McArthur v. State Farm Mutual Automobile Insurance Co.
2012 UT 22
Utah2012Background
- McArthur injured in auto collision and sued in federal court for UIM benefits under State Farm policy.
- McArthur settled tortfeasor’s liability with $90,000 of $100,000 policy limit; $10,000 shortfall.
- State Farm denied UIM coverage, claiming exhaustion of tortfeasor’s policy limits is required before UIM payment.
- District court granted summary judgment for State Farm, upholding the exhaustion clause as valid under Utah law.
- Tenth Circuit certified two Utah questions: public policy enforceability of exhaustion clauses and prejudice requirement, if any.
- Utah Supreme Court held exhaustion clauses are generally enforceable and are conditions precedent not covenants; no prejudice showing required.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are UIM exhaustion clauses generally unenforceable under public policy? | McArthur argues exhaustion clauses are void as public policy. | State Farm argues exhaustion clauses are consistent with statutory scheme and enforceable. | Not generally unenforceable; enforceable under Utah law. |
| Are exhaustion provisions governed as covenants requiring prejudice analysis, or as conditions precedent? | McArthur contends prejudicial breach governs coverage per Green. | State Farm contends exhaustion is a condition precedent, not a breach requiring prejudice. | Exhaustion is a condition precedent; no prejudice required. |
Key Cases Cited
- Green v. State Farm Mut. Auto. Ins. Co., 89 P.3d 97 (Utah 2003) (consent-to-settle clause treated as covenant; prejudice needed for denial of coverage)
- Augustine v. Simonson, 940 P.2d 116 (Mont. 1997) (exhaustion clauses void where public policy to promote settlement)
- Mann v. Farmers Ins. Exch., 836 P.2d 620 (Nev. 1992) (exhaustion/public policy balancing in Nevada leading to constructive exhaustion concept)
- In re Rucker, 442 N.W.2d 113 (Iowa 1989) (constructive exhaustion balancing settlement and insurer interests)
- Horace Mann Ins. Co. v. Adkins, 599 S.E.2d 720 (W. Va. 2004) (exhaustion doctrine balancing insured's settlement and insurer's indemnification)