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Country Mutual Insurance Company v. Fonk8/24/2000
The Honorable John H. Seidel, Judge (Deceased)
REVERSED AND REMANDED; AFFIRMED ON CROSS-APPEAL
In this appeal, we consider whether a party injured in an accident with an underinsured motorist is barred from collecting from her underinsured motorist insurance policy when the policy contains an exhaustion clause and she settles her claim with the tortfeasor for an amount that is less than his liability policy limits. We hold that the exhaustion clause is satisfied, and appellant's claim is not barred, in such circumstances because the insured may recover underinsured motorist benefits if the total damages sustained exceed the limits of the tortfeasor's liability policy, even though the insured settled with the tortfeasor for less than the liability limits. We have jurisdiction pursuant to Ariz. Rev. Stat. Ann. (A.R.S.) §§ 12-120.21(A)(1) and 12-2101(B).
For the following reasons, we reverse and remand on appeal and affirm on cross-appeal.
FACTUAL AND PROCEDURAL HISTORY
Appellant Robyn Fonk was injured in an accident in which her automobile was struck from behind by a vehicle driven by Ray Dunlap. Dunlap was insured by Farmers Insurance Company under an automobile policy with a liability coverage limit of $25,000 per person. After filing a lawsuit against Dunlap, Fonk settled her claim against him for $20,000, to be paid from the Farmers policy.
Fonk carried underinsured motorist (UIM) coverage in a policy issued by appellee Country Mutual Insurance Company (Country Mutual). After settling her claim against Dunlap, Fonk attempted to negotiate a settlement with Country Mutual under her UIM coverage. She understood that for UIM coverage purposes, her recovery from Dunlap would be deemed to be his $25,000 liability limit, and she believed her damages exceeded $25,000. When she and Country Mutual could not reach a settlement agreement, she requested arbitration within the terms of her policy.
Country Mutual obtained a stay of arbitration and filed a declaratory judgment action seeking an order that it was not obligated to provide UIM benefits to Fonk because she had not exhausted the liability limits of Dunlap's policy. The complaint referred to a clause in its policy that provides that it would pay under UIM coverage "only after all liability bonds or policies have been exhausted by judgments or payments."
Fonk moved for summary judgment, arguing that the exhaustion provision was void because it is contrary to the applicable statute, A.R.S. § 20-259.01. She noted that a number of courts in other jurisdictions had ruled that exhaustion provisions were unenforceable because they violated public policy. Country Mutual filed a cross-motion for summary judgment in which it argued that the contract provision is unambiguous and should be enforced.
It also asserted that no Arizona case invalidated or prohibited exhaustion clauses in insurance contracts and that they have been upheld in other states.
The trial court granted Country Mutual's cross-motion for summary judgment and denied Fonk's motion, reasoning that the exhaustion provision was not ambiguous and did not violate public policy. Country Mutual requested attorneys' fees under A.R.S. § 12-341.01 because the matter arose out of contract. The court denied the application, finding that an award of fees against Fonk would be an undue hardship. Fonk timely appealed from the judgment in favor of Country Mutual. Country Mutual filed a cross-appeal from the denial of its application for attorneys' fees.
DISCUSSION
At issue is whether the exhaustion clause as interpreted by Country Mutual is
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