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High Court to Rule on Household Exclusion Clause and Stacking

Posted on May 17, 2012

The Pennsylvania Supreme Court has agreed to hear arguments in an insurance case over whether the “household exclusion” clause can limit inter-policy UIM stacking when there is no waiver of stacking.

The court limited the argument in Erie Insurance Exchange v. Baker to whether Section 1738(a) of the Motor Vehicle Financial Responsibility Law precludes the application of the clause to prevent stacking of inter-policy underinsured motorist coverage when there was no valid waiver of

In a memorandum opinion issued in August 2007, a three-judge panel of the Superior Court upheld a lower court’s ruling that Eugene Baker was not allowed to stack the UIM coverage from Erie for three automobiles he owned on top of the UIM coverage he received from another insurer after he had an accident on his motorcycle.

Baker had argued to the lower court that the application of the household exclusion clause when there was no waiver of stacking was against sound public policy, according to the memorandum opinion.

Baker was in an accident in 1999 while driving his motorcycle insured by Universal Underwriter’s Insurance Co. The policy included stacked UIM coverage of $15,000, according to the opinion by Judges Mary Jane Bowes, John T. Bender and John T.J. Kelly Jr. Baker also owned three automobiles insured by Erie in a policy that included UIM coverage of $100,000 per person or $300,000 per accident. After his motorcycle accident, he collected $15,000 from his UIM policy with Universal and $15,000 from the tortfeasor’s policy, according to the opinion.

After collecting on those policies, Baker filed a claim against his Erie policy for UIM benefits, but Erie denied the claim, citing the household exclusion clause. Erie then brought a declaratory action in Allegheny Common Pleas Court to establish the clause barred Baker from recovering UIM benefits under the company’s policy, according to the opinion.

On appeal, the Superior Court examined Baker’s claim that the household exclusion clause conflicts with Section 1738 of MVFRL because it limits the stacking of UIM benefits and the application of the clause is not a knowing waiver of stacked benefits. He also argued the clause conflicted with Section 1733(a) of MVFRL because it cancels out the priority of recovery under “multiple, applicable policies,” according to the opinion.

Section 1738 of MVFRL deals with the stacking of uninsured and UIM benefits and the option to waive those benefits. Section 1733 deals with the priority of recovery.

The Superior Court determined Baker’s arguments were in fact public policy challenges, and it looked at two of the three prongs of the test to nullify a clause under such a challenge. The court stated that there has been a change of emphasis in the Pennsylvania courts’ approach from presuming that exclusion clauses are invalid as against public policy to looking at the clauses in the context of contract law and the public policy goals of MVFRL. The Superior Court said the household exclusion clause had repeatedly been enforced in similar situations as to the one presented by Baker.

The Superior Court panel also said the courts have resisted finding the household exclusion clause inconsistent with MVFRL because voiding the clause would frustrate the goal of the law to limit increasing costs of car insurance.

In Baker’s Erie policy, the household exclusion clause stated the UIM benefits did not apply to “damages sustained by anyone we protect while occupying or being struck by a motor vehicle owned by you or a relative, but not insured for Uninsured or Underinsured Motorists Coverage under this policy.”

In his petition for allowance of appeal to the Supreme Court, Baker’s attorney, Scott Cooper of Schmidt Kramer in Harrisburg, argued the household exclusion waiver does not satisfy proper notice of the waiving of stacking benefits, particularly when Baker was paying a premium for those

Cooper argued in the brief that the Superior Court’s decision in Baker was inconsistent with the Supreme Court’s 2006 ruling in Craley v. State Farm & Cas. Co. While the high court in Craley also barred UIM stacking, Cooper said it was done because Randall Craley had validly signed an inter-policy stacking waiver.

The Supreme Court declined to rule in Craley, however, on whether the Superior Court was correct in ruling that the household exclusion clause was “enforceable per se,” according to court documents filed for Baker. Cooper said in the court documents that the Superior Court in Baker continued to follow its reasoning of the Superior Court in Craley

In its opinion in Baker, the Superior Court mentioned Craley and said that while the waiver of full, stacked benefits must be knowingly made, the household exclusion clause is not a full waiver but shields insurers from certain risks associated with an insured getting into an accident in a vehicle that’s covered by another insurer.

“Furthermore, failure to enforce the household exclusion clause encourages insureds who own two motor vehicles to carry a low UIM limit on one vehicle and a higher UIM limit on another vehicle,” the court stated in Baker.

In an interview, Cooper said the general rule as a matter of law from the early 1990s has been that an insured gets stacking unless he specifically waives it. The household exclusion policy only applies, however, when the insured has paid for stacking.

“They take it away through the back door,” Cooper said of insurance companies.

He reiterated that his argument is not one of public policy, but of a clause that violates the law and is therefore invalid. Cynthia Danel of Edgar Snyder & Associates in Pittsburgh also represents Baker. Arthur J. Leonard of Robb Leonard Mulvihill in Pittsburgh represents Erie and was not able to comment by the time of publication.