Western States Insurance v. Zschau

No. 3--97--0697



IN THE

APPELLATE COURT OF ILLINOIS

SECOND DISTRICT

WESTERN STATES INSURANCE ) Appeal from the Circuit Court
COMPANY, ) of Du Page County.
)
Plaintiff and )
Counterdefendant-Appellee, )
)
v. ) No. 97--MR--116
)
PAUL ZSCHAU, NANCY ZSCHAU, and )
PETER ZSCHAU, )
) Honorable
Defendants and ) Bonnie M. Wheaton,
Counterplaintiffs-Appellants.) Judge, Presiding.

PRESIDING JUSTICE GEIGER delivered the opinion of the court:
The defendants-counterplaintiffs, Paul Zschau, Nancy Zschau,
and Peter Zschau, appeal from the August 20, 1997, order of the
circuit court of Du Page County granting summary judgment in favor
of the plaintiff-counterdefendant, Western States Insurance Company
(Western), on its complaint for declaratory judgment. The trial
court found that Western was not obligated to pay the Zschaus
underinsured motorist benefits under the provisions of their
automobile insurance policy. We affirm.
The facts relevant to the disposition of this appeal are as
follows. Paul and Nancy Zschau are Illinois residents who
purchased a personal automobile insurance policy issued by Western.
The policy provided underinsured motorist coverage limits of
$250,000 per person. The Zschaus son, Peter Zschau, resided in
his parents home and qualified as an additional insured under the
terms of the policy.
On July 12, 1994, Peter Zschau was a passenger in an
automobile owned and operated by Rachel Duever. Peter sustained
injuries when Duever s vehicle was involved in an accident near
Hokah, Minnesota. As a result of the accident, Peter suffered a
herniated disc and fracture requiring fixation and fusion;
gastrointestinal tract and duodenal hematoma injuries requiring
surgery; and a peptic ulcer caused by his medication. Peter s
medical bills totaled over $110,000.
Duever, who was also an Illinois resident, was insured under
a policy issued by Farmers Insurance Company (Farmers). Following
the accident, Farmers paid Duever s full bodily injury liability
limits of $250,000 to Peter Zschau.
Peter then submitted a claim to Western for underinsured
motorist benefits under his parents policy. Because Peter had
already collected benefits in an amount equal to the underinsured
coverage limits of his parents policy, Western denied the claim
and filed the instant action for declaratory judgment on February
27, 1997. In its complaint, Western alleged that its policy did
not provide coverage because Peter s damages did not arise out of
the use of an "underinsured motor vehicle" as defined by the
policy. The relevant policy provision provided as follows:
" 'Underinsured motor vehicle' means a land motor vehicle
or 'trailer' of any type to which a bodily injury liability
bond or policy applies at the time of the accident but its
limit for bodily injury liability is less than the limit of
liability for this coverage."
Such policy language complied with the requirements of the Illinois
Insurance Code. See 215 ILCS 5/143a--2(4) (West 1996).
On May 2, 1997, the Zschaus filed an answer denying the
material allegations of Western s complaint and also filed a
counterclaim for declaratory judgment. In their counterclaim, the
Zschaus alleged that Western was obligated to provide underinsured
motorist coverage under the "out of state" coverage provision
located in the liability coverage section of their policy. That
provision provided as follows:
"OUT OF STATE COVERAGE
If an auto accident to which this policy applies occurs
in any state or province other than the one in which your
covered auto is principally garaged, we will interpret your
policy for that accident as follows.
A. If the state or province has:
1. A financial responsibility or similar law specifying
limits of liability for bodily injury or property damage
higher than the limit shown in the Declarations, your policy
will provide the higher specified limit.
2. A compulsory insurance or similar law requiring a
nonresident to maintain insurance whenever the nonresident
uses a vehicle in that state or province, your policy will
provide at least the required minimum amounts and types of
coverage.
B. No one will be entitled to duplicate payments for the
same elements of loss."
Pursuant to this policy language, the Zschaus alleged that,
because the accident occurred in Minnesota, Western was bound by
the no-fault insurance laws enacted by the Minnesota legislature.
Under Minnesota law, underinsured motorist coverage is an "add-on"
coverage available to compensate an injured person for damages
suffered but not recovered. Minn. Stat. Ann. 65B.43, subd. 17
(West 1997); see also Davis v. American Family Mutual Insurance
Co., 521 N.W.2d 366, 368-69 (Minn. Ct. App. 1994). The Zschaus
therefore alleged that they were entitled to "add on" the
underinsured benefits from their Western policy to those benefits
already recovered from Duever s policy.
On June 27, 1997, Western filed a motion for summary judgment.
In its motion, Western argued that, although the policy did not
contain a choice of law provision, Illinois law was the appropriate
law to be applied to settle the controversy because Illinois was
the state in which the policy was negotiated, issued, and
performed. Western also noted that Illinois was the state in which
the insured s vehicles were registered and principally garaged and
the state where the insureds and tortfeasor resided. Western
concluded that, under Illinois law, the Zschaus were not entitled
to recover under the policy s underinsured motorist provisions
because Peter s injuries did not arise out of the use of an
"underinsured motorist vehicle," as defined in the policy.
Also on June 27, 1997, the Zschaus filed a motion for judgment
on the pleadings. In their motion, the Zschaus alleged that the
"out of state" coverage provision found in the liability coverage
section of the policy operated as a general choice of law provision
and that Minnesota law should therefore be applied to determine
Western s coverage obligations. The Zschaus argued that, under
Minnesota s "add on" underinsured motorist coverage law, they could
stack their underinsured motorist coverage on top of the $250,000
already recovered from Duever s policy.
On August 20, 1997, following a hearing, the trial court
granted Western s motion for summary judgment and denied the
Zschaus motion for judgment on the pleadings. The trial court
found that Illinois law applied, noting that "all of the indicia
for choice of law with the exception of the location of the
accident seem[ed] to point to the application of Illinois law."
The trial court also found that the "out of state" clause in the
liability coverage section of the Western policy was not a choice
of law provision that required application of Minnesota s "add on"
underinsured motorist law. Rather, the trial court found that
Duever s vehicle could not be considered underinsured because Peter
had already recovered benefits matching the underinsured motorist
coverage limits of the Western policy. The Zschaus filed a timely
notice of appeal.
On appeal, the Zschaus argue that the trial court erred in
granting summary judgment on behalf of Western and denying their
motion for judgment on the pleadings. Specifically, they argue
that the trial court erred in failing to recognize the "out of
state" coverage clause as a choice of law provision which required
the application of Minnesota law. The Zschaus therefore contend
that it was improper for the trial court to utilize the significant
contacts analysis to apply Illinois law to the instant case.
Summary judgment is proper if "the pleadings, depositions, and
admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that the
moving party is entitled to a judgment as a matter of law." 735
ILCS 5/2--1005(c) (West 1996). An order granting summary judgment
should be reversed if the judgment was incorrect as a matter of
law, and the standard of review is de novo. Quinton v. Kuffer, 221
Ill. App. 3d 466, 471 (1991). Similarly, on review of a motion for
judgment on the pleadings, the appellate court must determine
whether any genuine issue of material fact exists, and, if not,
whether the prevailing party was indeed entitled to judgment as a
matter of law. See Tim Thompson, Inc. v. Village of Hinsdale, 247
Ill. App. 3d 863, 890 (1993).
The parties to any insurance agreement, as the parties to any
other contract, have the power to contractually define the coverage
protection afforded to the insured party. See Community Unit
School District No. 5 v. Country Mutual Insurance Co., 95 Ill.
App. 3d 272, 275-78 (1981). The terms of an insurance policy must
be read according to their plain and ordinary meaning, and the
court should not search for ambiguity where there is none.
Allstate Insurance Co. v. Smiley, 276 Ill. App. 3d 971, 977 (1995).
If the policy provisions are clear and unambiguous, there is no
need for construction and the provisions will be applied as
written. Smiley, 276 Ill. App. 3d at 977. However, an insurance
policy is not intended to be interpreted in a factual vacuum and
without regard to the purpose for which the insurance policy was
written. Massachusetts Bay Insurance Co. v. Unique Presort
Services, Inc., 287 Ill. App. 3d 741, 744 (1997).
An examination of the language contained in the "out of state"
coverage provision of the instant policy reveals that it was not
intended to be a choice of law provision. Indeed, the provision
contains no language mandating that the policy be interpreted
according to the law of the state where the accident occurred. See
generally Potomac Leasing Co. v. Chuck s Pub, Inc., 156 Ill. App.
3d 755, 758-59 (1987). Rather, the plain language of the "out of
state" coverage provision provides that, in the event an accident
occurs in a state that has a financial responsibility or compulsory
insurance law that requires certain minimal amounts and types of
coverage, Western would provide that coverage to its insured. See
De los Reyes v. Travelers Insurance Cos., 135 Ill. 2d 353, 359
(1990). Contrary to the Zschaus' contentions, we do not believe
that this language was intended as a choice of law provision, but
was instead inserted to ensure that Western s insureds would be in
compliance with the financial responsibility and compulsory
insurance laws of any state in which they drove.
Support for this conclusion can be found in De los Reyes,
where our supreme court considered an "out of state" coverage
provision similar to the provision contained in the Western policy.
De los Reyes, 135 Ill. 2d at 355-56. In that case, an Illinois
resident was injured as a result of an automobile accident in
Indiana. De los Reyes, 135 Ill. 2d at 354. The question on appeal
was whether the insurer was obligated to pay $10,000 in bodily
injury coverage, as specified in the policy, or $25,000 in bodily
injury coverage, as provided under Indiana law. De los Reyes, 135 Ill. 2d at 355-56. In discussing the "out of state" coverage
provisions, the supreme court commented:
"It is apparent in the policy that the purpose of the
provisions is to ensure that with the optional coverage
defendant s insureds are in compliance with the financial
responsibility and compulsory insurance laws of any State in
which they drive. Thus, the reasonable construction of the
policy is that an insured subject to the provisions of the
financial responsibility laws of any State would be provided
coverage up to the minimum amount of required financial
responsibility specified in the statute; similarly, the policy
would provide insurance coverage in the amount required by any
State s compulsory insurance law." De los Reyes, 135 Ill. 2d
at 359.
After examining Indiana law, the supreme court noted that
Indiana s statutory insurance requirements only applied after a
motorist had already been involved in an accident. De los Reyes,
135 Ill. 2d at 356. Because the insured had no accidents prior to
the incident in question, the court held that the Indiana statute
did not apply and that the insurer was not obligated to provide
$25,000 in bodily injury coverage. De los Reyes, 135 Ill. 2d at
360. Although the court noted that the "out of state" provision
required the insurer to provide the minimum amount of coverage
mandated by state law, at no point in its analysis did the court
construe this language as a choice of law provision.
Indeed, our research has uncovered no case in which a court
has interpreted an "out of state" coverage clause similar to the
one herein to be a choice of law provision. As in De los Reyes,
the few courts that have considered such clauses have held that
they simply require the insurer to provide the minimum statutorily
mandated coverage for nonresident drivers required under the laws
of the state in which the accident occurred. See Automobile Club
Inter-Insurance Exchange v. State Farm Mutual Automobile Insurance
Co., 302 Ark. 78, 80, 787 S.W.2d 237, 238 (1990); Government
Employees Insurance Co. v. Fenton, 164 Ariz. 440, 441-42, 793 P.2d 1107, 1108-09 (Ariz. Ct. App. 1989). In applying such provisions,
these courts have therefore limited their inquiry to a
consideration of what minimum coverage must be provided to insureds
to comply with the laws of the states in which they drive. Fenton,
164 Ariz. at 441-42, 793 P.2d at 1108-09. For example, in Fenton,
the court did not require the insurer to provide underinsured
motorist coverage where such coverage was not required of
nonresidents traveling in the state where the accident occurred.
Fenton, 164 Ariz. at 441-42, 793 P.2d at 1108-09. Similarly, in
Automobile Club, the court did not require the insurer to provide
additional uninsured motorist coverage where such coverage was not
mandatory under the law of the state where the accident occurred.
Automobile Club, 302 Ark. at 80, 787 S.W.2d at 238; see also Draper
v. Draper, 115 Idaho 973, 976-77, 772 P.2d 180, 183-84 (1989);
Sotirakis v. United Service Automobile Ass n, 106 Nev. 123, 127-28,
787 P.2d 788, 791-92 (1990).
The sole authority that the Zschaus rely upon in support of
their contention that the "out of state" coverage clause is a
choice of law provision is Motorist Mutual Insurance Co. v. Howard,
110 Ohio App. 3d 709, 675 N.E.2d 51 (1996). In that case, the
question presented was whether an Ohio insurer was obligated to pay
its Ohio insured weekly disability benefits in accordance with the
no-fault motorist laws of Ontario, Canada, for injuries sustained
as a result of an accident that occurred in Ontario. Howard, 110
Ohio App. 3d at 710-11, 675 N.E.2d at 52-53. In holding that the
Ontario no-fault law applied, the court concluded that the plain
language of the "out of state" coverage provision required the
insurer to provide those " 'required minimum amounts and types of
coverages' " needed for lawful vehicular travel within Ontario,
including the obligation to pay weekly disability benefits.
Howard, 110 Ohio App. 3d at 713, 675 N.E.2d at 54.
Contrary to the Zschaus' characterizations, however, a close
reading of Howard reveals that the court did not hold that the "out
of state" coverage clause was a choice of law provision. Nowhere
in the court s opinion is any language requiring the application of
Ontario law, rather than Ohio law, in interpreting the meaning and
effect of the relevant policy language. Rather, the court merely
found that, under the "out of state" coverage provision, the
insurer was obligated to provide the minimum amounts and types of
coverage required for vehicular travel in Ontario. We believe that
such a determination is in harmony with the approach used in those
cases already discussed above. However, to the extent that Howard
may expand the scope of the "out of state" provision beyond this
limited inquiry, we decline to follow it as we believe it to be
contrary to those principles expressed by our supreme court in De
los Reyes.
Additionally, we reject the Zschaus' contention that the "out
of state" coverage clause should be read as a choice of law
provision because its meaning and intended purpose are ambiguous.
The Zschaus fail to provide any pertinent authority for this
contention. We note that none of the courts construing this type
of provision, including De los Reyes, have found the language to be
ambiguous or vague. Rather, each of these courts has found that
the plain language of this provision requires that an insured that
is subject to compulsory financial responsibility laws of another
state must be provided coverage up to the minimum required amount.
See De los Reyes, 135 Ill. 2d at 359; Automobile Club, 302 Ark. at
79-80, 787 S.W.2d at 238.
We therefore turn to a consideration of what coverage Western
was required to provide Peter Zschau in order to comply with
Minnesota s financial responsibility and compulsory insurance laws.
The Minnesota No-Fault Act requires that any automobile insurance
policy issued in Minnesota must include underinsured motorist
benefits. Minn. Stat. Ann. 65B.49, subd. 3a(1) (West 1997). The
Minnesota legislature has also provided for the situation in which
a motor vehicle involved in an accident in Minnesota is insured
under a policy written in another state:
"Subdivision 1. Every insurer licensed to write motor
vehicle accident reparation and liability insurance in this
state shall *** afford at least the minimum security provided
by section 65B.49 to all policy holders, except that in the
case of nonresident policyholders it need only certify that
security is provided with respect to accidents occurring in
this state.
Subdivision 2. Notwithstanding any contrary provision in
it, every contract of liability insurance for injury, wherever
issued, covering obligations arising from ownership,
maintenance, or use of a motor vehicle *** includes basic
economic loss benefit coverages and residual liability
coverages *** while the vehicle is in this state ***." Minn.
Stat. Ann. 65B.50 (West 1997).
The purpose of this statute is to ensure compliance with
Minnesota s no-fault rules by foreign insurers. Hedin v. State
Farm Mutual Automobile Insurance Co., 351 N.W.2d 407, 408 (Minn.
Ct. App. 1984).
In Aguilar v. Texas Farmers Insurance Co., 504 N.W.2d 791
(Minn. Ct. App. 1993), the Minnesota Court of Appeals applied this
statutory provision to a case analogous to the facts present
herein. In that case, a Texas resident was injured in a Minnesota
accident while riding as a passenger in a motor vehicle. Aguilar,
504 N.W.2d at 792. After exhausting the primary liability coverage
on the automobile in which he was riding, the plaintiff sought to
collect underinsured motorist coverage from his own Texas carrier.
Aguilar, 504 N.W.2d at 792-93. As in the instant case, the
plaintiff argued that, under Minnesota law, the underinsured
motorist coverage provided by his Texas policy should be construed
as "add on" coverage and that he was therefore entitled to the full
limits of the underinsured benefits in addition to those payments
he had already received from primary insurance. Aguilar, 504 N.W.2d at 792. The insurer, on the other hand, argued that the
policy required that any underinsured benefits had to be set off by
the primary insurance already received. Aguilar, 504 N.W.2d at
792.
The reviewing court in Aguilar held that the plaintiff was not
entitled to "add on" underinsured motorist coverage, noting that
section 65B.50 did not require out-of-state policies to provide
underinsured motorist coverage to their insureds while their
vehicles are in Minnesota. Aguilar, 504 N.W.2d at 793-94. Rather,
the court held that the statute only required nonresident drivers
to obtain basic economic loss coverage and residual liability
coverage. Aguilar, 504 N.W.2d at 793-94. As the Texas policy
contained all of the statutorily-mandated coverages, the court
concluded that any additional coverages, such as underinsured
motorist protection, were a matter of contract between the parties.
Aguilar, 504 N.W.2d at 794. As the policy provided only
"difference in limits" underinsured coverage, the court refused to
rewrite the contract to require "add on" underinsured coverage.
Aguilar, 504 N.W.2d at 794; see also Hedin, 351 N.W.2d at 409
(insurers licensed to sell insurance in Minnesota not required to
increase amount of uninsured motorist coverage in out-of-state
policies to meet the Minnesota statutory minimum when their
nonresident insureds are involved in Minnesota accidents).
In light of these authorities, we are compelled to conclude
that Minnesota law does not require nonresident automobile owners
to carry uninsured or underinsured motorist coverage while driving
in Minnesota. See Aguilar, 504 N.W.2d at 794. Moreover, we note
that the Zschaus do not contest that their Western policy already
contained all of Minnesota s statutorily mandated coverages for
economic loss benefits and residual liability coverage. As the
Western policy was already in compliance with Minnesota s financial
responsibility and compulsory insurance laws, we do not believe
that the "out of state" coverage provision operates to expand any
of Western s coverage obligations under the policy. See Aguilar,
504 N.W.2d at 794; Fenton, 164 Ariz. at 441-42, 793 P. 2d at 1108-
09.
In the absence of a choice of law provision, we believe that
the trial court properly determined that Illinois law governs the
instant dispute. In order to determine the governing law, Illinois
courts are required to apply Illinois choice of law rules. Society
of Mount Carmel v. National Ben Franklin Insurance Co., 268 Ill.
App. 3d 655, 664 (1994). Included among the factors to be
considered are the location of the subject matter, the place of
contract delivery, the domicile of the insured or the insurer, the
place of the last act giving rise to a valid contract, and the
place of performance. Hofeld v. Nationwide Life Insurance Co., 59 Ill. 2d 522, 528 (1975). Unless some other state has a more
significant relationship to the transaction, an automobile policy
will be governed by the law of the state where the car was intended
to be principally located, even if the car is occasionally located
elsewhere. Allen v. State Farm Mutual Automobile Insurance Co.,
214 Ill. App. 3d 729, 738 (1991). Here, there is no real dispute
that most of these factors point to Illinois as the appropriate
governing law.
The parties agree that, as written, the Western policy does
not provide "add on" underinsured motorist coverage. Moreover, the
parties agree that such a policy provision is in harmony with the
Illinois Insurance Code. 215 ILCS 5/143a--2(4) (West 1996). As
underinsured motorist coverage is not required for nonresident
drivers in Minnesota, the nature of such coverage was a matter of
contract between the parties. Aguilar, 504 N.W.2d at 794. In the
Western policy, the contract clearly calls for "difference in
limits" underinsured coverage. As Peter Zschau has already
received benefits under Duever s policy equaling the underinsured
limits of the Western policy, we believe the trial court properly
determined that Peter s damages did not arise out of the use of an
"underinsured motor vehicle" and therefore conclude that Western
was entitled to summary judgment on its complaint for declaratory
judgment.
For the foregoing reasons, the judgment of the circuit court
of Du Page County is affirmed.
Affirmed.
THOMAS and RATHJE, JJ., concur.