Filed July 18, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 00-4151
NATIONWIDE MUTUAL INSURANCE COMPANY
v.
WILLIAM COSENZA; ANGELINA C. COSENZA, h/w;
PATSY DEZII
William Cosenza; Angelina C. Cosenza;
Patsy Dezii,
Appellants
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil No. 99-cv-03533)
District Judge: Hon. Eduardo C. Robreno
Argued May 31, 2001
Before: SLOVITER, FUENTES and COWEN,
Circuit Judges
(Filed: July 18, 2001)
David C. Corujo, Esq.
(Argued)
Fronefield & de Furia
17 E. Front Street
P.O. Box 647
Media, PA 19063
Counsel for Appellants
James C. Haggerty, Esq.
Scott J. Tredwell, Esq.
(Argued)
Christine P. Busch, Esq.
Swartz, Campbell & Detweiler
1601 Market Street, 34th Floor
Philadelphia, PA 19103
Counsel for Appellee
OPINION OF THE COURT
COWEN, Circuit Judge.
This appeal presents a question of first impr ession
relating to the construction and enforceability of an
exclusion in an automobile insurance contract stating that
an insured cannot recover benefits under both the liability
coverage and the underinsured motorist coverage of the
insurance contract. The District Court exercised
jurisdiction based on diversity of citizenship under 28
U.S.C. S 1332. We exercise appellate jurisdiction under 28
U.S.C. S 1291. We hold that, on the facts of this case, the
"dual recovery" prohibition is invalid and unenforceable
pursuant to Pennsylvania's Motor Vehicle Financial
Responsibility Law (MVFRL). 75 Pa. C.S.A. S 1701 et seq.
I
This case is a dispute about insurance coverage arising
from the following facts. On July 16, 1995, Mrs. Cosenza
was driving a vehicle in which her husband and mother
(Ms. Dezii) were passengers when they collided with a
vehicle driven by Angela Nicolucci. Mr. Cosenza and Dezii
were very seriously injured in the crash and Mrs. Cosenza
sustained some injuries as well. They instituted suit in
state court against Nicolucci. Nicolucci joined Mrs. Cosenza
as a defendant, claiming that she was contributorily
negligent. Nationwide Insurance, the Cosenzas' insur er and
the appellee in this case, assumed the defense of Mrs.
Cosenza and consistently asserted her lack of fault. On the
eve of trial, the suit was settled.
2
Under the terms of the settlement, appellants received
$15,000 from Nicolucci's insurer, the full amount of
coverage available under her liability policy. Mr . Cosenza
and Dezii also received some payment under the liability
portion of Nationwide's auto policy, but did not exhaust the
full amount of the coverage available under that policy. The
Cosenzas' vehicle was covered by an auto insurance policy
issued by Nationwide Insurance. That policy pr ovided
$500,000 in liability coverage and $500,000 in
underinsured motorist coverage. Mr. Cosenza also
maintained an umbrella insurance policy that pr ovided an
additional $1,000,000 in total liability coverage and
$500,000 in underinsured motorist coverage. The
settlement did not include any payments by Nationwide
under either the underinsured motorist portion of the policy
or under the umbrella policy.
Thereafter, the Cosenzas and Dezii, the appellants in this
appeal, notified Nationwide of their intention to proceed
with underinsured motorist arbitration under their auto
insurance policy and the supplemental umbrella insurance
policy. They filed a petition in state court to compel
arbitration. In response, Nationwide filed a notice of
removal of the proceedings to the district court and also
filed a complaint seeking a declaratory judgment preventing
arbitration. Each of the parties moved for summary
judgment with the following results:
1) The District Court determined that the dispute did
not fall within the insurance contract's arbitration
clause and was, therefore, properly before the court;
2) Mr. Cosenza and Dezii, who recover ed under the
liability portion, were prohibited fr om recovering
underinsured motorist benefits for their own injuries
under the auto policy or the umbrella policy;
3) Mrs. Cosenza, who did not recover under the liability
coverage, was allowed to seek recovery under the
underinsured motorist provision of the auto policy and
the umbrella policy;
4) Mrs. Cosenza was prohibited from r ecovering loss of
consortium benefits for her husband's injuries under
the underinsured motorist provisions;
3
5) Mr. Cosenza was allowed to seek loss of consortium
benefits for his wife's injuries under the underinsured
motorist provision;
6) The court determined that Nationwide was not
entitled to a credit in the amount of payments already
received by the insureds pursuant to the state court
settlement.
Appellants appeal the District Court's ruling that this
dispute is not subject to arbitration. Alter natively, they
appeal the court's holding that Mr. Cosenza and Dezii are
barred from recovering under the underinsured motorist
provision of the auto policy and under the umbr ella policy.
They also appeal the court's ruling that Mrs. Cosenza is
barred from recovering loss of consortium damages based
on her husband's injuries under the underinsur ed motorist
provision of the auto policy and under the umbr ella policy.
Nationwide purports to cross-appeal the district court's
findings as to Mrs. Cosenza's eligibility for r ecovery, Mr.
Cosenza's right to recover for loss of consortium for his
wife's injuries, and the court's ruling that Nationwide is not
entitled to a credit for payments made in the state court
settlement.
II
Before proceeding to a discussion of the substantive
issues in this case there are two thr eshold issues that must
be addressed - whether the district court had jurisdiction to
decide the issues raised in this case and whether this Court
can properly entertain Nationwide's purported cross-appeal
of the adverse portions of the District Court's judgment. As
a federal court sitting in diversity, we are bound to
adjudicate the case in accordance with applicable state law.
See Erie Railroad v. Tompkins, 304 U.S. 64 (1938). Both
parties agree that Pennsylvania law gover ns this dispute.
A. Jurisdiction/Arbitrability of Claims Raised
To determine the arbitrability of a dispute a court must
address two issues: 1) whether the parties for med an
agreement to arbitrate; and 2) whether the dispute in
question falls within the scope of that agreement. Messa v.
4
State Farm Ins. Co., 641 A.2d 1167, 1168 (Pa. Super.
1994). In this case, both parties concede the existence of an
agreement to arbitrate. Thus, the sole question is whether
the dispute regarding appellants' entitlement to seek
recovery under the underinsured motorist (UIM) provision
of the contract falls within the scope of the arbitration
agreement.
Appellants argue that the District Court did not have
jurisdiction to rule on the summary judgment motions that
are the subject of this appeal because the insurance
contracts require arbitration of their claim.1 The UIM
provision of the Cosenza's insurance policy pr ovides:
RECOVERY
1. Before recovery, we and any party seeking
protection under this [UIM] coverage must agree on
two points:
a) whether there is a legal right to r ecover damages
from the owner or driver of an underinsur ed
motor vehicle; and if so,
b) the amount of such damages.
_________________________________________________________________
1. Nationwide argues that the appellants have not properly preserved
this particular issue for appeal pursuant to F .R.A.P. 3(c)(1)(B), which
requires an appellant's Notice of Appeal to "designate the judgment,
order, or part thereof being appealed." Appellants' Notice of Appeal
designated the District Court's November 2, 2000 Or der, which did not
address the arbitration issue, instead of its October 27 Order, which did
dispose of that issue. Appellants' failure to specifically designate the
October 27 Order for appeal is not fatal because a policy of liberal
construction of notices of appeal prevails in the Third Circuit where the
intent to appeal an unmentioned or mislabeled ruling is apparent and
there is no prejudice to the adverse party. Williams v. Guzzardi, 875 F.2d
46, 49 (3d Cir. 1989)("if from the notice of appeal itself and the
subsequent proceedings . . . it appears that the appeal was intended to
have been taken from an unspecified . . . or der . . . , the notice may be
construed as bringing up the unspecified or der for review."); Murray v.
Commercial Union Insurance Co., 782 F .2d 432, 434-35 (3d Cir.
1986)(exercising jurisdiction because despite the mislabeled Notice of
Appeal, "in their appellate briefs all parties addressed every issue
presented").
5
If agreement can't be reached, the matter will go to
arbitration.
2. Questions between the injured party and us
regarding whether the injured party is an insured
under this coverage, or the limits of such coverage,
are not subject to arbitration and shall be decided
by a Court of law.
(Endorsement 2360, Underinsured Motorist Coverage --
Non-Stacked (Pennsylvania) App. 39a) (emphasis in
original). Thus, according to the clear ter ms of the
arbitration agreement, questions regar ding whether a
claimant is an "insured" for the purposes of UIM coverage
or questions regarding the limits of UIM coverage are to be
decided by the courts. All other questions should be
submitted for arbitration.2
First, we consider if this case presents the question of
whether the appellants are "insureds" for the purpose of
UIM coverage. The insurance policy defines an"insured" as
"one who is described as entitled to protection under each
coverage." (App. 12a)(emphasis added). Accor dingly, we look
to the section governing UIM coverage to deter mine whether
the appellants are entitled to protection thereunder. That
coverage endorsement provides that Nationwide will pay
"compensatory damages, including derivative claims, which
are due by law to you or a relative fr om the owner or driver
of an underinsured motor vehicle because of bodily injury
suffered by you or a relative." (UIM Endorsement 2360,
App. 38a)(emphasis added). Thus, for the purposes of this
UIM coverage, an "insured" is the policy holder and
relatives of the policy holder who are entitled by law to
_________________________________________________________________
2. Appellants also reference an arbitration provision found in the UIM
coverage section of the auto insurance contract stating that "if we and
the insured disagree about the right to r ecover damages, or the amount
of such damages . . ." arbitration will ensue. (App. 29a). However, this
broader arbitration provision was "r eplaced" by Endorsement 2360 to the
insurance policy, which states "[t]his endorsement replaces the policy's
Underinsured Motorists coverage section. Coverage is subject to all terms
and conditions of the policy, except as changed by this endorsement."
(App. 38a). Accordingly, we look to the arbitration provision set out in
Endorsement 2360 to determine the arbitrability of the instant dispute.
6
recover damages from the driver or owner of the
underinsured vehicle.
Nationwide argues that because appellants have
recovered under the liability provisions and are prohibited
by the policy language from also recovering under the UIM
provisions that there are no damages"due by law" and
thus, appellants do not fit within the definition of an
"insured." This argument misappr ehends the definition of
an "insured" set out in the UIM pr ovisions. The definition
does not require that damages be due by law under the
insurance contract, as Nationwide argues. Instead, the
definition requires only that damages be due by law from
the driver of an underinsured vehicle. Nowhere does
Nationwide suggest that the appellants are not entitled
under the law to recover additional damages fr om Nicolucci,
the driver of the underinsured vehicle. Even if Nationwide
did advance such an argument, the issue of whether
appellants are legally entitled to damages fr om Nicolucci is
an issue that falls squarely within the agr eement to
arbitrate, as set forth above. Further, Nationwide's
argument begs the question of who is an "insured" because
it argues that the appellants are not"insureds" because
Nationwide is correct about the underlying dispute
regarding whether or not the dual r ecovery prohibition is
enforceable. The question of whether that pr ovision is
enforceable, however, is a separate and distinct question
from whether the appellants are "insur eds" under the UIM
coverage.
The fallacy of Nationwide's argument is also
demonstrated by the "limits of payment" pr ovision of the
contract, which Nationwide references in support of its
argument. That provision states, "[t]he insured may recover
for bodily injury under the auto liability coverage or the
underinsured motorist coverage of this policy, but not
under both coverages." (UIM Endorsement 2360, App. 40a)
(emphasis added). This provision forms the basis of
Nationwide's argument that there ar e no damages "due by
law" and that, therefore, appellants ar e not insureds.
However, this same provision effectively states that
appellants are considered "insur eds" within the meaning of
the UIM coverage. Thus, the underlying dispute in this case
7
cannot be characterized as a dispute regar ding whether the
injured party is an insured and cannot escape arbitration
on that basis.
We must also consider whether this case pr esents a
question regarding the limits of UIM coverage. We conclude
that the dispute does not fall within the arbitration
agreement because it is clearly within the second prong of
the arbitration agreement as a dispute about the "limits" of
the coverage. The UIM Endorsement contains the following
provision:
LIMITS OF PAYMENT
Amounts Payable for Underinsured Motorists Losses
We agree to pay up to the limits stated in the policy
Declarations. The following applies to these limits:
***
4. The insured may recover for bodily injury under the
Auto Liability coverage or the Underinsured Motorists
coverage of this policy, but not under both coverages.
(UIM Endorsement 2360, App. 40a). According to the
express terms of the UIM endorsement, the underlying
dispute is a question between the injured parties and
Nationwide regarding the limits of coverage and must, by
the very terms of the insurance agreements, be decided by
a court of law.
Appellants argue that, in light of the important state law
public policy favoring arbitration of automobile insurance
disputes, this dispute must be dismissed by the court and
submitted to arbitration. Indeed, Pennsylvania public policy
does favor arbitration of insurance claims. Bor gia v.
Prudential Insurance Co., 758 A.2d 843, 847-50 (Pa. 2000);
Brennan v. General Accident Fire and Life Assurance Corp.,
574 A.2d 580 (Pa. Super. 1980). However , state courts have
not favored arbitration when to do so would contravene the
express terms of a binding arbitration agreement. Brennan,
574 A.2d 580 (dismissing dispute as arbitrable, but
disclaiming that it would have done so had ther e been any
limiting language in the arbitration clause); Messa v. State
Farm Ins. Co., 641 A.2d 1167, 1168 (Pa. Super. 1994)
8
(scope of arbitrator's authority is limited by ter ms of
arbitration agreement). Therefore, despite Pennsylvania's
preference for arbitration of auto insurance disputes, the
District Court properly concluded that the dispute in this
case is specifically excluded from the arbitration agreement
and appropriately maintained jurisdiction over the claim.
B. Nationwide's Purported Cross-Appeal
In its brief Appellee Nationwide asks this Court to reverse
the District Court on every issue where its conclusions were
adverse to the insurance company. Specifically Nationwide
argues the District Court erred in holding that Mrs.
Cosenza is not excluded from seeking recovery under the
UIM provision for her injuries, that Mr . Cosenza is not
precluded from seeking recovery under the UIM provision
for loss of consortium due to Mrs. Cosenza's injuries, and
that Nationwide is not entitled to a credit for its
contribution to the tort settlement. However , Nationwide
failed to follow the procedures for lodging a cross-appeal on
any of these issues. It is settled law that "what (an appellee)
may not do in the absence of a cross-appeal is to `attack
the decree with a view either to enlarging his own rights
thereunder or of lessening the rights of his adversary,
whether what he seeks is to correct an err or or to
supplement the decree with respect to a matter not dealt
with below.' " Morley Constr. Co. v. Maryland Casualty Co.,
300 U.S. 185, 191, 57 S.Ct. 325 (1937)(quoting United
States v. American Ry. Express Co., 265 U.S. 425, 435, 44
S.Ct. 560 (1924)). Because a reversal on any of the three
adverse holdings would enlarge Nationwide's rights and
lessen Appellants' rights, Nationwide was required to file a
cross-appeal.
Nationwide responds that its failure to cr oss-appeal is
immaterial because this Court may affirm the District
Court on any basis which finds support in the r ecord
and/or that as long as the issue raised is mer ely an
alternative argument relative to the judgment below, a
cross-appeal on that issue is unnecessary. While these are
accurate statements of law, they are inapplicable here
because Nationwide is asking us to reverse the District
Court, not to affirm on the basis of r ecord evidence.
Additionally, Nationwide does not present any"alternative
9
arguments relative to the judgment below." On the
contrary, it plainly asks us to reverse the District Court's
holdings and constrict the appellants' rights, which we
cannot do in the absence of a properly filed cross-appeal.
Because Nationwide failed to file a cross-appeal, none of the
three issues on which the District Court ruled adversely to
Nationwide are properly before us on appeal.
III
Due to Nationwide's failure to file a cr oss-appeal, the only
remaining substantive issues revolve ar ound the effect of
the insurance policy's "dual recovery" pr ohibition. A
determination as to the proper construction and the validity
of the dual recovery prohibition disposes of the three
remaining substantive issues in this case. First, the District
Court concluded that the contractual prohibition on
recovering under both the liability coverage and the UIM
coverage, precluded Mr. Cosenza and Ms. Dezii from
seeking recovery for their own injuries under the UIM
coverage and precluded Mrs. Cosenza from seeking recovery
for loss of consortium based on her husband's injuries
under the UIM coverage.
Second, Mr. Cosenza also maintained an umbr ella
insurance policy designed to protect against losses in
excess of the amount covered by his other liability
insurance policies, which provided an additional
$1,000,000 in liability coverage and $500,000 in UIM
coverage. The umbrella policy here included the limitation
that "[i]t is agreed that this endorsement is subject to the
terms and conditions of the underinsur ed motorist coverage
included in [the auto policy] . . ." (App. 49a). Accordingly,
when the District Court concluded that no recovery was
available under the UIM coverage of the auto policy for any
injuries suffered by Mr. Cosenza or Dezii, it also had to
conclude that they could not seek recovery under the
umbrella policy. However, the converse is true as well. That
is, if the dual recovery prohibition is unenforceable or
interpreted narrowly as allowing UIM coverage for the
appellants, they would be entitled to coverage under the
umbrella policy as well.
10
Third, the district court concluded that Mrs. Cosenza's
loss of consortium claim is ultimately based on bodily
injuries suffered by Mr. Cosenza and is therefore derivative
of his claim. Setting aside the dual recovery issue, under
Pennsylvania law the success of a derivative claim is
"always dependent upon the injured spouse's right to
recover." Scattaragia v. Shin Shen Wu, 495 A.2d 552, 554
(Pa. Super. 1985). Thus, the District Court concluded that
because Mr. Cosenza, as the injured spouse, had no right
to recover under the UIM coverage or the umbr ella policy,
Mrs. Cosenza could have no right to recover derivatively
under those same insurance contracts. Again, however ,
because this conclusion is based on the assumption that
Mr. Cosenza had no right of recovery under the UIM
coverage or the umbrella policy, a reversal on that issue
necessitates a reversal on Mrs. Cosenza's derivative loss of
consortium claim.3 Thus, a r esolution of the dual recovery
issue effectively resolves all of the substantive issues in this
case.
A. The Express Terms of the UIM Insurance Coverage
Endorsement 2360 to Appellants' UIM insurance
contract, which "replaces the policy's Underinsured
Motorists coverage section," provides that"[t]he insured
may recover for bodily injury under the Auto Liability
coverage or the Underinsured Motorists coverage of this
policy, but not under both coverages." (App. 38a & 40a)
(emphasis added). Nationwide argues that this language
clearly and unambiguously precludes Mr. Cosenza and
Dezii, who have already received some payment under the
liability coverage, from also recovering under the UIM
coverage. Nationwide also argues that this dual recovery
prohibition precludes Mrs. Cosenza fr om recovering
derivatively under the UIM coverage for loss of consortium
based on her husband's bodily injuries, because he
recovered some damages under the liability coverage.
When interpreting the terms of an insurance contract the
court must generally attempt to effectuate the intent of the
_________________________________________________________________
3. It is undisputed that the UIM coverage includes coverage for derivative
claims, such as a loss of consortium claim, based on bodily injuries
suffered by Mr. Cosenza.
11
parties as manifested by the language of the written
instrument. Standard Venetian Blind Co. v. American
Empire Ins. Co., 469 A.2d 563, 566 (Pa. 1983); Mohn v.
American Cas. Co. of Reading, 326 A.2d 346, 451 (Pa.
1974). To that end, courts must generally enforce the clear,
unambiguous terms of the policy. See, e.g., The Medical
Protective Co. v. Watkins, 198 F .3d 100 (3d Cir. 1999);
Madison Construction Co. v. Harleysville Mut. Ins. Co., 735
A.2d 100 (Pa. 1999). Nationwide argues that the terms of
UIM coverage prohibiting dual recovery ar e clear and
unambiguous and must therefore be enfor ced by this court.
The burden is on the insured to establish coverage under
an insurance policy. Erie Ins. Exchange v. T ransamerica
Ins. Co., 533 A.2d 1363, 1366-67 (Pa. 1987). As we
concluded in the discussion on arbitrability above,
appellants are clearly insureds under both the auto
insurance policy and the umbrella policy. It is the insurer,
however, that bears the burden of establishing the
applicability of an exclusion in an insurance contract,
American States Ins. Co. v. Maryland Cas. Co., 628 A.2d
880, 887 (Pa. Super. 1993), and exclusions ar e always
strictly construed against the insurer and in favor of the
insured. Selko v. Home Ins. Co., 139 F .3d 146, 152 n. 3 (3d
Cir. 1983).
B. Invalidating Clear and Unambiguous Exclusions in
Insurance Contracts
Instead of arguing that the dual recovery provision is
ambiguous, appellants' main avenue of attack is to argue
that the provision is unenforceable as violative of public
policy as evidenced by case law and the intent of the
Pennsylvania Motor Vehicle Financial Responsibility Law
(MVFRL), 75 Pa. C.S.A. S 1701, et seq. Nationwide takes the
exactly contrary position and argues that not only is
enforcement of the dual recovery pr ohibition consistent
with public policy, dual recovery is never allowed under
Pennsylvania law regardless of whether the insurance
contract at issue expressly prohibits it.
Pennsylvania courts have consistently held that"even
clear and unambiguous insurance policy language may
conflict with an applicable statute, [including] . . . the
12
MVFRL." Kmonk-Sullivan v. State Farm Mut. Ins. Co., 746
A.2d 1118, 1121 (Pa. Super. 1999). See also Allwein v.
Donegal Mut. Ins. Co., 671 A.2d 744, 752 (Pa. Super. 1996)
(en banc). While courts do not have a license to r ewrite
insurance contracts, insurers do not have a right to rewrite
or undercut state legislation or policy. Allwein, 671 A.2d at
752; Kmonk-Sullivan, 746 A.2d at 1121. In such situations,
courts will not give effect to the contract pr ovision:
As a general rule, stipulations in a contract of
insurance in conflict with, or repugnant to, statutory
provisions which are applicable to, and consequently
form a part of, the contract, must yield to the statute,
and are invalid, since contracts cannot change existing
statutory laws.
Id. See also George J. Couch, Couch on Insurance 2d (Rev.
ed.) S 13.7 at 827 (1984). Accordingly, if the dual recovery
prohibition contained in appellants' UIM coverage conflicts
with the MVFRL or the public policy inherent therein, this
Court must declare it invalid and unenfor ceable.
The Pennsylvania Supreme Court has provided the
following guidelines to assist in determining when an
insurance contract provision is against public policy:
Public policy is to be ascertained by refer ence to the
laws and legal precedents and not from general
considerations of supposed public interest. It is only
when a given policy is so obviously for or against the
public health, safety, morals or welfare that there is a
virtual unanimity of opinion in regard to it, that a
court may constitute itself the voice of the community
in declaring what is or is not in accord with public
policy. The phrase "public policy" has been used also
when the courts have interpreted statutes br oadly to
help manifest their legislative intent.
Paylor v. Hartford Ins. Co., 640 A.2d 1234, 1235
(1994)(emphasis added) (citations omitted). Other state
courts have further elaborated that "in deciding whether to
uphold an insurance policy exclusion, which operates to
deny coverage to an injured party, [our focus] is the factual
circumstances of the particular case." Kmonk-Sullivan, 746
A.2d at 1123. See also Paylor v. Hartfor d Ins. Co., 640 A.2d
13
1234, 1240 (Pa. 1994). Moreover, "[c]ontract provisions
[that] are not in accord with public policy, and are not
advantageous to the insured are particularly subject to a
finding of invalidity." Kmonk-Sullivan, 746 A.2d at 1123.
See also Allwein, 671 A.2d at 753 (quoting Geor ge J.
Couch, Couch on Insurance S 13.7, at 827-29 (2d ed. rev.
1984)). There is also a presumption that"the Legislature
intends to favor the public interest as opposed to any
private interest." Pennsylvania Fin. Responsibility Assigned
Claims Plan v. English, 664 A.2d 84, 87 (Pa. 1995)(citations
omitted). See also Allwein, 671 A.2d at 751; Kmonk-
Sullivan, 746 A.2d at 1123; 1 Pa. C.S. S 1922. These
guidelines are read to favor coverage for the insured in
close or doubtful cases. Kmonk-Sullivan, 746 A.2d at 1123;
Allwein, 671 A.2d at 751.
This Court has also had occasion to consider limits on
the enforceability of clear and unambiguous pr ovisions in
insurance contracts under Pennsylvania law. In Bensalem
Twp. v. International Surplus Lines Ins. Co. , after a review
of Pennsylvania law, we concluded that under limited
circumstances the reasonable expectations of the insured
may override the clear and unambiguous terms of the
contract. 38 F.3d 1303, 1311 (3d Cir. 1994). In reaching
this conclusion, the court observed:
We are unable to draw any categorical distinction
between the types of cases in which Pennsylvania
courts will allow the reasonable expectations of the
insured to defeat the unambiguous language of an
insurance policy and those in which the courts will
follow the general rule of adhering to the pr ecise terms
of the policy. One theme that emerges fr om all the
cases, however, is that courts are to be chary about
allowing insurance companies to abuse their position
vis-a-vis their customers. Thus, we are confident that
where the insurer or its agent cr eates in the insured a
reasonable expectation of coverage that is not supported
by the terms of the policy that expectation will prevail
over the language of the policy.
Id. (emphasis added).
As discussed in more detail below, the obligation of
courts to invalidate insurance contract provisions that are
14
contrary to state law or policy has been taken very
seriously by Pennsylvania courts. However, before we can
determine if state law or policy is implicated we must
examine the legislative intent and policies underlying
Pennsylvania's MVFRL.
C. Pennsylvania Public Policy and the MVFRL
Generally, statutes requiring underinsur ed motorist
coverage are remedial and must be construed liberally,
narrowly interpreting exclusions so as to provide the desired
remedy. Couch, supra SS 45:624. The purpose of these
statutes is limited to protecting those persons who
purchase motor vehicle liability insurance and then suffer
bodily injury or property damage caused by a motorist who
did not purchase similar coverage. Id. Pennsylvania
embodied its public policy of protecting such persons in the
MVFRL. Applicable standards of statutory construction
compel Pennsylvania courts to "ascertain and ef fectuate the
intention of the General Assembly" and to strive to give
effect to all provisions in a statute. 1 Pa.C.S. S 1921(a). See
also Kmonk-Sullivan, 746 A.2d at 1121.
The MVFRL contains no explicit statement of legislative
intent or purpose. However, Pennsylvania courts are
unanimous that the legislative intent underlying the
MVFRL was to establish a liberal compensatory scheme of
underinsured motorist protection. See, e.g., Kmonk-
Sullivan, 746 A.2d at 1123; Marroquin v. Mutual Benefit Ins.
Co., 591 A.2d 290, 293 (Pa. Super. 1991). Courts also agree
that the MVFRL is a remedial statute that must be liberally
construed to effectuate its policy of indemnifying victims of
accidents for harm they suffer on Pennsylvania highways.
See, e.g., Kmonk-Sullivan, 746 A.2d at 1123; Allwein, 671
A.2d at 751; Wolgemuth v. Harleysville Mut. Ins. Co., 535
A.2d 1145, 1151 (Pa. Super. 1988).
More specifically, UIM insurance is designed to protect an
insured from a negligent driver of another vehicle who
causes injury to the insured, but through no fault of the
insured, lacks adequate insurance coverage to compensate
the insured for his or her injuries. Eichelman v. Nationwide
Ins. Co., 711 A.2d 1006, 1008 (Pa. 1998); Kmonk-Sullivan,
746 A.2d at 1123; Wolgemuth, 535 A.2d at 1149.
15
Pennsylvania courts have been especially attentive to the
fact that UIM coverage is purchased "to pr otect oneself from
other drivers whose liability insurance purchasing decisions
are beyond one's control." Paylor , 640 A.2d at 1238. See
also Kmonk-Sullivan, 746 A.2d at 1123.
In cases such as this one Pennsylvania courts have also
been attentive to whether or not there wer e two or more
insurance contracts at play:
The language of the [MVFRL] itself suggests that
underinsurance motorist coverage requir es the
existence of at least two applicable policies of motor
vehicle insurance. See 75 Pa. C.S. S 1731(c). An
underinsured motor vehicle, must, by definition, be an
insured vehicle. Thus, the statute contemplates one
policy applicable to the vehicle which is at fault in
causing the injury to the claimant and which is the
source of liability coverage . . . , and a second policy
. . . which the statute contemplates as the sour ce of
underinsured motorist coverage. . . .
Wolgemuth, 535 A.2d at 1149 (emphasis in original). It is
noteworthy that this condition is met here. That is, there
are two policies at play - the liability insurance policy of
Nicolucci and the UIM insurance policy of the appellants.
As discussed below, in virtually all instances wher e UIM
insurance exclusions are upheld it is because this condition
is NOT present and the insureds ar e attempting to convert
inexpensive UIM coverage in their policy into the more
expensive liability insurance under the same policy.
In 1990 the legislature amended the MVFRL, which had
previously made the purchase of UIM insurance mandatory,
to give insureds the choice of saving money on premiums or
purchasing more protective coverage, such as UIM
coverage. See generally Kmonk-Sullivan, 746 A.2d at 1124.
The Pennsylvania Supreme Court finds these amendments
relevant in that "there is a corr elation between premiums
paid by the insured and the coverage the claimant should
reasonably expect to receive." Eichelman, 711 A.2d at 1010
(quoting Hall v. Amica Mut. Ins. Co., 648 A.2d 755, 761 (Pa.
1994)). Thus, by choosing to purchase UIM insurance, in
the event of an injury caused by an underinsur ed
16
tortfeasor, an insured reasonably expects to shift the risk of
loss to his or her insurer. Kmonk-Sullivan, 746 A.2d at
1124. Any other approach would shift the costs to the
insureds who had no part in creating the risk that led to
their injuries and who had no control over the tortfeasor's
insurance decisions. "Allowing the insurers to evade
payment of UIM benefits in [such a] case, where the
insured had paid a premium to procur e UIM coverage,
would be against public policy." Kmonk-Sullivan, 746 A.2d
at 1124 & 1126.
D. Application of the MVFRL's Policies to UIM Insurance
Contracts
As noted briefly above, Pennsylvania courts take their
obligation to review and invalidate insurance contract
provisions that are contrary to state law very seriously.
There are innumerable cases addressing this issue and
while state courts do not invalidate clear and unambiguous
insurance clauses in every instance, neither have they been
reticent about doing so, especially in cases involving
attempts by insurers to withhold paid-for UIM benefits.
There are two cases of particular r elevance to the instant
case.
In Trapper v. Maryland Cas. Ins. Co., the Pennsylvania
Court of Common Pleas invalidated a clear contractual
provision that excluded an insured fr om recovering UIM
benefits after he had already recover ed liability benefits
under the same insurance contract. 17 Pa. D. & C. 4th 165
(1992). Trapper is factually indistinguishable from the
instant case in that it involved a clear and unambiguous
policy exclusion and that it was a two vehicle accident
involving two tortfeasors. The court noted, "the operation of
this clause excludes a class of plaintiffs in joint tortfeasor,
two-car accidents who have paid for coverage and who have
no control over the choice or type of coverage for a second
non-occupied, non-owned vehicle." Id. at 168. The court
concluded that the exclusion of UIM benefits in such a
situation extinguishes UIM coverage for accident victims,
regardless of the severity of their injuries, when a family
member is the driver of one of the vehicles. Id. at 169. "The
elimination of UIM motorist benefits in this situation
results in the insured paying for benefits that cannot be
17
recovered. Clearly this cannot be the intent of the MVFRL."
Id. The Trapper court's analysis is even more applicable to
our case, where the appellants paid for very substantial
liability coverage and substantial UIM coverage with the
expectation that, as a result, they would be fully covered for
any injuries sustained in a car accident regar dless of the
amount of liability coverage purchased by the other driver.
The second case of particular relevance is Continental Ins.
Co. v. Kubek decided by a federal District Court applying
Pennsylvania law. 86 F.Supp.2d 503 (E.D. Pa. 2000). The
issue in Kubek was whether an insurer was required to
provide UIM coverage to an insured who had already
recovered liability benefits from his insurer and from the
other driver's insurer. Id. The insurer moved for summary
judgment based on a "family vehicle exclusion," which
operated to preclude dual recovery in the same way that
the dual recovery prohibition in the Cosenzas' contract
purportedly precludes recovery. Id. Thus, while the policy
exclusion in Kubek is not identical to the exclusion at issue
in our case, it has the exact same effect in the exact same
factual circumstances.
After an extensive review of state case law, the Kubek
court refused to uphold the family car exclusion,
concluding that cases involving only one tortfeasor were not
applicable to determining the enforceability of coverage
exclusions in joint tortfeasor cases. Id. at 505-07. After
reviewing the reasoning behind upholding exclusions in
single tortfeasor cases and the intent behind the MVFRL,
the District Court concluded that even though the victim
received liability benefits under his wife's (one of the
drivers) policy, that recovery was based only on her role in
the accident and had no effect on the victim's ability to
claim UIM benefits under the same policy for the other
tortfeasor's negligence. Id. at 509. This conclusion was
based on the rationale that "[a]s ther e are two policies in
play, the prohibition on recovering fr om a single policy is
not at issue; Mr. Kubek is not attempting to convert his
UIM coverage into liability coverage." Id.
Finally, it is noteworthy that Pennsylvania courts have
invalidated express UIM provisions excluding coverage as
violative of public policy or the intent of the MVFRL in other
18
instances as well. For example, courts have r epeatedly
refused to enforce clear and unambiguous definitions of
underinsured vehicles that exclude vehicles owned by
government agencies. See, e.g., Midili v. Erie Insurance
Group, 746 A.2d 1126 (Pa. Super. 2000); Kmonk-Sullivan v.
State Farm Mut. Ins. Co., 746 A.2d 1118 (Pa. Super. 1999).
Courts have also refused to enforce contract provisions that
provide for gap UIM coverage, which provides less coverage
than excess UIM coverage, because such provisions are
contrary to the intent of the MVFRL. See, e.g., Allwein v.
Donegal Mut. Ins. Co., 671 A.2d 744 (Pa. Super . 1996).
E. Application of the MVFRL to Dual Recovery Exclusion
Before moving to a specific discussion of how the relevant
case law and the MVFRL applies to the facts of this case
and this insurance contract, it is helpful to first address
Nationwide's two arguments in favor of enfor cing the
exclusion on dual recovery. First, Nationwide argues
extensively that, regardless of the existence of a provision
in the contract prohibiting recovery of both liability and
UIM benefits, Pennsylvania public policy never allows dual
recovery. Obviously, the Trapper and Kubek cases
referenced above directly contradict this assertion. Further,
however, even in cases upholding exclusions that preclude
recovery of UIM benefits, including the cases Nationwide
cites in support of its argument, the courts have noted that
dual recovery is not prohibited in all cases. See, e.g.,
Pempkowski v. State Farm Mutual Auto Ins. Co. , 678 A.2d
398, 403 (Pa. Super. 1996)(finding dual r ecovery prohibited
because case involved only a single tortfeasor , but noting
that such recovery would be allowed in cases involving joint
tortfeasors and two insurance policies). Instead, whether a
victim can recover both liability benefits and UIM benefits
under the same insurance policy depends on the particular
facts of the case at bar.
There is a certain category of cases wher e courts have
uniformly declined to invalidate insurance exclusions that
preclude recovery of both UIM benefits and liability
benefits. It is these case and only these cases that
Nationwide cites in support of its argument that dual
recovery is always prohibited. These cases are easily
distinguishable from the appellants' case, however, because
19
all of these cases involve single tortfeasor accidents and
usually only one insurance policy. See W olgemuth, 535
A.2d 1145 (Pa. Super. 1988 (en banc) (single vehicle
accident, exclusion enforceable to prevent conversion of
UIM benefits to liability benefits); Newkirk v. USAA, 597
A.2d 1153 (Pa. Super. 1990)(same); Sturkie v. Erie, 595
A.2d 152 (Pa. Super. 1991)(same); Caldararo v. Keystone
Ins. Co., 573 A.2d 1108 (Pa. Super. 1990)(single vehicle
accident, family car exclusion enforceable to prevent
conversion of benefits); Cooperstein v. Liberty Mut. Fire Ins.
Co., 611 A.2d 721 (Pa. Super. 1992)(multiple vehicle
accident, but exclusion upheld to avoid conversion of UIM
benefits to liability benefits because ther e was only one
tortfeasor). We are in accord with the Kubek court's
extensive analysis, which concluded that these single
tortfeasor cases were inapplicable to multiple tortfeasor,
multiple insurance contract cases such as this one.
Moreover, the rationale behind pr ohibiting dual recovery in
single tortfeasor cases is simply inapplicable to joint
tortfeasor cases.
Liability insurance is the most expensive for m of
insurance in Pennsylvania. UIM insurance, on the other
hand, is relatively inexpensive. As a r esult, Pennsylvania
courts have refused to invalidate insurance contract
exclusions that bar an insured from converting inexpensive
UIM insurance into the more expensive liability insurance.
Such a conversion can be accomplished when an insur ed
purchases a small amount of liability insurance and then,
once the insured is injured in an accident for which he or
she was at fault, attempt to claim UIM benefits under the
same insurance contract on the theory that the vehicle was
underinsured. The Kubek court's apt summary of
Pennsylvania law is instructive:
The true holdings of Wolgemuth and its progeny are
that an individual should not be able to convert the
relatively inexpensive underinsured motorist insurance
into the more expensive liability insurance simply by
undercovering him or herself for liability insurance and
then claiming that the vehicle was `underinsur ed.'
86 F.Supp.2d at 508. The rationale behind UIM insurance
is inapplicable in single tortfeasor cases, wher e injured
20
parties can ensure that they have adequate coverage simply
by purchasing adequate liability insurance. These are not
cases where the victim is injured by someone whose
liability insurance choices are beyond the victim's control.
Finally, in accord with its thorough analysis of
Pennsylvania state law, the Kubek court concluded that
enforcing the family car exception is a "limited exception to
the general rule that such provisions ar e invalid as against
the policy of the MVFRL." Id. at 508. See also Paylor, 640
A.2d at 1240; Marroquin, 591 A.2d 296-97. Thus, it is the
exception, rather than the rule, to enforce such
exclusionary provisions.
The Pennsylvania Supreme Court has clearly stated that
the primary consideration in determining the enforceability
of an exclusion in an UIM contract is whether or not
allowing recovering would effect a conversion of UIM
coverage to liability coverage. In Paylor v. Hartford Ins. Co.,
the Court concluded that a family car exclusion was
enforceable. In reaching this conclusion, however, the Court
explained that the key issue in determining the
enforceability of this type of UIM exclusion is whether,
based on the facts of the particular case, the insur ed is
attempting to convert UIM coverage into liability coverage.
640 A.2d 1234, 1240-41 (Pa. 1994).
Because a case by case analysis is requir ed we must
determine whether invalidating the dual r ecovery
prohibition in this case would allow appellants to effect an
unlawful conversion of UIM benefits to liability benefits.
This inquiry also allows us to address Nationwide's second
argument in favor of enforcing the coverage exclusion.
Allowing appellants to recover UIM benefits in the instant
case would not effect a conversion of UIM benefits to
liability benefits. In this case, when the umbr ella insurance
policy is taken into account, appellants pur chased very
substantial liability insurance (in excess of $1,500,000).
However, if the dual recovery pr ohibition is enforced, it is
irrelevant how much liability insurance they purchased.
They still would not be able to recover for the full value of
their injuries because they were injured by a driver who
purchased inadequate liability insurance. This is not a case
where appellants would be fully compensated for their
21
injuries if only they had purchased mor e liability insurance.
In fact, it is the opposite case. They purchased very large
liability insurance coverage AND very large UIM coverage
($1,000,000) with the expectation that they would be
compensated for their injuries regardless of who was at
fault and how much insurance that person had opted to
purchase. To prohibit recovery denies them the UIM
benefits that they paid for for many years and is contrary
to the Pennsylvania Supreme Court's statement that
insureds should receive the coverage for which they pay
and that voluntarily choosing to purchase UIM insurance
shifts the risk of loss to the insurer. See Eichelman, 711
A.2d at 1010; Hall, 648 A.2d at 761; Kmonk-Sullivan, 746
A.2d at 1124. Further, appellants' voluntary decision to
purchase such substantial liability and UIM insurance
policies reasonably created an expectation that they would
be covered. As we held in Bensalem Twp., when a
reasonable expectation of coverage is not supported by the
terms of the policy, the expectation of coverage prevails
over the language of the policy. 38 F.3d at 1311.
Nationwide argues that allowing recovery would effect a
conversion of UIM benefits into liability benefits because of
the laws of joint and several liability. It ar gues that
appellants will attempt to recover UIM damages for all of
their injuries, including those injuries attributable to the
negligence of Mrs. Cosenza, who was a named insur ed. The
argument is that under principles of joint and several
liability Nationwide will be required to pay for all of the
damages, but will be unable to recover those damages that
are due to the comparative negligence of the driver for
whom they have already paid liability benefits. This
argument is unavailing for several reasons. First, it has not
been established in this case that Mrs. Cosenza, the driver
insured under Nationwide's liability policy, has any fault for
the accident. Second, no Pennsylvania court has expr essed
the slightest bit of concern over the fatalistic scenario that
the application of joint and several liability will lead to a
conversion of coverage, despite the fact that at least two
courts have allowed dual recovery. Finally, Nationwide
provides no evidence whatsoever that the application of
such principles is mandatory in arbitration of these cases
or that appellants would demand damages for all of their
22
injuries, as opposed to seeking recovery only for those
injuries attributable to the comparative negligence of the
underinsured motorist. The latter is appellants'
acknowledged position in this appeal. Further , it is our
expectation that, consistent with Pennsylvania law and this
opinion, an arbitrator would allow recovery of damages
attributable to the underinsured motorist's negligence, but
would reject a demand for recovery of damages attributable
to any contributory negligence by Mrs. Cosenza as contrary
to the MVFRL.
Application of the principles underlying the MVFRL also
supports invalidating the dual recovery pr ohibition in
multiple tortfeasor cases. First, as discussed above,
enforcing the dual recovery prohibition would result in
denying appellants benefits for which they voluntarily paid
additional premiums. Such a denial is contrary to the
intent of the amendments to the MVFRL, which gave
consumers the option of purchasing UIM benefits, but that
also assumes consumers are entitled to the benefits that
they voluntarily opted to purchase. Further , it denies them
paid-for benefits in a case where they wer e injured by
someone whose liability insurance purchasing decisions
they could not control, the very situation they sought to
avoid by purchasing UIM benefits and the very purpose for
which UIM insurance exists. See Paylor, 640 A.2d at 1238;
Eichelman, 711 A.2d at 1008; Kmonk-Sullivan , 746 A.2d at
1123.
Second, the only directly applicable case law, that which
involves two or more tortfeasors and two or mor e insurance
policies, invalidated insurance exclusions that operated to
deny UIM benefits. Trapper, 17 Pa. D. & C. 4th 165; Kubek,
86 F.Supp.2d 503. These two decisions find additional
support in the cases discussed above that uphold UIM
exclusions, but that nonetheless recognize that cases
involving two tortfeasors and two insurance policies are
analytically distinct. See Wolgemuth, 535 A.2d at 1135;
Pempkowski, 678 A.2d at 403. As the Pempkowski court
noted, in joint tortfeasor situations, a claimant is not
always precluded from seeking liability and UIM insurance
benefits under the same policy. 678 A.2d at 403. See also
Kubek, 86 F.Supp.2d at 505-09. The Pennsylvania Supreme
23
Court's decision in Paylor also supports r ecovery for the
appellants because, under the facts of this case, allowing
recovery would not allow the insureds to convert
inexpensive UIM coverage into more costly liability
coverage. 640 A.2d at 1240-41.
Third, upholding the dual recovery pr ohibition in
multiple tortfeasor cases would be counter to the express
purpose of UIM insurance, which is "protecting those
persons who purchase motor vehicle liability insurance and
then suffer bodily injury or property damage caused by a
motorist who did not purchase similar coverage." Couch,
supra S 45:624; Kmonk-Sullivan, 746 A.2d at 1123. Clearly,
if the underinsured driver, Nicolucci, had purchased the
same amount of liability coverage that appellants
purchased, they could have recover ed for the full extent of
their injuries. A fourth, and related, r eason to find the dual
recovery provision unenforceable in this case, is that the
MVFRL is a remedial statute that must be br oadly
construed to effectuate its goal of fully compensating
victims injured on Pennsylvania highways. Accor dingly,
Pennsylvania courts narrowly construe exclusions such as
the one at issue here. Kmonk-Sullivan, 746 A.2d at 1123;
Allwein, 671 A.2d at 751. See also Couch, supra S 45:624.
In this case, the only construction of the dual r ecovery
prohibition consistent with Pennsylvania case law and the
MVFRL, is to limit its enforceability to situations involving
single tortfeasors, where invalidating the exclusion would
permit the conversion of UIM benefits to liability benefits.
Fifth, and finally, state law requires that, in close cases,
courts opt for an interpretation of the MVFRL and
contractual provisions that provides coverage for the
insured. English, 664 A.2d at 87; Kmonk-Sullivan, 764 A.2d
at 1123; Allwein, 671 A.2d at 751. This appr oach is in
accord with the presumption that the state legislature
intends to favor the public interest over the private interest.
English, 664 A.2d at 87.
For the foregoing reasons, we conclude that enforcement
of the dual recovery prohibition in multiple tortfeasor cases
such as this one is violative of the MVFRL. However , as the
preceding discussion indicates, in single tortfeasor cases
the dual recovery exclusion actually pr omotes the goals of
24
the MVFRL by barring unlawful conversion of UIM coverage
to liability coverage. We cannot, ther efore, categorically
declare that the exclusion is invalid and unenforceable.
Instead, following the Pennsylvania Supreme Court's
mandate to narrowly construe exclusions in insurance
contracts, we construe the dual recovery pr ohibition as
speaking only to single tortfeasor accidents wher e allowing
recovery would effectuate a conversion of UIM coverage.
This construction reads the exclusion as incorporating the
case law pronouncements on the dual recovery issue into
the insurance contract and invalidates the exclusion only in
joint tortfeasor cases where enforcing it would be contrary
to applicable case law and the intent of the MVFRL.
Accordingly, we cannot agree with the District Court's
holding that the dual recovery provision prohibits Mr.
Cosenza and Ms. Dezii from seeking UIM benefits under the
auto insurance policy or the umbrella policy for any
damages due by law as a result of Nicolucci's negligence.
We also hold that Mrs. Cosenza may seek loss of
consortium benefits based on her husband's injuries under
both the UIM coverage of the auto insurance policy and the
umbrella policy.
IV
For the foregoing reasons, the District Court's Order of
October 27, 1999 declining to dismiss the case for lack of
jurisdiction is affirmed. The District Court's Order of
November 3, 2000, prohibiting appellants fr om seeking
recovery of underinsured motorist benefits, is reversed, and
the matter is remanded back to the District Court for the
entry of an Order referring the matter to arbitration for the
purpose of determining the amount of an awar d under the
underinsured motorist provisions of the auto insurance
policy and the umbrella policy. Costs taxed against the
appellee.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
25
