The standard personal-auto policy offers uninsured motorists (UM) coverage to insureds; of course, there are exclusions that limit the scope of the coverage.

One of the more troublesome exclusions is one that states the insurer will not provide UM coverage for bodily injury sustained “by an insured while occupying, or when struck by, any motor vehicle owned by that insured which is not insured for this coverage under this policy.”

This exclusion—better known as the “owned-but-not-insured” exclusion—seems straightforward enough. If an insured is driving to the store in his 2012 Chevy and is hit by an uninsured motorist, then that insured cannot claim UM coverage for his bodily injuries under his auto policy if he has not purchased that particular coverage for the 2012 Chevy. However, as with most insurance policy language, the owned-but-not-insured exclusion is subject to judicial interpretation which can render the exclusion void and useless.

An example of this is Calvert v. Farmers Insurance Company of Arizona, 697 P.2d 684 (1984) wherein the Arizona Supreme Court declared: “We hold that the exclusion denying coverage to an insured injured by an uninsured motorist while the insured is occupying a vehicle owned by the insured but not listed in the policy is invalid as being contrary to the coverage mandated by A.R.S. 20-259.01.” Other examples of rulings that have held the owned-but-not-insured exclusion to be unenforceable are: Kau v. State Farm Mutual Automobile Insurance Company, 564 P.2d 443 (1977); Kaufmann v. Economy Fire & Casualty Company, 368 N.E. 371 (1977); and State Farm Mutual Automobile Insurance Company v. Hinkel, 488 P.2d 1151 (1971).

Restrictions and Arguments
The main thrust behind the decisions invalidating the exclusion is the belief that uninsured motorists coverage is there for the protection of persons. State law that allows or mandates UM coverage has the intended purpose of providing protection to an insured that he would have received had he been injured by a financially responsible tortfeasor. As was stated by the Court of Appeals of Tennessee in Shepherd v. Fregozo, 175 S.W.3d 209 (2005), “the exclusion is viewed as a restriction on the intended scope of uninsured motorists coverage which ordinarily applies regardless of whether the insured is injured in an insured vehicle, an unowned vehicle, or on foot.”

Add to this argument the fact that if state law mandates UM coverage for its citizens, public policy would be violated if an exclusion on the auto policy were allowed to circumvent the intent of the state legislature. So, it is easy to see why some courts are not eager to enforce the owned-but-not-insured exclusion. Of course, on the other hand, there are courts that do not flinch when it comes to upholding the exclusion as simply a reasonable, contractual limitation on insurance coverage offered by an insurer.

In Clark v. State Farm Mutual Automobile Insurance Company, 743 P.2d 1227 (1987), the Utah Supreme Court noted that the insured and the insurer freely entered into a contract to exclude coverage in the owned-but-not-insured vehicle situation. The court saw no intent on the part of the state legislature to allow an individual to purchase insurance on one vehicle and then, in effect, get coverage on all of his or her vehicles. And, as was stated in Anderson v. American Economy Insurance Company, 719 P.2d 1345 (1986), “to permit recovery otherwise would result in a free-ride for some multiple vehicle owners and would force insurers to provide gratuitous coverage while incurring additional risk”—additional risk that was not considered when it came to establishing a premium.

Nationwide v. Hampton, 935 F.2d 578 (1991) is a useful case for the debate over the validity of the owned-but-not-insured exclusion in that it lists the state Supreme Court decisions that have rejected the exclusion and those that have upheld it. This case is also useful in that it summarizes the rationale behind enforcing the exclusion. The U.S. Court of Appeals, Third Circuit, noted the following points: Insurers should not be forced to assume risks for which they had not contracted; and, there is a basic inequity in allowing a person who insures one car to obtain a free ride by getting coverage on one, two, or more cars upon which no premium was paid.

Managing Risk
The arguments on both sides of the issue are solid, and both sides have their weaknesses. It is true that UM coverage is for the protection of persons, but both liability coverage and med pay coverage are for the protection of persons also, and yet both coverages have exclusions designed to limit that protection. The same goes for the public-policy idea. It is proper for the state to mandate UM coverage, just as it is proper for the state to mandate auto liability coverage, but the liability coverage is limited by exclusions. Why can't UM coverage also be limited by exclusions?

On the other hand, it is true that insurers should not be forced to assume risks for which they had not contracted and of which they had no knowledge. However, it is the responsibility of the insurer to set a premium in accordance with the risks involved, and any capable insurer should certainly be aware of the risks involved with UM coverage. And as for the basic inequity of a free ride, again, the insurer should have the ability to charge an adequate premium and does have the responsibility to know its insureds and the exposures presented by those insureds.

Regardless of the strengths and weaknesses of the arguments for and against the validity of the owned-but-not-insured exclusion, there is a basic truth that insureds and insurers should realize: In the end, it is how the exclusion is interpreted by the courts that will determine the scope of uninsured motorists coverage. As was stated in Clampit v. State Farm Mutual Auto Insurance Company, 828 S.W.2d 593 (1992), the judicial interpretations of the exclusion are “in a transitional stage.”

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Judicial Interpretations of &lsquo;Owned-But-Not-Insured&rsquo;

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