The standard personal-auto policy offers uninsuredmotorists (UM) coverage to insureds; of course, there areexclusions that limit the scope of the coverage.

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

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

An example of this is Calvert v. Farmers Insurance Companyof Arizona, 697 P.2d 684 (1984) wherein the Arizona SupremeCourt declared: “We hold that the exclusion denying coverage to aninsured injured by an uninsured motorist while the insured isoccupying a vehicle owned by the insured but not listed in thepolicy is invalid as being contrary to the coverage mandated byA.R.S. 20-259.01.” Other examples of rulings that have held theowned-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 InsuranceCompany v. Hinkel, 488 P.2d 1151 (1971).

Restrictions and Arguments
The main thrustbehind the decisions invalidating the exclusion is the belief thatuninsured motorists coverage is there for the protection ofpersons. State law that allows or mandates UM coverage has theintended purpose of providing protection to an insured that hewould have received had he been injured by a financiallyresponsible tortfeasor. As was stated by the Court of Appeals ofTennessee in Shepherd v. Fregozo, 175 S.W.3d 209 (2005),“the exclusion is viewed as a restriction on the intended scope ofuninsured motorists coverage which ordinarily applies regardless ofwhether the insured is injured in an insured vehicle, an unownedvehicle, or on foot.”

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

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

Nationwide v. Hampton, 935 F.2d 578 (1991) is a usefulcase for the debate over the validity of the owned-but-not-insuredexclusion in that it lists the state Supreme Court decisions thathave rejected the exclusion and those that have upheld it. Thiscase is also useful in that it summarizes the rationale behindenforcing the exclusion. The U.S. Court of Appeals, Third Circuit,noted the following points: Insurers should not be forced to assumerisks for which they had not contracted; and, there is a basicinequity in allowing a person who insures one car to obtain a freeride by getting coverage on one, two, or more cars upon which nopremium was paid.

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

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

Regardless of the strengths and weaknesses of the arguments forand 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 courtsthat will determine the scope of uninsured motorists coverage. Aswas stated in Clampit v. State Farm Mutual Auto InsuranceCompany, 828 S.W.2d 593 (1992), the judicial interpretationsof the exclusion are “in a transitional stage.”