Introduction

The Arizona Appellate Courts issued two critical rulings in 2023 to clarify Arizona law on underinsured motorist (UIM) and uninsured motorist (UM) coverage. As explained below, the cases highlight that insurance carriers must be vigilant in expressly limiting “stacking” of coverages where multiple vehicles are insured under one policy by complying with the requirements of A.R.S. §20-259.01, or risk paying additional benefits under the policy for the failure to strictly comply with the Arizona statute and its notice requirement to insureds. Additionally, insurance carriers are prohibited from attempting to limit UIM coverage through policy language or in any way not expressly authorised by the statute. These cases recognise a trend by the Arizona courts to provide more protection to insureds, even when such coverage was not necessarily contemplated by or negotiated between the parties to the insurance contract.

Case 1: Arizona Insurers Must Comply With Strict Requirements to Prevent Intra-policy Stacking of Underinsured Motorist Coverage

On 28 July 2023, the Arizona Supreme Court issued its Opinion in Franklin v. CSAA Gen. Ins. Co., 255 Ariz. 409, 532 P.3d 1145 (2023), holding as follows:

• In order to prevent insureds from intra-policy stacking in automobile insurance policies, insurers must comply with the anti-stacking provision of Arizona Revised Statute (A.R.S.) §20-259.01(H) by:
1. expressly and plainly limiting stacking in the policy; and
2. satisfying the notice requirement by informing the insured of their “right to select one policy or coverage” either in the policy itself or in writing to the insured within thirty days after the insurer is notified of the accident.
• A.R.S. §20-259.01(B) does not limit collection under UIM coverage.

Summary

In Franklin, the Arizona Supreme Court answered two certified questions of law, submitted by the District Court of Arizona on the issue of stacking policy limits within automobile insurance policies. The Court held that A.R.S. §20-259.01 mandates that a single policy insuring multiple vehicles provides separate UIM coverage for each vehicle, and that intra-policy stacking of the separate UIM limits is permitted. The Court also ruled that an insured may stack UIM coverages to recover an amount higher than their policy’s liability limits, regardless of the language in A.R.S. §20-259.01(B) governing what UIM limits insurers are required to offer.

Facts

The insured died in an automobile accident caused by a negligent driver. The insured’s daughter, Kay Franklin, collected the per-person liability limit of the negligent driver’s insurance policy and then submitted a UIM claim to her mother’s insurer, CSAA General Insurance Company (CSAA). At the time of the accident, the insured’s automobile insurance policy (the “Policy”) covered two vehicles and provided USD50,000 of UIM coverage “per person”. The Policy also included a limitation of liability clause, limiting the amount paid to the Limit of Liability shown on the Declarations Page, regardless of covered cars and premiums paid. 

Despite receiving USD50,000 under the Policy’s UIM coverage, Franklin sought an additional USD50,000 under an “intra-policy stacking” theory, arguing that because the Policy covered two vehicles, it provided a second separate UIM coverage which increased her mother’s total UIM coverage from USD50,000 to USD100,000. Franklin argued for stacking the Policy’s UIM limits because CSAA failed to comply with the notice requirements of A.R.S. §20-259.01(H). That subsection of the statute states in full:

“If multiple policies or coverages purchased by one insured on different vehicles apply to an accident or claim, the insurer may limit the coverage so that only one policy or coverage, selected by the insured, shall be applicable to any one accident. If the policy does not contain a statement that informs the insured of the insured’s right to select one policy or coverage as required by this subsection, within thirty days after the insurer receives notice of an accident, the insurer shall notify the insured in writing of the insured’s right to select one policy or coverage”.

When CSAA rejected Franklin’s claim for the additional USD50,000, she sued CSAA in federal district court for declaratory judgment, breach of contract, and bad faith. In the course of the litigation, CSAA filed a motion for the district court to certify two questions of law to the Arizona Supreme Court. The Arizona Supreme Court accepted review to clarify how A.R.S. §20-259.01 regulates an insurer’s ability to preclude insureds from intra-policy stacking UIM coverages. 

Legal reasoning

Question 1: Does A.R.S. §20-259.01 classify multi-vehicle insurance policies as providing a single UIM coverage or multiple UIM coverages for each vehicle? The Court found that while the text of the statute was ambiguous, the statute’s history and purpose clearly indicated that multi-vehicle policies provide separate UIM coverages for each vehicle. In coming to this conclusion, the Court reasoned as follows:

• Subsection (H) of Arizona’s anti-stacking statute dictates how insurers can prevent insureds from stacking UIM or UM (uninsured motorist) coverages. To limit stacking under subsection (H), insurers must (i) expressly and plainly disavow stacking in the policy; and (ii) satisfy the notice requirement informing the insured of their “right to select one policy or coverage” either in the policy itself or in writing to the insured within thirty days after the insurer is notified of the accident.
• The text of subsection (H) that relates to “coverages purchased” is ambiguous, as it is unclear whether a multi-vehicle policy constitutes purchasing of multiple UIM coverages for each vehicle. In reviewing the statutory language and history, the Court ruled that A.R.S. §20-259.01 supports a broader interpretation of “coverages purchased”. As a result, all multi-vehicle policies provide separate UIM coverage per vehicle that the insured has “purchased”, triggering the application of subsection (H) to multi-vehicle policies.
• The purpose of subsection (H), as amended in 1997, was to provide the sole means by which insurers may limit UIM/UM stacking – whether intra-policy (in a multi-vehicle policy) or inter-policy (when separate policies insure separate vehicles).

Question 2: Does A.R.S. §20-259.01(B) impose a ceiling on UIM coverage based on the bodily injury or death liability limits of the policy? The Court held that subsection (B) does not restrict what an insurer may be obligated to pay out for a claim. In coming to this conclusion, the Court reasoned as follows:

• Subsection (B) requires insurers to initially offer insureds UIM coverage with “limits not less than the liability limits for bodily injury or death.” The legislature’s use of the phrase “not less than” means the insurer must, at a minimum, offer UIM coverage that is at least the same amount as the policy’s bodily injury or death liability limits.
• Subsection (B) also allows insureds to request and purchase UIM coverage in any amount that the insureds select. Thus, an insured may reject the insurer’s initial offer and request per-vehicle UIM coverage in any amount up to the liability limits for bodily injury or death contained within the policy.
• Subsection (B)’s “up to” language refers to per-vehicle coverage, not total UIM coverage in a stacked scenario. Thus, subsection (B) codifies requirements pertaining to the offer and purchase of UIM coverage, it does not concern stacking, and therefore it does not restrict what an insurer may be obligated to pay on a claim.

Case 2: Arizona Insurers Cannot Exclude Vehicles Involved in Accidents From UIM Coverage Based on the Vehicle Type

On 15 August 2023, the Arizona Court of Appeals issued its Opinion in State Farm Automobile Insurance Company v. Jacey Lee Orlando, 256 Ariz. 55, 535 P.3d 57 (App. Div. 1 2023), holding that the automobile insurance policy’s “underinsured motor vehicle” definition cannot limit or bar UIM coverage based on the type of vehicle involved.

Summary

In Orlando, the Arizona Court of Appeals analysed whether summary judgment in favour of State Farm was appropriate where the trial court found that there was no UIM coverage for an all-terrain vehicle (ATV) involved in an accident that occurred while used off-road based on the policy’s definition of “underinsured motor vehicle” and statutory interpretation. The Court of Appeals reversed and remanded the coverage issue based upon a narrow reading of Arizona’s underinsured motorist coverage statute as compared to the language used in Arizona’s uninsured motorist statute. The Orlando case also involved a claim of bad faith against State Farm, for which summary judgment was also granted in State Farm’s favour at the trial court level and upheld by the Court of Appeals.

Facts

Jacey Orlando was a passenger in an ATV and was injured during a February 2018 rollover accident in California’s Imperial Sand Dunes. Orlando received the full limits of the driver’s automobile liability insurance and made a UIM claim to State Farm on her own automobile policy. The policy defines underinsured motor vehicle as:

• “Underinsured Motor Vehicle does not include a land motor vehicle: (...) 2. designed for use primarily off public roads except while on public roads.”

Relevant to this claim, the policy, as written, would pay for bodily injury damages an insured is legally entitled to recover from the owner or driver of an underinsured motor vehicle so long as the insured’s bodily injury is caused by an accident that involves the operation of an “underinsured motor vehicle” as a motor vehicle.

State Farm declined coverage for the accident because the ATV did not meet the definition of an “underinsured motor vehicle” under the policy language. It cited two cases that addressed UM coverage to support its position that the Arizona Financial Responsibility Act (FRA), A.R.S. §§28-4001 to -4153, and the Uninsured/Underinsured Motorist Act (UMA), A.R.S. §20-259.01, do not compel coverage for vehicles not intended to be operated on highways. It invited Orlando to provide contrary information or analysis if she disagreed.

After no response from Orlando for eleven months, State Farm filed a declaratory judgment action seeking a ruling that the insurance policy did not provide UIM coverage for the ATV accident. Orlando counterclaimed for breach of the insurance policy and bad faith. State Farm filed a motion for summary judgment arguing that the plain language of the policy – the “underinsured motor vehicle” definition – did not include an ATV as a covered vehicle. Orlando opposed the motion arguing that the policy could not limit UIM coverage based on the vehicle type because exceptions to UIM coverage not specifically allowed by the applicable statute are void.

The trial court concluded that the ATV was not an “underinsured motor vehicle” under the policy as it was designed for use primarily off public roads and the accident did not occur on a public road. It also held that the UMA did not bar the definition on UIM coverage because it was nearly identical to the definitions approved of in cases relating to UM coverage.

Legal reasoning

Faced with the question of whether the UMA prohibits limitations of underinsured coverage for specific types of vehicles, the Court of Appeals reasoned as follows:

• UM and UIM coverage are addressed in separate sections of the UMA, and though similar, they are not identical.
1. “Uninsured motorist coverage,” subject to the terms and conditions of that coverage, means coverage for damages due to bodily injury or death if the motor vehicle that caused the bodily injury or death is not insured by a motor vehicle liability policy that contains at least the limits prescribed in §28-4009. A.R.S.§20-259.01(E) [emphasis added].
2. “Underinsured motorist coverage” includes coverage for a person if the sum of the limits of liability under all bodily injury or death liability bonds and liability insurance policies applicable at the time of the accident is less than the total damages for bodily injury or death resulting from the accident. To the extent that the total damages exceed the total applicable limits, the underinsured motorist coverage provided in subsection B of this section is applicable to the difference. A.R.S. §20-259.01(G) [emphasis added].
• UM coverage is subject to the terms and conditions of the policy and covers damages caused by a motor vehicle, while UIM coverage is not subject to the terms and conditions of the policy and provides coverage for damages resulting from an accident without reference to a motor vehicle.
• Prior case law has established that exceptions to UIM coverage not permitted under the UMA are void. See, eg, Cundiff v. State Farm Mut. Auto. Ins. Co., 217 Ariz. 358, 360, ¶9 (2008).
• Cases State Farm and the trial court relied upon relating to UM coverage were not instructive to the matter at hand because the UMA provides a definition of “uninsured motor vehicle” that is subject to the terms and conditions of a carrier’s insurance policy, where no similar definition is provided for “underinsured motor vehicle” within the statute.
• State Farm’s policy definition of “underinsured motor vehicle” is a term and condition of coverage. The UMA only contemplates applying a policy’s terms and conditions to UM coverage, but not UIM coverage.
• Arizona law does not permit insurers to void UIM coverage through policy exceptions not contemplated and specifically permitted by the UMA.
• Currently, the only permissive limitations to UIM coverage under the UMA is the inclusion of anti-stacking language, provided the insurer adheres to the statutory requirements, and allowing the parties to reach an agreement as to who is insured.

The Court of Appeals held that the policy’s “underinsured motor vehicle” definition cannot limit or bar UIM coverage based on the type of vehicle involved in an accident.

Conclusion

These recent Arizona decisions demonstrate that insurance carriers must strictly comply with the requirements of Arizona’s Uninsured/Underinsured Motorist Act (UMA), A.R.S. §20-259.01, or risk paying additional benefits not contemplated under the policies to an insured. Arizona courts believe the Arizona legislature intended for UIM coverage to apply broadly to provide insureds with benefits up to the policy limits – for each vehicle – where the insured is not made whole by the available limits of liability. Additionally, carriers are not permitted to attempt to limit that liability in ways not expressly authorised by the UMA, such as by limiting the definition of an “underinsured motor vehicle”.