6.7.2 Named Insureds

• Jurisdiction: Arizona

The Arizona courts have considered the validity of coverage reduction clauses directed at named insureds in two principle contexts: (1) household exclusions^[129] and (2) rental car coverage.^[130]

The supreme court recently discussed the enforceability of a household exclusion in Averett v. Farmers Insurance Co. of Arizona.^[131] The facts before the court in Averett established that the insured told the agent that he asked for, and believed he had, "full coverage." The insured further testified that he never discussed the policy provisions with the agent, and that he did not receive a copy of the policy. Based on this testimony, the court concluded that sufficient evidence existed to present the insured's "reasonable expectations" of coverage to a jury. In so holding, the court stated:

Our decision should not be read to mean that a household exclusion is unenforceable under all circumstances. As Arceneaux makes clear, the insurance company and its insured may agree to this exclusion with respect to losses above the statutorily required minimum amounts of coverage. But such a limitation must be intended and agreed to, not merely imposed upon an unwitting customer. When an exclusion, limitation or escape clause runs contrary to what a reasonable insured would expect, or when it significantly diminishes coverage that the policy purports on its face to provide, the surrounding facts and circumstances must be considered to determine whether, and to what extent, there was a meeting of the minds between the contracting parties.^[132]

Thus, whether the household exclusion reducing coverage is enforceable requires a fact-intensive inquiry. The analysis will focus primarily upon policy formatting (notice of the clause) and clarity, as well as the circumstances surrounding the policy acquisition.^[133]

In State Farm Mutual Automobile Insurance Co. v. Bogart,^[134] the supreme court expressed its concern about policy provisions that reduce coverage to FRA minimums when larger coverage amounts are otherwise stated in the policy. The court in Bogart considered a situation where the standardized rental car exclusion eviscerated the non-standard terms of the policy, i.e., the declarations page coverage limit. In Bogart, the "dickered deal" memorialized in the policy declarations page was the purchase of owned and non-owned automobile liability coverage with limits of $100,000 per person/$300,000 per accident for bodily injury claims. However, the policy contained a clause that reduced coverage to $15,000, the minimum statutory coverage limit, whenever the insured drove a rented car. Reviewing the facts before it, the court stated:

. . . [W]e believe that it [is] quite clear that the clause in question also significantly modifies the "dickered deal" and could even be found unconscionable. The "dickered deal" was to buy $100,000/300,000 in owned and non-owned auto coverage. Most informed policyholders would be shocked to discover that the substantial protection which they had purchased was reduced to the $15,000 minimum statutory coverage whenever they drove a rented car. Such an eventuality is certainly one that should be clearly called to the attention of the insured.^[135]

The importance of having the reduced limits identified in the policy declarations page cannot be overstated. The policy declarations page has specific stated limits and represents the "dickered deal," while the coverage reduction clause, which is usually buried within the main body of the policy, reduces the limits of coverage stated on the declarations page. This is a classic set-up for a reasonable expectation challenge, because policy boilerplate eviscerates the coverage the insured expects from the declarations page. When this type of evisceration of stated coverage occurs, the Arizona courts require that the exclusion or limiting language be clearly called to the insured's attention, and failure to do so will be contrary to the reasonable expectations of the typical insured.^[136] Where the declarations page of the policy references the coverage reduction, then the boilerplate clause, by definition, cannot eviscerate coverage because the clause becomes part of the "dickered deal." If the coverage reduction clause itself is not clear, it will not be enforceable.^[137]

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Notes:

[129]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.,21 Ariz. App. 392, 519 P.2d 1157 (1974). In Stevens, an infant sued his mother for injuries sustained in an automobile accident 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, is void as being in contravention of the FRA. The court agreed, citing numerous Arizona cases for the...