Farmland Insurance Companies of Des Moines v. Heitmann

498 N.W.2d 620, 1993 S.D. LEXIS 30, 1993 WL 103419

• Court: South Dakota Supreme Court
• Decided: April 7, 1993
• Docket: 17854
• Status: Published

Opinions

WUEST, Justice.

This is an appeal from summary judgment granted to Farmland Insurance Co. concerning its obligation to pay underin-sured motorist benefits for the death of Laura Heitmann. We affirm.

FACTS

The facts in this case are not in dispute. On August 24, 1990, decedent Laura Heit-mann was riding her bicycle when she was struck and killed by a pick-up truck driven by Terrance Hornseth (Hornseth) and owned by Gary Greseth (Greseth). Horn-seth was drunk at the time; he later pled guilty to vehicular homicide in the accident.

At the time of the accident, Hornseth carried liability insurance with a per person limit of $25,000 with Viking Insurance Company and Greseth carried liability insurance with a per person limit of $100,000 with Horace Mann Insurance Company. Laura Heitmann and her husband, Nicholas, carried automobile liability insurance which included a $100,000 per person limit of underinsured motorist coverage (UIM), with Farmland Insurance Companies of Des Moines, Iowa (Farmland). Nicholas Heitmann (Heitmann) has neither demanded nor received payment under the liability policies-of Hornseth or Greseth.¹

Farmland failed to issue its standard UIM limiting endorsement with the Heit-mann’s policy. The missing endorsement would have limited the available UIM coverage to the difference between the UIM policy limits and all other applicable insurance. Claiming damages sustained as a result of Laura’s death exceeded the amounts available under the applicable liability policies, Heitmann demanded payment of the $100,000 UIM from Farmland.

Farmland denied payment and brought a declaratory judgment action to determine its obligations to its insured. The trial court determined the terms of the insurance policy issued to the Heitmanns provided UIM coverage for uncompensated damages up to the $100,000 limit. The court then found SDCL 58-11-9.5 (1990) limited Heitmann’s recovery to the difference between the policy limits and the amount recovered from any tort-feasors and it granted summary judgment to Farmland.

Heitmann appeals; we address the following issue:

WHETHER SDCL 58-11-9.5 OPERATES TO LIMIT UNDERINSURED MOTORIST COVERAGE TO THE DIFFERENCE BETWEEN THE POLICY LIMITS AND THE AMOUNT RECOVERED FROM THE TORT-FEASOR.

Summary judgment will be affirmed only if there are no genuine issues of material fact and the trial court has correctly decided the legal issues before it. Stroh v. Town of Java, 463 N.W.2d 923 (S.D.1990); Bego v. Gordon, 407 N.W.2d 801 (S.D.1987); Trapp v. Madera Pacific, Inc., 390 N.W.2d 558 (S.D.1986). There is no dispute as to the facts in this case. Consequently, we review to determine the correctness of the trial court’s application of the law. Construction of a statute is a question of law. Vellinga v. Vellinga, 442 N.W.2d 472 (S.D.1989); Nash Finch Co. v. South Dakota Dep’t of Revenue, 312 N.W.2d 470 (S.D.1981). Review of the trial court’s order granting summary judgment will be affirmed if any basis exists which supports the ruling. Trapp, 390 N.W.2d at 562; Uken v. Sloat, 296 N.W.2d 540 (S.D.1980).

I.

Farmland argues the missing endorsement imposed the obligation to pay UIM benefits and, without the endorsement, the duty to pay benefits must be imposed by statute. Heitmann argues the terms of the policy issued impose an obligation to pay UIM benefits without the endorsement so there is no need to impose a duty to pay through use of the statute.

The trial court was correct in finding the policy issued by Farmland provided coverage up to “the full amount the insured is legally entitled to recover as damages,” capped only by the $100,000 policy limit. The policy issued to the Heitmanns states on the cover page “[tjhese policy provisions with the declarations page and endorsements, if any, issued to form a part thereof, complete this policy.” (Emphasis added.) Part B of the declarations page states clearly “insurance is provided where a premium is shown for the coverage.” Directly underneath is printed a charge for underin-sured coverage of $100,000 per person, $300,000 per accident. Another provision in the contract defines an “underinsured motor vehicle.”

“Underinsured motor vehicle” means a land motor vehicle or trailer of any type to which a bodily injury liability bond or policy applies at the time of the accident but the amount paid for “bodily injury” under that bond or policy to an “insured” is not enough to pay the full amount the insured is legally entitled to recover as damages.

This completes the policy’s reference to underinsured coverage. The trial court correctly refused to consider the missing endorsement as part of the policy. The policy as issued provided $100,000 UIM without any limitations.

Farmland next claims since South Dakota statutes are automatically incorporated into insurance contracts, SDCL 58-11-9.5 operates to limit UIM to the difference between the UIM policy limits less the amount available from the tort-feasors. Heitmann argues if the statute applies, the first sentence of the statute allows the terms of the insurance contract to extend broader coverage than required by law. Thus, Heitmann’s UIM coverage would be subject to the terms of the insurance policy, not the lesser coverage imposed by statute.

SDCL 58-11-9.5 provides:

Subject to the terms and conditions of such underinsured motorist coverage, the insurance company agrees to pay its own insured for uncompensated damages as its insured may recover on account of bodily injury or death arising out of an automobile accident because the judgment recovered against the owner of the other vehicle exceeds the policy limits thereon. Coverage shall be limited to the underinsured motorist coverage limits on the vehicle of the party recovering less the amount paid by the liability insurer of the party recovered against.

A.

First, we decide whether the statute is applicable to this policy. Farmland relies on the “general rule” that statutes in effect at the issuance of the policy become part of the policy itself. Farmland, citing Alexander and Epiphany, asserts South Dakota law follows the “general rule” and requires existing statutes to be read into an insurance policy as if they were express provisions. Alexander v. Home Ins. Co., 53 S.D. 305, 308, 220 N.W. 525, 526 (1928); Epiphany Roman Catholic Church v. German Ins. Co., 16 S.D. 17, 20, 91 N.W. 332, 333 (1902).

Heitmann asserts there is an exception to this general rule when the policy is more favorable to the insured. “An exception is made to the rule that the statute prevails over the terms of the contract where the provision of the policy which conflicts with the statute is more favorable to the insured. In such case the policy provision prevails and is enforced.” Couch on Insurance 2d (Rev. ed.) § 13:8. Further, Heit-mann distinguishes the South Dakota cases of Alexander and Epiphany as both cases enlarged, not reduced, the scope of protection for the insured. Alexander, 53 S.D. at 310, 220 N.W. at 526; Epiphany, 16 S.D. at 23, 91 N.W. at 332.

The trial court determined “contracts cannot change statutory law” and found the weight of authority followed the “general rule.” Couch on Insurance 2d (Rev. ed.) § 13:7; 43 Am.Jur.2d, Insurance, § 256. The trial court, citing Alexander and Epiphany, held, “[i]n South Dakota insurance statutes in force at the time an insurance contract is entered into become a part of the contract as if the statute had been incorporated into the policy its.elf.”

We agree with the trial court and the greater weight of authority. “As a general rule, stipulations in a contract of insurance in conflict with, or repugnant to, statutory provisions which are applicable to, and consequently form a part of, the contract, must yield to the statute, and are invalid, since contracts cannot change existing statutory laws.” Couch on Insurance 2d (Rev ed) § 13:7. “Where such statutes exist, their provisions become mandatory unless expressly rejected as provided by law.... One must consider the legislative intent and statutory purpose, and its definitions will prevail over those of a policy.” 8C Appleman, Insurance Law and Practice § 5067.35 (1981).

The determinative factor in South Dakota is the apparent intent of our state legislature. Union Ins. Co. v. Stanage, 454 N.W.2d 736, 739 (S.D.1990). By passing SDCL 58-11-9, which requires UIM insurance, the legislature clearly sought to protect insured motorists from underin-sured motorists. Id. However, modifications of this statute show a legislative determination that UIM coverage may be limited. See SDCL §§ 58-11-9.6 thru 58-11-9.9. Only policy provisions not inconsistent with chapter 58 may be included in insurance policies.² Chapter 58 governs policies omitting required conditions or containing provisions inconsistent with the chapter.³ Further, where the legislature intended to allow contractual deviations from chapter 58, it has used discretionary language or expressly stated exceptions.⁴ We hold SDCL 58-11-9.5 applies to UIM policies sold in South Dakota.

B.

We now address Heitmann’s contention that if SDCL 58-11-9.5 applies, the first sentence allows parties to contract for broader coverage than the statute requires. In reviewing statutes, this court will construe them according to their plain and ordinary meaning. Cimarron Ins. Co. v. Croyle, 479 N.W.2d 881, 886 (S.D.1992); Appeal of AT & T Information Systems, 405 N.W.2d 24, 27 (S.D.1987); Oahe Conservancy Subdistrict v. Janklow, 308 N.W.2d 559, 561 (S.D.1981). It is a fundamental rule of statutory construction that a statute must be read as a whole and effect given to all its provisions. Beitelspacher v. Winther, 447 N.W.2d 347, 351 (S.D.1989); Hartpence v. Youth Forestry Camp, 325 N.W.2d 292, 295 (S.D.1982); State v. Heisinger, 252 N.W.2d 899, 903 (S.D.1977).

The question in construing SDCL 58-11-9.5 is whether the modifying clause “[s]ub-ject to the terms and conditions of such underinsured motorist coverage” applies only to the sentence in which it appears or to the entire statute. “It is a general rule of statutory construction that modifying phrases or clauses should be referred to the word, phrase, or clause with which they are grammatically connected.” EEOC v. Brotherhood of Painters, 384 F.Supp. 1264, 1266 (D.S.D.1974) (citing M’Clurg v. Kingsland, 42 U.S. (1 How.) 202, 11 L.Ed. 102 (1843)); Cf. Kaberna v. School Bd. of Lead-Deadwood, 438 N.W.2d 542, 543 (S.D.1989). Here, the phrase allowing contractual modification appears only in the first sentence of the statute. To accept Heitmann’s argument, apply the modification language to the entire statute, and allow contractual modification would make the coverage limits imposed by the statute meaningless and render the second sentence surplusage.

Further, the word “shall” in the second sentence is mandatory, not discretionary, language. Helmbolt v. LeMars Mut. Ins. Co., Inc., 404 N.W.2d 55, 59 (S.D.1987); Cf. State v. Bunnell, 324 N.W.2d 418, 420 (S.D.1982); Stephens v. Jones, 24 S.D. 97, 100-01, 123 N.W. 705, 707 (1909). This court assumes “statutes mean what they say and that legislators have said what they meant.” In re Famous Brands, Inc., 347 N.W.2d 882, 885 (S.D.1984) (citing Crescent Electric Supply Co. v. Nerison, 89 S.D. 203, 210, 232 N.W.2d 76, 80 (1975)). If the legislature had intended UIM coverage limits to be subject to contractual terms, it could have used the discretionary “may” instead of the mandatory “shall.”

The clear intent of the legislature was to limit the amount recovered under UIM without any exceptions by contract. This court must construe the law as it finds it, whatever its opinion as to the wisdom of the legislation. Famous Brands, 347 N.W.2d at 884. We hold that coverage is limited to the difference between the un-derinsured motorist coverage limits on the vehicle of the insured less the amount paid by the liability insurer of the uhderinsured motorist.

C.

Heitmann argues that even if SDCL 58-11-9.5 applies, Farmland cannot apply any offset until damages are actually paid by the tort-feasor or his liability insurance.

SDCL 58-11-9.5 is a difference of the limits statute. It clearly limits the insured’s UIM recovery to the difference between the UIM policy limits less the amount paid by the liability insurer of the tort-feasor. Here, the combined liability coverage of the Horace Mann policy and the Viking policy is $125,000. Heitmann’s Farmland policy provides $100,000 in UIM coverage. Where the liability insurance of the tort-feasor exceeds UIM limits, there is no UIM recovery.

This court has never determined a specific time when the UIM offset may be applied. In Helmbolt, this court found a judgment of liability was not a precondition to any payment under a UIM policy. Helmbolt, 404 N.W.2d at 59-60 (judgment of liability not a prerequisite to insurers good faith duty to settle underinsured claim). To encourage pre-trial settlement, we deliberately left open the question of when offset may be applied. “Thus, the avenue for settlement of these cases out of court remains open. Helmbolt, 404 N.W.2d at 59.

We agree with the reasoning of the Minnesota Supreme Court in interpreting its difference of the limits statute:

In summary, then,- the amount recoverable under UIM coverage is not a matter of timing; the limit of UIM coverage is not dependent on whether the UIM claim is made before or after the UIM insured has disposed of his or her claim against the tortfeasor. We hold that the maximum liability of the insurer with respect to underinsured motorist coverage is the lesser of the difference between the limits of UIM coverage set out in the policy declarations or schedules and the amount which has been paid or will be paid to the insured by or for the tortfeasor or tort-feasors, or the amount of damages sustained but not recovered.

Broton v. Western National Mutual Insurance Company, 428 N.W.2d 85, 90 (Minn.1988).

Thus, the issue is not a matter of timing but a question of whether UIM coverage is available. Here, the liability insurance proceeds available from the tort-feasor exceed the UIM policy limits. Until the Heit-manns show the liability insurance proceeds are less than $100,000, there is no UIM available.

II.

Heitmann claims prejudgment interest under SDCL 21-1-11 and attorneys fees and costs under SDCL 58-12-3, claiming Farmland’s conduct was vexatious and without reasonable cause. As this case is before us on an appeal from summary judgment, there are no findings of fact from the trial court below. As counsel for both parties agreed at oral argument, the above issues cannot be decided by this court when there are no factual determinations from the trial court below.

We affirm the trial court’s grant of summary judgment.

SABERS, J., concurs. AMUNDSON, J., concurs specially. MILLER, C.J., and HENDERSON, J., dissent.

1 . We note an auto claim data sheet of Horace Mann Insurance alleges the Montana licensed vehicle was stored in South Dakota, was taken by a relative of Greseth's and was being driven without permission by a friend of the relative when Laura Heitmann was killed.

2 . SDCL 58-11-10 provides:

A policy may contain additional lawful provisions not inconsistent with this title, subject to the director’s approval.

3 . SDCL 58-11-38 provides:

Any insurance policy, rider, or endorsement issued after June 30, 1966 and otherwise valid which contains any condition, omission or provision not in compliance with the requirements of this title, shall not be thereby rendered invalid but shall be construed and applied in accordance with such conditions and provisions as would have applied had such policy, rider, or endorsement been in full compliance with this title.

4 .SDCL 58-11-9.3 provides:

An insurance policy covering a private passenger automobile or other motor vehicle registered or principally garaged in this state may by written agreement with the named insured exclude a named individual from coverage or contain a restrictive endorsement reducing the limits of liability or collision coverage when the vehicle is operated by a named person or class of persons, provided, however, that the liability coverage may not be less than the minimum prescribed by chapter 32-35 as amended.