                                                                                                                           Opinions of the United
2003 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


12-18-2003

Nationwide Mutl Ins v. Riley
Precedential or Non-Precedential: Precedential

Docket No. 00-1961




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                           PRECEDENTIAL

                                Filed December 18, 2003

        UNITED STATES COURT OF APPEALS
             FOR THE THIRD CIRCUIT


                     No. 00-1961


    NATIONWIDE MUTUAL INSURANCE COMPANY,
                           v.
                    PAMELA RILEY,
                            Appellant

     Appeal from the United States District Court
         for the Eastern District of Pennsylvania
           (D.C. Civil Action Nos. 99-cv-05141)
    District Judge: Honorable Thomas N. O’Neill, Jr.

                 Argued May 13, 2003
Before: AMBRO, BECKER and STAPLETON, Circuit Judges

              (Filed: December 18, 2003)

                    Neil Hoffman, Esquire
                    Frederic S. Karpf, Esquire (Argued)
                    Law Offices of Neil Hoffman
                    Buck Village Professional Commons
                    1200 Bustleton Pike - Suite 9
                    Feasterville, PA 19053
                      Attorneys for Appellant
                                  2


                          Matthew S. Crosby, Esquire
                          Gregory S. Feather, Esquire
                          Handler, Henning & Rosenberg
                          1300 Linglestown Road
                          P.O. Box 1177
                          Harrisburg, PA 17108
                          Scott B. Cooper, Esquire (Argued)
                          Schmidt, Ronca & Kramer
                          209 State Street
                          Harrisburg, PA 17101
                            Amicus Curiae for Appellant
                            Pennsylvania Trial Lawyers
                            Association
                          James C. Haggerty, Esquire (Argued)
                          Swartz, Campbell & Detweiler
                          1601 Market Street, 35th Floor
                          Philadelphia, PA 19103
                            Attorney for Appellee


                   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. Kowalewski issued
Arthur Riley, Pamela Riley’s father, a personal automobile
insurance    policy  with    Nationwide    that   provided
underinsured motorist benefits1 in the amount of $100,000

1. Underinsured motorist benefits, discussed further below, provide
coverage in the event that an insured is involved in an accident with a
tortfeasor who has inadequate liability coverage.
                                    3


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
  One 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 (TICO)—as well as the maximum ($25,000) in
underinsured motorist benefits under her own policy with
Nationwide.
  Pamela also claimed but was denied underinsured
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:

2. Riley signed a waiver when obtaining coverage for her own vehicle. By
signing the waiver, she agreed as follows:
    rejecting stacked limits of underinsured motorists coverage under
    the policy for myself and members of my household under which the
    limits of coverage available would be the sum of limits for each
    motor vehicle insured under the policy. Instead the limits of
    coverage that I am purchasing shall be reduced to the limits stated
    in the policy. I knowingly and voluntarily reject the stacked limits of
    coverage. I understand that my premiums will be reduced if I reject
    this coverage.
When coverage is stacked, “[t]he limits of coverages available . . . shall
be the sum of the limits for each motor vehicle as to which the injured
person is an insured.” 75 Pa. Cons. Stat. Ann. § 1738(a). Put simply, the
colloquial word “stacked” (to add on or accumulate) has become an
insurance term of art.
                                  4


      This coverage does not apply to:
      [b]odily 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 underinsured 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, 813 A.2d 747 (Pa. 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-feasor.” 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., 640 A.2d 1234,
1235-36 (Pa. 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

3. We have appellate jurisdiction under 28 U.S.C. § 1291. Our review of
a decision by the District Court to grant summary judgment is plenary.
Omnipoint Communications Enters. L.P. v. Newtown Township, 219 F.3d
240, 242 (3d Cir. 2000).
                              5


the injuries caused by his [or her] negligence” (quoting
Wolgemuth v. Harleysville Mut. Ins. Co., 535 A.2d 1145,
1149 (Pa. Super. 1988))).
   Under Pennsylvania’s prior insurance scheme, the
Commonwealth required motorists to carry uninsured, but
not underinsured, 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 driving 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
(“[C]laimants would find themselves in a better position
were the tortfeasor’s vehicle totally uninsured, rather than
underinsured.” (quoting Davis v. Gov’t Employees Ins. Co.,
454 A.2d 973, 976 (Pa. 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 underinsured 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., 641 A.2d 1154 (Pa. 1994);
Eichelman v. Nationwide Ins. Co., 711 A.2d 1006, 1009 (Pa.
1998); Burstein v. Prudential Prop. and Cas. Ins. Co., 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
                               6


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, 711 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 exclusion 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
                                   7


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

4. The Court examined four decisions, three of which had held the
exclusion clause was enforceable. See Paylor, 640 A.2d at 1236-39
(discussing Wolgemuth, 535 A.2d at 1149, Newkirk v. United Services
Automobile Association, 564 A.2d 1263, 1266 (Pa. Super. 1989), and
Kelly v. Nationwide Insurance Co., 606 A.2d 470, 474 (Pa. Super. 1992),
in which the court held the exclusion clause valid, and Marroquin v.
Mutual Benefit Insurance Co., 591 A.2d 290, 296 (Pa. Super. 1991), in
which the court held the exclusion clause invalid). The Paylor Court, in
analyzing the Marroquin Court’s opinion (which had looked to the law of
Minnesota), noted that there is a “general rule under [Minnesota] state
law . . . that a policy provision which excluded underinsured motorist
benefits when the insured is injured while occupying a vehicle owned by
the insured or a family member is invalid,” subject to an exception
“when the plaintiff attempts to convert his inexpensively purchased
underinsurance into additional liability insurance.” 640 A.2d at 1239
(citing American Motorist Ins. Co. v. Sarvela, 327 N.W.2d 77 (Minn.
                                   8


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. (“[U]nderinsured 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 the
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-

1982)). Apparently this analysis the Pennsylvania Supreme Court found
persuasive, as it later in the opinion adopted the same rule, but without
citation to Minnesota law. Id. at 1240 (“Allowing the ‘family car
exclusion’ to bar coverage in cases where a plaintiff is attempting to
convert underinsured coverage into liability coverage is a limited
exception to the general rule that such provisions are invalid as against
the policy of the MVFRL.”) (citing Sherwood v. Bankers Standard Ins. Co.,
621 A.2d 1015, 1017 (Pa. Super. 1993)).
                                 9


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 Burstein 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.
                               10


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
general 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
                                  11


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 insureds 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

5. Indeed, we do not think that, had Prudential been notified of the
existence of Colbert’s car (so that it was not, in fact, being asked to
underwrite an unknown risk), it would have changed the outcome of
Colbert, given the presence of the household exclusion clause and the
tenor of the Pennsylvania Supreme Court’s opinion.
                               12


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.

A True Copy:
        Teste:

                    Clerk of the United States Court of Appeals
                                for the Third Circuit
