in disbelief.

“We were surprised, quite candidly, by the decision,” Aeschliman said, noting that State Farm has used the same intra-family exclusion language in Oregon for about a decade.

“Until the decision was handed down,” Atkins said, “we thought we were on solid ground.”

So did the trial and appellate courts in both cases, which upheld the language in the two policies.

In each case, a family member who was killed (State Farm) or injured (North Pacific) was denied the ability to recover more than Oregon’s financial responsibility limit of $25,000. Both families sought the full liability limits for individuals in each policy. In the State Farm case, the family also tried to recover from an umbrella policy, which also contained the intra-family exclusion. The Supreme Court upheld the language in State Farm’s umbrella policy.

The Oregon Supreme Court devoted considerable verbiage in its decisions to information that was contained on the declarations page in each policy. In fact, the decision in North Pacific v. Hamilton begins as follows: “The issue in this insurance coverage case is whether a provision in the exclusions section of a motor vehicle liability policy operates to reduce liability coverage for an injured insured below the limit provided on the declarations page of the policy.”

The first paragraph of the Wright v. State Farm decision includes this passage:

“. . . we conclude that the family member exclusion in the motor vehicle liability policy is unenforceable and that State Farm therefore must pay the amount set out on that policy’s declarations page.”

Jack Munro, lobbyist for the American Insurance Association and Independent Insurance Agents of Oregon, said the rulings “make the dec sheet, which has never been part of the contract.”

“There’s only so much you can put on a dec page,” Aeschliman added.

The court inferred that the family members relied on the information on the dec page because the language in the policy was “ambiguous” or even “obtuse.”

In the North Pacific case, the court was particularly concerned about the use of the term “limits of liability” in the exclusion because, the court noted, whenever else that term appeared in the policy, it referred to the maximum liability limits available.

Further, the court was displeased that the North Pacific policy referred to the “limits of liability required by the Oregon financial responsibility law.” An insured, the court noted, would have an extremely difficult time trying to connect that phrase to the actual figure, $25,000.

“We need to be more succinct in explaining what the financial responsibility limit is,” Atkins said.

Oregon is hardly the only state to have court battles over these exclusions.

“The intra-family language gets attacked all the time,” Masek said.

Oregon had a case 10 years ago, Collins v. Farmers Insurance Co., that involved an outright denial by an insurer of any benefits under the liability section of an auto policy based on the intra-family exclusion. In that case, the court found that the claimant was entitled to recovering the minimum financial responsibility limits, a ruling that forced insurers such as State Farm and North Pacific to alter the wording in their policies.

Some states prohibit intra-family exclusions altogether. As such, State Farm has what Aeschliman calls three tiers of intra-family coverage in its auto policies: complete exclusions, limited exclusions (such as in Oregon), and no exclusions. Insurers aren’t exactly wild about the latter.

“The whole purpose of the intra-family exclusion,” Atkins said, is to eliminate the potential for fraud.”

Topics Carriers Auto Oregon