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Babinski v. American Family Ins. Group: US District Court : INSURANCE - drop-down household exclusion with 'stealth' language unenforceableUNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Donald Babinski )
v. ) ORDER
American Family Insurance )
This matter is before the Court on cross-motions for summary
judgment. Plaintiff asks the Court to find the insurance policy
purchased from defendant offers coverage of up to million.
Defendant asks the Court to limit the coverage to ,000.
Plaintiff’s motion is granted; defendant’s motion is denied.
Plaintiff, Donald Babinski, purchased a million insurance
policy from defendant. While the policy was in effect, his son,
John Babinski, and John’s wife, Kathi, were killed in an automobile
accident while John was driving plaintiff’s truck. Kathi’s estate
commenced a wrongful death action against John’s estate, of which
plaintiff is the personal representative. On April 4, 2007,
defendant sent plaintiff a letter stating his policy “provide[d]
liability coverage for any possible wrongful death claims made by
Kathi Babinski’s next of kin.” Ex. A; Court Anderson Aff.
Notwithstanding this declaration, American Family later cited
the policy’s exclusion provisions in support of its contention that
it was not required to indemnify plaintiff to the full million
policy limit. Defendant did, however, acknowledge its duty to pay
something under the policy’s “Liability Provision,” which states:
We will pay compensatory damages an
insured person is legally liable for
because of bodily injury and property
damage due to the use of a car or utility
We will defend any suit or settle any
claim for damages payable under this
policy as we think proper.
Ex. 1; Donald Babinski Aff.
The policy’s definition of “insured person” includes “any
person using your insured car.” But under “Exclusion 10,” the
policy does not cover:
Bodily injury to:
a. Any person injured while
operating your insured car;
b. You or any person related to you
and residing in your household;
c. Any person related to the
operator and residing in the
household of the operator.
This exclusion applies only to the extent
the limits of liability of this policy
exceed the limits of liability required by
Defendant contends that, under the “household exclusion” or
“drop-down exclusion,” it is only required to indemnify plaintiff
up to ,000.00, rather than the policy limit. Compl. ¶ 9; Answer
¶ 3. Defendant further claims South Dakota law applies, requiring
the Court to reduce its financial responsibility to plaintiff. The
Insurance policy interpretation, and the application of those
terms to the facts of the case, are questions of law. Franklin v.
W. Nat’l Mut. Ins. Co., 574 N.W.2d 405, 406 (Minn. 1998). It is
axiomatic that a court will resolve any ambiguity against the
insurer and in accordance with the reasonable expectations of the
insured. Caledonia Cmty. Hosp. v. St. Paul Fire & Marine Ins. Co.,
239 N.W.2d 768, 770 (Minn. 1976).
Summary judgment is appropriate when the evidence, viewed in
the light most favorable to the nonmoving party, presents no
genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S.
317, 322-23 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
246 (1986). The party opposing summary judgment may not rest upon
the allegations set forth in its pleadings, but must produce
significant probative evidence demonstrating a genuine issue for
trial. See Anderson, 477 U.S. at 248-49.
A. Household Exclusion
The Court begins by invalidating the policy’s “household
exclusion.” While swiftly done, this holding merely recognizes
that Minnesota has held such exclusions invalid as a matter of law
since 1979. See Hime v. State Farm Fire & Cas. Co., 284 N.W.2d 829
(Minn. 1979). This invalidation appears to be in accord with South
Dakota’s practice, and likely yields the same result. Id. at 832;
see also MGA Ins. Co. v. Goodsell, 707 N.W.2d 483, 488 (S.D. 2005)
(invalidating household exclusion of liability coverage for injury
to resident relative of permissive user).
B. Drop-Down Exclusion
Next, the Court denies defendant’s request to enforce the
policy’s “drop-down exclusion” and limit its liability to 3% of the
policy’s face amount. The “drop-down” would occur if the Court
enforced the closing term of “Exclusion 10” as requested by
American Family. The clause states: “This exclusion applies only
to the extent the limits of liability of this policy exceed the
limits of liability required by law.”
This exclusion is not at all self-explanatory. Defendant
would have the Court interpret it to mean the policy pays only the
amount the state requires as minimum liability insurance for a
driver to drive in the state. The Court takes judicial notice of
Minnesota’s law requiring a driver to maintain a minimum of ,000
in liability coverage in order to drive in this state. The policy
has a face amount of million. If the Court applied the
exclusion as the insurer suggests, the policy would pay ,000, or
3% of the policy’s face value. The Court declines to do so.
As an initial matter, the Minnesota Supreme Court has not
addressed the enforceability of such exclusions. The Minnesota
Court of Appeals touched this question in Frey v. United States
Auto. Assoc., 2007 WL 4634034 (Minn. Ct. App. Jan. 8, 2008). The
Frey court appeared sympathetic to such a drop-down. The Court
declines to accept the Court of Appeals reading for three reasons.
First, the Court considers that, while Minnesota’s appellate
courts opinions are persuasive authority and entitled to respectful
consideration, they are not binding. Marvin Lumber and Cedar Co.
v. PPG Indus., Inc., 223 F.3d 873, 883 (8th Cir. 2000).
Second, this case is factually distinguishable from Frey.
There, the Minnesota Court of Appeals enforced drop-down limits on
bodily-injury coverage for a family member who resided in the home.
Id. at *2. But that court also recognized the non-resident victim
could recover a sum above the statutory minimum. Id. at *7. Here,
the parties agree John and Kathi did not reside with the insured.
Pl.’s Mot. Summ. J. 2; Def.’s Mot. Summ. J. 1-2. Thus, even under
Frey, plaintiff would likely be entitled to recover more than
American Family contends.
Third, and importantly, the Frey insurance policy set forth in
writing - in actual figures - the amount it would pay to resident
drivers. It did not use the “stealth” language employed in
This leads the Court to find American Family’s policy vague,
ambiguous, and falls far below any ordinary consumer’s reasonable
expectation. The American Family policy before this Court has a
face value of million; it never refers to any other sum. And it
is not difficult - it is impossible - to tell from within the
policy’s four corners the amount it will pay. According to
defendant, the company pays the minimum insured amount in the state
in which the accident occurs. Again, the Court takes judicial
notice that Minnesota and South Dakota impose differing minimum
insurance sums. Minnesota’s is ,000.00; South Dakota’s is
,000.00. This means that if the same accident took place in
South Dakota, American Family would not even pay the 3% it is
offering here; it would pay ,000, a 2.5% sum. Reading within
the policy’s four corners, it is impossible to discern the sum it
Even if the Court applied the provision in question as a
“drop-down exclusion,” the policy remains ambiguous. There is no
reference to the state’s minimum insurance amount to which
defendant would drop down. Both the Court, and certainly the
insured, search in vain for any such statement within the policy’s
four corners. This makes the policy unclear, vague, and
misleading, such that the Court declines to enforce it.
Finally, taking all of the facts in the light most favorable
to plaintiff, the Court finds Donald Babinski is entitled to
recover attorney’s fees. Where an “insurer has breached the
insurance contract in some respect[,]” an insured is entitled to
recover the attorney’s fees and costs. Chicago Title Ins. Co. v.
Fed. Deposit Ins. Co., 172 F.3d 601, 605 (8th Cir. 1999).
Accordingly, defendant shall pay the amount of ,712.33 in
For these reasons, the Court denies defendant’s motion for
summary judgment and grants plaintiff’s cross-motion. On this
record, the Court cannot, of course, determine the liability
American Family bears. But the Court does find the policy’s
exclusion invalid. This is a million policy, and so it shall
IT IS SO ORDERED.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated: April 11, 2008
s/James M. Rosenbaum
JAMES M. ROSENBAUM
United States Chief District Judge
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Michael E. Douglas, Attorney at Law, Saint Paul MN. All Rights
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