Pennsylvania Client Advisory

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PA CLIENT ADVISORY

Donovan v. State Farm Mut. Auto. Ins. Co.
Pennsylvania Supreme Court
2021 Pa. LEXIS 3394

Decided: August 17, 2021

In a shocking decision that will result in countless secondary UM/UIM claims against insurers that received no premium for such coverage, the Pennsylvania Supreme Court held that the statutorily-required stacking rejection form was ineffective for rejection of inter-policy stacking when executed in connection with a policy covering more than one vehicle and, therefore, the infamous Gallagher v. GEICO decision applied to invalidate the household vehicle exclusion despite the rejection of stacking.

Background

Donovan was injured while riding his own motorcycle when it collided with a vehicle driven by the torfeasor. Donovan collected the $25,000 limit of the tortfeasor’s liability coverage, plus the $50,000 limit of UIM coverage under the State Farm policy he selected for his motorcycle. He then demanded an additional $100,000 in UIM coverage under a State Farm policy issued to his mother. This demand was made despite the fact that Donovan’s mother had rejected stacking by executing the exact form mandated by the MVFRL, and despite the fact that her insurance policy excluded UIM coverage for injuries sustained by resident relatives in vehicles insured under a different policy (the “household vehicle exclusion”).

Holding

The Court held that when executed by someone who was insuring more than one vehicle, the rejection of stacking form prescribed by statute was ineffective to reject inter-policy stacking because the form refers to limits of coverage under “the policy,” rather than the “policies.” Therefore, the form “does not . . . alert insureds that they are waiving the ability to stack the coverage for which premiums were paid in ‘this policy’ on top of the coverage available under a separate policy.” The Court further held that Gallagher v. GEICO Indem. Co., 201 A.3d 131 (Pa. 2019) applied to invalidate the household vehicle exclusion because there was no valid rejection of inter-policy stacking.

The Donovan Court pointed out that the effectiveness of the rejection form was considered some fifteen years ago in Craley v. State Farm Fire & Cas. Co., 895 A.2d 530 (Pa. 2006), where it was held that the form was effective to reject inter-policy stacking when executed in connection with a single vehicle policy. Even though the Craley Court recognized that the form was phrased in terms of intra-policy stacking of coverage in a multi-vehicle policy, because the legislature required use of the form, the Court concluded that the insured must have intended to waive inter-policy stacking, as there was no potential intra-policy stacking subject to waiver in a single-vehicle policy. In dicta, in a footnote to the Craley majority opinion, and in a concurring opinion, it was questioned whether the form effectively conveyed information regarding waiver of inter-policy stacking with respect to multi-vehicle policies. The Craley Court urged the legislature or the Insurance Commissioner to clarify the issue. (Incidentally, TTH anticipated this potential outcome 15 years ago when Craley was decided. Consequently, at that time, TTH encouraged insurers to protect themselves via the addition of a specific inter-policy stacking rejection form. In its liability eNotes from that time period, TTH provided a summary of the Craley decision and then remarked: “Unless and until the courts, the Insurance Commissioner and/or the legislature clarify that issue, insurers would be well-advised to add an appropriate, specific form for rejection of inter-policy stacking to the menu of forms presented to insurance applicants.”)

Noting that the legislature has not clarified the law, in Donovan, the Court held that the statutorily-required form was invalid to reject inter-policy stacking for multi-vehicle policies. The holding was reached despite recognition that the MVFRL mandates the right to reject inter-policy stacking, specifies the exact form (set forth at 75 Pa.C.S. § 1738) which must be used for that purpose, and indicates that “[a]ny rejection form that does not comply with this section [1738] is void.” The Court agreed that insurers are placed in a “Catch-22” in that the statute requires them to allow insureds to reject inter-policy stacking in exchange for reduced premiums, and requires them to use a specific form, but the Court was now holding that form to be ineffective for that purpose. Rather than simply recognizing that the statute had to be followed despite its perceived shortcomings, the Court in effect held that insurers must bear the burden of the legislature’s imprecision. As stated in Donovan:

We recognize that insurers are placed in a Catch-22 as they are required to provide insureds the opportunity to waive UM/UIM stacking but without the ability to enforce the insureds’ waiver of inter-policy stacked coverage in multi-vehicle policies because the statute mandates the use of the Section 1738(d) form. The remedy, however, is not with the courts but with the General Assembly, which has the power to amend its language to provide for waiver of inter-policy stacking on multi-vehicle polices. As in Craley, we again call on the Legislature to clarify the Section 1738(d) waiver language and its application to inter-policy UM/UIM stacking.

Thus, in odd twists of logic, it has now been held that a form plainly designed primarily to apply to a multi-vehicle policy is effective to reject inter-policy stacking for a single-vehicle policy (Craley), but is ineffective for a multi-vehicle policy (Donovan). Unfortunately, the consequences of requiring insurers to provide secondary stacked UM/UIM benefits to people who rejected stacking, and chose to purchase less coverage elsewhere, will inevitably be visited on all insurance consumers through higher premiums.

In considering the impact of this decision, the following should also be recognized: (1) the rejection form in such cases remains effective with respect to intra-policy stacking; (2) State Farm issued both the policy on the occupied vehicle and the policy under which second priority UIM coverage was sought, so the Court had no occasion to decide whether Gallagher applies when different insurers are involved; and (3) the Court had no occasion to decide the validity of exclusions other than the household vehicle exclusion involved in Gallagher.

Questions about this case can be directed to Pete Speaker at pspeaker@tthlaw.com, Kevin McNamara at  kmcnamara@tthlaw.com, Bernie Kwitowski at bkwitowski@tthlaw.com, Chris Gallagher at cgallagher@tthlaw.com or John Lucy at jlucy@tthlaw.com.