Forrest, J. Grosse, C.j., concurs. Scholfield, J., dissents by separate opinion.
On January 2, 1985, Robert and Nancy Kelly were seriously injured when struck by a pickup truck driven by Max Pau, an employee of AFC, Inc., while on company business. The registered and legal owner of the pickup was AFC, Inc., but the vehicle was listed on a United Pacific policy issued to Graydon Smith, AFC's president and majority shareholder.
The Kellys sued Pau, the Smiths, and AFC. Pau stated in interrogatories that AFC: (1) was the registered owner of the truck; (2) was the "actual owner"; (3) was benefited by the use of the vehicle; (4) paid the expenses for the trip that the truck was on; and (5) paid for the insurance, gas, oil, maintenance and repair of the truck. The trial court dismissed the Kellys' claims against the Smiths after the Smiths argued that they were neither the owner of the truck nor the employer of Pau, and thus owed no duty to the Kellys.*fn1 Neither United Pacific, Smith, Pau, nor AFC claimed that Smith owned the pickup. The Kellys' case proceeded against AFC and Pau.
The United Pacific policy designating the Smiths as named insureds contains a provision which extends coverage to the following:
(a) With respect to an Owned or Hired Automobile,
(2) an executive officer or partner of the Named Insured;
(4) any other person while using such an Automobile with the permission of the Named Insured, provided his Use thereof is within the scope of such permission . . .
(b) With respect to a Non-owned Automobile,
(2) an executive officer or partner of the Named Insured . . .
The United Pacific policy defines an "owned automobile" as "an Automobile (a) owned by the Named Insured . . .".
The United Pacific liability policy had a limit of $500,000 and listed the particular pickup truck involved in the accident. In addition to the above policy, the Smiths also had a $1 million "umbrella" policy subject to a $10,000 self-insured retention. During settlement negotiations, although the recovery sought exceeded $500,000, United Pacific never issued a reservation of rights letter and never claimed that the umbrella policy was unavailable. In 1987, the Kellys settled for $500,000, paid under the United Pacific automobile liability policy.
Because the Kellys claimed damages in excess of $500,000, they sought additional benefits on their underinsured motorist (UIM) policy with Public Employees Mutual Insurance Company (PEMCO). The Kellys claimed that under the United Pacific policy Pau was uninsured/underinsured because United Pacific was not contractually obligated to cover Pau -- despite the settlement of $500,000.
PEMCO refused payment, maintaining that Pau was insured under the United Pacific policies. PEMCO sought a declaratory judgment and moved for an order of partial summary judgment, claiming that it was entitled to a $1,500,000 credit (the combined limits of the Smiths' two United Pacific policies) against any recovery that the Kellys might obtain in underinsured motorist arbitration. The trial court agreed, granting a partial summary judgment against the Kellys. After the parties stipulated that the recovery sought was less than $1,500,000, the court granted full summary judgment dismissing the Kellys' claims against PEMCO. In denying the motion for reconsideration,
the trial court stated that it believed "Mr. Pau was a permissive user of a vehicle owned by a named insured under the terms ...