Darryl Ile was riding his motorcycle when he hit a parked car and was killed. Debra Ile, as personal representative of his estate, collected $20,000 from Titan Insurance Company, which insured the parked car; this was the maximum amount payable under the Titan policy.
Darryl Ile’s motorcycle was insured under a policy issued by Foremost Insurance Company. Ile had uninsured motorist (UM) and underinsured motorist (UIM) coverage with limits of $20,000 per person and $40,000 per accident – the lowest available limits. UM and UIM insurance, which is optional under the no-fault act, permits an injured motorist to obtain coverage from his own insurance company to the extent that a third-party claim would be permitted against an uninsured or underinsured at-fault driver. In general, UM and UIM insurance is intended to provide insurance proceeds an insured could have recovered from another driver if that driver was not uninsured or underinsured.
With regard to UM coverage, the Foremost policy stated that the company “will pay compensatory damages which an ‘insured’ is legally entitled to recover from the owner or operator of an ‘uninsured motor vehicle’ because of ‘bodily injury[.]’”
Foremost’s UIM coverage states that the company “will pay compensatory damages which an ‘insured’ is legally entitled to recover from the owner or operator of an ‘underinsured motor vehicle’ because of ‘bodily injury[.]’” The policy defines “underinsured motor vehicle” as “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.” But the policy also states that an “underinsured motor vehicle” does not include a vehicle “[t]o 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 minimum limit for bodily injury liability specified by the financial responsibility law of the state in which ‘your covered auto’ is principally garaged.” Under Michigan law, the minimum limit for bodily injury liability is $20,000/$40,000.
Foremost’s insurance policy also includes reducing clauses that preclude policyholders from collecting UM/UIM benefits for any losses paid by the other driver. With respect to an underinsured driver, the policy states that the “limit of liability shall be reduced by all sums paid because of the ‘bodily injury’ by or on behalf of persons or organizations who may be legally responsible.”
After collecting the $20,000 policy limits from the insurer of the parked vehicle, the estate sought to recover an additional $20,000 from Foremost. The insurance company denied the claim, taking the position that the parked vehicle was neither uninsured nor underinsured. According to Foremost, the parked vehicle was not uninsured because it carried bodily injury liability coverage at the minimum limit required by law, and it was not underinsured because its coverage was not less than the $20,000 coverage level selected by Darryl Ile. Foremost acknowledges that, when a policyholder selects UM/UIM coverage limits of $20,000/$40,000, it is impossible for another vehicle to be defined as “underinsured.” If the vehicle has no insurance, or has insurance with bodily injury liability limits of less than the Michigan statutory minimum of $20,000/$40,000, the vehicle is considered “uninsured.” And if the other vehicle has insurance with bodily injury liability limits equal to or greater than $20,000/$40,000, the vehicle is considered adequately insured under the policyholder’s selected limits and there is no coverage.
The plaintiffs sued Foremost for breach of contract and misrepresentation. The trial court ruled that Foremost’s policy language was unambiguous, but that the UIM coverage was illusory, because it provided no coverage whatsoever. The trial judge held that Darryl Ile’s estate is entitled to recover up to an additional $20,000 in UIM benefits to the extent the estate’s damages exceed the $20,000 already paid Titan Insurance. The trial court rejected the argument that Rory v Continental Ins Co, 473 Mich 457 (2005), required enforcement of the insurance contract as written. Rory did not prevent the court from considering whether UIM coverage under the contract was illusory, the court said.
The Court of Appeals affirmed in a published opinion. The Court of Appeals agreed with the trial court that the doctrine of illusory coverage applied where part of the insurance premium is specifically allocated to a particular type of coverage and that coverage turns out to be functionally nonexistent. The appellate court rejected Foremost’s argument that the UIM coverage was not illusory because the insured could potentially recover under the UM part of the policy. The Court of Appeals held that the trial court’s remedy – to require Foremost to reimburse the estate’s damages in an amount up to $20,000 – was appropriate, because that is the amount of benefits that an insured covered by the policy would expect to be paid if his damages exceeded the amount paid by the other driver.