The Illinois Supreme Court held in Thounsavath v. State Farm Mutual Automobile Insurance Co., 2018 IL 122558, that an insurer cannot rely on a named driver exclusion to deny underinsured motorist coverage to its insured because the exclusion is unenforceable under Illinois’ mandatory automobile insurance statutory scheme and the state’s public policy.
State Farm provided automobile liability and uninsured motorist (UM)/underinsured motorist (UIM)coverage to Thounsavath, which contained a named driver exclusion stating no liability shall attach “while any motor vehicle is operated by Clinton M. Evans.” Thounsavath was injured while riding as a passenger in Evans’ vehicle and she submitted a UIM claim to State Farm. State Farm denied her claim, relying upon the named driver exclusion. Thounsavath then sought a declaration that the named driver exclusion, as applied to her, violated the Illinois Insurance Code and Illinois public policy.
The Illinois Supreme Court unanimously agreed with Thounsavath. The court began its analysis by acknowledging that named driver exclusions are generally permitted in Illinois. However, in this particular context, the court found the exclusion to violate the Illinois Insurance Code. The court reasoned that the purpose of mandatory liability insurance is “to protect the public by securing payment of their damages” and further, “to place the insured in the same position he would have occupied if the tortfeasor had carried adequate insurance.” It follows that if a tortfeasor is insured for less than the claimant bargained for under her policy, UIM coverage should ensure the claimant will still be compensated up to the limits of her own policy. Accordingly, because Evans’ liability insurance was inadequate, Thounsavath should be able to seek the protection of her UIM benefits purchased from State Farm. The court determined that because UIM coverage was mandated by statute, the named driver exclusion could not exclude that coverage through a contractual provision. Notably, the court did not find persuasive that Thounsavath entered a vehicle with a driver she knew was excluded under the policy.
Thounsavath inhibits insurers’ ability to selectively exclude risks. Now, insurers have effectively only two options for named driver exclusions: (1) they can exclude a certain driver from liability coverage, such as excluding a son under a family’s policy, or (2) they can exclude a driver from making uninsured claims under the insured’s policy. Public policy considerations weigh in favor of allowing named driver exclusions to be applied to a named insured in certain situations. Here, Thounsavath entered into a contract that completely excluded Evans as a risk. Considering the risks involved and the voluntariness of Thounsavath’s agreement, excluding Evans should have been seen as a reasonable restriction on Thounsavath’s benefits under a policy. What is more, despite knowing there was no coverage, Thounsavath chose to ride in a car with Evans. A bright-line rule that UIM coverage must be available in every instance prevents an insurer from excluding undesirable risks, such as Evans, thereby impeding an insurer’s ability to underwrite. Also, required automobile insurance is designed to protect the public. Here, it could be determined that Thounsavath was a party to a private contract, not a member of the public. At bottom, Thounsavath secured a lower premium by excluding Evans as a risk, but State Farm was prohibited from availing itself of the benefit of the bargain.
Auto carriers should familiarize themselves with this decision and consider alternatives or modifications to their named driver exclusions.