The Florida Supreme Court returned from its summer hiatus last week with its first regular release of opinions since July 8, and sent this message: when the grandkids come to visit, don’t let them drive your car! 

Among the new opinions released on Thursday, August 25, 2011 was State Farm Mutual Automobile Insurance Co. v. Menendez, which resolved a split between the 3rd and 4th DCAs on the application of so-called “Household Exclusion” clauses in auto insurance policies when an accident occurs while an insured vehicle is being driven by someone who does not live with the policyholder, and a passenger who lives with the driver (but not the policyholder) is injured.

In Menendez, Grandma was the named insured under a State Farm policy and the vehicle’s owner. Granddaughter and her Mom and Dad (who lived with her, not with Grandma) went for a ride in Grandma’s car. Grandma let Granddaughter drive. Granddaughter got into an accident. Everyone was injured.

The question was: Was State Farm on the hook to indemnify their injuries? Under the Household Exclusion in the policy, State Farm was off the hook for coverage of injuries suffered by “any insured or any member of an insured’s family residing in the insured’s household.” The effect of the household exclusion is straightforward in the common scenario, where a named insured (Grandma) is driving, and a family member who lives with her (e.g., Grandpa) is injured. The Household Exclusion operates to exclude coverage for Grandpa’s injuries.

But the situation in Menendez was trickier, because Grandma’s policy also indemnified her for accidents that might occur while her car was being driven by someone who borrowed it. And to that end, the policy defined the term “insured” as including “any other person while using such a car” with the named insured’s consent.

The good news for Grandma is that when Granddaughter was driving Grandma’s car, she was considered to be an “insured” under the policy, so State Farm, not Grandma, would be on the hook for claims by injured third parties. The bad news for Grandma is that since Granddaughter is an “insured,” her injuries aren’t covered under Grandma’s policy.

The question was whether the Household Exclusion also precludes coverage of injuries to family members who don’t live with the named insured but do live the authorized borrower of the car who is deemed to be an “insured” under the policy.  In other words, were the injuries suffered by Granddaughter’s Mom and Dad, who lived with her, but not Grandma, excluded from coverage by the Household Exclusion? 

The Supreme Court unanimously held that they were.  Like most appellate decisions in insurance coverage disputes, the discussion began and ended with interpreting a single phrase, in this case the Household Exclusion’s wording that it excluded injuries to ““any member of an insured’s family residing in the insured’s household.” 

The court had little trouble concluding that this phrase “unambiguously excludes coverage for any bodily injury claims asserted by members of a permissive-driver insured‟s family residing in the household of the permissive-driver insured.”  That conclusion followed naturally from the policy’s definition of the term “insured” as including permissive drivers such as Granddaughter as well as the named insureds.  “Named insured” was a separately defined term under the policy, so the clause would have used that term if only the members of the named insured’s household were to be excluded.   

Although Grandma’s side (as well as the trial court and the 3rd DCA) thought it significant that the phrase referred to family members of “an insured” but used the term “the insured” when referring to who those family members must live with to be excluded, the Supreme Court found that distinction unimportant.  The policy used the phraseology of “an insured” and “the insured” interchangeably, it said, so there was no reason to think that using “the insured” in this phrase signified that only members of the named insured’s household were excluded. 

Given this unanimity and what seems like a pretty straightforward construction of the policy terms, you might ask why the 3rd DCA (and trial court) didn’t reach the same result.  My hunch — and it’s only a hunch — is that it may have had something to do with the commonly understood notion of what household exclusions are supposed to do.  

That is to say those exclusions have historically been understood to be directed at excluding claims by immediate family members against the policy owner (e.g., my daughter sues me for injuries she suffered in an accident we got into while I drove her to school), which due to both parties being part of the same economic unit, is a lot like suing yourself and carries the potential for fraudulent and/or collusive claims. 

But suppose I lend you my car, which I know has faulty brakes.  When the brakes inevitably fail, you get into an accident.  After taking your daughter home from the hospital, you sue me for negligently causing the injuries your daughter suffered in the accident.  Now it seems a lot less intuitive that your claims should be excluded from coverage.  In that scenario, the fraud/collusion rationale doesn’t apply, and it makes a lot less sense to exclude coverage of your daughter’s injuries simply because she lives with you.  There’s also the anomaly that resulted in Menendez case that if Grandma had driven rather than riding shotgun, Mom and Dad’s injuries would have been covered, because Granddaughter wouldn’t have been an “insured,” and they didn’t live with Grandma.     

It’s hard to know whether those types of considerations played any role in the courts below, but they obviously didn’t sway any of the Supreme Court justices. Instead, Menendez joins a long list of decisions showing that when it comes to interpreting insurance policies, about the only thing the Court cares about is the literal meaning of the words and phrases used in the policy. Whether or not that may lead to counterintuitive results.

But if Grandma had simply driven instead of letting Granddaughter do it, everyone’s injuries would have been covered, except of course for Grandma’s injuries.  So the other lesson here for grandparents is not to let your grandchildren drive when they come to visit.  Or make sure they don’t get into accidents.