6.16 Household Exclusions

• Jurisdiction: Arizona

Many standard personal automobile liability policies contain a "household exclusion." The terms of the exclusion preclude bodily injury coverage to any insured or "any member of the family of an insured residing in the same household as the insured." There are various permutations of this exclusionary language used within the insurance industry. This type of exclusion is invalid in Arizona to the extent that it precludes recovery of the minimum financial responsibility act limits of $15,000 per person and $30,000 per accident required by A.R.S. Sec. 28-4009. However, the exclusion is valid and enforceable above the financial responsibility act minimum coverage limits provided that the insurance company appropriately formats its policy to provide notice of the exclusion/coverage reduction clause.

The first case to address the validity of a "household exclusion" clause in an automobile insurance policy was Stevens v. State Farm Mutual Automobile Insurance Co.^[228]In Stevens, an infant sued his mother for injuries sustained in an automobile accident which was caused by the mother's negligence. The insurance company asserted the "household exclusion" as a coverage defense. The insured argued that the "household exclusion" clause, when applied to persons other than the named insured, should be deemed void as being in contravention of Arizona's Financial Responsibility Act. The court agreed, citing numerous Arizona cases for the proposition that "exclusions in automobile insurance policies which attempt to prohibit recovery under a policy to injured third parties are void."^[229]

The holding in Stevens was followed by the Arizona Supreme Court in Arceneaux v. State Farm Mutual Automobile Insurance Co.,^[230] where the court found that a homeowner's exclusionary clause was invalid because it did not provide for the $15,000 per person coverage required by Arizona's Financial Responsibility Act. However, the court held that the exclusion was enforceable to the extent the policy's liability limits exceeded $15,000. The court in Arceneaux noted that the Stevens case did not concern itself with the issue of whether, in light of the "household exclusion," the injured party would be entitled to receive more than the amount provided under the act, if policy limits exceeded that amount. The court accepted the insurance company's argument that the household exclusion should be given effect above the minimum level of insurance required by the statute. Stated differently, the exclusion should not operate to preclude coverage up to the amount required by Arizona's Financial Responsibility Act of $15,000 per person and $30,000 per accident coverage. Above that amount, however, the parties were free to contract as they saw fit and the exclusion should be given effect.

The Arizona Court of Appeals directly addressed the enforceability of a household exclusion 12 years later in State Farm Mutual Automobile Insurance Co. v. Dimmer.^[231] In that case, the plaintiff was injured in a motor vehicle accident that resulted from her husband's negligence. Eventually, the wife filed an action seeking recovery from her injuries. The policy at issue contained an exclusion, which provided: "There is no coverage . . . for any bodily injury to . . . any insured other than you or any family member of an insured residing in the same household as the insured." Initially, the insured contended that all household exclusions should be deemed void as violative of Arizona's public policy. The court rejected that position, but did acknowledge that all such provisions are void insofar as they are inconsistent with the act. Thus, ultimately, the court in Dimmer found that the insured would be entitled to coverage up to the statutory minimum, and that further analysis would be necessary to determine the effect of the household exclusion above the minimum...