S.D. Court Rules on When Umbrella Kicks in as Excess Coverage

Deciding an issue never settled before in South Dakota, the state Supreme Court said that secondary, umbrella insurance does not kick in until another insurer’s primary coverage has paid its full limit. The unanimous ruling came in a case involving a Jan. 16, 1999, traffic accident in Brown County. A pickup driven by Gene Frederickson, but owned by Larry Lorenzen, collided with a vehicle driven by Laurel Pehl of Barnard.

Six people in the Pehl vehicle were injured, and they sued Frederickson for damages. It was determined that Frederickson was negligent, and National Farmers Union Property and Casualty Co. settled the claims for $735,000.

National Farmers Union, which was the pickup owner’s insurance company, then sued Frederickson’s insurer to be reimbursed for a portion of the claims. Frederickson had a $50,000 limit on his liability coverage with Farm & City Insurance Co. of West Des Moines, Iowa. Lorenzen had two auto policies with National Farmers Union. The first policy had a $500,000 payment limit per accident; an umbrella policy provided an extra $1 million in liability coverage.

National Farmers Union first paid the $500,000 limit on Lorenzen’s primary policy and then paid the remaining $235,000 of the settlement as coverage under the larger $1 million umbrella policy.

But the pickup owner’s insurer said in the lawsuit that its umbrella policy did not come into play until Farm & City had paid its $50,000 share of the damages. Farm & City countered that its policy provided no benefit because the other insurer was obligated to pay all of the claims. In an alternative argument, Farm & City said if it was obligated to contribute for the damages, only $11,186 would be owed as its share of the excess settlement.

In essence, both companies’ policies required that the other insurer first pay to the limit of its policy before they would pay. Circuit Judge Jack Von Wald of Aberdeen ruled in March that the exclusionary provisions of both auto policies were repugnant, but he said Farm & City must pay $11,186.

Reversing Von Wald, the Supreme Court said only the National Farmers Union umbrella coverage was a true excess insurance policy and was last in line for payment, meaning Farm & City must pay the $50,000 limit of Frederickson’s primary policy.
“Farm & City would only be last in priority if (its) policy were specifically purchased to apply over and above the underlying liability policy (National Farmers Union) plus the umbrella policy,” wrote Justice Judith K. Meierhenry.