July 22, 2010

Phantom
Prejudice

By Kevin L. Connors

Addressing an insured’s notice requirement for a phantom vehicle accident when claiming entitlement to uninsured motorist benefits, the Pennsylvania Supreme Court recently held, in Vanderhoff v. Harleysville Insurance, decided on July 6, 2010, that the insurance carrier must prove that it has been prejudiced by an insured’s failure to provide earlier notice, thereby reversing the Superior Court’s ruling that the insured’s notice was not sufficiently timely to allow the uninsured claim to be pursued by its insured.

The underlying facts involved a 2001 motor vehicle accident, with three vehicles allegedly involved. The accident occurred in Luzerne County, infamous for other unrelated judicial developments.

Harleysville’s insured was driving a truck in the course of his employment, with Harleysville insuring both the vehicle, and also providing workers’ compensation insurance coverage.

The motor vehicle accident in question involved two vehicles attempting to turn left with Vanderhoff’s vehicle behind another driver’s vehicle. When the traffic light turned green, Vanderhoff took his eyes off the road for a second, began to drive forward, immediately discovering that the car in front of him had stopped suddenly, as the driver of that vehicle claimed to have stopped to avoid an unidentified car in front of it.

The unidentified vehicle, which if it was involved in the accident, might have been a “phantom vehicle,” potentially triggering coverage for uninsured motorist benefits.

The motor vehicle accident was reported to police, although the police report did not contain any mention of the unidentified vehicle, which if it was involved in the accident, might have been a “phantom vehicle,” potentially triggering coverage for uninsured motorist benefits, as defined under Section 1702 of the Pennsylvania Motor Vehicle Financial Responsibility Law (“MVFRL”).

The relevant provision in the MVFRL defines an uninsured motor vehicle as “an unidentified motor vehicle that causes an accident resulting in injury provided the accident is reported to the police or proper governmental …”

Vanderhoff then filed a workers’ compensation claim with Harleysville, although Vanderhoff did not specifically report either to his employer or to Harleysville, the alleged involvement of the phantom vehicle in the motor vehicle accident.

Harleysville denied the claim for uninsured motorist benefits, on grounds that Vanderhoff had never provided notice of the allegedly phantom uninsured motor vehicle.

Almost eight months after the accident, Vanderhoff filed a claim for uninsured motorists benefits, in response to which, Harleysville denied the claim for uninsured motorist benefits, on grounds that Vanderhoff had never provided notice of the allegedly phantom uninsured motor vehicle, when reporting the accident to the police, or when reporting the accident to his employer and to Harleysville, for workers’ compensation purposes.

Disputing the claim for uninsured motorist’s benefits, Harleysville filed a Declaratory Judgment action, with Vanderhoff filing, in turn, a Petition for Appointment of a Mutual Arbitrator, for purposes of convening an uninsured motorist benefits arbitration panel.

Presumably consolidating the actions filed by Harleysville and Vanderhoff, the trial court held hearings to determine whether an uninsured motor vehicle was involved in the accident, as well as whether Vanderhoff had satisfied the notice requirements under the MVFRL, and Harleysville’s insurance policy.

The police officer also testified that it was not unusual for drivers to report differing versions of the facts, and to sometimes leave out details regarding the accident.

Testimony presented at the trial court hearing included that of Vanderhoff, and the other driver, as well as testimony from the police officer. The police officer testified that Vanderhoff had requested that the police report be amended, several months after the accident, to include reference to the phantom vehicle, but that request had been denied by the police department.

The police officer also testified that it was not unusual for drivers involved in motor vehicle accidents to report differing versions of the facts, and to sometimes leave out details regarding the accident, in the immediate aftermath of a collision or crash.

In addition to the police officer and the two drivers testifying, a Harleysville representative testified that Vanderhoff did not give notice of the uninsured motorist claim until eight months after the accident, and that the claims representative was not aware that Vanderhoff had also filed a related workers’ compensation claim with Harleysville.

Trial Court

The trial court found that Vanderhoff’s testimony was “more credible and believable” than the other witnesses that had testified in court.

The trial court then entered judgment in favor of Vanderhoff, with Harleysville immediately appealing that order to the Superior Court. The trial court found in favor of Vanderhoff, in reliance upon the trial court finding that Vanderhoff’s testimony was “more credible and believable” than the other witnesses that had testified in court. The trial court also concluded that Vanderhoff had taken steps to notify both Harleysville, the insurance carrier, and the police department, that a phantom vehicle had been involved in the accident.

Superior Court

Ruling in favor of Harleysville, the Superior Court ruled that Vanderhoff had not provided the requisite notice to Harleysville that a phantom or uninsured motor vehicle had been involved in the accident.

Ruling in favor of Harleysville, the Superior Court reversed the trial court, ruling that Vanderhoff had not provided the requisite notice to Harleysville, that a phantom or uninsured motor vehicle had been involved in the accident, with the Superior Court also finding no reference in the record to support the trial court’s findings that Vanderhoff had notified not only his employer, but also Harleysville, that a phantom vehicle was involved.

The Superior Court further concluded that the MVFRL required Vanderhoff to have notified Harleysville not only that an accident had occurred, but that an uninsured motor vehicle was involved in the accident, and that Vanderhoff would have had to provide that notice to Harleysville within thirty (30) days of the accident. The Superior Court determined, based on its review of the record before the trial court, that the earliest notice that Vanderhoff ever provided of the involvement of the phantom vehicle to Harleysville, was when Vanderhoff was undergoing an independent medical examination in 2002, about four months post-accident.

Supreme Court

Granting Vanderhoff’s appeal to the Supreme Court, the Supreme Court granted Vanderhoff’s Petition to decide the following question: “whether an insurance carrier should be required to prove prejudice relative to the late reporting to the carrier of an accident involving an unidentified vehicle when such accident was timely reported to law enforcement officials?”

Factors critical to the Supreme Court’s reasoning in Vanderhoff were its statutory interpretation of the MVFRL, and its precedential holdings in Brakeman v. Potomac Insurance, 371 A.2d 193 (Pa. 1977), in which the Court had held that an insurer’s denial of benefits had to be predicated on the insured proving that it had been prejudiced by an insured’s failure to provide notice”, and, more recently, State Farm v. Foster, 889 A.2d 78 (Pa. 2005), wherein an insured seeking uninsured motorist benefits following a motor vehicle accident alleging involving a “phantom” uninsured vehicle, had failed to notify police and law enforcement that a phantom vehicle had been involved in the accident, a notice statutorily required under the PMVFRL.

The Majority Opinion

Reversing the Superior Court, the Supreme Court held in Vanderhoff, in distinguishing between Brakeman and Foster, that Harleysville could not deny benefits to its insured, Vanderhoff, without proving that it had been prejudiced by Vanderhoff’s apparent failure to notify Harleysville of the involvement of a phantom uninsured vehicle, and, in doing so, accepting, in part, the trial court’s finding of fact and legal conclusion that Vanderhoff had told police of the involvement of an unidentified “phantom” vehicle being involved in the accident.

In Vanderhoff, the appellate arguments were framed around Harleysville relying upon the Supreme Court’s 2005 Foster decision, with Vanderhoff relying upon the Brakeman decision, a precedent ultimately relied upon by the Vanderhoff Supreme Court in finding that when “an insurance company seeks to be relieved of its obligations under a liability insurance policy on the ground of late notice, the insurance company will be required to prove that the cited provision was, in fact, breached and that the breach resulted in prejudice to its position,” citing from Brakeman, at 198.

The Supreme Court remanded Vanderhoff back to the trial court to determine whether Harleysville had been prejudiced by the delayed notice in the case.

Since the trial court never reached the question of Harleysville’s potential prejudice, the Supreme Court remanded Vanderhoff back to the trial court to determine whether Harleysville had been prejudiced by the delayed notice in the case while holding that an insurer denying uninsured motorist benefits resulting from an accident involving a phantom vehicle must prove that it has been prejudiced by the insured’s failure to notify the insurer of the phantom vehicle accident.

By way of clarification, the Supreme Court held that its ruling in Foster should only be interpreted to require that law enforcement (police) authorities be notified promptly in phantom vehicle cases, to investigate and eliminate potential fraud, further requiring, under Brakeman, that the insurance carrier must prove prejudice because of “delayed notification”, as established prejudice will support the insured’s decision to deny uninsured motorist benefits.

The majority’s decision in Vanderhoff was authored by Justice Baer, with Justices Castille, Todd, and McCaffery joining in the Opinion, while Justices Eakin and Saylor dissented.

The Dissent

In the dissent authored by Justice Eakin, a dissent that most of us would join in affirming, Justice Eakin reasoned that the plain language of Section 1702 of the MVFRL would not require an insurer to prove prejudice, when notice is not given to police, in effect, tracking the Court’s Foster ruling, as opposed to its Brakeman ruling. Keep in mind that Brakeman was decided in 1997, 13 years prior to the MVFRL being enacted.

There being no specific prejudice requirement or reference in Section 1702, with that statutory provision also not establishing any exceptions to the notice requirements, Justice Eakin found it unfair for the majority to require the insurer to prove prejudice, as requiring the insurer to prove prejudice unfairly shifted the burden of proof to only one party in the dispute, effectively robbing the statutory necessity of proving notice first.

Moreover, Eakin’s dissent correctly and tellingly recites that Brakeman is a pre-MVFRL decision, with the MVFRL specifically addressing the public policy interests in controlling the spiraling costs of automobile insurance, through reduction of fraudulent claims, obviously reduced by the implementation of statutory notice requirements, not previously embedded in Pennsylvania automobile insurance law.

There being no specific distinction between notice to the police versus notice to the insurer, for purposes of preserving the ability to pursue a phantom vehicle uninsured motorist claim, Eakin’s dissent explains that notifying the insurer, as soon as practicable, saves the very same public policy, as the statutory requirement of notifying the police.

Judge Eakin believed that Vanderhoff’s months of silence on the phantom vehicle issue should have negated the burden-shifting requirement that Harleysville prove prejudice.

Observing that Vanderhoff clearly missed several key opportunities to provide notice to Harleysville, to include having failed to tell his employer about the phantom vehicle, having failed to report that a phantom vehicle was involved, when filing his workers’ compensation claim, and having not mentioned the unidentified vehicle to the police at the accident scene, Judge Eakin believed that Vanderhoff’s months of silence on the phantom vehicle issue should have negated the burden-shifting requirement that Harleysville prove prejudice, when denying the uninsured motorist claim.

Practically Speaking

If the baseball adage of three strikes and you’re out were true here, Vanderhoff’s claim would be denied on missed balls.

With Vanderhoff having filed a written statement of the accident, his employer submitted in support of his workers' compensation claim, and that statement contained no reference whatsoever to the phantom unidentified vehicle, the majority's Opinion clearly seems to stretch the end result here, applying principles of statutory construction, and the ageless reference to contracts of adhesion (insurance policies), as being one-sided contracts drafted for benefit of the premium-collecting insurance carrier, to the detriment of the premium-paying, but benefit-denied insured.

In effect, Vanderhoff, requires the insurance carrier to prove that it would not have to pay the sought-after benefits, if a fact-finder, be it jury or arbitration panel, concluded that the party seeking benefits prejudiced the carrier’s right to investigate the claim and develop defenses that would limit or preclude liability for the sought-after benefits, akin to, in fairy tales, putting the carriage before the horse.

Questions

Questions concerning casualty litigation practice and procedures, can be directed to our general litigation department attorneys.

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