North Carolina Farm Bureau Mutual Insurance v. Hilliard, 90 N.C. App. 507 (1988)

June 21, 1988 · North Carolina Court of Appeals · No. 8710SC1147
90 N.C. App. 507


No. 8710SC1147

(Filed 21 June 1988)

Insurance § 92— automobile insurance — underinsurance policies —order of payment

In a declaratory judgment action between two insurance companies to determine the order of payment to an individual insured under two separate underinsurance policies, defendant Hilliard’s insurer, Farm Bureau, must pay one-fourth of Hilliard’s damages and State Farm must pay three-fourths of her damages even though Hilliard was a State Farm insured only as a third-party beneficiary based on her sister’s policy. The court declined to discriminate between the two policies based upon the fact that the insured actually paid the premiums on one policy and a third party paid the premiums on the other because Hilliard fell within the same class of insureds, under both policies; the non-owned vehicle clauses were mutually repugnant and the policies were read as if those clauses were not present; the policies had identical other insurance clauses with language limiting payment to the proportion that the policy’s limit of liability bears to the total of all applicable limits; and Farm Bureau was liable for a maximum of $25,000 and State Farm for a maximum of $75,000. N.C.G.S. § 20-279.21(b)(3).

Appeal by plaintiff from Preston, Judge. Judgment entered 27 August 1987 in Superior Court, Wake County. Heard in the Court of Appeals 6 April 1988.

This is a declaratory judgment action in which North Carolina Farm Bureau Mutual Insurance Company (Farm Bureau) seeks a declaration of its obligations as well as the obligations of State Farm Mutual Automobile Insurance Company (State Farm) under their respective insurance policies arising from a settlement entered into by both companies with their insured, Mildred J. Hilliard.

*508On 8 July 1985, while a passenger in a car driven by Linda Skinner, Ms. Hilliard was injured when struck by a car driven by Debra Branch. Hilliard claimed damages of $75,000. Because Branch’s negligence caused the accident, her insurance company, Allstate Insurance Company (Allstate), assumed responsibility for payment of damages to the injured.

Branch’s liability policy had limits of $25,000 per person and $50,000 maximum per accident. Integon Insurance Company insured the Skinner vehicle but the policy did not include underin-surance coverage. At the time of the accident Hilliard had an automobile insurance policy with Farm Bureau which included un-derinsurance coverage up to $50,000 per person. Because Hilliard lived with her sister, her sister’s automobile insurance policy with State Farm also provided insurance coverage for her at the time of the accident. The State Farm policy provided underinsurance coverage up to a maximum of $100,000.

Allstate paid the limits of its policy to those injured in the accident. Hilliard received $21,571.22 from Allstate in partial settlement of her claim. She then made demand for her remaining damages upon Farm Bureau and State Farm pursuant to their respective policies’ underinsurance provisions. Hilliard subsequently waived recovery of $3,428.78 and accepted payment of $50,000 from Farm Bureau and State Farm in settlement of her claim.

At trial State Farm argued, and the trial court ordered, that “Mildred J. Hilliard should look first to her own insurer.” The order obligated Farm Bureau and State Farm to pay $25,000 each toward the Hilliard settlement. Farm Bureau appeals.

Henson Henson Bayliss & Coates, by Paul D. Coates, for plaintiff-appe llant.

DeBank, McDaniel, Heidgerd, Holbrook & Anderson, by Douglas F. DeBank, for defendant-appellee.

EAGLES, Judge.

In this declaratory judgment action between two insurance companies to determine the order of payment to an individual insured under two separate underinsurance policies, the trial court ordered Hilliard’s “own insurer,” Farm Bureau, to pay first. We reverse and remand.

*509Since this accident occurred on 8 July 1985, the 1983 version of G.S. 20-279.21 applies. The General Assembly has amended the statute twice since. The only issues before us are the order of payment between the two insurers and the amount of each insurer’s share of the settlement figure.

“Underinsurance” provides a type of insurance coverage that allows an insured to be indemnified by his own insurer, in whole or in part, for damages caused by a negligent motorist who is insured inadequately. 2 A. Widiss, Uninsured and Underinsured Motorist Insurance Section 32.1. G.S. 20-279.21(b)(4) defines an underinsured highway vehicle as

a highway vehicle with respect to the ownership, maintenance, or use of which, the sum of the limits of liability under all bodily injury liability bonds and insurance policies applicable at the time of the accident is less than the applicable limits of liability under the owner’s policy.

Both insurance companies agree that Hilliard is an insured under their respective policies and that she is entitled to underin-surance coverage from both. State Farm argues, however, that there is a fundamental difference between the two policies which makes the State Farm policy excess to the Farm Bureau policy. State Farm points out that Hilliard had an explicit contractual relationship with Farm Bureau since she directly paid and contracted for her policy with Farm Bureau. Hilliard was a State Farm insured only as a third-party beneficiary based on her sister’s purchase of an automobile liability policy with State Farm. State Farm argues that since Hilliard made no premium payments on the State Farm policy, she must look first to Farm Bureau for indemnification of her damages. We disagree.

State Farm’s underinsurance provision provides that any family member is a covered person. In addition, our Supreme Court has ruled that the Motor Vehicle Safety-Responsibility Act (Act), G.S. 20-279.1 et seq., becomes a part of every insurance liability policy written. Insurance Co. v. Chantos, 293 N.C. 431, 238 S.E. 2d 597 (1977).

For uninsurance and underinsurance coverage G.S. 20-279.21 (b)(3) establishes two separate classes of insureds. Crowder v. N.C. Farm Bureau Mut. Ins. Co., 79 N.C. App. 551, 554, 340 S.E. *5102d 127, 129, disc. rev. denied, 316 N.C. 731, 345 S.E. 2d 387 (1986). The statute’s first class of “persons insured” are “the named insured and, while resident of the same household, the spouse of any such named insured and relatives of either, while in a motor vehicle or otherwise.” G.S. 20-279.21(b)(3). Hilliard and her sister, State Farm’s named insured, lived in the same household. Accordingly, Hilliard was a “person insured” under the State Farm policy. Further, she was in this first class of insureds under both policies.

In Crowder this Court explicitly “allow[ed] underinsured motorist coverage for insureds operating, or riding in, a nonowned vehicle.” [Emphasis in original.] Crowder at 555, 340 S.E. 2d at 130. The insured there was the named insured’s minor son. Implicit in the Crowder holding was the idea that who actually paid the premiums for insurance coverage was irrelevant to the issue of whether or not coverage applied. See also Hunt v. State Farm Mut. Ins. Co., 349 So. 2d 642 (Fla. Dist. Ct. App. 1977). Similarly here, we reject the argument that these two policies should be treated differently as a matter of law. We decline to discriminate between these two insurance policies based upon the fact that the insured actually paid the premiums on one policy, and a third party paid the premiums on the other. So long as an insured falls within the same class of insureds established by G.S. 20-279.21 (b)(3) under both policies, we see no merit in making that distinction.

We have found no provision of the Act which expressly establishes a statutory priority of payment among different insurance policies. We note that G.S. 20-279.21Ü) does allow an insurance liability policy to “provide for the prorating of the insurance thereunder with other valid and collectible insurance.”

Insurance policies are contracts. “[T]he parties’ intent must be examined in order to properly construe each policy.” Reliance Ins. Co. v. Lexington Ins. Co., 87 N.C. App. 428, 434, 361 S.E. 2d 403, 407 (1987). Where there are two policies, they must be .construed separately, each according to its individual terms. Allstate Insurance Co. v. Shelby Mutual Insurance Co., 269 N.C. 341, 152 S.E. 2d 436 (1967). The only evidence of the contracting parties’ intent is the policies.

*511Here each policy’s uninsured motorist provision contains the following identical “other insurance” paragraph.

If this policy and any other auto insurance policy issued to you apply to the same accident, the maximum limit of liability for your injuries under all the policies shall not exceed the highest applicable limit of liability under any one policy. In addition, if there is other applicable similar insurance we will pay only our share of the loss. Our share is the proportion that our limit of liability bears to the total of all applicable limits. However, any insurance we provide with respect to a vehicle you do not own shall be excess over any other collectible insurance.

By making its policy “excess” each company attempted to limit the amount it must indemnify its insured when he is injured in a nonowned vehicle. See Carrier Ins. Co. v. Policyholders’ Ins. Co., 404 A. 2d 216 (Me. 1979). Excess insurance clauses generally provide “that if other valid and collectible insurance covers the occurrence in question, the ‘excess’ policy will provide coverage only for liability above the maximum coverage of the primary policy.” Horace Mann Insurance Co. v. Continental Casualty Co., 54 N.C. App. 551, 555, 284 S.E. 2d 211, 213 (1981). When “excess” clauses in several policies are identical and determination of which policy is primary is impossible, the clauses are deemed mutually repugnant and neither excess clause will be given effect. Alliance Mutual Ins. Co. v. Central Ins. Co., 70 N.C. App. 140, 318 S.E. 2d 524 (1984).

When excess clauses are mutually repugnant, the majority rule in other jurisdictions requires the insured’s claim to be prorated between the two insurers according to their respective policy limits. E.g., Buckeye U. Ins. Co. v. State Auto. Mut. Ins. Co., 49 Ohio St. 2d 213, 361 N.E. 2d 1052 (1977). This rule “assures indemnification for the insured up to the maximum amount of coverage afforded by each policy.” Id. at 1054.

On the other hand, a minority of jurisdictions have ruled that the two insurers should pay the damages equally up to the maximum limits of the smaller policy. E.g., Carrier Ins. Co., 404 A. 2d at 221. The rationale for this rule is that the majority rule discriminates against larger policies and amounts to a subsidy from the large coverage policies in favor of small coverage *512policies. Furthermore, proponents of this rule argue that the majority rule does society a disservice by discouraging large coverage policies. Id. at 222.

Here, the language of the respective insurance policies compels us to conclude that the two insurers must share the Hilliard settlement on a pro rata basis. Because the nonowned vehicle clauses are mutually repugnant, we read the policies as if those clauses were not present. Each policy also has language that “if there is other applicable similar insurance we will pay only our share of the loss. Our share is the proportion that our limit of liability bears to the total of all applicable limits.”

Within their respective uninsured motorist provisions each policy specifically defines “limit of liability.” The definition, in each policy provides, in part:

Any amounts otherwise payable for damages under this coverage shall be reduced by all sums:
1. Paid because of the bodily injury or property damage by or on behalf of persons or organizations who may be legally responsible. This includes all sums paid under Part A; and
2. Paid or payable because of the bodily injury under any of the following or similar law:
a. workers’ compensation law; or
b. disability benefits law.
No payment will be made for loss paid or payable to the covered person under Part D or any policy of property insurance.
Any payment to any person under this coverage will reduce any amount that person is entitled to recover for the same damages under Part A.

Each policy limits coverage to the damages not paid by the tortfeasor or his insurer. Here Hilliard received $21,571.22 from Allstate and waived payment of an additional $3,428.78 for a total of $25,000. The two insurance companies together have indemnified Hilliard for her remaining damages, $50,000. Based on the plain language of each insurer’s respective “limit of liability” *513clause, Farm Bureau was liable for a maximum of $25,000 and State Farm was liable for a maximum of $75,000. The maximum or “total of all applicable limits” that Hilliard could have collected from both underinsurance carriers was $100,000, one-fourth from Farm Bureau and three-fourths from State Farm. Accordingly, we hold that Farm Bureau must pay one-fourth ($12,500) and State Farm must pay three-fourths ($37,500) of Ms. Hilliard’s damages. We reverse the judgment below and remand for entry of a judgment consistent with this opinion.

Reversed and remanded.

Chief Judge Hedrick and Judge Phillips concur.