Underinsured Motorist Coverage Follows the Insured: Public Policy Bars “Owned But Not Insured” Exclusions

Introduction

The Supreme Court of South Dakota’s decision in Earll v. Farmers Mutual Insurance Co. (2025 S.D. 20) addresses whether an “owned but not insured” exclusion in an underinsured motorist (UIM) policy violates state public policy. After their daughter Rebecca Earll was killed by an underinsured driver, David and Marcia Earll filed a declaratory-judgment action against Farmers Mutual to recover UIM benefits under their policy. Farmers Mutual denied the claim based on a policy exclusion. The circuit court granted summary judgment to the insurer; the Earlls appealed. In a unanimous decision, the Supreme Court reversed and held that such exclusions, when used to deny coverage to an insured individual, are void as against South Dakota public policy.

Summary of the Judgment

The Court reaffirmed that South Dakota statutes (SDCL 58-11-9.4 and 58-11-9.5) mandate UIM coverage “for the protection of persons insured” and require insurers to pay “uncompensated damages” suffered by an insured.
It held that UIM coverage “follows the insured rather than the vehicle,” consistent with long-standing precedent.
The “owned but not insured” exclusion at issue—denying coverage when the insured occupies a vehicle not listed on the policy—conflicts with the statutory public policy and is unenforceable.
Pourier v. De Smet Ins. Co. (2011) was overruled to the extent it permitted such exclusions; the circuit court’s grant of summary judgment for Farmers Mutual was reversed, and summary judgment was directed for the Earlls.

Analysis

1. Precedents Cited

Clark v. Regent Ins. Co. (1978): Established that uninsured/underinsured statutes exist to give the insured the same protection as if the at-fault driver carried minimum liability limits.
Gloe v. Iowa Mutual Ins. Co. (Gloe I, 2005): Held UM and UIM statutes share a common purpose and must be construed together; UIM coverage follows the insured, not the vehicle.
De Smet Ins. Co. v. Gibson (1996): Confirmed that policy provisions conflicting with mandatory statutes are invalid.
Heitmann v. Farmland Ins. (1993): Recognized UIM coverage was enacted to protect insured motorists and that reasonable exclusions are permitted if not inconsistent with the statutory scheme.
Wheeler v. Farmers Mut. Ins. Co. (2012): Invalidated an “owned but not insured” exclusion in the UM context; highlighted the absence of “subject to terms and conditions” language in the UM statute.
Pourier v. De Smet Ins. Co. (2011): Upheld an “owned but not insured” exclusion in a split decision; later overruled as inconsistent with statutory purpose.
Streff v. State Farm (2017): Invalidated a government-owned-vehicle exclusion in a UIM umbrella policy, applying the same public policy principles.
Larimer v. Am. Family Mut. Ins. Co. (2019): Treated an “owned but not insured” exclusion as ambiguous in the UIM context; concurring opinion reiterated statutory public policy.

2. Legal Reasoning

The Court began with the statutory framework:

SDCL 58-11-9 mandates uninsured motorist (UM) coverage “for the protection of persons insured.”
SDCL 58-11-9.4 similarly mandates underinsured motorist (UIM) coverage equal to the policy’s liability limits.
SDCL 58-11-9.5 requires insurers, “subject to the terms and conditions” of UIM coverage, to pay insureds their “uncompensated damages,” less amounts recovered from an underinsured tortfeasor.
SDCL 58-11-10 permits “reasonable policy exclusions” not inconsistent with Title 58.

Key principles applied:

Public policy is derived from the statutes and cases: UM/UIM coverage is mandated to protect insured individuals who suffer bodily injury or death by uninsured/underinsured motorists.
Coverage “follows the insured” rather than a particular vehicle.
Exclusions are permissible only if they do not frustrate the statutory purpose. An exclusion that denies coverage to an insured individual under mandatory UIM coverage is inconsistent with that purpose.

Applying these principles, the Court concluded that denying UIM benefits because Rebecca occupied her own vehicle not listed on her parents’ policy directly conflicts with the mandate to protect insured persons for “uncompensated damages.” The Legislature’s use of “subject to terms and conditions” in SDCL 58-11-9.5 was interpreted to allow reasonable limitations on recovery method (e.g., offset by tortfeasor benefits), not to authorize wholesale denial of coverage to a qualifying insured.

3. Impact

This decision will have several important effects on South Dakota insurance law:

It reaffirms that UIM coverage is personal to the insured; insurers cannot draft around mandatory coverage by linking benefits exclusively to specific vehicles.
Insurers writing South Dakota motor-vehicle policies must remove or refrain from enforcing “owned but not insured” exclusions that bar coverage for qualifying insureds in UIM claims.
Policyholders gain clearer assurance that they will receive UIM benefits up to their limits, regardless of which covered vehicle they occupy at the time of an accident.
It fosters statutory coherence: UM and UIM statutes will continue to be construed together, avoiding the anomalous and inconsistent outcomes produced by Pourier and Wheeler.

Complex Concepts Simplified

UM vs. UIM: Uninsured Motorist (UM) coverage pays when the at-fault driver has no insurance. Underinsured Motorist (UIM) coverage pays the “difference of limits” when the at-fault driver’s insurance is insufficient.
Difference-of-Limits Statute (SDCL 58-11-9.5): Insurers credit the insured with whatever the at-fault driver’s insurer paid, then cover the remainder up to the insured’s UIM limit.
“Subject to Terms and Conditions”: This phrase allows insurers to set reasonable rules governing how and when UIM benefits are paid—but it does not authorize exclusions that conflict with a statute’s core purpose.
“Coverage Follows the Insured”: Benefits attach to the person who bought the policy, not strictly to each vehicle listed on the declarations page.

Conclusion

The Supreme Court of South Dakota in Earll v. Farmers Mutual Insurance Co. has reaffirmed that mandatory UIM coverage exists to protect insured persons for their uncompensated damages after an accident with an underinsured motorist. An “owned but not insured” exclusion that denies coverage to a qualifying insured individual—simply because the insured was in a vehicle not listed on the policy—violates the clear public policy expressed in SDCL 58-11-9.4 and 58-11-9.5. In overruling Pourier, the Court restored coherence to the UM/UIM statutory scheme and reinforced the fundamental principle that UIM coverage follows the insured, not the vehicle. Insurers must thus cease reliance on these void exclusions, ensuring that South Dakota drivers receive the full protection their policies promise and the law demands.