March 30, 2007

UIM
Setoffs

The Pennsylvania Supreme Court, reversing the Superior Court, held in Pennsylvania National Mutual Casualty Company v. Ellen Black, that a setoff provision in the underinsured motorist provision of an automobile insurance policy, reducing the Claimant’s underinsured motorist benefits recovery, did not violate public policy, and was, therefore, enforceable, as had been originally concluded by the trial court.

The decision flowed from a 1999 motor vehicle accident. It was a two car collision, with the driver and passenger of the car insured by Pennsylvania National dying from accident injuries. That car was operated by John Myers, and the passenger was Eric Black. Todd Jamison, driving the other vehicle involved in the accident, sustained non-fatal injuries.

Black’s parents claimed that both drivers were responsible for causing the accident. Against Myers, the claim was that Myers failed to observe a stop sign. Against Jamison, the claim was that he was driving at an excessive speed.

Black’s parents brought claims against the automobile insurance carriers for the two vehicles involved in the accident.

Penn National sought a Declaratory Judgment, with the trial court determining the limits of insurance coverage available as a result of Eric Black’s death.

Insuring the Myers vehicle, in which Eric Black sustained fatal injuries, Pennsylvania National sought a Declaratory Judgment, with the trial court determining the limits of insurance coverage available as a result of Eric Black’s death. The Blacks sought both bodily injury liability limits and underinsured motorist benefits under the Penn National insurance policy on the Myers’ motor vehicle.

Progressive tendered $15,000.00 in policy limits to the Blacks, with the Blacks also recovering $60,000.00 from their insurance carrier, State Farm.

A claim was also brought against the other driver, Jamison, who was insured by Progressive with minimum coverage of limits of $15,000.00 per person and $30,000.00 per accident. Progressive tendered $15,000.00 in policy limits to the Blacks, with the Blacks also recovering $60,000.00 from their insurance carrier, State Farm. The Progressive and State Farm tenders were the maximum policy limits available under those insurance policies for the 1999 automobile accident.

Penn National maintained $100,000.00 in bodily injury liability limits, and $100,000.00 in underinsured motorist coverage on the Myers’ vehicle. The Blacks sought both coverages under Penn National’s insurance policy, contending that their son was a class two insured under Penn National’s policy, as he was a guest passenger in the insured vehicle when fatally injured.

Penn National sought a Declaratory Judgment that its policy contained a setoff provision.

With the Blacks seeking underinsured motorist coverage by virtue of Eric Black being a class two insured, Penn National sought a Declaratory Judgment that its policy contained a setoff provision, under which it had excluded any motor vehicle for which liability coverage was being provided under Penn National’s policy. It also contained a “setoff” provision for underinsured motorist coverage, stating as follows:

“the limit of liability under this coverage is reduced by any amount paid to the same person for the same accident under Part A (Liability Coverage) or Part C (Underinsured Motorist Coverage).”

The Blacks claimed that they were not bound by the policy’s per person limit because separate claims were being asserted by the mother, father, and estate against the bodily liability provisions, as well as under the underinsured motorist coverage provisions. The Blacks claimed that seeking coverage as separate “persons” did not trigger the duplicate recovery setoff provision in the underinsured motorist coverages.

Having paid $1,000 to Jamison for bodily injury liability coverage, Penn National then offered to settle the Black’s bodily injury claims for the remaining $99,000 in available policy limits.

With Penn National having paid $1,000.00 to Jamison for bodily injury liability coverage, Penn National then offered to settle the Black’s bodily injury claims for the remaining $99,000.00 in available policy limits. Penn National also offered to settle the Black’s claims for underinsured motorist coverage for $1,000.00, claiming that the remaining $99,000.00 of underinsured motorist coverage was “setoff” by the $99,000.00 being tendered to the Blacks under the bodily liability coverage.

To determine its exposure for bodily injury and underinsured motorist coverages, Penn National filed a Declaratory Judgment action, seeking to limit its exposure to the Blacks to $100,000.00. It sought to limit that exposure to the bodily injury liability limits, excluding the underinsured motorist coverage. It also sought to enforce the setoff provision under the underinsured motorist coverage.

The trial court granted summary judgment for Penn National.

The trial court granted summary judgment for Penn National, denying the Black’s summary judgment motion. The trial court held that the bodily injury coverage portion of the policy prohibited duplicate payments for the same loss against the underinsured motorist coverage.

The Blacks argued that the setoff was void against public policy.

Appealing the trial court’s grant of summary judgment, the Blacks argued that Penn National’s setoff provision was void as against public policy.

In an unpublished decision, the Superior Court reversed the trial court on the enforceability of the setoff provision. The Superior Court found the setoff provision unenforceable, in reliance upon the Third Circuit’s ruling in Nationwide v. Cosenza, 258 F. 3d197 (3d Cir. 2001). Cosenza involved a provision prohibiting a dual recovery, but did not address a setoff provision per se. Holding that the setoff provision violated the public policy underlying the Pennsylvania Motor Vehicle Financial Responsibility Law, the Superior Court reversed the summary judgment ruling, and remanded the matter for further proceedings.

With the Superior Court not having noted what public policy or what section of the MVFRL would be violated by the setoff provision, Penn National filed a petition for allowance of appeal with the Supreme Court, with the court granting that petition to address the follow question:

Did the Superior Court err in ruling that the standard setoff provision in the Penn National Insurance Policy (which reduces the amount recoverable as underinsured motorist benefits by the amount paid under the liability coverage of the same policy to the same person for the same accident) is void as against public policy?

Penn National argued that the setoff provision allows insurance companies to reduce premiums.

Arguing that its setoff provision was consistent with the cost containment public policy of the MVFRL, with Pennsylvania Courts having long-recognized that the primary purpose for the enactment of the MVFRL, and the repeal of the prior No-Fault Law, had been the legislative intent to reduce insurance premiums, Penn National argued that the setoff provision allows insurance companies to reduce premiums. It also argued that the MVFRL mandates that insurance carriers offer underinsured motorist coverage to every policyholder, but allows the policyholder to reject the coverage in order to secure a reduced premium.

Seeking affirmation of the Superior Court Ruling, the Blacks argued that the Superior Court had correctly held that the setoff provision was unenforceable in contravention of public policy under the MVFRL.

The Supreme Court held that the Blacks failed to show that Penn National’s setoff provision violated the MVFRL statute.

The Supreme Court, in an opinion issued by Justice Baer on February 21, 2007, held that the Blacks had failed to claim that the setoff provision was ambiguous, instead arguing that it was contrary to public policy. To determine whether the setoff provision conflicted with the public policy provisions of the MVFRL, the Supreme Court held that the Blacks failed to show that Penn National’s setoff provision violated the MVFRL statute. The Court further found that the Department of Insurance, an agency charged with responsibility for approving insurance policies in Pennsylvania, had itself incorporated a setoff provision in its standard form for uninsured motorist coverage.

The Supreme Court ruled that the setoff provision was enforceable, limiting the Black’s recovery to $100,000 under the bodily injury liability limits, with the underinsured motorist coverage being set off by policy provisions.

Holding that the setoff provision did not conflict with either the provisions of MVFRL, or with any public policy, the Supreme Court ruled that the setoff provision was enforceable, limiting the Black’s recovery to $100,000.00, under the bodily injury liability limits, with the underinsured motorist coverage being setoff by clear and unambiguous policy provisions. The Supreme Court further held that the setoff provision furthered the cost containment purposes of the MVFRL, by allowing consumers to weigh the benefits of increasing coverage against increased premiums. Finding that it was a public policy favored under the MVFRL, the Court noted that the Myers, the vehicle owners insured by Penn National, could have negotiated insurance coverage that did not contain a setoff provision.

Declining to rewrite the insurance policy, the Supreme Court concluded that the setoff provision was enforceable, as it was consistent with the provisions and public policy of the MVFRL, allowing individuals to balance the benefits of added coverage against the resulting increases in premiums.

In a dissenting opinion filed by Chief Justice Cappy, Justice Cappy criticized the majority opinion, indicating instead that public policy would have voided the setoff provision as unenforceable.

Explaining that underinsured motorist coverage is either characterized as “excess” coverage, aiming to maximize the potential for full compensation to the injured party, as opposed to “gap” coverage, aiming to place the injured party in the same position that they would have been had the tortfeasor carried liability coverage sufficient to compensate with the injured party’s injuries, Justice Cappy would have held that the first category, where UIM coverage is “excess,” would have supplemented the tortfeasor’s liability coverage, while in the second category, being the “gap” coverage, the UIM coverage could only fill in "any gap between the tortfeasor’s liability coverage and the injured insured’s UIM policy limit.”

Justice Cappy would have found that the setoff provision would frustrate the statutory intent of the MVFRL

Characterizing the MVFRL as providing “excess” UIM coverage, Justice Cappy would have found that the setoff provision in Penn National’s policy frustrated the statutory intent of the MVFRL to maximize the potential for a full recovery to the injured party.

Justice Cappy further concluded that the Department of Insurance’s utilization of a setoff provision in its standard uninsured motorist policy form was not persuasive as to whether the utilization of that language would validate the Penn National’s setoff provision under the Myers’ policy.

Practical Tips

As the holding in the Penn National indicates, the incorporation of a setoff provision in underinsured motorist coverage, and, for that matter, in uninsured motorist coverage, is an invaluable limitation on coverage that might otherwise be sought under both bodily injury and underinsured motorist provisions, particularly in situations where more than one tortfeasor is potentially responsible for having caused the accident triggering potential exposure for coverage.

Questions concerning this decision and like issues, can be directed to our casualty litigation department attorneys.

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