State Farm Mutual Automobile Insurance v. Thomas , 316 Ark. 345 ( 1994 )

Robert L. Brown, Justice.

This is the second appeal taken in this case. See State Farm Mut. Auto. Ins. Co. v. Thomas, 312 Ark. 429, 850 S.W.2d 4 (1993). We dismissed the first appeal for failure to comply with Ark. R. Civ. P. 54(b). Appellant State Farm Mutual Automobile Insurance Company appeals once more and raises the issue of whether the trial court erred in applying the penalty statute (Ark. Code Ann. § 23-79-208 (Supp. 1991) for failure to pay underinsurance benefits upon demand in this case. We conclude that the trial court did err in assessing statutory penalties and attorney’s fees, and we reverse and remand.

Steve and Carol Thomas, husband and wife, and their two daughters, Jennifer and Lindsay, were involved in a three-car accident with John Laughlin, deceased, and David Spears on March 29, 1991. Laughlin had carried liability coverage of $100,000 per person with Farmer’s Insurance Company. Spears had liability coverage of $25,000 per person with Farm Bureau Insurance Company.

On April 9, 1991, the Thomases filed suit against Laughlin and Spears. On November 1, 1991, the Thomases made demand on State Farm, their carrier, to pay underinsured benefits and sent the carrier a description of partial medical expenses incurred by Lindsay Thomas. According to the demand, Lindsay Thomas, who was five years old at the time of the accident, had sustained' head injuries, including skull fractures, and a broken leg. The payment of underinsured benefits was not forthcoming by State Farm. On February 3, 1992, the Thomases filed a second amended complaint naming State Farm as a party defendant and praying for the $25,000 in benefits, for attorney’s fees, and for a 12 percent penalty for failure to pay benefits on demand. In the complaint the Thomases alleged that Lindsay Thomas’s damages exceeded all liability coverage and that payment under the under-insured coverage was warranted.

On June 10, 1992, the day before trial, Farmer’s Insurance Company paid the policy limits — $100,000 — to the Thomases on behalf of its insured, John Laughlin, deceased. Within an hour on that same day, State Farm tendered the $25,000 in underinsured benefits to the Thomases. Though this is somewhat unclear in the record, it appears that no payment of liability benefits had been made at that time by Farm Bureau Insurance Company, the liability carrier for David Spears.

On July 8, 1992, the trial court entered judgment against State Farm in the amount of $5,000 in attorney’s fees and a 12 percent penalty to be applied against the $25,000 paid. All other parties to this action have now been dismissed.

We begin by observing once again that our statute, Ark. Code Ann. § 23-79-208, being penal in nature, is strictly construed. Shepherd v. State Auto Prop. & Cas. Ins. Co., 312 Ark. 502, 850 S.W.2d 324 (1993); Miller’s Mutual Ins. Co. v. Keith Smith Co., 284 Ark. 124, 680 S.W.2d 102 (1984). The penalty nature of the statute is directed against unwarranted delaying tactics of insurers. Simmons First National Bank v. Liberty Mutual Ins. Co., 282 Ark. 194, 667 S.W.2d 648 (1984).

State Farm contends that the language of its policy with the Thomases controls:

THERE IS NO COVERAGE UNTIL THE LIMITS OF LIABILITY OF ALL BODILY INJURY LIABILITY INSURANCE POLICIES OR BONDS THAT APPLY TO THE INSURED’S BODILY INJURY HAVE BEEN USED UP BY PAYMENT OF JUDGMENT OR SETTLEMENTS.

This language is highlighted in the policy in capital letters. We agree with State Farm’s position.

Clearly, all liability benefits had not been “used up by payment of judgment or settlements” prior to June 10, 1992;. State Farm paid immediately after one liability carrier — Farmer’s Insurance Company — paid its policy limits. Indeed, State Farm paid its maximum benefit even before it knew what the liability carrier for the other alleged tortfeasor, Farm Bureau Insurance Company, would pay. If anything, State Farm paid before all liability benefits had been amassed. Because the penalty statute, § 23-79-208, only requires payment “within the time specified in the policy,’’.State Farm’s payment of benefits was timely.

The fact that the bold exclusion in State Farm’s policy is not repeated a second time in the policy under the general heading for other exclusions is not fatal and does not create an ambiguity, as the Thomases contend. The exclusion appears on the front page of the policy endorsement providing underinsured coverage and is clear and precise in its meaning.

Nor do we read a public policy into either our common law or the underinsured motorist statute (Ark. Code Ann. § 23-89-209 (Supp. 1991)) which militates against this decision. It is practical and pure common sense that underinsurance should not pertain until it is determined whether the insured is in fact underinsured. That means, under the policy language in this case, waiting until all liability benefits have been made available in order to trigger payment of this supplemental coverage.

The Thomases urge that the injuries to Lindsay clearly showed that underinsured coverage would come into play and that State Farm should have evaluated her claim in that light and made payment. The Thomases add that this is precisely what State Farm did with regard to its payment of underinsured benefits to Steve Thomas before all liability benefits had been paid on his behalf. We do not agree that the underinsured motorist coverage statute, § 23-89-209, places this obligation on the carrier.

The underinsured motorist statute contemplates payment by the tortfeasor’s insurance company. It also contemplates a determination of the injured party’s damages. There is no directive under the statute that the underinsured carrier must investigate and evaluate a claim prior to the payment of liability coverage by the tortfeasor’s insurance company. Also, in this case the State Farm policy is clear and precise in stating that there is no under-insured coverage until liability insurance is “used up.” Of course, should the liability carriers be dilatory in their payments or operate in bad faith, the insured party has remedies.

The order of the trial court assessing a penalty and attorney’s fees under § 23-79-208 against State Farm is reversed, and this cause is remanded for an appropriate order to be entered.

Reversed and remanded.

Newbern, J., dissents. Corbin, J., not participating.