'We Have Questions and They Are Many'

Supreme Court's latest decision on the Household Exclusion muddies the water

By William M. Radcliffe
Special to the Law Weekly

The state Supreme Court recently handed down an opinion with regard to the enforceability of the household exclusion in the stacking of uninsured and under insured motor vehicle coverage, which was much awaited by practitioners representing both plaintiffs and defendants.

By this author's count, there have been more than 15 previous opinions from the Pennsylvania appellate courts with regard to this issue. However, those opinions did not analyze, with any specificity, the apparent conflict between the statutory language and the policy provision.

In Erie Insurance Exchange v. Baker, 972 A.2d 507 (Pa. 2009), a 4-3 opinion upheld the household exclusion, with three justices joining the opinion of the court and one concurring.

Paraphrasing former Steelers Coach Chuck Noll, who said after a tough game, "We have questions and they are many," the Baker opinion may have raised as many questions as it answered. The litigation regarding the conflict in language between insurance policy limitations and the statutory provisions under the Pennsylvania Motor Vehicle Financial Responsibility Law may not have ended. First, some background is helpful. The starting point for discussing UM/UIM stacking in Pennsylvania is Section 1738 of MVFRL. Section 1738(a) provides that: "When more than one vehicle is insured under one or more policies" the limits of those coverages are to be added together. This concept, using two policies to stack coverage, is called inter-policy stacking.

The language of Section 1738 also mandates intra-policy stacking, which means the insured may total the UM/UIM coverages for vehicles insured under one policy. Finally, in the absence of a signed stacking waiver from the named insured, UM/UIM stacking is required, and the insured pays an increased premium for stacking coverage.

Contrary to Section 1738, the household exclusion prevents inter-policy stacking. Specifically, the household exclusion prohibits an insured from recovering UM/UIM benefits from his policy if the insured was occupying at the time of the accident another household vehicle that was insured under another policy. Inter-policy stacking is prohibited whether all vehicles are insured by the same or different carriers, despite the fact that UM/UIM stacking premiums were paid under all policies. On its face, the prohibition of inter-policy stacking by the household exclusion seemed to conflict with Section 1738(a). It was hoped by all parties that the Baker decision would bring clarity to the issue. In Baker, plaintiff Eugene Baker was making a claim for UIM benefits under a multi-vehicle Erie policy. The claimant was riding a motorcycle at the time of his accident, which he owned and insured with another carrier.

Erie raised the household exclusion and denied UIM benefits. All agreed that the household exclusion clearly and unambiguously barred recovery under the Erie policy, because at the time of the accident, the claimant was occupying a household vehicle that was not insured under the multi-vehicle Erie policy. Baker maintained that because he both paid a stacking premium for UM/UIM coverage to Erie and had not waived UM/UIM coverage, the household exclusion, which barred inter-policy stacking, was an implied waiver of stacking. Therefore, it was statutorily impermissible.

Erie maintained that if the household exclusion was unenforceable, carriers would be forced to provide coverage for risks on vehicles that they did not know about or collect premiums to underwrite. That principle was enunciated in a prior Supreme Court decision in Burstein v. Prudential Property and Cas. Insurance Co., 809 A.2d 204 (Pa. 2002), and has gone basically unchallenged since that time.

Parenthetically, it should be noted that this rationale, that the carrier cannot calculate potential losses because of these "unknown risks" from other household vehicles, has not been substantiated by any evidence in any previous appellate opinions on this issue. Further, the household exclusion bars recovery for another household vehicle insured by the same carrier on a separate policy. It would seem illogical that a carrier could argue it was not aware of another household vehicle which the same carrier insured, but the Superior Court upheld the household exclusion in such a situation in Alderson v. Nationwide Mutual Insurance Co., 884 A.2d 288 (Pa. Super. 2005).

Nevertheless, the Supreme Court in Baker considered both arguments and analyzed Section 1738(a) of MVFRL noting that it "mandates stacking of uninsured and under insured benefits when multiple vehicles are insured under policies on which the insured is covered for a given accident." Thus, the court interpreted Section 1738(a) to require inter-policy stacking. Further, the court pointed out if Baker had been in an accident driving one of the Erie-insured vehicles and the tortfesor did not have sufficient coverage, he would have been permitted to stack coverage on that Erie policy, which is intra-policy stacking.

Finally, the court concluded that because Baker was not riding in an Erie-insured vehicle, he was not entitled to stack coverages as there was "no UIM coverage to stack." The court adopted Erie's position that because the exclusion was clear and had been historically upheld, it was enforceable.

Unanswered Questions Remembering the warning of Justice Oliver Wendell Holmes that "the life of the law has not been logic," the first question is, if the Baker situation is not "stacking," what is stacking under Section 1738(a)? The Baker court's conclusion that there was "no UIM coverage to stack" due to the household exclusion, without any attempt to reconcile the statutory language and exclusion, is puzzling. In analyzing this conflict in language between an unambiguous statute and policy exclusion, the court did not appear to apply the first rule of legislative interpretation which is, "What does the statute say?" Thus, it appears the majority viewed the issue not as a conflict between a policy provision and statute, but solely as an issue of policy interpretation.

A more nuanced view, which may be in accord with Justice Thomas G. Saylor's concurring opinion, might be that just because the statute permits inter-policy stacking, it does not require stacking in all situations. Under this view, even if Section 1738 mandates stacking, it does not mean that some stacking cannot be excluded by policy provisions that historically have been recognized by the courts, such as the household exclusion. The Superior Court pointed out this concept in GEICO v. Ayers, 955 A.2d 1025 (Pa. Super. 2008), quoting a federal district court decision involving the household exclusion.

There is an important distinction between paying for something you cannot receive (e.g., paying for stacking in a policy that contains an exclusion of all stacking) and paying for something that all parties know is limited by the terms of the policy (e.g., the situation here where the household exclusion clause limits stacking only in certain situations and does not otherwise affect the insured's right to stack). The latter is contractually valid and not inconsistent with public policy.