Is Self-Insurance Really Insurance? Uninsured Motorist Insurance And Personal Injury Protection Coverage Obligations For Self-Insurers - Part II

Editor's Note:Part I of this article appears in the May 2009 issue of The Metropolitan Corporate Counsel.

In response to the economic downturn, businesses are considering self-insurance as a means to reduce expenses. A recurring question is whether the self-insurer is obligated to provide personal injury protection (PIP) or uninsured/underinsured motorist (UM) coverage. In Part I of this article, the authors defined the issue and discussed how the legislatures and courts in Washington, California and Oregon have approached it. Part II looks at the subject with particular focus on whether excess or umbrella coverage may satisfy the self-insurer's obligation.

In Oregon, just because a self-insurer agrees to provide the same level of UM and PIP coverage that a commercial insurer would be obligated to pay does not mean that self-insurer provides same "scope of coverage" required in an insurance policy under Or. Rev. Stat. § 806.080(1)(b).¹Or. Rev. Stat. § 806.080(1)(b) provides the following requirement:

[The motor vehicle liability insurance policy] must insure the named insured and all other persons insured under the terms of the policy against loss from the liabilities imposed by law for damages arising out of the ownership, operation, use or maintenance of those motor vehicles by persons insured under the policy. The policy must include in its coverage all persons who, with the consent of the named insured, use the motor vehicles insured under the policy, except for any person specifically excluded from coverage under ORS 742.450.²

Or. Rev. Stat. § 806.130, which controls the minimum coverage amounts that self-insurers must provide, makes no reference to Or. Rev. Stat. § 806.080.³§ 806.080 applies "only to insurers who issue insurance policies insuring others against risk in consideration of premiums."⁴Thus, even though self-insurers in Oregon are required to provide UM and PIP coverage at least to the limits set out in § 806.070, they are not required to provide "omnibus coverage" under § 806.080. "Drop-Down" Coverage Requirements For Excess-Insurers

Another question can arise when self-insurers purchase excess or umbrella insurance to cap their exposure to cover claims over a certain amount. In such a case, is the excess insurer required to "drop down" to provide PIP or UM benefits? The Washington UM statute provides, in pertinent part, that:

The coverage required to be offered under this chapter is not applicable to general liability policies, commonly known as umbrella policies, or other policies which apply only as excess to the insurance directly applicable to the vehicle insured.⁵

In MacKenzie v. Empire Ins. Companies, ⁶the Washington Supreme Court concluded that "a comprehensive automobile liability insurance endorsement contained in a special multi-peril policy is exempt from Washington's [UM] statute insofar as such insurance policy merely provides coverage in excess of the primary automobile coverage."⁷

The court so held despite plaintiff's argument that there is a general public policy underlying the UM statute of increasing the public's protection against automobile accidents. While recognizing the existence of this general policy, the MacKenzie court stated that it "is not sufficient by itself to justify our disregarding the carefully reasoned and well-supported holding in Thompson v. Grange Association." ⁸The Thompson court had reasoned that "catastrophic-type policies pick up where primary coverages end."⁹"They provide coverage excess to that provided by the primary policies."¹⁰The Thompson court held, therefore, that Washington's UM statute did not apply to a "catastrophe" or "umbrella" policy.¹¹

In discussing Thompson and other applicable authorities, the MacKenzie court noted that "umbrella" policies, a type of excess coverage, are different in nature than primary liability coverage:

Umbrella policies serve an important function in the industry. In this day of uncommon, but possible, enormous verdicts, they pick up this exceptional hazard at a small premium . . . it may assume as a primary carrier certain coverage not included elsewhere, such as invasion of privacy, false arrest, etc., but there is no intention to supplant the basic carriers on the homeowners or automobile coverages. Therefore, these should not even enter into our current consideration [of UM coverage].¹²

The MacKenzie court went on to observe that the Appleman treatise had "conceded" that some courts have held to the contrary, but concluded that "those decisions reflect a 'misunderstanding of the courts as to the nature of such coverages.'"¹³

The MacKenzie court also discussed the fact that in 1985, subsequent to the accident that resulted in the Thompson litigation, the Washington legislature had amended the UM statute to, "in effect, write the Thompson holding into the [UM] statute."¹⁴The amendment added the above-quoted language exempting excess carriers from the UM requirements embodied in Wash. Rev. Code § 48.22.030.¹⁵

California law is generally on par with Washington Law. For example, in Wiemann v. Indus. Underwriters Ins. Co ., the court observed that the California legislature specifically exempted excess or umbrella insurers from the obligations of Cal. Ins. Code § 11580.2:

(a)(1) No policy of bodily injury liability insurance covering liability arising out of the ownership, maintenance, or use of any motor vehicle. . . shall be issued . . . unless the policy contains, or has added to it by endorsement, a provision . . . insuring the insured . . . for all sums within such limits which he . . . shall be legally entitled to recover as damages for bodily injury or wrongful death from the owner or operator of an uninsured motor vehicle. . . . A policy shall be excluded from the application of this section . . . if the automobile liability coverage is provided only on an excess or umbrella basi s.¹⁶

Thus, subject to the terms of the excess policy, generally, an excess insurer's coverage becomes applicable only when the self-insurer's liability exceeds its self-insured retention.¹⁷

Of particular note was the court's holding in Wiemann that an excess insurer is not required to provide UM coverage, even when the insured was not registered with the California Department of Motor Vehicles as a self-insured entity.¹⁸The court held that the insured's failure to obtain a valid D.M.V. certificate as a self-insurer did not create an obligation on the part of the excess insurer to provide UM coverage.¹⁹The court stated, "[p]etitioner has not supplied this court, nor has our research disclosed, any statutory or decisional law which imposes on an excess carrier [ ] the duty to supply uninsured motorist coverage or to require its self-insured policyholder [ ] to first obtain such a certificate from the D.M.V. before issuing an excess coverage policy."²⁰

In Oregon, whether an excess insurer is obligated to "drop down" to provide UM or PIP benefits does not appear to be an issue. The Oregon financial responsibility statute provides that self-insurers must "[a]gree to pay the same amounts with respect to an accident occurring while the certificate [of self-insurance] is in force that an insurer would be obligated to pay under a motor vehicle liability insurance policy, including uninsured motorist coverage and liability coverage to at least the limits specified in ORS 806.070."²¹Thus, there would never be a need for the excess insurer to "drop down" to pay the required UM or PIP benefits because the self-insurer is already obligated to do so.

Conclusion

Courts in Washington and California seem to rely heavily on the notion that they cannot create obligations for self-insurers in the area of UM and PIP coverage, no matter how socially desirable, because to do so would be to usurp the function of the legislature. Perhaps those states' legislatures will follow the Oregon state legislature's lead and create UM and PIP coverage requirements for self-insurers. At any rate, courts in all three states are in agreement that a self-insurer does not, by virtue of its status, issue a "motor vehicle liability insurance policy."

¹Farmers Ins. Co. of Oregon v. Snappy Car Rental, Inc., 128 Or. App. 516, 519, 876 P.2d 833 (1994).

² Or. Rev. Stat. § 806.080(1)(b).

³Snappy Car Rental, Inc., 128 Or. App. at 521.

⁴Id.

⁵Wash. Rev. Code § 48.22.030(2).

⁶113 Wash. 2d 754. 782 P.2d 1063 (1989).

⁷Id. at 760 .

⁸Id . (citing Thompson v. Grange Association, 34 Wash. App. 151, 660 P.2d 307, rev. denied, 99 Wash. 2d 1011 (1983)).

⁹MacKenzie, 113 Wash. 2d at 759 ( citing Thompson, 34 Wash. App at 156-157 ).

¹⁰Id.

¹¹Id.

¹²Id. at 757-58 (citing Appleman, Insurance § 5071.65 at 107).

¹³Id . at 758 (citing Appleman, Insurance § 5071.65 at § 5071.65).

¹⁴Id. at 759.

¹⁵Id.

¹⁶Wiemann v. Indus. Underwriters Ins. Co., 177 Cal. App. 3d 38, 41, 222 Cal. Rptr. 705 (1986) (citing Cal. Ins. Code § 11580.2(a)(1)) (court's emphasis).

¹⁷Id. at 43, ft. 2 (citing O'Sullivan v. Salvation Army, 85 Cal. App. 3d 58, 147 Cal. Rptr. 729 (1978)).

¹⁸Id.

¹⁹Id.

²⁰Id.

²¹ Or. Rev. Stat. § 806.130.