                                                                                                                           Opinions of the United
2007 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


4-20-2007

State Farm Mutl Auto v. Rosenthal
Precedential or Non-Precedential: Precedential

Docket No. 06-2158




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                                         PRECEDENTIAL

       UNITED STATES COURT OF APPEALS
            FOR THE THIRD CIRCUIT


                       No. 06-2158


       STATE FARM MUTUAL AUTOMOBILE
               INSURANCE CO.,

                             Appellant

                               v.

                BRIAN D. ROSENTHAL


    On Appeal from the United States District Court
         for the Eastern District of Pennsylvania
              (D.C. Civil No. 05-cv-01156)
  District Court Judge: Honorable Bruce W. Kauffman


                 Argued March 13, 2007

 Before: FUENTES, VAN ANTWERPEN, and SILER*,
                      Circuit Judges.
                      _____________
* The Honorable Eugene E. Siler, Jr., Senior United States
Circuit Judge for the Sixth Circuit, sitting by designation.
                   (Filed April 20, 2007)

John J. McGrath (Argued)
McKissock & Hoffman, P.C.
1818 Market Street, 13th Fl.
Philadelphia, PA 19103

      Counsel for Appellant

Richard P. Hunter, Jr. (Argued)
1800 J.F.K. Blvd., Suite 1500
Philadelphia, PA 19103

      Counsel for Appellee

Scott B. Cooper (Argued)
Schmidt, Ronca & Kramer
209 State Street
Harrisburg, PA 17101

Matthew S. Crosby
Handler, Henning & Rosenberg
1300 Linglestown Road
Harrisburg, PA 17110

      Counsels for Amicus Appellant Pennsylvania Trial
      Lawyers




                OPINION OF THE COURT

                               2
VAN ANTWERPEN, Circuit Judge.

        Appellant State Farm brought this declaratory
judgment action against Appellee Brian D. Rosenthal
alleging that his underinsured motorist claim was time barred
by Pennsylvania’s four-year statute of limitations on contract
claims. To resolve this action, the District Court had to
predict when the Pennsylvania Supreme Court would begin
running the statute of limitations on such claims. Ruling in
favor of Rosenthal, the District Court predicted that the
statute of limitations on such claims would begin to run when
the insurer denies the insured’s claim. We will affirm the
District Court’s ruling in favor of Rosenthal on different
grounds, as we predict that the Pennsylvania Supreme Court
would start running the statute of limitations on the date on
which the insured settles with or obtains an award from the
adverse driver for less than the value of his damages.

                              I.

       The facts of this case are not in dispute. On June 8,
1998, Brian Rosenthal, a State Farm insured who resides in
Pennsylvania, was struck from behind by another driver. In
August 1999, Rosenthal met with a vocational specialist who
opined that Rosenthal sustained a loss of earning capacity in
excess of $2 million as a result of two accidents—the one in
June 1998 and an earlier one in March of the same year. Also
in August 1999, Rosenthal obtained a report from an
economist who estimated his lost wages due to these

                              3
accidents at $1 million.1

        On June 9, 2003, Rosenthal reached an agreement to
settle his claim against the driver who hit him for $85,000.
This other driver had a liability policy with a limit of
$100,000. In a letter dated July 9, 2003, Rosenthal’s attorney
requested that State Farm approve the settlement agreement
and notified the company about his intent to pursue an
underinsured motorist (UIM) claim against State Farm as
follows: “As you are aware, I will be pursuing a UIM case
under Mr. Rosenthal’s policy with your company.”2 App. at
A25. State Farm notified Rosenthal’s attorney of its consent
to the settlement and continued to correspond with him about
the details of his underinsured motorist claim for the next
year.

      On July 22, 2004, Rosenthal’s attorney demanded
underinsured motorist arbitration from State Farm. In
response, on March 11, 2005, State Farm filed a complaint in


      1
    Rosenthal is a lawyer who had his own law firm at the time
of the accident. After the accident, Rosenthal claimed he could
not bill as many hours because of neck and back pain.
  2
   Underinsured motorist (UIM) claims arise when an insured’s
damages exceed those allowed for under the adverse driver’s
policy. Underinsured motorist coverage, therefore, picks up
where the adverse driver’s policy leaves off. In contrast,
uninsured motorist (UI) claims arise when the adverse driver has
no insurance at all.

                               4
the District Court seeking a declaratory judgment that
Rosenthal’s underinsured motorist claim was time barred
because of Pennsylvania’s four-year statute of limitations3 on
contract claims. Rosenthal filed a motion to dismiss, arguing
the statute of limitations had not run. His motion was later
converted into a motion for summary judgment. State Farm
filed a response and a cross-motion for summary judgment.
Their motions presented an issue that has yet to be decided by
the Pennsylvania Supreme Court: when the statute of
limitations begins to run on underinsured motorist claims.

        On January 20, 2006, the District Court denied State
Farm’s summary judgment motion and granted Rosenthal’s,
predicting that the Pennsylvania Supreme Court would not
start running the four-year statute of limitations on
underinsured motorist claims until the insurer denies such a
claim. In this case, the District Court found that date to be in
March 2005, when State Farm refused to arbitrate and filed a
declaratory judgment action. Under this reasoning,
Rosenthal’s underinsured motorist claim does not become
stale until 2009.

        State Farm filed this timely appeal on March 31, 2006.

                               II.

        The District Court had subject matter jurisdiction over


    3
      The parties do not dispute that the four-year statute of
limitations of 42 Pa. Cons. Stat. § 5525(a)(8) applies.

                               5
this diversity action pursuant to 28 U.S.C. § 1332(a)(1), and
we have jurisdiction to review the District Court’s grant of
summary judgment pursuant to 28 U.S.C. § 1291. This
Court’s review of the District Court’s grant of summary
judgment is plenary. Anderson v. Consolidated Rail Corp.,
297 F.3d 242, 246 (3d Cir. 2002) (citation omitted).

        Because this case involves a novel question of
Pennsylvania law not addressed by the Supreme Court of the
Commonwealth, our task “is to predict how that court would
rule.” Pa. Glass Sand Corp. v. Caterpillar Tractor Co., 652
F.2d 1165, 1167 (3d Cir. 1981). In making this prediction,
“we must consider the pronouncements of the lower state
courts.” Connecticut Mutual Life Ins. Co. v. Wyman, 718 F.2d
63, 65 (3d Cir. 1983). Although such pronouncements “are
not controlling on an issue on which the highest court of the
state has not spoken, [we] must attribute significant weight to
these decisions in the absence of any indication that the
highest state court would rule otherwise.” Wisniewski v.
Johns-Manville Corp., 759 F.2d 271, 273-74 (3d Cir. 1985)
(citations omitted).

                              III.

       Based on our review of relevant Pennsylvania
Superior Court caselaw, the parties’ briefs, and the positions
taken by the parties at oral argument, there seems to be three
possibilities as to when the Pennsylvania Supreme Court
would start running the four-year statute of limitations on
underinsured motorist claims (listed chronologically): (1) the
date of the accident (as State Farm argues); (2) the date on

                               6
which the insured settles with the adverse driver for less than
the insured’s damages (as Rosenthal argues); or (3) the date
on which the insurer rejects the insured’s underinsured
motorist claim (as the District Court found and as amicus
curiae advocates). The parties advance a variety of legal
arguments and policy justifications for selecting one date
over another. After reviewing the relevant caselaw on this
topic and considering the practical consequences of this
decision, we predict that the Pennsylvania Supreme Court
would start running the four-year statute of limitations on
underinsured motorist claims on the date on which the
insured settles with the adverse driver for less than the value
of the insured’s damages.

                               A.

      We begin our analysis with a review of relevant
Pennsylvania law.

        While no Pennsylvania state court has addressed the
statute of limitations for underinsured motorist claims, there
is ample caselaw from the Pennsylvania Superior Court
regarding the statute of limitations for uninsured motorist
claims. See Clark v. State Farm Auto. Ins. Co., 599 A.2d
1001 (Pa. Super. Ct. 1991); Seay v. Prudential Prop. & Cas.
Ins., 543 A.2d 1166 (Pa. Super. Ct. 1988); Boyle v. State
Farm Mut. Auto. Ins. Co., 456 A.2d 156 (Pa. Super. Ct.
1983). These cases are in agreement that the four-year statute
of limitations begins to run when the right to payment of a
benefit accrues to the insured, i.e., when “(1) the insured is in
a motor vehicle accident; (2) the insured sustains bodily

                                7
injury as a result of the accident; and (3) the insured knows of
the uninsured status of the other owner or operator.” Clark,
599 A.2d at 1005.

        In Wheeler v. Nationwide Mutual Insurance Company,
a district court in the Eastern District of Pennsylvania
examined this Superior Court line of uninsured motorist cases
and determined “[the three] criterion [listed above] apply also
to underinsured motorist cases.” 749 F.Supp. 660, 662
(E.D.Pa. 1990). Interpreting these criterion in the
underinsured context, Wheeler concluded the statute does not
begin to run until the underinsured status of the adverse
driver is definitively established, and reasoned as follows:

       Unlike an uninsured motorist case where the issue of
       whether a motorist has coverage at all is easily
       determined, the question of whether an insured
       motorist has enough coverage is not. This court holds
       that it is only at the time that [the insured] actually
       settled . . . with the underinsured motorist’s insurance
       company . . . that the status of the situation as one
       involving an underinsured motorist was definitely
       ascertainable.

Id. (emphasis in original). Consequently, Wheeler concluded
that the statute of limitations does not begin to run on an
underinsured motorist claim until the insured settles his claim
with the underinsured driver or obtains a judgment against
him.

       The reasoning of Wheeler seems to have been

                               8
followed until another court in the Eastern District rejected it
in 2005 in Motorist Mutual Insurance Company v. Durney,
No. 04-3232, 2005 U.S. Dist. LEXIS 33752 (E.D.Pa. Dec.
16, 2005). That case involved a Motorist Mutual insured who
suffered approximately $100,000 in injuries as a result of a
1997 accident with a driver who had only $35,000 of liability
coverage. The insured settled with the underinsured driver for
$35,000 (with the consent of Motorist Mutual) in 1999, and
then corresponded with Motorist Mutual about her ongoing
treatment costs and her medical condition over the next five
years. In 2004, without ever having denied its insured’s claim
or notifying its insured about the need to commence
arbitration, Motorist Mutual filed a declaratory judgment
action asking the District Court to find the insured’s claim
time barred. The District Court ruled the claim was not time
barred, essentially analogizing a dispute over underinsured
motorist benefits to any other type of contract dispute:

       In contracts disputes generally, the statute of
       limitations does not begin to run when the contractual
       rights vest, but when the contract is breached. By this
       reasoning, a statute of limitations will not start to run
       in the UIM context when the insured’s rights to UIM
       under the insurance contract vest (i.e., when the
       insured settles with the other motorist), but when the
       cause of action against her insurer accrues.

Id. at *10 (emphasis added). The Court went on to find that a
cause of action does not “accrue” in the underinsured context
until the insurer denies the insured’s claim. As a
consequence, the statute of limitations at issue in Motorist

                               9
Mutual did not commence until 2004, when Motorist Mutual
indicated it would breach the contract by filing a declaratory
judgment action. In support of its decision, the District Court
cited Burkshire Mutual Insurance Company v. Burbank, 664
N.E.2d 1188, 1190 (Mass. 1996), a case in which the
Supreme Court of Massachusetts found that such a rule
comported with the rule adopted in several other states.4

        Two other Pennsylvania Superior Court cases are
relevant to the statute of limitations issue before us: Harper v.
Providence Washington Insurance Company, 753 A.2d 282
(Pa. Super. Ct. 2000) and Krakower v. Nationwide Mutual
Insurance Company, 790 A.2d 1039 (Pa. Super. Ct. 2001). In
Harper, an insured sought to sue his insurance company for
the damages he sustained in excess of those covered by the
adverse driver’s policy prior to settling his claim with the
adverse driver. The insurance company argued this claim was
premature under their contract, as the insured had not yet
exhausted the liability policy of the adverse driver. The
Superior Court rejected this argument, finding “exhaustion
clauses as a predicate for coverage under underinsurance
provisions of an insurance contract [] void as against public
policy.” Harper, 753 A.2d at 285 (internal quotation and
citation omitted). It further found that, as long as the insured
credits the insurance company the face value of the adverse
driver’s liability coverage, the insured’s underinsured


   4
     Burkshire Mutual seemed to approve of this approach, in
part, because insurers could contract around it. See Burkshire
Mut., 664 N.E.2d at 1190 n.4.

                               10
motorist claim may commence before his claim against the
adverse driver is settled.

        In Krakower, an insured won an underinsured motorist
award from his insurance company in front of a panel of
arbitrators in January 2000 and then lost his claim against the
adverse driver in front of a jury in February 2000. The insurer
challenged this result, arguing it was “contrary to law.”
Krakower, 790 A.2d at 1040. In upholding Harper, the
Superior Court acknowledged the inconsistent result, but
noted that “[h]ad an arbitration award been entered in favor
of the insurer and a jury verdict rendered in favor of the
insured, the insured would have no right to seek to void the
arbitration ruling because it was inconsistent with the jury
verdict.” Id. at 1041. Accordingly, it held that, “irrespective
of the outcome of the third party action, it is appropriate to
allow the underinsured motorist arbitration action to proceed
where the insurer is given credit for the full amount of the
third party liability policy limits.” Id.

                              B.

        Turning now to the question before us, we note at the
outset that neither the approach advocated by State Farm nor
the approach adopted by the District Court are well-supported
by existing Superior Court caselaw. As discussed above,
State Farm argues the Pennsylvania Supreme Court would
start running the statute of limitations on underinsured
motorist claims on the date of the accident. They argue this
approach is dictated by the Superior Court’s decisions in
Krakower and Harper. We disagree. While these two cases

                              11
hold that an insured may pursue an underinsured claim
immediately after an accident (because this is when the right
to the benefit “vests”), nothing in these cases suggests this is
when an insured must pursue such a claim. In addition,
interpreting Krakower and Harper in this way would lead to
an incongruous result: The statute of limitations on
underinsured claims would begin running before the statute
on uninsured claims. This would be a particularly harsh result
given how much more difficult it is to ascertain whether a
driver is underinsured as compared to uninsured.
Furthermore, as amicus curiea note, State Farms’ approach
would encourage an insured to assert an underinsured
motorist claim against his insurer solely to preserve such a
claim, resulting in unnecessary court filings.

       The approach adopted by the District Court, i.e.,
waiting to start the statute of limitations until the insurer
denies the underinsured claim, is equally unsupported by
existing Pennsylvania caselaw. The District Court based its
decision largely on Motorist Mutual, which in turn is based
on the well-established principle of contract law that a cause
of action does not accrue until one party to the contract
breaches. Since a breach does not occur in this context until
the insurer denies its insured’s underinsured motorist claim,
the District Court reasoned the statute of limitations could not
begin running until this time. This approach, while amply
supported by general contract principles, did not consider the
Superior Court’s decisions with respect to uninsured motorist
claims. Given the similarity between uninsured and
underinsured claims, we believe these decisions should help
guide our analysis. In addition, the District Court’s approach

                              12
does not account for the proclivity of Pennsylvania to treat
insurance contracts differently from other types of contracts.
See, e.g., Motor Vehicle Financial Responsibility Law, 75 Pa.
Cons. Stat. §§ 1701-1799.7 (specially regulating motor
vehicle insurance contracts); Collister v. Nationwide Life Ins.
Co., 388 A.2d 1346, 1351 (Pa. 1978) (explaining “normal
contract principles [are] no longer applicable in insurance
transactions”); Brakeman v. Potomac Ins. Co., 371 A.2d 193,
196-97 (Pa. 1977) (rejecting a “strict contractual approach”
when construing an insurance policy because such an
approach “fails to recognize the true nature of the relationship
between insurance companies and their insureds”); Drelles v.
Manufacturers Life Ins. Co., 881 A.2d 822, 836 (Pa. Super.
Ct. 2005) (explaining that not all contract principles apply to
consumer insurance contracts); Pressley v. Travelers Prop. &
Cas. Corp., 817 A.2d 1131 (Pa. Super. Ct. 2003) (explaining
“because the insurer is in the business of writing insurance
agreements, the recent trend in insurance cases has been away
from strict contractual approaches”); but see Nationwide Mut.
Ins. Co. v. Johnson, 676 A.2d 680, 684 (Pa. Super. Ct. 1996)
(asserting that an insurance contract is no different than any
other contract). Finally, as a practical matter, this approach
has no mechanism for limiting stale claims and could be seen
as encouraging insurers to either routinely deny underinsured
motorist benefits to claimants (to start the clock running) or
compel arbitration with respect to such claims, potentially
confusing consumers.

       Rosenthal argues the Pennsylvania Supreme Court
would begin running the statute of limitations on the date the
insured settles his claim with or obtains an award from the

                              13
underinsured driver, and we believe he is correct. First, this
approach has roots in existing Pennsylvania caselaw. See
Wheeler, 749 F.Supp. at 662 (deriving this approach from the
Superior Court’s uninsured motorist claim line of cases).
Second, the adoption of this approach harmonizes the law
with respect to the statute of limitations involving uninsured
and underinsured claims. That is, regardless of whether the
adverse driver is uninsured or underinsured, the date on
which the statute of limitations begins to run is essentially the
same, i.e., the date on which the insured definitively
ascertains the deficient insurance status of the adverse driver.
Finally, this approach is practical, in that it gives an insured
time to assess his own damages and learn of the adverse
driver’s policy limits. In this way, it eliminates the need for
the insured to prematurely file an underinsured motorist claim
in order to protect his rights. Accordingly, we hold that the
four-year statute of limitations begins to run when the insured
settles his claim with or obtains an award from the
underinsured driver.

        Applying the date-of-settlement approach to
Rosenthal’s claim, we conclude that it is not time barred.
Rosenthal settled his claim against the adverse driver in 2003,
and, consequently, his July 2004 demand for underinsured
motorist arbitration was well within the four-year statute of
limitations.

                              IV.

      For the foregoing reasons, we will affirm, on different
grounds, the District Court’s decision to grant Rosenthal’s

                               14
Motion for Summary Judgment and deny State Farm’s Cross-
Motion for Summary Judgment.




                           15
