352 F.3d 804

NATIONWIDE MUTUAL INSURANCE COMPANY, v. Pamela RILEY, Appellant.

No. 00-1961.

United States Court of Appeals, Third Circuit.

Argued May 13, 2003.

Filed Dec. 18, 2003.

*805Neil Hoffman, Frederic S. Karpf, (Argued), Law Offices of Neil Hoffman, Buck Village Professional Commons, Feaster-ville, PA, for Appellant.

Matthew S. Crosby, Gregory S. Feather, Handler, Henning & Rosenberg, Harrisburg, PA, Scott B. Cooper, (Argued), Schmidt, Ronca & Kramer, Harrisburg, PA, Amicus Curiae for Appellant Pennsylvania Trial Lawyers Association.

James C. Haggerty, (Argued), Swartz, Campbell & Detweiler, Philadelphia, PA, for Appellee.

Before AMBRO, BECKER and STAPLETON, Circuit Judges.

OPINION OF THE COURT

AMBRO, Circuit Judge.

Nationwide Mutual Insurance Company (“Nationwide”) filed suit for a declaratory judgment to determine its obligation, if any, to pay underinsured motorist benefits to Pamela Riley under her father’s insurance policy. As we conclude that Nationwide is not so required, we affirm the District Court’s decision to grant summary judgment to Nationwide.

I. Facts and Procedural History

In July 1997 insurance agent P. Kowa-lewski issued Arthur Riley, Pamela Riley’s father, a personal automobile insurance policy with Nationwide that provided un-derinsured motorist benefits1 in the amount of $100,000 per person and $300,000 per accident. In September of that year the same agent issued Pamela a personal automobile insurance policy with Nationwide for her 1991 Volkswagon Jetta, which provided underinsured motorist benefits in the amount of $25,000 per person and $50,000 per accident.2

*806One month later a third party’s vehicle ran a stop sign and struck Pamela’s Jetta, resulting in her injury. She recovered $15,000-the liability limit of the third party’s insurer (TlCO)-as well as the maximum ($25,000) in underinsured motorist benefits under her own policy with Nationwide.

Pamela also claimed but was denied un-derinsured motorist benefits from Nationwide under her father’s policy. The basis for her claim was the clause included in that policy providing that Nationwide “will pay compensatory damages including derivative claims, which are due by law to you or a relative from the owner or driver of an underinsured motorist vehicle because of bodily injury suffered by you or a relative.” Nationwide denied her claim, stating that the household exclusion clause in her father’s policy barred the recovery that would otherwise have been available to Pamela. That clause (with emphasis supplied) provided:

This coverage does not apply to:
[bjodily injury suffered while occupying a motor vehicle owned by you or a relative but not insured for Underinsured Motorist coverage under this policy; nor to bodily injury from being hit by any such motor vehicle.

Nationwide filed suit in October 1999 seeking a declaratory judgment to the effect that it was not required to pay under-insured motorist benefits to Pamela under the insurance policy issued to her father. The District Court ordered cross-motions for summary judgment to be filed. In May 2000 the District Court granted summary judgment to Nationwide, concluding that, by the terms of the household exclusion clause, Pamela was not entitled to recover under her father’s policy. This appeal followed.3

We stayed the appeal pending the resolution of Prudential Property & Casualty Insurance Company v. Colbert, in which we certified to the Pennsylvania Supreme Court the question of the validity, under similar circumstances, of a household exclusion clause. On December 31, 2002, the Pennsylvania Supreme Court issued its opinion. Prudential Prop. & Cas. Ins. Co. v. Colbert, 572 Pa. 82, 813 A.2d 747 (2002). Having considered the supplemental letters filed by the parties, we now conclude that we are bound by Colbert to affirm the District Court’s decision.

II. Discussion

Underinsured motorist insurance (“UIM”) “is a first party coverage intended to supplement the inadequate motoring liability insurance of an at-fault tort-fea-sor.” Theodore J. Smetak, Underinsured Motorist Coverage in Minnesota: Old Precedents in a New Era, 24 Wm. Mitchell L.Rev. 857, 859 (1998); see also Paylor v. Hartford Ins. Co., 536 Pa. 583, 640 A.2d 1234, 1235-36 (1994) (purpose of UIM is to protect an “insured (and his [or her] additional insureds) from the risk that a negligent driver of another vehicle will cause injury ... and will have inadequate coverage to compensate for the injuries caused by his [or her] negligence” (quoting Wolgemuth v. Harleysville Mut. Ins. Co., 370 Pa.Super. 51, 535 A.2d 1145, 1149 (1988))).

Under Pennsylvania’s prior insurance scheme, the Commonwealth required motorists to carry uninsured, but not underin-sured, motorist insurance. Pennsylvania No-Fault Motor Vehicle Insurance Act, 40 Pa. Cons.Stat. § 1009.101-1009.701 (1974) (repealed P.L. 26, No. 11, § 8(a) (Feb. 12, 1984)). As a result, individuals who were involved in accidents with tortfeasors driv*807ing uninsured vehicles would be able to recover on their own policies, but would not be able to recover were the tortfeasor merely to have underinsured his or her vehicle. Paylor, 640 A.2d at 1236 (“[Claimants would find themselves in a better position were the tortfeasor’s vehicle totally uninsured, rather than underin-sured.” (quoting Davis v. Gov’t Employees Ins. Co., 500 Pa. 84, 454 A.2d 973, 976 (1982))).

The Pennsylvania legislature rectified this anomaly by passing the Motor Vehicle Financial Responsibility Law, 75 Pa. Cons. Stat. §§ 1701-1799.7 (“MVFRL”), which mandated the issuance of both uninsured and underinsured motorist coverage as part of every motor vehicle liability insurance policy issued in the Commonwealth. Paylor, 640 A.2d at 1236. In 1990, the MVFRL was amended to require that an insurance company continue to offer un-derinsured and uninsured motorist coverage, but to eliminate the requirement that an insured accept those coverages. Id. at 1236 n. 1 (citing 75 Pa. Cons.Stat. § 1731(a)).

The MVFRL has presented the Pennsylvania courts with many issues “involving claimants’ eligibility for underinsured motorists benefits and exclusionary clauses in automobile insurance policies.” Id; see also, e.g., Windrim v. Nationwide Ins. Co., 537 Pa. 129, 641 A.2d 1154 (1994); Eichelman v. Nationwide Ins. Co., 551 Pa. 558, 711 A.2d 1006, 1009 (1998); Burstein v. Prudential Prop. and Cas. Ins. Co., 570 Pa. 177, 809 A.2d 204, 206 (2002); Colbert, 813 A.2d at 753. This case is the latest in that long line of decisions. At their base are two principles of contract interpretation. A clear and unambiguous contract provision must be given its plain meaning. Burstein, 809 A.2d at 206. However, contract provisions will not be enforced if to do so would be contrary to a clearly expressed public policy. Id. Appellees do

not claim that the language of the clause that the District Court deemed to bar their recovery is ambiguous; rather, they claim that to enforce that language would be contrary to the public policy expressed by the Pennsylvania legislature in the MVFRL.

1. Public Policy of the MVFRL

The Pennsylvania Supreme Court has cautioned against invalidating contract provisions because of vague public policy concerns articulated by the courts. Eichelman, 711 A.2d at 1008. It has noted that “[p]ublic policy is to be ascertained by reference to the laws and legal precedents and not from general considerations of supposed public interest.” Id. “[O]nly dominant public policy” will “justify the invalidation of a contract as contrary to that policy,” manifested by “long governmental practice or statutory enactments, or [by] violations of obvious ethical or moral standards.” Id.

The predecessor legislation to the MVFLR, the No-Fault Act, embodied the public policy concern of “maximum feasible restoration” to accident victims. Burstein, 809 A.2d at 207. But, according to the Pennsylvania Supreme Court, the MVFLR parted emphasis from that principle. While “other public policies may underlie” the MVFLR, its “dominant and overarching public policy” is “legislative concern for the spiralling consumer cost of automobile insurance.” Id. at 208 n. 3. And the Court continues to assert that whether public policy concerns justify invalidating an exclusionary clause in an insurance contract must be determined on the facts of each case. Colbert, 813 A.2d at 752 (citing Paylor, 640 A.2d at 1240).

2. Validity of Household Exclusion Clauses

In Paylor, the Pennsylvania Supreme Court first addressed the validity of exclu*808sion clauses under the MVFRL. Paylor involved a “family car exclusion,” which “excludes a vehicle owned by or furnished or available for the regular use of the named insured or any family member from the definition of an underinsured motor vehicle.” 640 A.2d at 1234. In other words, if an insured is injured by a “family car” which is underinsured, the policy will not compensate the insured as it would had the insured been injured by a third person. Janet Paylor sued on behalf of her mother, Betty Dymond, who was killed in a single-vehicle accident involving the motor home operated by her husband, Fred Dymond. Id. at 1235. The motor home was insured by Foremost Insurance Company; the Dymonds’ other three vehicles were insured by Hartford Insurance Company. Id. Paylor recovered the limits of the liability coverage under the Foremost policy, and then sought to recover underinsured motorist benefits under the Hartford policy. Id. Hartford denied coverage based on the family car exclusion, and the Supreme Court upheld the insurance company’s denial. Id.

The Court first rejected Paylor’s suggestion that any sort of contractual exclusion was per se invalid. Id. at 1241 n. 6 (rejecting arguments that “the ‘family car exclusion’ is repugnant to the purposes and policy of the MVFRL”). Instead, it adopted an approach in which “[t]he enforceability [of these clauses] is dependent upon the factual circumstances presented in each case.” Id. at 1240. The Court announced a “general rule that such provisions are invalid as against the policy of the MVFRL,” but acknowledged a “limited exception” of validity “where a plaintiff is attempting to convert underinsured coverage into liability coverage.”4 Id. Because underinsured motorist coverage is less expensive than liability coverage, the Court did not want to encourage individuals to scrimp on the purchase of liability coverage and rely on their underinsured motorist coverage in the event of an accident. Id. (“[UJnderinsured motorist coverage is not designed to relieve an insured or his family from the failure to purchase adequate liability coverage.”).

In subsequent cases, the so-called general rule has morphed into the minority rule, as most exclusion clauses have been deemed valid. See Nationwide Mut. Ins. Co. v. Ridder, 105 F.Supp.2d 434, 436 (E.D.Pa.2000) (“While the Pennsylvania Supreme Court has held that the enforceability of the exclusion is dependent upon *809the factual circumstances presented in each case, it has been upheld in nearly all of the cases in which it has been considered.”); see also Paylor, 640 A.2d at 1234; Windrim, 641 A.2d at 1158; Eichelman, 711 A.2d at 1009; Troebs v. Nationwide Ins. Co., No. CIV.A. 98-CV-3556, 1999 WL 79555 (E.D. Pa. Jan 20, 1999); Burstein, 809 A.2d at 208; Colbert, 813 A.2d at 753.

Here, in a variation of the situation in Paylor, Pamela Riley failed to purchase sufficient underinsured motorist benefits to cover her injuries and then sought additional recovery under her father’s policy. The policy limits of the underinsured motorist coverage provided by her father’s Nationwide policy-$100,000-were four times the limits of her own policy. Under Pennsylvania case law prior to Colbert, the exclusion in this case would be upheld as consistent with the public policy of the MVFRL, providing as it does an incentive for drivers to purchase adequate insurance coverage at the outset, thus later precluding payouts by insurers for lesser premiums that, while short-term positive for an individual insured, in the long term result in higher premiums for other insureds.

3. The Colbert Decision

At the end of December 2002 the Pennsylvania Supreme Court decided the question requested of it by our Court: “whether the ‘other household vehicle’ exclusion contained in the Prudential policy is void as against the public policy of the MVFRL,” as applied to Adam Colbert. Colbert, 813 A.2d at 748-49. In Colbert, the Pennsylvania Supreme Court reaffirmed its holding in Paylor that “the application of public policy concerns in determining the validity of an insurance exclusion is dependent upon the factual circumstances presented in each case.” Id. at 752. The Court reviewed its recent decision in Bur-stein and noted that the reasoning in that case “focused upon whether the insurer was compelled to underwrite unknown risks that it has not been compensated to insure.” Id. at 754. It concluded that the public policy concern of cost-containment expressed in the MVFRL validates those exclusions that “protect insurers against forced underwriting of unknown risks that insureds have neither disclosed nor paid to insure. Thus, operationally, insureds are prevented from receiving gratis coverage, and insurers are not compelled to subsidize unknown and uncompensated risks by increasing insurance rates comprehensively.” Id. at 753 (quoting Burstein, 809 A.2d at 208 (emphasis omitted)).

Applying these principles to the circumstances of Colbert’s case, the Pennsylvania Supreme Court found the following facts significant:

1. Colbert purchased underinsured motorist vehicle coverage from State Farm and received the maximum amount payable-the coverage for which he paid.
2. Colbert and his parents did not pay Prudential to insure his car and the household exclusion clause in his parents’ Prudential insurance policy expressly excluded his vehicle from coverage under that policy.
3. The record did not suggest that Colbert or his parents ever disclosed Colbert’s vehicle to Prudential.

The Court concluded that, given this set of facts, voiding the household exclusion clause would penalize Prudential by forcing it to pay for risks it never knew for premiums it never received. Id. at 754. Indeed, absent the exclusion, Adam Colbert would receive “gratis coverage or, more accurately, double coverage." Id. In this context, it declined to permit such a result.

Yet the Colbert Court did not limit its conclusions to the particular factual circumstances before it. It noted as a gener*810al matter that voiding the household exclusion clause

would empower insureds to collect UIM benefits multiplied by the number of insurance policies on which they could qualify as an insured, even though they only paid for UIM coverage on one policy. As a result, insureds would receive benefits far in excess of the amount of coverage for which they paid, as would be the case here were we to void the exclusion. The same would be true even if the insureds never disclose any of the other household vehicles to the insurers.

Id. (emphasis in original).

4. Application of Colbert to This Case

The facts in Colbert are strikingly similar to the facts before us. Adam Colbert’s motor vehicle was insured by State Farm Insurance Company. Like Pamela Riley, at the time that Colbert was involved in an accident involving this vehicle, he resided with his parents. Also, Colbert’s parents had insurance policies containing a household exclusion clause. And Colbert received the liability insurance policy limits from the individual who struck his vehicle and the underinsured motorist policy limits from State Farm, but was denied the benefits from his parents’ policy with Prudential. Unlike Pamela Riley, however, Colbert’s parents’ vehicles were insured by a different insurance company-Prudential.

There is, therefore, one meaningful distinction between this case and Colbert. In contrast to Colbert, in which the Supreme Court noted that “there is nothing to suggest that Adam or his parents ever disclosed Adam’s vehicle to [the insurer],” here the insurer, Nationwide, knew of Pamela’s car because it insured Pamela and her father. Indeed, while the record is not entirely clear on this point, it would appear that the two used the same insurance agent. This factual distinction means that, unlike Colbert, Nationwide was not being asked to underwrite an unknown risk.

The fact that the two vehicles were insured by the same insurance company does not, however, turn the tide. Even though the Colbert Court noted as a relevant fact that the insurer did not know of Adam’s vehicle, that fact does not appear critical to its analysis.5 Upholding the household exclusion clause in this case will further the policy goals of the MVFRL of containing insurance costs, and therefore does not counsel differently than Colbert. In exchange for a reduction in insurance premiums, Arthur Riley chose to exclude the other cars in his household from his underinsured motorist policy. Now that his daughter Pamela has already recovered to the limit of her own underinsured motorist policy, she seeks benefits for which she has not paid. She has presented no evidence, however, that Nationwide factored in the risk of her having an accident with an uninsured motorist when it calculated Arthur’s premium. Indeed, we may presume that it did not, as Pamela’s insurance policy was issued months after Arthur’s policy. Voiding the exclusion clause would therefore allow Pamela added underinsured policy recoveries, and force Nationwide to pay for items not factored into its risk calculations.

Further, the Colbert court also discussed its broader concerns about negating household exclusion clauses in general and those concerns are implicated here as well. Voiding such a clause “would empower *811insureds to collect UIM benefits multiplied by the number of insurance policies on which they could qualify, ” and Pamela Riley “would receive benefits far in excess of the amount of coverage for which [she] paid.” Colbert, 813 A.2d at 754 (emphasis in text). Nationwide “would be forced to increase the cost of insurance, which is precisely what the public policy behind the MVFRL strives to prevent.” Id. at 754-55.

III. Conclusion

Under the test set out by the Pennsylvania Supreme Court, the exclusion provision we review would require an insurer to underwrite risks that the insured did not pay to insure. Because here Arthur Riley did not pay to insure his daughter’s vehicle under his underinsured motorist policy, the exclusion is valid and she cannot recover under that policy. We therefore affirm the District Court’s order granting summary judgment to Nationwide.

Nationwide Mutual Insurance v. Riley
352 F.3d 804

Case Details

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Nationwide Mutual Insurance v. Riley
Decision Date
Dec 18, 2003
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352 F.3d 804

Jurisdiction
United States

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