NO. A06-2445

State of Minnesota

In Court of Appeals Patricia A. Frey, as Trustee for the heirs and next-of-kin of

Stephen J. Frey, Patricia A. Frey, individually, and Aven K. Frey, individually,

Respondents, V.

United Services Automobile Association and Nathan C. Frey,

Appellants.

APPELLANTS' BRIEF AND APPENDIX

Timothy P. McCarthy (#20335X) CHESTNUT & CAMBRONNE

3700 Campbell Mithun Tower 222 South Ninth Street Minneapolis, MN 55402 (612) 339-7300

Attorney for R.espondents Patricia A. Frey, as Trustee for the heirs and next-of-kin of Stephen]. Frey, Patricia A. Frey, individually, and Aven K Frey, individually

Robert W. Kettering, Jr. (#55499) Douglas D. McGhee (#277939) ARTHUR, CHAPMAN, KETTERING,

SMETAK & PIKALA, P.A. 500 Young Quinlan Building 81 South Ninth Street Minneapolis, MN 55402-3214 (612) 339-3500

Attorneys for Appellants United Services Automobile Association and Nathan C. Frey

2007 BACHMAN I·RINTING- FAX (612)

The appendix to this brief is not available for online viewing as specified in the Minnesota Rules of Public Access to the Records of the Judicial Branch, Rule 8, Subd. 2(e)(2).

TABLE OF CONTENTS

TABLE OF CONTENTS ................................................ 11

TABLE OF AUTHORITIES ............................................ iv

STATEMENT OF THE ISSUES .......................................... 1

STATEMENT OF THE CASE ............................................ 2

STATEMENT OF FACTS ............................................... 4

SUMMARY OF ARGUMENT ............................................ 6

ARGUMENT .......................................................... 6 Standard of Review ................................................ 6 Limited-Family Exclnsions Like the One Found in USAA's Policy Are

Common and Enforceable .................................... 6 The USAA Automobile Policy Limits Claims by Family Members

Against Other Family Members to $30,000/$60,000 .......... 7 Minnesota's Experience with Absolute Household Exclusions Is

Instructive ............................................ 8 Other Jurisdictions Have Upheld Similar Household Exclusions ... 11

The Trial Court Erred in Holding That the Limited-Family Exclusion Does Not Apply Because it Is Not an Enumerated Ground for Cancellation or Limit Reduction Under Minn. Stat. § 65B.15 .................. 15

Did the Trial Court Err in Concluding That the USAA Policy Was Ambiguous Because it Did Not Sufficiently Define the Term "Resident?" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Reasonable Apprehension Has No Place in Ambiguity Analysis .... 17 "Resident of Your Household" Is Not Ambiguous ................ 18 Under Minnesota Law, Aven Frey Was a Resident of Nathan Frey's

Household ........................................... 20 The Trial Court Erred in Concluding That the Reasonable Expectations

Doctrine Required USAA to Provide Coverage .................. 24 The USAA Policy Is Not Ambiguous ........................... 25 The USAA Policy Does Not Contain a Hidden Major Exclusion .... 26 USAA Communicated Important and Major Exclusions .......... 26

11

Whether Substance of Provisions at Issue Was Known to the General Public ............................................... 26

Aven Frey Is Not Entitled to Underinsnred Motorist Coverage Under the Separate Automobile Insurance Policy Issued by USAA in Iowa and Naming Her as an Insured ................................... 28

CONCLUSION ....................................................... 31

l1l

TABLE OF AUTHORITIES

CASES

Adzick v UNUM Life Ins. Co. Of America, 351 F.3d 883 (D. Minn.2003) ........... 20

Allstate Ins. Co. v. Wyoming Ins. Dept., 672 P.2d 810 (Wyo. 1983) ............... 13

American Fam. Mut. Ins. Co. v. Ryan, 330 N.W.2d 113 (Minn. 1983) .......... 7, 8, 14

Arceneaux v. State Farm Mut. Ins. Co., 550 P.2d 87 (Ariz. 1976) ................. 12

Atwater Creamery Co. v. Western Nat'! Mut. Ins., 366 N.W.2d 271 (Minn. 1985) .... 1, 24,25

Auto Owners v. Van Gessel, 665 So.2d 263 (Fla. Dist. Ctr. App. 1995) ............ 12

Bell v. Safeco, 1999 WL 1024010 (8th Cir. 1999) ......................... 1, 11, 12

Babich v. Oja, 258 Minn. 287, 104 N.W.2d 19 (1960) ...................... 17, 26

Cimarron Ins. Co. v. Croyle, 479 N.W.2d 881 (S.D. 1992) ...................... 13

Collins v. Farmers Ins. Co. of Oregon, 822 P.2d 1146 (Or. 1991) ................. 13

DeWittv. Young,625P.2d478(Ka. 1981) ................................... 12

Engebretson v. Austvold, 199 Minn. 399,271 N.W. 809 (1937) .................... 8

Estate of Neal v. Farmers Ins. Exchange, 566 P. 2d 81 (Nev. 1977) ............... 12

Farkas v. Hartford Accident & Indem. Co., 285 Minn. 324, 173 N.W.2d 21 (1969) ... 18

Farmers Home Mut. Ins. v. Lill, 332 N.W.2d 635 (Minn.1983) .............. 1, 17, 26

Fireman's Ins. Co. v. Viktora, 318 N.W.2d 704 (Minn.1982) .................... 21

Freeman v State Farm Mut. Auto Ins. Co., 436 F.3d 1033 (8th Cir. (Mo.) 2006) ...... 14

Garrick v. Northland Ins. Co., 469 N.W.2d 709 (Minn.1991) ..................... 6

IV

Gunderson v. Classified Ins. Corp., 397 N.W.2d 922 (Minn. Ct. App. 1986) ... 1, 27, 28

Halpin v. American Family Mut. Ins. Co., 823 S.W.2d 479 (Mo. 1992) ............ 12

Hartline v. Hartline, 39 P.3d 765 (Ok. 2001) ................................. 13

Liberty Mut. v. Sanford, 879 S.W.2d 9 (Tex. 1994) ............................ 13

Lobeck v. State Farm Mut. Auto. Ins. Co., 582 N.W.2d 246 (Minn. 1998) ......... 6, 17

Marschall v. Reinsurance Ass 'n of Minn., 447 N.W.2d 460 (Minn. Ct. App. 1989) ...................................................................... 25

Merseth v. State Farm, 390 N.W.2d 16 (Minn. Ct. App. 1986) .............. 1, 27, 28

Morgan v. Illinois Farmers Ins. Co., 392 N.W.2d 37 (Minn. Ct. App.1986) ......... 23

National Family Ins. Co. v. Muellerleile, 308 Minn. 340, 242 N.W.2d 598 (1976) .... 9

National Indemnity Co. of Minnesota v. Ness, 457 N.W.2d 755 (Minn. Ct. App.1990) ...................................................................... 25

Pearson v. Johnsen, 215 Minn. 480, 10 N.W.2d 357 (1943) ...................... 8

Reinsurance Ass'n of Minn. v. Johanesson, 516 N.W.2d 562 (Minn. Ct. App. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Rusthoven v. Commercial Standard Ins., 387 N.W.2d 642 (Minn.1986) .......... 1, 17

Schaer v. West Bend Mut. Ins. Co., 473 N.W.2d 73 (Minn. Ct. App. 1991) ....... 22, 23

Sicoli v. State Farm Mut. Auto. Ins. Co., 464 N.W.2d 300 (Minn. Ct. App. 1990) ..... 25

Skarsten v. Dairyland Ins. Co., 381 N.W.2d 16 (Minn. App.1986) ................ 23

St. Paul School Dist. No. 625 v. Columbia Transit Corp., 321 N.W.2d 41 (Minn.1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

State Farm Mut. Automobile Ins. Co. v. Mastbaum, 748 P.2d 1042 (Utah 1987) ..... 13

V

Stepha v. Allstate Ins. Co., 383 S.E.2d 887 (Ga. 1989) .......................... 12

Tomlyanovich v. Tomlyanovich, 239 Minn. 250, 58 N.W.2d 855 (1953) ............. 8

Vierkantv. AMCOins. Co., 543 N.W.2d 117 (Minn. Ct. App. 1996) .............. 14

Walker v. American Fam. Ins. Co., 340N.W.2d 599 (Iowa 1983) ................. 12

Walther v. Allstate Ins. Co., 575 A.2d 339 (Md. Ct. App. 1990) ............. 1, 12, 13

Wood v. Mutual Serv. Casualty Ins. Co., 415 N.W.2d 748 (Minn. Ct. App.1987) ..... 22

Wyatt v. Wyatt, 58 N.W.2d 873 (Minn.1953 .................................. 18

STATUTES

Minn. Stat.§ 65B.15 ............................................... 1, 15, 16

Minn. Stat. § 65B.23 ..................................................... 9

Minn. Stat.§ 65B.41 ................................................ 1, 9, 10

Minn. Stat.§ 65B.43 subd. 5 ............................................ 1, 21

Minn. Stat.§ 65B.48, subd. 1 ........................................... 9, 10

Minn. Stat.§ 65B.49, subd. 3 ........................................... 9, 10

Minn. Stat. § 72A.1491 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

OTHER AUTHORITIES

Black's Law Dictionary (8th ed. 2004) .................................... 19, 20

http://merriamwebster.com/dictionary/household .... .......................... 19

VI

STATEMENT OF THE ISSUES

1. Is a limited-family exclusion, similar to, but less sweeping than the absolute family exclusion in homeowner's insurance policies, a valid and enforceable insurance policy provision under Minnesota law?

List of most apposite authorities:

• Minn. Stat.§ 65B.41 et seq • Bell v. Safeco, 1999 WL 1024010 (8th Cir. 1999) • Walther v. Allstate Ins. Co., 575 A.2d 339 (Md. Ct. App. 1990)

2. Did the trial court err in refusing to enforce the limited-family exclusion because it is not listed as a possible basis for cancelling an automobile insurance policy under the No-Fault Act?

List of most apposite authorities:

• Minn. Stat.§ 65B.15

3. Did the trial court err in concluding that the term "resident-relative" was ambiguous in light of the facts of this case?

List of most apposite authorities:

• Minn. Stat. § 65B.43 subd. 5 • Rusthoven v. Commercial Standard Ins., 387 N.W.2d 642,644 (Minn.1986) • Farmers Home Mut. Ins. v. Lill, 332 N.W.2d 635, 637-38 (Minn.1983)

4. Did the trial court err in concluding that the reasonable expectations doctrine required USAA to provide coverage despite the limited-family exclusion?

List of most apposite authorities:

• Atwater Creamery Co. v. Western Nat'! Mut. Ins., 366 N.W.2d 271 (Minn. 1985)

• Merseth v. State Farm, 390 N.W.2d 16 (Minn. Ct. App. 1986) • Gunderson v. Classified Ins. Corp., 397 N.W.2d 922 (Minn. Ct. App. 1986)

5. Is Aven Frey entitled to UM Benefits?

1

List of most apposite authorities:

• Order Granting Plaintiff's Motion for Summary Judgment and Declaratory Relief, A.A. 1, October 24, 2006

STATEMENT OF THE CASE

At 11 :00 p.m. on November 27, 2004, Nathan Frey was operating a 1996 Pontiac

with the permission of the owner, his father Stephen J. Frey, when it was involved in a

one-vehicle accident on Interstate 35 near 195th Street in Lakeville, Minnesota. Plaintiffs'

Motion for Summary Judgment, A.A. 98 at A.A. 99. Stephen J. Frey, Nathan's mother

Patricia A. Frey, his sister Aven K. Frey, and Aven's boyfriend Thomas Alexander were

all passengers in the vehicle. Id. at A.A. 100. Stephen J. Frey and Thomas Alexander died

in the accident. Id. Patricia A. Frey has been appointed as the Trustee for the heirs and

next-of-kin of Stephen J. Frey. Id. at A.A. 98.

Appellant United Services Automobile Association ("USAA") issued two

insurance policies to the Preys. Id. at A.A. 100. The first was a Minnesota Automobile

policy issued to Stephen J. Frey as the Named Insured for the period effective July 27,

2004 through January 27, 2005. USAA Minnesota policy issued to Stephen J. Frey, A.A.

10 - A.A. 51. This policy insured four vehicles, including the Pontiac. Id. at A.A. 13. The

liability limits under this policy were $300,000/$500,000. Id. The second policy was

issued to Stephen J. Frey as the Named Insured for the period effective July 27, 2004

through January 27, 2005. USAA Iowa policy issued to Stephen J. Frey, A.A. 52 - A.A.

82. This policy covered a 1992 Mitsubishi Eclipse owned by Stephen and Patricia Frey

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that Aven used while attending Grinnell College in Iowa. Id. at A.A. 55. The liability

limits under this policy were $100,000/$300,000. Id. It also provided UM/UIM coverage

with limits of $100,000/$300,000. Id.

Shortly after the accident, Thomas Alexander's parents hired an attorney who

demanded that USAA pay its complete per person limits of $300,000 in exchange for a

release of all claims that the Alexander family had against Nathan Frey, the Estate of

Stephen Frey, and Patricia Frey. A.A. 127 - A.A. 128. Because liability was not contested,

all three were faced with substantial excess exposure. Id. After attempting to negotiate a

more favorable settlement, USAA settled the case for $300,000. Id. Therefore, only

$200,000 of the original $500,000 limits on the Preys' Minnesota policy is still at issue in

this lawsuit. Because USAA agrees that its limited household exclusion provides limits

of $30,000/$60,000 for the injuries to Stephen, Patricia, and Aven, the only amount in

controversy under the policy on the Pontiac is $140,000 ($200,000 in remaining limits -

$60,000 in Limited Family Exclusion limits results in $140,000 remaining in

controversy). Id. USAA has honored all of its obligations under other coverage provisions

of the policies, including its duty to pay medical expenses, lost wages, and associated

losses. Id. It has honored these obligations without asking the Frey family to compromise

their right to prosecute this case. Id.

A declaratory judgment action was filed and summary judgment motions were

submitted to Judge Crump of the Hennepin County District Court in order to determine

3

the extent ofUSAA's obligation to provide coverage. Order Granting Plaintiff's Motion

for Summary Judgment and Declaratory Relief, October 24, 2006, A.A. I. Judge Crump

granted summary judgment to the Freys, and denied USAA's motion. Id. The numerous

errors oflaw in Judge Crump's decision require that his decisions be reversed.

STATEMENT OF FACTS

The Freys' accident occurred on Interstate 35 near 195th Street in Lakeville,

Minnesota. Complaint at 2, A.A. 143. Their Pontiac was in the left-hand lane of

Interstate 35 approaching the 195th Street intersection. Defendants' Motion for Summary

Judgment, A.A. 125. Nathan attempted to change from the left to the right lane. Id. As he

glanced over his right shoulder to look for traffic, the Pontiac drifted to the left. Id. He

overcorrected to the right, followed by another over-correction, a loss of control, and a

collision with a guard rail in the median. Id. Stephen K. Frey and Thomas Alexander died

as a result of injuries sustained in the accident. Id.

The Freys resided in Elko, Scott County, Minnesota. Complaint, A.A. 142. They

moved there in August, 200 I, in order for Stephen Frey to take advantage of an

employment offer. Defendants' Motion for Summary Judgment, A.A. 126. They bought a

home and established a family residence there. Deposition of Patricia Frey at 13, A.A.

87. All three children had separate bedrooms at their Elko residence. Defendants' Motion

for Summary Judgment, A.A. 126.

4

In the fall of 2001, Aven enrolled as a freshman at Grinnell College in Grinnell,

Iowa. Id. While she studied at Grinnell she lived in a dormitory and in other school­

supplied housing. Deposition of Patricia Frey at 42, A.A. 95. Her parents paid for her

tuition and college housing. Id., A.A. 93, 95. They also paid for her health insurance and

cell phone, and purchased and insured a Mitsubishi Eclipse for her use. Id. at 41-43, A.A.

94-95.

During those years, A ven returned to the family home at intervals, much like most

college students, on holidays, periodic visits, and for portions of the summer. She had a

personal bedroom there all four years. Id. at 36, A.A. 93. She kept personal items there

such as clothing and other belongings. Id. She returned home to exchange these personal

items as the seasons changed. Id. The school mailed bills and education-based

information to the family home. Id. at 42, A.A. 95. She was treated as a dependent of the

family on her parents' income tax return. Id.

The accident occurred while Aven and Thomas Alexander were staying at the Frey

family home over the Thanksgiving holiday. Defendants' Motion for Summary Judgment,

A.A. 127. After the accident, Aven's injuries prevented her from returning to Grinnell for

the remainder of the 2004 fall semester and the 2005 Spring semester. Id. Aven

recuperated at the Frey family home during that time. Id. She returned to Grinnell in the

fall of 2005, completed her studies, and graduated in May of 2006. Id.

5

SUMMARY OF ARGUMENT

The trial court erred in granting summary judgment to Respondents and denying

summary judgment to Appellants. The court's decision was based on its refusal to

recognize the validity ofUSAA's limited-family exclusion, a commonly found and

commonly enforced provision of many automobile insurance policies. The legal

arguments that the trial court relied upon in choosing not to enforce the limited-family

exclusion are deeply flawed. In addition, the issue of Aven Frey's entitlement to UM

benefits, which the trial court did not reach, must be decided in favor of Appellant

USAA.

ARGUMENT

I. Standard of Review

On appeal from summary judgment, the reviewing court must determine whether

genuine issues of material fact remain for trial and whether the district court erred in

applying the law. The interpretation of an insurance policy raises questions oflaw which

are reviewed de novo by the appellate court. Garrick v. Northland Ins. Co., 469 N.W.2d

709,711 (Minn.1991).

II. Limited-Family Exclusions Like the One Found in USAA's Policy Are Common and Enforceable

The interpretation of an insurance policy is governed by general contractual

principles. Lobeck v. State Farm Mut. Auto. Ins. Co., 582 N.W.2d 246, 249 (Minn. 1998).

So long as an insurance policy does not violate applicable statutes, "the insurer's liability

6

is governed by the contract entered into." Id. Furthermore, when "insurance policy

language is clear and unambiguous, the language used must be given its usual and

accepted meaning." Id. at 249. So long as the contract complies with Minnesota law, its

terms control the amount ofliability coverage available. American Fam. Mut. Ins. Co. v.

Ryan, 330 N.W.2d 113, 115 (Minn. 1983).

A. The USAA Automobile Policy Limits Claims by Family Members Against Other Family Members to $30,000/$60,000

USAA issued an automobile policy to Stephen Frey that provided bodily injury

liability coverage to him and permissive users as "covered persons" in the amount of

$300,000 per person/$500,000 per accident. A.A. 13. However, that liability coverage is

limited to $30,000 per person/$60,000 per accident when a claim is made by a family

member of the driver against a driver-family member. Id. "Family member" is defined in

the USAA policy as "a person related to you by blood, marriage, or adoption who is a

resident of your household. This includes a ward or foster child." A.A. 26. These lower

limits apply because intra-family claims are subject to the policy's "limited household

exclusion" (LFE):

PART A- LIABILITY COVERAGE

EXCLUSIONS

C. There is no coverage for BI [Bodily Injury) for which a covered person becomes legally responsible to pay a member of that covered person's family residing in that covered person's household. This exclusion applies only to the extent that the limits of liability for the coverage exceed $30,000 for each person or $60,000 for each accident.

7

A.A. 29. Exclusion C sets lower coverage limits for lawsuits and claims by one family

member against another. Id. It does not eliminate all coverage for claims made by

family members against one another. Rather, it indemnifies an insured for intra-family

claims, but only up to Minnesota's statutorily required minimum limits of

$30,0001$60,000. Id. By comparison, it operates similarly- but not as broadly- as the

"absolute household exclusion" incorporated into virtually all homeowner policies. 1

B. Minnesota's Experience with Absolute Household Exclusions Is Instructive

Minnesota's treatment of absolute household exclusions makes it clear that

insurers may sell policies that do not insure against intra-family claims and lawsuits.

Before 1969, Minnesota courts enforced the household exclusion clause in automobile

policies as an unambiguous exercise of the contractual right to limit an insurer's exposure

in cases where collusion is likely. Tomlyanovich v. Tomlyanovich, 239 Minn. 250,263,

58 N.W.2d 855, 862 (1953); Pearson v. Johnsen, 215 Minn. 480, 10 N.W.2d 357 (1943);

Engebretson v. Austvold, 199 Minn. 399, 271 N.W. 809 (1937). In 1969, the Legislature

declared household exclusions unenforceable for policies issued or renewed after July 1,

1969. 1969 Minn. Laws, ch. 474, §las codified at Minn. Stat.§ 72A.1491 (hereafter,

1See, e.g., American Fam. Mut. Ins. Co. v. Ryan, 330 N.W.2d 113, 115 (Minn. 1983)(holding that a policy provision excluding all coverage for claims between family members is valid and enforceable). Since the clause excludes any and all coverage for intra-family claims, it is called an "absolute household exclusion."

8

I

"household exclusion ban").2 The household exclusion ban statute was later amended and

renumbered in 1971. 1971 Minn. Laws, ch. 719, § 1 as codified at Minn. Stat.§ 65B.23;

National Family Ins. Co. v. Muellerleile, 308 Minn. 340,242 N.W.2d 598 (1976)

( outlining the background of the 1971 amendment to the household exclusion ban

statute). Essentially, the 1971 amendment clarified the legislature's intent as to the

statute's scope. Id. at 343-44, 242 N.W.2d at 600.

In 1974, the statute (then codified at Minn. Stat.§ 65B.23) was repealed as part of

the adoption of the Minnesota No-Fault Act. Minn. Stat.§ 65B.41 et seq. But the

household exclusion ban does not appear in the text of the No-Fault Act. Instead, the

No-Fault Act establishes that an automobile owner must provide insurance on his vehicle

and that an insurer must provide certain minimum levels ( e.g., $30,000/$60,000) of

liability coverage. Minn. Stat. § 65B.48, subd. 1 and§ 65B.49, subd. 3 (2000). Minnesota

Statute§ 65B.48, subd.1 makes insurance mandatory:

Every owner of a motor vehicle of a type which is required to be registered or licensed or is principally garaged in this state shall maintain ... a plan of reparation security ... insuring against loss resulting from liability imposed by law for injury . . . sustained by any person arising out of the ownership, maintenance, operation or use of the vehicle. The plan of reparation security shall provide for basic economic loss benefits and residual liability coverage

2 As originally enacted, the statute provided that:

No policy of automobile liability insurance ... shall contain an exclusion of liability for damages for bodily injury solely because the injured person is a resident or member of an insured's household or related to the insured by blood or mamage.

9

in amounts not less than those specified in section 65B.49, subdivision 3, clauses (I) and (2).

Minn. Stat.§ 65B.48, subd.1(2000)(emphasis added). Minnesota Statute §65B.49, subd.

3 (1) imposes minimum statutory limits upon mandatory coverage:

Each plan of reparation security shall also contain stated limits of liability, exclusive ofinterest and costs, with respect to each vehicle for which coverage is thereby granted, of not less than $30,000 because of bodily injury to one person in any one accident and, subject to said limit for one person, of not less than $60,000 because of injury to two or more persons in any one accident ...

Minn. Stat.§ 65B.48, subd.1 (2000).

Put another way, the 1974 Legislature removed the household exclusion ban and

replaced it with a requirement of mandatory liability coverage in specified minimum

limits. In addition, the legislature permitted the insurer and insured to agree to additional

levels of coverage. Minn. Stat.§ 65B.49, subd. 7 (2000) ("Nothing in sections 65B.41 to

65B.71 shall be construed as preventing the insurer from offering other coverages in

addition to those required to be offered under this section.") Thus, as of 1974, Minnesota

has required an automobile owner to obtain, and an insurer to provide, coverage in the

minimum statutory amounts. But for amounts above the statutory minium limits, the

insurer is free, in a competitive market place, to offer, and qualify, additional coverage

so long as it meets the minimum requirements of the No Fault Act. USAA did exactly

that.

The limited-family exclusion found at Exclusion C of the USAA policy is a

legitimate, valid, and enforceable limitation of coverage. It fully complies with the

10

governing statute, and thus, by definition, does not contravene public policy. The policy

provides no less than the statutorily required levels of coverage for all claimants -

whether family members or third-parties. True, for levels above the statutory minimum, it

does not provide additional coverage limits for family members. But, since it provides

everything that the legislature requires of an automobile insurance policy, a court is duty

bound to enforce it.

C. Other Jurisdictions Have Upheld Similar Household Exclusions

While there are no Minnesota state decisions considering a limited family

exclusion in an automobile policy, Minnesota federal courts have enforced them under

Minnesota law. Moreover, the Minnesota Supreme Court has enforced household

exclusions in other contexts. And there is virtual unanimity amongst other state courts

that limited family exclusions are enforceable so long as statutorily mandated minimum

coverage is provided. Thus, it is highly likely that the Minnesota Supreme Court would

enforce a limited household exclusion.

In an unpublished decision, the United States District Court for the District of

Minnesota enforced a similar household limitation in an automobile liability policy. Bell

v. Safeco, 98-CV-376 (D. Minn. 1999), A.A. 83. The Eighth Circuit affirmed this

decision, again in an unpublished opinion. Bell v. Safeco Ins. Co. of America, 1999 WL

1024010 (8th Cir. 1999). Id. The Eighth Circuit observed that Safeco had notified its

insured, Charles Bell, that it was instituting a limited-family exclusion in its automobile

11

policies. Id. This exclusion was in effect at the time of an accident involving Bell and his

spouse, Norma Bell, in which Charles Bell died from his injuries and Norma was injured.

Id. Safeco notified Norma Bell that her recovery would not exceed the statutory

minimums because of the limited-family exclusion, and she filed a declaratory judgment

action. Id. The trial court determined that the limited-family exclusion was valid and

enforceable, and the Eighth Circuit affirmed, reasoning that the policy met the statutory

minimums required by Minnesota statute. Id.

Nor is acceptance oflimited-family and absolute exclusions limited to the Eighth

Circuit. Appellate courts in many other states agree that a limited family exclusion in an

automobile liability policy is enforceable.3 Walther v. Allstate Ins. Co., 575 A.2d 339

3 See, e.g., Arceneaux v. State Farm Mut. Ins. Co., 550 P.2d 87,89 (Ariz. 1976)("It seems logical that the contract of insurance here need provide for members of the household nothing more than the [Uniform Financial Responsibility Act] requires, and thereafter the [household exclusion clause] is viable"); Auto Owners v. Van Gessel, 665 So.2d 263 (Fla. Dist. Ctr. App. 1995)(upholding the absolute household exclusion); Stepho v. Allstate Ins. Co., 383 S.E.2d 887 (Ga. 1989)(holding an absolute exclusion void but only to the extent of the minimum mandatory insurance - amounts above the minimum can be excluded); Walker v. American Fam. Ins. Co., 340 N.W.2d 599, 602 (Iowa 1983)(noting that "freedom to contract is not taken lightly by this court" and upholding an absolute household exclusion); DeWitt v. Young, 625 P.2d 478, 483 (Ka. 1981)("We adhere to [the general rule regarding the household exclusion clauses] and find the exclusions void only as to the minimum coverage required by statute"); Walther v. Allstate Ins. Co., 575 A.2d 339 (Md. Ct. App. 1990)(holding that insurers have a right to limit their liability over the statutory required minimum limits because it doesn't violate a statute or public policy); Halpin v. American Family Mut. Ins. Co., 823 S.W.2d 479 (Mo. 1992)(household exclusion clause only invalid for statutory minimum liability requirements); Estate of Neal v. Farmers Ins. Exchange, 566 P. 2d 81, 83 (Nev. 1977)("[T]he insurance policy here need provide nothing more than the minimum security required by the (Nevada Motor Vehicle Safety Responsibility Act], and, beyond this

12

(Md. Ct. App. 1990) helps to understand their general reasoning. In Walther, a wife was

injured while exiting a car driven by her husband. The Court rejected the wife's argument

that the abrogation of inter-spousal immunity in Maryland meant, by force oflogic, that

household exclusions were invalid. Id. at 340. It held that an insurer that limits its liability

for spousal injuries to the minimum limits required by statute did not limit the injured

person's right to pursue recovery in excess of that amount from her spouse. Id. at 342.

Because the minimum statutory requirements were met, and the spouse had the legal right

to pursue the excess from her spouse, the limited household exclusion was valid and

enforceable.

In the analogous context ofhomeowner's policies, the public policy of Minnesota

is to enforce even absolute intra-family and household exclusions. The Minnesota

minimum security, the [household exclusion] clause is viable"); Hartline v. Hartline, 39 P.3d 765 (Ok. 2001)(holding that household exclusions are only invalid if they deny all coverage to a family member- the minimum limits must be provided); Liberty Mut. v. Sanford, 879 S.W.2d 9 (Tex. 1994)(holding the exclusion valid for amounts above the minimum limits); Collins v. Farmers Ins. Co. of Oregon, 822 P.2d 1146, 1151 (Or. 1991)("The Financial Responsibility Law requires specified coverage. As to amounts and other coverage apart from that minimum, it is lawful to restrict that additional coverage by [a household exclusion clause]"); Cimarron Ins. Co. v. Croyle, 479 N.W.2d 881 (S.D. 1992) superseded by statute S.D.C.L. 32-35-70(2003)(This court decision has been superseded by statute. The South Dakota Court held an absolute exclusion was void only to the minimum amounts required by statute and the legislature enacted the statute allowing full exclusions); State Farm Mut. Automobile Ins. Co. v. Mastbaum, 748 P.2d 1042, 1044 (Utah 1987)("We adhere to ... the majority view and hold that the household or family exclusion is valid in this state as to insurance provided by an automobile policy in excess of the statutorily mandated amounts and benefits"); Allstate Ins. Co. v. Wyoming Ins. Dept., 672 P.2d 810 (Wyo. 1983)(holding household exclusions void with respect to the minimum liability limit requirements).

13

Supreme Court recognized absolute household exclusions in homeowner's policies as

valid and enforceable contract provisions in 1983. American Fam. Mut. Ins. Co. v. Ryan,

330 N.W.2d 113 (Minn. 1983). Later, in 1996, the Court of Appeals rejected arguments

that the an absolute household exclusion was unconscionable, ambiguous, against public

policy, and contrary to the insured's reasonable expectations. Vierkant v. AMCO Ins. Co.,

543 N.W.2d 117, 120-121 (Minn. Ct. App. 1996). Ryan and Vierkant make it

unchallengeably clear that family member household exclusions, even absolute

exclusions, have their place in Minnesota so long as there is no legislative proscription on

them. Thus, if a limited exclusion does no harm to statutorily mandated coverage, there is

no reason to believe that the Minnesota Supreme Court would find it unlawful.

The Eighth Circuit has also recognized the validity oflimited household exclusions

under Missouri law. The court in Freeman v State Farm Mut. Auto Ins. Co., 436 F.3d

1033 (8th Cir. (Mo.) 2006), enforced a State Farm limited household exclusion that

provided for $25,000, rather than $100,000, limits in an accident in which a child was

killed while in an automobile accident with his mother.

There is an additional justification for including a limited household exclusion in

USAA's insurance policies. Doing so permits consumers to address and prepare for losses

caused by intra-family injuries other than automobile insurance. For example, many

families protect themselves from the risks of intra-familial injuries by way of health,

disability, and life insurance, family savings, intra-family sacrifice, generosity, and

14

fidelity. Put another way, they deal with intra-family injuries by other means, rather than

looking to iawsuits and liability policies. An insured's choice of the best means of

managing the risks of intra-family injuries should be respected. For those who prefer to

do so through automobile liability policies, there are plenty of insurers willing to sell such

coverage.

II. The Trial Court Erred in Holding That the Limited-Family Exclusion Does Not Apply Because it Is Not an Enumerated Ground for Cancellation or Limit Reduction Under Minn. Stat. § 65B.15

While the trial court's most significant mistake was its failure to appreciate the

validity and enforceability of limited-family exclusions in automobile insurance policies,

its analysis in reaching that conclusion is fraught with additional error. The trial court's

first basis for holding that the limited-family exclusion was inapplicable is that it was not

a possible basis for exclusion under Minn. Stat.§ 65B.15, governing the cancellation or

reduction of limits in insurance policies. This statute provides in relevant part that:

Sec. 65B. l 5. Cancellation or reduction in limits during policy period

Subdivision 1. Grounds and notice. No cancellation or reduction in the limits of liability of coverage during the policy period of any policy shall be effective unless notice thereof is given and unless based on one or more reasons stated in the policy which shall be limited to the following:

1. nonpayment of premium; or

2. the policy was obtained through a material misrepresentation; or

15

This statute is completely inapplicable to the issues present in this case. It governs

situations where an insurer reduces coverage or cancels a policy during the policy's term,

and sets out the correct manner in which an insurer may do so, and the reasons why an

insurer may do so. It has nothing to do with the situation in this case, where a policy from

its inception contained a limitation that would reduce benefits in certain limited

circumstances. Had USAA incorporated the limited family exclusion into the policy after

the policy was issued, Minn. Stat. 65B.15 might have been relevant to the trial court's

analysis, but the limited-family exclusion was in the policy from its inception. Whether or

not one of the enumerated grounds for reducing benefits is applicable to USAA's action

is irrelevant, because the statute itself is irrelevant to the issues in this case.

III. Did the Trial Court Err in Concluding That the USAA Policy Was Ambiguous Because it Did Not Sufficiently Define the Term "Resident?"

The trial court also determined that the limited household exclusion did not apply

to the Preys' claim because the term "resident of your household" was insufficiently

defined in the policy:

Defendant USAA's 'bodily injury exclusion' is not immediately susceptible to multiple interpretations, until arriving at the definition of"family member" contained in the policy. The definition reads as follows:

Family member, except as modified in part B-1 means a person related to you by blood, marriage, or adoption who is a resident of your household. This includes a ward or foster child (USAA Policy at 3)

"Resident of your household" is not further defined in the policy.

16

Trial Court Decision at 7, A.A. 7. The court went on to conclude that since "resident of

your household" was not defined, the Preys could "reasonably have apprehended" that

A ven Frey was not a resident of their household. Therefore, the trial court concluded that

the exclusion was ambiguous and should be construed against USAA.

This conclusion is erroneous because an insured's subjective interpretation of

policy language has no place in ambiguity analysis. Moreover, the definition of"resident

of your household" is not ambiguous under the policy.

A. Reasonable Apprehension Has No Place in Ambiguity Analysis

General principles of contract interpretation govern a court's interpretation of an

insurance policy. Lobeck v. State Farm Mutual Auto. Ins. Co., 582 N.W.2d 246, 249

(Minn.1998) ( citing St. Paul School Dist. No. 625 v. Columbia Transit Corp., 321

N.W.2d 41, 45 (Minn.1982)). Whether an insurance policy provision is ambiguous is a

question oflaw. Reinsurance Ass'n of Minn. v. Johanesson, 516 N.W.2d 562 (Minn. Ct.

App. 1994). When the language of an insurance policy is reasonably subject to more than

one interpretation, the policy is ambiguous. Id. Ambiguity may also result from an

irreconcilable conflict between terms or provisions within the policy. Rusthoven v.

Commercial Standard Ins., 387 N.W.2d 642, 644 (Minn.1986). A policy's complexity

alone, however, does not make it ambiguous. Farmers Home Mut. Ins. v. Lill, 332

N.W.2d 635, 637-38 (Minn.1983); Babich v. Oja, 258 Minn. 287,294, 104 N.W.2d 19,

24 (1960) ("the court has no right to read an ambiguity into plain language of an

17

insurance policy in order to construe it against the one who prepared the contract").

Further, any endorsements attached to an insurance contract are part of the contract and

"exclusions ... are as much a part of the policy as the coverage and must be read as part of

coverage[.]" Wyatt v. Wyatt, 58 N.W.2d 873, 875 (Minn.1953). A court must not create

an ambiguity where none exists in order to afford coverage to the insured. Farkas v.

Hartford Accident & Indem. Co., 285 Minn. 324,327, 173 N.W.2d 21, 24 (1969).

"Reasonable apprehension" is not included among those principles of

interpretation. The terms of the USAA policy are plain. They do not require consideration

of the Freys' reasonable apprehensions. While it is true that an insured's reasonable

apprehensions are a factor in determining whether the reasonable expectations doctrine

should apply to alter policy language, reasonable apprehensions are irrelevant to

determining whether the policy possesses a clear plain meaning.

Because the court incorporated an improper element into its analysis of whether

Aven Frey was a resident of the Freys' household, its conclusion based on that analysis­

that Aven was not a resident - must be rejected.

B. "Resident of Your Household" Is Not Ambiguous

Taking the Frey's reasonable apprehensions about residency out of the analysis,

there is no question that Aven was an insured family member under Stephen Frey's

Minnesota and Iowa policies because she was a resident relative of Stephan Frey's

household within the meaning of the policy definition of the defined term family member.

18

The USAA policy does not define insureds based on whether they are listed as operators

on the declaration sheets, but rather by their status as a family member residing in the

named insured's household:

Family member, except as modified in part B-1 means a person related to you by blood, marriage, or adoption who is a resident of your household. This includes a ward or foster child.

USAA Policy at 3, A.A. 26. Summary judgment should have been granted to USAA on

the residency issue. Plaintiffs contend that 17 year-old Nathan did not own the Frey

"household", and, therefore, the limited family exclusion is ambiguous and must be

construed against USAA. This claim stretches credulity. First, the limited family

exclusion, on its face, is not ambiguous. Incorporating the facts of this case, it reads as

follows:

Stephen, Patricia and Aven Frey were all members of the "covered person's [Nathan's]" family and resided in "that covered person's" [Nathan's] household" within the meaning of the Limited Household Exclusion.

The flaw in plaintiffs's argument is that it unreasonably assumes that the term household

must be linked to ownership of the household. According to the plaintiffs, Nathan had no

household, since he did not own the Frey home {rather Stephen and Patricia owned it).

This argument stretches every known meaning of the word "household". Merriam

Webster defines household as "those who dwell under the same roof and compose a

family; also: a social unit composed of those living together in the same dwelling."

http://merriamwebster.com/dictionary/household. Similarly, Black's Law Dictionary

19

defines household as "n. 1. A family living together. 2. A group of people who dwell

under the same roof. Cf.FAMILY.'' Black's Law Dictionary (8th ed. 2004), A.A. 121.

Neither definition makes any mention of the concept of ownership. By contrast, "head of

household," which is not present in the USAA policy, seems to embody some of the

concept of ownership advocated by Respondents:

head of household. 1. The primary income-provider within a family. 2. For income-tax purposes, an unmarried or separated person ( other than a surviving spouse) who provides a home for dependents for more than one-half of the taxable year. • A head of household is taxed at a lower rate than a single person who is not head of a household. Cf. HEAD OFF AMIL Y; HOUSEHOLDER.

Black's Law Dictionary, 8th Ed. (2004), A.A. 122.

In Minnesota, the language of an insurance policy is ambiguous only if it is

susceptible to more than one reasonable interpretation. Adzick v UNUM Life Ins. Co. Of

America, 351 F.3d 883 (D. Minn.2003). Here, there is only one reasonable meaning­

the insured family members all share, and are members of, a single household regardless

of actual ownership. The concept of a family "household" for insurance purposes is a

well developed and durable feature of Minnesota automobile and homeowner liability

insurance law. Plaintiffs present no case that even suggests that USAA's use of the

phrase is ambiguous. There are none.

C. Under Minnesota Law, Aven Frey Was a Resident of Nathan Frey's Household

Even adopting the arguments advanced by Plaintiffs at summary judgment does

not compel the conclusion that Aven was not a resident of her parents' home. Aven

20

asserts that she lived in a separate residence with her fiance (implying that she was not a

family member of her father's household for any purpose). This is not correct. As is the

case with most parents with college age children, the Preys paid for tuition and school­

furnished housing for Aven during her four college years, inclusive of the year in which

this accident happened. Deposition of Patricia Frey at 42., A.A. 95. That she may have

stayed elsewhere with others does not change the reality that she, like countless other

college students with dormitory housing, was a resident of her parents' household even

though she stayed with friends and acquaintances before her graduation.

The residential status of college students and their status as residents under their

parents's insurance coverage is a recurring subject oflitigation. As a starting point,

Minnesota has a statutory provision in the No Fault Statute. Minn. Stat. § 65B.43 subd. 5,

provides that: "A person resides in the same household with the named insured if that

person's home is usually in the same family unit, even though temporarily living

elsewhere." That is the case here. Stephen Frey was the named insured. Aven was a

typical student living at Grinnell College for a typical four year college education. At the

same time, she was still a member of the Frey family and household where she had her

own bedroom and periodic residence with her family. Fireman's Ins. Co. v. Viktora, 318

N.W.2d 704, 706 (Minn.1982) ("the term "household" is synonymous with "family,"

including people who live together as a family in the same house"). Id. at 707. Thus, the

21

No Fault Statute itself is dispositive on the point. Aven was a family member who

resided in the same household as Nathan.

Even if the statute were not controlling, Minnesota common law requires the same

conclusion. There are three factors that determine residency in the named insured's

household: (1) living under the same roof; (2) in a close, intimate and informal

relationship; and (3) where the intended duration is likely to be substantial, where it is

consistent with the informality of the relationship, and from which it is reasonable to

conclude that the parties would consider the relationship "in contracting about such

matters as insurance or in their conduct in reliance thereon." Id. at 706. Factors

considered in this analysis include:

(1) the age of the person;

(2) whether a separate residence is established;

(3) the self-sufficiency of the person;

( 4) the frequency and the duration of the stay in the family home; and

(5) the intent to return.

Schaer v. West Bend Mut. Ins. Co., 473 N.W.2d 73, 76 (Minn. Ct. App. 1991), citing

Wood v. Mutual Serv. Casualty Ins. Co., 415 N.W.2d 748, 750 (Minn. Ct. App.1987),

pet.for rev. denied (Minn. Feb. 12, 1988). Personal possessions remaining in the home

and use of the home as a mailing address may be considered but are not dispositive. Id. at

751.

22

In Schaer, a college student's residency in his mother's home was established by

the fact that he returned home periodically, was not entirely self-sufficient, and did not

establish a permanent residence other than his mother's home. Schaer, 473 N.W.2d at 76,

citing Skarsten v. Dairyland Ins. Co., 381 N.W.2d 16, 17 (Minn. App.1986),pet.for rev.

denied (Minn. Mar. 27, 1986). His age of21 years did not preclude this conclusion. Id.,

citing Skarsten at 16 (24-year-old college student was resident of parents' household);

Morgan v. Illinois Farmers Ins. Co., 392 N.W.2d 37 (Minn. Ct. App.1986),pet.forrev.

denied (Minn. Oct. 22, 1986) (21-year-old college student was resident of parents'

household). Schoer also recuperated from his injuries there (as did Aven). Id. at 17.

Similarly, in Morgan v. Illinois Farmers Ins. Co., 392 N.W.2d 37, 39 (Minn. Ct.

App. 1986), a college student was deemed a resident of her parents' home where she

lived in other residences during college, received mail at her parents' home, kept

possessions there, had a bedroom there, spent weekends and holidays with her parents,

received financial support from her parents, had her own key to their home, and was

claimed as a dependent on her parents' tax returns.

The facts of this case show that A ven Frey was clearly a family member and

resident of the resident of family household for the purpose of insurance coverage and

this case. She maintained possessions at the home, received some mail at the home,

stayed at the home during various parts of the year, was claimed as a dependent on her

23

parents' tax return, had her own key to their home, had a bedroom there, and received

financial support from her parents. A.A. 84-A.A. 97.

Moreover, it is hard to believe that plaintiffs really mean to claim that Aven was

not a family member within the meaning of the USAA policy. It was, after all, greatly in

Aven's interests to be treated as an insured family member. For example, were Aven to

have caused an accident in Iowa while operating the Mitsubishi, she would have insisted

(rightly) that USAA defend and indemnify her on the ground that she was a family

member operating a vehicle owned and insured by her father under his USAA

policy. Thus, her current claim that she is not a resident of the Frey household in this

lawsuit is perverse in light of the primary purpose of the coverage - defense and

indemnity protection for A ven when and if she were to cause an accident while driving

the Mitsubishi.

IV. The Trial Court Erred iu Concluding That the Reasonable Expectations Doctrine Required USAA to Provide Coverage

The Preys also argued, and the trial court appeared to accept, the argument that

enforcing the limited-family exclusion was contrary to the Preys' reasonable expectations.

The doctrine of reasonable expectations was recognized by the Minnesota Supreme Court

in Atwater Creamery Co. v. Western Nat'! Mut. Ins., 366 N.W.2d 271, 277-79 (Minn.

1985). The doctrine protects individuals where insurance policy terms have been

misrepresented or misunderstood, or where legal technicalities would defeat coverage

which the insured reasonably believed was in place. Id. at 27 6-77. The doctrine may not

24

be applied, however, where a prominent policy term excludes coverage or where the

evidence does not indicate that the insured was misled. Marschall v. Reinsurance Ass 'n of

Minn., 447 N.W.2d 460 (Minn. Ct. App. 1989). The doctrine of reasonable expectations

does not relieve Plaintiff of his responsibility to read the Policy. National Indemnity Co.

of Minnesota v. Ness, 457 N.W.2d 755, 757 (Minn. Ct. App.1990). Determining whether

an insured had a reasonable expectation of coverage is a question of law. Sicoli v. State

Farm Mut. Auto. Ins. Co., 464 N.W.2d 300,303 (Minn. Ct. App. 1990).

Application of the doctrine "has generally been limited to those cases in which the

policy, while purporting to provide a specific coverage, so limited the coverage as to

amount to a hidden exclusion." Id. To determine whether the doctrine of reasonable

expectations should apply, courts generally consider four factors: (1) the presence of

ambiguity, (2) language operating as a hidden major exclusion, (3) whether the insurer

communicated important and obscure conditions or exclusions, and (4) whether the

substance of the particular provisions at issue in the contract are generally known by the

public. Id. at 278.

A. The USAA Policy Is Not Ambiguous

All of the Atwater Creamery factors favor USAA. To begin with, the USAA

policy is not ambiguous. Judge Crump' s assessment of the policy's alleged ambiguity

rested on the insured's subjective impressions of the policy, a consideration that has no

relevance to a plain text analysis. The only reason cited by Plaintiffs in support of an

25

ambiguity argument is the alleged confusion over whether it is Nathan Frey or Stephen

Frey's household at issue. As discussed previously, neither of these arguments is a correct

interpretation of controlling law.

B. The USAA Policy Does Not Contain a Hidden Major Exclusion

The limited-family exclusion is neither "hidden" nor "major." It is found in plain

view in the policy itself. A policy's complexity alone does not make it ambiguous.

Farmers Home Mut. Ins. v. Lill, 332 N.W.2d 635, 637-38 (Minn.1983); Babich v. Oja,

258 Minn. 287,294, 104 N.W.2d 19, 24 (1960) ("the court has no right to read an

ambiguity into plain language of an insurance policy in order to construe it against the

one who prepared the contract").

C. USAA Communicated Important and Major Exclusions

Plaintiffs assert that USAA should have notified Stephan Frey of the limited

family exclusion. It did. It provided him with a complete copy of the full policy, inclusive

of the limited family exclusion, upon inception of the Minnesota policy. Minnesota, like

most other states, provides that an insured is responsible to read the policy. There is no

law obliging an insurer to do more. Upon inception, insureds are bound by the policy

terms and conditions, just as the insurer is, whether they actually read the policy or not.

D. Whether Substance of Provisions at Issue Was Known to the General Public

As described previously, intra-family exclusions are a common feature of

insurance policies both in Minnesota and in other states. Moreover, the public policy of

26

Minnesota is to enforce intra-family and household exclusions in other contexts, even

when they are absolute.

In short, none of the factors that could lead to the conclusion that an insured's

reasonable expectations were unsatisfied apply to this case. Cases interpreting the

reasonable expectations doctrine agree. In Merseth v. State Farm, 390 N.W.2d 16 (Minn.

Ct. App. 1986), for example, a child was injured while traveling in a truck driven by his

father. His mother brought suit against the father (and State Farm, the family's

homeowner's insurer) on the child's behalf. State Farm denied coverage, noting that the

family's policy unambiguously excluded recovery for injuries arising from use of a motor

vehicle. There was no testimony that the insured was misled by the insurer or was

confused about the meaning of the policy. The father did testify, however, that the

exclusion was not brought to his attention, and that he relied upon his agent's expertise.

The trial court agreed that there was no coverage after finding that the reasonable

expectations doctrine did not apply because the language of the policy was plain and

unambiguous.

Similarly, in Gunderson v. Classified Ins. Corp., 397 N.W.2d 922 (Minn. Ct. App.

1986), Gunderson sought the protection of the reasonable expectations doctrine after her

son's friend crashed her son's vehicle while driving with the son's consent. The vehicle

was titled in the son's name. When the son purchased the vehicle, Gunderson requested

that her insurer add the vehicle to her policy as a family car. She did not mention that the

27

vehicle was owned by the son or that he was its primary driver. Nor had the insurer

inquired about these topics. Id. at 924. The vehicle was added to the mother's policy as an

additional owned vehicle. Id. After the accident, the trial court granted summary

judgment to the insurer because the policy only offered additional vehicle coverage to

vehicles owned by "named" insureds, i.e. plaintiff Gunderson and her husband. Following

Merseth, the court further determined that the policy terms were unambiguous and that

the Gundersons were not misled by the insurer's conduct. Accordingly, the Gundersons'

expectation of coverage was not reasonable. Id.

V. Aven Frey Is Not Entitled to Underinsured Motorist Coverage Under the Separate Automobile Insurance Policy Issued by USAA in Iowa and Naming Her as an Insured

The trial court did not reach the question of whether A ven Frey was entitled to

Underinsured Motorist Coverage under the Freys' Iowa policy. Determining Aven's

entitlement to UIM benefits hinges on three important facts. First, the owners of the 1992

Mitsubishi were Patricia and Stephen Frey, not A ven. Patricia paid for the car and titled it

in her own name. Frey Deposition at 28-29, A.A. 91.

Second, the Iowa policy was not issued to Aven. Rather, it was issued to Stephen

Frey. He was the Named Insured on the policy. Patricia was also a named insured by

virtue of being a spouse. Iowa Policy, A.A. 55 (upper right hand comer).

Third, Underinsured Coverage is substantially different from Liability Coverage.

It is governed by its own unique set of definitions, exclusions, and related provisions.

28

Important to this case, the policy defines an Underinsured motor vehicle. Equally

important, it has a specific provision addressing what is not an Underinsured motor

vehicle.

As defined by the policy, Underinsured motor vehicle means:

a land motor vehicle or trailer of any type to which a liability bond or policy applies at the time of the accident but its available limit for bodily injury is not enough to pay the full amount the covered person is legally entitled to recover as damages.

Id. at 10, A.A. 62 ..

In contrast, the next provision, ¶ D, sets out a description of what is not included

within the definition of an underinsured motor vehicle:

D. Underinsured motor vehicle does not include:

1. Any vehicle or equipment owned by or furnished or available for the regular use of you or any family member.

Id., and:

"Family member" is defined by the policy as follows:

E. Family member means a person related to you by blood, marriage, or adoption who is a resident of your household.

Id. at 3, A.A. 55.

This exclusion applies to the facts of this case. The offending Pontiac was not an

Underinsured motor vehicle because it was a "vehicle ... owned by or furnished or

available for the regular use of "you [Stephen and/or Patricia Frey] or any family

member [Stephen and/or Patricia Frey and the Frey children]." Its purpose is to

29

prevent the conversion of UIM coverage on a non-accident family owned car (here the

Mitsubishi Eclipse) into liability coverage for an injury arising from an accident in

another family owned car (here the Pontiac).

Furthermore, the policy specifically excludes UIM coverage for vehicles other than

the Mitsubishi Eclipse. Exclusion A in the Iowa policy issued to Stephen Frey as the

named insured contained the following exclusion with respect to underinsured coverage

at page 12 of21 in the Iowa policy:

Exclusions:

A. We do not provide UIM Coverage for BI sustained by a covered person while occupying, or when struck by, any motor vehicle owned by you or any family member which is not insured for UIM Coverage under this policy.

This exclusion is triggered when the instant facts are incorporated into it. However, for

purposes of clarity, it is important to keep in mind that only the Mitsubishi is insured

under the Iowa policy, not the Pontiac. With the operative facts imbedded into the

exclusion, it reads as follows:

[USAA does] not provide UIM Coverage for BI sustained by a covered person [Aven Frey] while occupying ... any motor vehicle [the offending Pontiac] owned by you [Stephen Frey, not A ven Frey] or any family member which is not insured for UJM Coverage under this [the Iowa] policy.

The last clause, italicized for emphasis, is critical to the correct reading of the exclusion.

Obviously, the Pontiac was the vehicle that A ven occupied at the time of the accident.

Just as obviously, the Pontiac was not insured under the Iowa policy; it was insured under

30

the Minnesota policy. Only the Mitsubishi was insured under the Iowa policy. Because

the Pontiac was not insured for UIM coverage under the Iowa policy, exclusion A is

triggered, and, accordingly, there is no UIM coverage running in favor of Aven Frey

arising from the November 27, 2004 accident.

CONCLUSION

In denying Appellants' motion for summary judgment and refusing to enforce its

limited-family exclusion, the trial court failed to recognize that the limited-family

exclusion is fully compliant with controlling Minnesota law, is valid, and is enforceable.

Nor is it unusual: limited-family exclusions are a centerpiece of automobile and other

insurance policies in many jurisdictions throughout the United States. In addition, the

specific arguments on which the trial court premised its denial of Appellants' motion are

equally erroneous: whether limited-family exclusions are an enumerated basis for

cancelling or reducing policy limits under the No-Fault Act is completely irrelevant, the

policy is not ambiguous, and enforcing the limited-family exclusion is not contrary to the

Preys' reasonable expectations. Nor is Aven Frey entitled to UIM benefits. For all of

these reasons, the decision of the trial court should be reversed and summary judgment

granted to Appellant USAA.

31

Dated:

32

Respectfully submitted,

ARTHUR, CHAPMAN, KETTERING

SMETAK & PIKALA, PA

By: Robert W. Ke ring, Jr. (#55499) Douglas D. McGhee (#277939) 500 Young Quinlan Building 81 South Ninth Street Minneapolis, MN 55402 Telephone: (612) 339-3500

Attorneys for Appellants United Services Automobile Association and Nathan C. Frey