NC Court of Appeals Upholds “Class” Distinction In Determining UIM Liability Apportionment
Jessica C. Tyndall, McAngus Goudelock & Courie
On January 21, 2014, the North Carolina Court of Appeals handed down the Nationwide Mutual Ins. Co. v. Integon Nat’l Ins. Co. decision, affirming its somewhat controversial holding in North Carolina Farm Bureau Mutual Ins. Co. v. Bost, 126 N.C. App. 42, 483 S.E. 452 (1997) and holding that the “Class” of insured into which the claimant falls is a determinative factor in apportioning liability and credits among competing UIM policies. Nationwide, 2014 N.C. App. LEXIS 64, 1, 2014 WL 217110 (N.C. Ct. App. Jan. 21, 2014).
The fact pattern on which the Nationwide decision is based involves a motorcyclist who was killed when an underinsured driver failed to stop at a red light. The motorcyclist was a named insured on separate policies issued by Integon National Insurance Company and State National Insurance Company, both of which provided the motorcyclist with underinsured motorist coverage. The motorcyclist was also a resident of his parents’ household at the time of the accident and, as a result, qualified for underinsured motorist benefits under their Nationwide Mutual Insurance Company policy as well.
The underinsured tortfeasor admitted liability for the accident, and her insurer paid its $50,000 limit of liability. Nationwide argued that its policy and the other two applicable policies all afforded the motorcyclist primary coverage because the motorcyclist was a “Class I” insured under all three policies. Based on the fact that the claimant was a “Class I” insured under all three policies and the fact that all three policies had “mutually repugnant” “Other Insurance” clauses, Nationwide argued that all three carriers were entitled to a pro-rata share of the $50,000 paid by the tortfeasor’s carrier.
In contrast, Integon, which insured the motorcycle involved in the accident, argued that its policy and the State National policy covered the claimant with respect to vehicles owned by the claimant while the Nationwide policy covered the claimant with respect to a vehicle he did not own. Thus, based on a “plain reading” of the policies’ “Other Insurance” clauses, the Integon and State National policies would afford primary coverage to the claimant while the Nationwide policy would afford excess coverage to the claimant.
Relying on its holding in Bost, the Court agreed with Nationwide and set out a three step analysis to instruct courts and practitioners on how “UIM credit/liability apportionment disputes” should be decided. Nationwide, 2014 N.C. App. LEXIS 64, 11, 2014 WL 217110.
The Court’s three step analysis requires carriers and practitioners to first decide whether the competing policies’ “Other Insurance” clauses are “mutually repugnant,” meaning that they have identical terms or, if not identical terms, the same meaning. If those clauses are mutually repugnant, they are effectively stricken from the policies and given no effect.
When mutually repugnant “Other Insurance” clauses are involved, carriers and practitioners must evaluate the “Class” into which the claimant falls for each of the UIM policies at issue. Case law interpreting North Carolina’s underinsured motorist statute has established that “Class I” insureds are those who are “named insured[s] and, while resident of the same household, the spouse of any named insured and relatives of either, while in a motor vehicle or otherwise.” “Class II” insureds are those insureds who do not fall within Class I but who nonetheless qualify as insureds for the purpose of UIM coverage. If the claimant falls within the same “Class” for each policy at issue, the competing UIM carriers share liability and credits on a pro-rata basis.
If the claimant does not fall within the same “Class” under each of the UIM policies at issue, carriers and practitioners must revisit the policies’ language, specifically evaluating, at least in the Nationwide decision, whether the vehicle in which the claimant was riding at the time of the accident was owned by the named insured or the named insured’s spouse whose policy covered the vehicle. The “owned” versus “non-owned” distinction may require one or more policies to extend primary UIM coverage to the claimant while other policies will extend excess coverage.
According to the Court, the Nationwide decision was intended to clarify decisions handed down subsequent to Bost suggesting that the “Class” determination was not relevant to the apportionment analysis. As examples, in Benton v. Hanford and Iodice v. Jones, the Court, faced with arguably identical apportionment issues to those addressed in the new Nationwide decision, looked not at the claimants’ “Class” and instead looked at whether the claimants suffered injury while riding in “owned” or “nonowned” vehicles. See Benton v. Hanford, 195 N.C. App. 88, 671 S.E.2d 31 (2009); Iodice v. Jones, 133 N.C. App. 76, 514 S.E.2d 291 (1999).
In Benton and Iodice, the claimants were passengers riding in vehicles owned by named insureds possessing policies with underinsured motorist benefits. In both cases, the claimant passengers were also entitled to underinsured motorist coverage through policies held by family members on vehicles not involved in the collisions at issue. In both cases, the Court construed the policies’ “owned” vs. “nonowned” language to require the policies covering the vehicles in which the claimants were riding to afford the claimants primary coverage (as “owned” vehicles) while the policies covering the claimants as resident family members (as “non-owned” vehicles) afforded excess coverage.
The Nationwide Court distinguished the Benton and Iodice decisions by noting that the claimants in both cases were “Class II” insureds under the policies of insurance covering the vehicles in which they were riding and “Class I” insureds under the policies covering them as resident family members.
Because insureds of different Classes may be treated differently, the Court reasoned that those cases were decided consistently with the Court’s new three-step analysis. Nationwide, 2014 N.C. App. LEXIS 64, 21, 2014 WL 217110.
Critics of the Nationwide decision point out that the Court’s analysis seems unnecessarily complicated given that, as Integon and State National argued, the dispute could have been decided by applying the plain language of the policies’ “Other Insurance” clauses to the facts. Instead, the Court has inserted the Class I/Class II dichotomy into the analysis without having any contractual basis in policy language to do so.
On the other hand, as Nationwide itself argued in its appellate brief, “for the sake of consistency and predictability, the focus [of the Nationwide decision appears to have been] on determining what the law actually is, rather than what the law arguably should be.” Brief for Appellee at p. 27, Nationwide, 2014 N.C. App. LEXIS 64, 21, 2014 WL 217110 (No. COA 13-640)(emphasis in original). In that regard, the Nationwide decision upholds Bost and perhaps provides practitioners and insurers more certainty when these disputes arise. Now, whether grounded in policy language or not, the initial inquiry will be to look at the Class into which the claimant falls first with the ownership or nonownership of the vehicle involved in the collision becoming a secondary inquiry.