Two-Year Suit Limitation for UM Claims Unreasonable Under the Circumstances
February, 2006
In Faeth v. State Farm Mutual Automobile Ins. Co., 707 N.W.2d 328 (Iowa), the Iowa Supreme Court held that a two year limitation on the filing of suit against an insurer for uninsured motorist (“UM”) benefits was unreasonable where the tortfeasor was a self-insured that became insolvent after the expiration of the two years.
Facts
Lynn Faeth was injured when the motor vehicle he was driving was rear-ended by a truck owned by Umthun Trucking Company (Umthun) and operated by its driver, Daniel Simmons. Umthun was a self-insured motor carrier under the authority of the United States Department of Transportation for the first $300,000 of liability. Faeth sued Umthun and Simmons. State Farm provided UM coverage to Faeth. The policy required that actions to recover on UM coverage must be commenced within two years of the date of the accident. More than two years after the accident, Umthun became insolvent and was unable to make payments on claims made against it during its self-insured status. Faeth then brought an action for UM benefits against State Farm. Faeth received a default judgment in the amount of $456,986 against Umthun and Simmons. State Farm asserted that Faeth’s action against it was barred by the two-year suit limitation provision in its policy, which provided as follows:
Suit Against Us
There is no right of action against us:
....
d. under uninsured motor vehicle coverage unless such action is commenced within two years after the date of the accident.
The trial judge found that the suit limitation provision was clear and unambiguous and required a UM claim to be brought within two years of the accident. The court also ruled that State Farm’s UM coverage did not apply to claims against self-insured motor vehicles in any event.
Analysis
On appeal, the Iowa Supreme Court first analyzed potential application of the State Farm policy provision excluding self-insurers from being considered as uninsured motorists to insolvent self-insurers.
The court looked to a New Jersey court’s interpretation of a similar provision which found that policy provisions removing legally sanctioned self-insurers from uninsured status for purposes of uninsured-motorist coverage only apply to solvent self-insured entities. Goodwin v. Rutgers Cas. Ins. Co., 538 A.2d 425 (N.J. Super. 1988). An insolvent self-insurer is neither insured nor financially responsible. There is no reason to conclude that the statute permits a person injured by such an owner to be deprived of UM coverage. Goodwin, 538 A.2d at 427. The Iowa Supreme Court held that if the provision in State Farm’s policy excluding self-insurers from being considered as uninsured motorists were applied to insolvent self-insurers, the policy would not provide the coverage mandated by the Iowa Code.
The Iowa court then considered whether self-insurers who become insolvent after the accident are considered in the same manner as conventional liability insurers under the Iowa Code and concluded that Umthun was the equivalent of an insured motorist at the time of the subject accident. Conversely, when it became insolvent, it then became an uninsured motor vehicle under the Iowa Code.
Although the court previously found that limiting the time to sue to a period of two years following the accident was not unreasonable, it concluded that the insurance protection to be accorded those who claim against uninsured motor vehicles under the Code extends to sanctioned, self-insured vehicles that become insolvent subsequent to the accident and therefore, those claimants must be given a reasonable time after the insolvency occurs within which to bring suit to enforce their UM coverage. The two-year limitation from the date of the accident contained in State Farm’s policy left Faeth with no time to sue following the accrual of his claim. Consequently, that limitation was clearly unreasonable as applied to Faeth’s claim. The Iowa Court held that because the application of the contractual limitation on time to sue contained in State Farm’s policy would serve to extinguish Faeth’s UM claim before it accrued, it was unreasonable and unenforceable.
Learning Point:
American Service Ins. Co. v. Pasalka, 842 N.E.2d 1219 (Ill. App. 1st. Dist. 2006), relied upon Faeth and announced a similar finding. In Pasalka, the policies provided that no demand for arbitration of a UM claim could be made more than two years after an accident. There was no exception made for an insured that could not discover the insolvency of the tortfeasor’s insurer before the two-year limitation has passed. The tortfeasor’s insurance company went into liquidation more than two years after the accident. The court affirmed an insurer’s right to limit its exposure, but stated there was nothing reasonable about a limitation that attempted to defeat the protection mandated by statute. Like Faeth, the Pasalka court found the UM notice of claim provision to be unenforceable under the circumstances.
These cases illustrate how a well drafted policy can be altered from its original intent by a court due to unforeseen circumstances. Both courts affirmed an insurer’s right to include a suit limitation provision but also found that the suit limitation provisions were unenforceable under the circumstances. Despite the drafter’s best effort, knowledge of existing law, and drafting the clause in conformity with existing law, the policies were found to apply under conditions where they were not intended to apply. The law is dynamic and insurers are encouraged to monitor the evolution of the law and implement policy language review procedures in order to craft policy language that conforms to the changing legal landscape. •
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