In an Arizona Supreme Court decision published today, State Farm v. Orlando, the Court considered “whether Arizona law requires an insurer to provide coverage under a UIM policy for an accident involving all-terrain vehicles (“ATVs”) that did not occur on a public road.” The Court held that Arizona law does not require coverage for accidents involving ATVs which are not on public roads and reaffirmed the right of insurers to preclude such coverage under an underinsured motorist (“UIM”) policy. This decision vacated the Arizona Court of Appeals’ ruling and affirmed the trial court’s grant of summary judgment in favor of State Farm.
The lawsuit arose out of an ATV accident where a passenger—Jacey Lee Orlando—seriously injured her leg. Although the driver’s insurer paid Ms. Orlando the applicable liability policy limits, the amount was insufficient to cover her injuries. Subsequently, Ms. Orlando made a UIM claim with her insurer, State Farm. Ms. Orlando’s UIM policy excluded land vehicles “designed for use primarily off public roads except while on public roads” from the definition of “underinsured motor vehicle.” Thus, State Farm denied coverage on the basis that the ATV was not an “underinsured motor vehicle” under the policy. State Farm invited Ms. Orlando to provide information to support an alternative conclusion, but she did not respond. Thereafter, State Farm filed an action for declaratory relief seeking a ruling that the UIM policy did not provide coverage for the ATV accident, and Ms. Orlando counterclaimed for breach of contract and bad faith
In the trial court declaratory action, State Farm moved for summary judgment on the ground that the ATV did not meet the UIM policy’s definition of “underinsured motor vehicle,” relying on prior case law upholding “nearly identical exclusions” under uninsured motorist (“UM”) policies. In response, Ms. Orlando argued that State Farm’s reliance on the “nearly identical” exclusions was misplaced because the case involved a UIM policy and “[UM] and [UIM] coverages are separate and distinct.” Furthermore, she contended that State Farm’s exclusion was void because it was not permitted under Arizona statutes and was, therefore, contrary to public policy. The trial court rejected Ms. Orlando’s arguments and granted State Farm’s motion for summary judgment, holding that State Farm’s exclusions were not void under Arizona law. In doing so, the court relied on the aforementioned case law regarding exclusions under UM policies and extended the same reasoning to UIM policies. Ms. Orlando appealed.
On appeal, the Arizona Court of Appeals reversed the grant of summary judgment in favor of State Farm, holding that Arizona’s Uninsured/Underinsured Motorist Act (“UMA”) did not permit excluding coverage for the ATV accident. In reaching this conclusion, the appellate court relied on “unambiguous and ‘notable differences’ between the text of the UM and UIM provisions” of the relevant statute. These differences included the fact that per the statute, UM coverage is explicitly “subject to the terms and conditions of that coverage,” whereas UIM coverage contains no such limitation. Additionally, UM coverage applies to accidents involving a “motor vehicle,” while UIM coverage applies broadly to “accidents” without referencing motor vehicles. Furthermore, the Court of Appeals concluded that the case law relied upon by State Farm—permitting exclusions under UM policies—was inapplicable to the present case.
In the unanimous Supreme Court opinion, Justice Montgomery began by analyzing Arizona’s statutory scheme for motor vehicle insurance coverage. The Court noted the function of the UMA as a “gap filler” for Arizona’s Financial Responsibility Act (“FRA”) and recognized the shared purpose of both statutes—to protect persons from financially irresponsible or inadequately insured motorists. Additionally, the Court explained that—despite frequent references to “motor vehicle” within the UMA—it does not actually provide a definition. The FRA, however, does define “motor vehicle.” Because the Court found that the statutes are “of the same subject or general purpose,” it concluded that they should be interpreted together as though they were one law, and that the FRA’s definition of “motor vehicle” could be used to supplement the UMA. Accordingly, the Court held that, under the UMA, State Farm would only be required “to provide coverage under Orlando’s UIM policy if the ATV is a ‘motor vehicle’ that the FRA requires to be insured.”
After analyzing the FRA, the Arizona Supreme Court concluded that a “motor vehicle” is defined as “‘a self-propelled vehicle’ that is ‘operated on a highway’ and does not include an ‘[a]ll-terrain vehicle or off-road recreational motor vehicle operating’ off-road.” Applying this definition, the Court held that UIM coverage for an off-road ATV accident is therefore neither required nor prohibited under the UMA. As such, UIM coverage for ATVs involved in accidents not on public roads is a matter of contract, and the State Farm policy’s definition of “underinsured motor vehicle” was permissible under Arizona law. Thus, the Court vacated the portions of the Court of Appeals’ decision addressing the breach of contract claim and affirmed the trial court's entry of summary judgment in favor of State Farm.
With this decision, the Arizona Supreme Court has made clear that insurers operating within the state may permissibly exclude all-terrain or off-road recreational motor vehicles operating off-road from UIM coverage. The Court has left this issue as a matter of contract; thus, insurers should ensure that such exclusions are clearly stated within their policies.