ARTICLE: Pa. Supreme Court Completes U-Turn on Validity of Household Exclusion

Below is a copy of my recent article which was published in the March 30, 2023 edition of the Pennsylvania Law Weekly and which is republished here with permission: 


Pa. Supreme Court Completes U-Turn on Validity of Household Exclusion

March 30, 2023

By Daniel E. Cummins


Back in 2019, in the case of Gallagher v. GEICO Indemnity, 201 A.3d 131, 138 (Pa. 2019), the Pennsylvania Supreme Court ruled that the household exclusion, found in automobile insurance policies, violated Pennsylvania’s Motor Vehicle Financial Responsibility Law and was, therefore, not enforceable under any circumstance.

With its Gallagher decision, the Pennsylvania Supreme Court threw open the door for injured parties to seek uninsured (UM) and underinsured (UIM) motorists benefits coverage in a wide variety of new circumstances. The decision reversed 20 years of precedent and resulted in expensive litigation on the issue in many pending cases. Plaintiffs also revived old cases in which the household exclusion had been previously applied against them to preclude coverage. A class action lawsuit in this regard even developed.

Also, other injured parties began to pursue new uninsured and underinsured motorists claims which, prior to the Gallagher decision, might not have been paid out by insurance companies due to an application of the household exclusion. It is certainly possible that some of those claims were simply paid out by some carriers due to the complete eradication of the household exclusion by the Pennsylvania Supreme Court in Gallagher. Other carriers still attempted to assert the household exclusion and these cases were litigated with mixed results in the federal and state courts.

But not all justices on the Pennsylvania Supreme Court agreed with the Gallagher decision. In his dissenting opinion in Gallagher and again in his concurring opinion in Donovan, Pennsylvania’s “Great Dissenter,” Justice David N. Wecht, described the Gallagher decision as a “mistake” and noted that “the enormity of the court’s blunder quickly became apparent as state and federal courts struggled to apply (and make sense of) Gallagher’s reasoning.” See Donovan v. State Farm Mutual Automobile Insurance, 256 A.3d 1145, 1163 (Pa. 2021).

Now, in a recent spate of decisions, the Pennsylvania Supreme Court has retreated from its unduly expansive decision in Gallagher in which the court had noted that it had eradicated the household exclusion across the board. In the end, like a driver making a surreptitious U-turn and hoping no one was watching, the Pennsylvania Supreme Court has backpedaled on the issue.

As a result, the household exclusion has recovered from the death knell sounded by the Pennsylvania Supreme Court in the Gallagher decision and now instead remains a valid exclusion in Pennsylvania in most circumstances.

The Household Exclusion

Most automobile insurance policies contain a household exclusion. The basic premise of the household exclusion is that an insured is only permitted to recover uninsured (UM) or underinsured (UIM) motorist benefits under coverage that they have paid for by way of payment of premiums. In other words, the exclusion upholds the principle that you can’t get something for nothing.

More specifically, the household exclusion typically applies to a scenario where an insured in a household owns multiple motor vehicles. After that insured in involved in an accident, that injured party sues the driver who caused the accident and then turns to his or her own automobile insurance policy covering the vehicle that was involved in the accident for UIM benefits. That insured then also attempts to also recover UM/UIM benefits under another automobile insurance policy or policies issued by the same or different insurance companies that cover other vehicles in the same household which vehicles were not involved in the accident.

The household exclusion works to prevent the carriers covering the other noninvolved vehicles in the household from having to pay out UIM benefits to the injured party. The rationale is that the carrier that issued the policy on the other vehicle in the household was not paid a premium to provide coverage for injuries that resulted when the injured party was occupying a different vehicle from the same household.

‘Seismic’ Change in the Law

In what was called a “seismic” change in the law, the Pennsylvania Supreme Court held in Gallagher v. GEICO Indemnity, 201 A.3d 131, 138 (Pa. 2019), that the household exclusion, which the court noted was allegedly “buried in an amendment” to the policy, was invalid and unenforceable. In the Gallagher decision, the Supreme Court deviated from decades of precedent upholding the validity of the household exclusion and instead ruled that the household exclusion violated Pennsylvania’s Motor Vehicle Financial Responsibility Law and was, therefore, not enforceable.

More specifically, in Gallagher, the Supreme Court wrote “we hold that the household vehicle exclusion violates the MVFRL; therefore, these exclusions are unenforceable as a matter of law.” The exclusion was found to be in violation of the MVFRL the household exclusion was viewed by the court as impermissibly operating as a de facto waiver of stacked UM or UIM coverage when the MVFRL required insurance companies to actually secure written waivers of UIM coverage from its insureds.

In the Gallagher decision, the Pennsylvania Supreme Court did not limit its decision to the facts before it. As such, the decision was read as an eradication by the Pennsylvania Supreme Court of the household exclusion across the board. See Gallagher, 201 A.3d at 139 n. 8. (“As in every case, we are deciding the discrete issue before the court and holding that the household vehicle exclusion is unenforceable because it violates the MVFRL.”).

In so ruling, the majority in Gallagher, in seemingly regrettable language, noted, “We recognize that this decision may disrupt the insurance industry’s current practices; however, we are confident that the industry can and will employ its considerable resources to minimize the impact of our holding.”

Expressing his disagreement with the majority opinion in Gallagher and foreshadowing his own later majority opinion in the Mione case, Wecht issued a strong dissenting opinion in the Gallagher decision.

Wecht noted that the majority in Gallagher “upended the court’s well-established precedent” that had upheld the household exclusion. Wecht scoffed at the fact the “majority’s parting wisdom to Pennsylvania insurers is simply that they should use their ‘considerable resources’ to mitigate the damage that the court inflicted” in the Gallagher decision.

Wecht confirmed that the Gallagher decision was rife with incomplete and flimsy logic regarding an alleged de facto waiver of coverage and noted that the decision would only serve to result in an increase of the cost of automobile accident insurance which was “the very outcome that the General Assembly sought to avoid when it enacted the MVFRL.”

In his later concurring opinion in the Donovan case, a chagrined Wecht confirmed that “Gallagher was a mistake, but we must all live with it now.”

Wecht also cautioned his fellow jurists on the Supreme Court that unfortunate decisions like Gallagher would leave the court unnecessarily “destined to remain in the exclusion-umpiring business for the foreseeable future.”

As wisely predicted by Wecht his dissenting opinions in Gallagher and again in his concurring opinion in Donovan, the Gallagher decision unfortunately threw automobile law in Pennsylvania into a tizzy and resulted in expensive litigation on the issue, including a class action.

While most federal courts obediently followed the Gallagher decision as the new, expansive law of the land that eradicated the household exclusion in Pennsylvania, some state trial court and Superior Court judges instead chose to more specifically apply the elements of the doctrine of stare decisis. Those other more astute judges who applied the doctrine of stare decisis, thereby limited the Gallagher decision to its specific facts and otherwise ruled that the household exclusion remained enforceable in certain circumstances distinguishable from those facts presented in the Gallagher case.

In an apparent move not to run afoul of the Pennsylvania Supreme Court’s decision in Gallagher, certain Pennsylvania Superior Court panels listed their post-Gallagher decisions upholding the household exclusion as “nonprecedential.” See Erie Insurance Exchange v. Colebank, No. 1244 WDA 2021 (Pa. Super. 2022); see also Erie Insurane Exchange v. Sutherland, No. 1113 WDA 2020 (Pa. Super. 2021).

However, in Erie Insurance Exchange v. Mione, 253 A.3d 754 (Pa. Super. 2021), the case that would eventually work its way up to the Pennsylvania Supreme Court, the Pennsylvania Superior Court published its decision in which it distinguished the Gallagher decision and upheld the insurance company’s application of a household exclusion. But, before the Pennsylvania Supreme Court would decide the Mione case, it would first reaffirm its finding that the household exclusion was unenforceable in another decision.

Pennsylvania Supreme Court Decision Reaffirms That Household Exclusion Is Invalid

In Donovan v. State Farm Mutual Automobile Insurance, 256 A.3d 1145 (Pa. 2021), the Pennsylvania Supreme Court doubled down on its finding that the household exclusion was invalid by reaffirming its previous decision in Gallagher v. GEICO and again ruling that plaintiffs need not worry about the household exclusion provision as it was invalid as violative of Pennsylvania’s MVFRL and, therefore, unenforceable.

In Donovan, while still ruling that the household exclusion was invalid, the Pennsylvania Supreme Court attempted to quietly began its retreat from its overly expansive “blunder” of a decision in Gallagher without acknowledging it was doing so. See Donovan, 256 A.3d at 1163 (Wecht, J., Concurring)

More specifically, although the majority in Gallagher had both almost gleefully presented its decision as eradicating the household exclusion across the board and told the insurance industry to use its considerable resources to figure it out, in Donovan, the court instead attempted to say (with a straight face) that it had instead only ruled in Gallagher that the household exclusion was only “unenforceable as applied to the facts of Gallagher.”

Regardless of the Pennsylvania Supreme Court’s refusal to acknowledge its reluctant retreat from its expansive language in Gallagher relative to the household exclusion and all of the confusion and litigation that came from the Gallagher decision as a result, the court still came to the same conclusion as to the invalidity of the household exclusion in the Donovan case. More specifically, the Supreme Court in Donovan noted that, while the household exclusion was found to be unenforceable in Gallagher where the insured did not execute a waiver of stacking, the exclusion was also unenforceable under the facts of Donovan as well where the waiver signed by the insured was found to be deficient and, therefore, invalid.

In the end, the Donovan court again stated that, in either case, the household exclusion cannot operate as a de facto waiver of stacked coverage where the MVFRL requires insurance companies to secure written waivers of stacking from its insureds. Wecht concurred in the Donovan result but felt compelled to again note that the “flimsy” de facto waiver rationale behind the majority’s decisions on the household exclusion “ignore binding precedent” and was “at odds with the text of the MVFRL.”

 
Pennsylvania Supreme Court Reverses Course

In the Pennsylvania Supreme Court’s most recent pronouncement on the issue in the case of Erie Insurance Exchange v. Mione, No. 89 MAP 2021 (Pa. Feb. 15, 2023), the court unanimously fell into line behind an opinion written by Justice David N. Wecht and held that the household exclusion is indeed valid and enforceable in certain circumstances.

Most notably, in the Mione case, the Supreme Court unanimously rejected the plaintiff’s arguments that the high court’s 2019 ruling in Gallagher v. Geico should be interpreted to broadly invalidate all household exclusions in all cases across the board in Pennsylvania. In Mione, the court wrote, “We reiterate today that the holding in Gallagher was based upon the unique facts before us in that case, and that the decision there should be construed narrowly.”

Although the Pennsylvania Supreme Court had definitively stated otherwise in the Gallagher decision, Wecht confirmed in the Mione decision that the Pennsylvania Supreme Court “continues to reject the view that household vehicle exclusions are ipso facto unenforceable.”

In the case of Erie Insurance Exchange v. Mione, the court addressed the enforceability of two household vehicle exclusions in a pair of automobile insurance policies. The distinguishing fact in this case was that the vehicle that the injured party was operating at the time of the accident did not even have UM or UIM coverage. As such, there was no stacking issue implicated and, therefore, there was no need to conduct the analysis of whether any valid stacking waivers had been secured from the insured in writing. Thus, there was no danger of the household exclusion even acting as a de facto waiver of stacked coverage in this case.

In the end, whereas the Pennsylvania Supreme Court had previously repeatedly and broadly ruled that household exclusions are unenforceable, that court now held that household exclusions do indeed remain enforceable under Pennsylvania law in certain circumstances.

The Pennsylvania Supreme Court in Mione ultimately concluded that the lower courts along this case’s rise up the appellate ladder had correctly distinguished the Gallagher decision on the facts and had correctly enforced the household exclusions as contained in the insured’s automobile insurance policies. In the Mione decision, the injured party was precluded from obtaining UIM benefits that the injured party had not paid for and the goal of the MVFRL of containing rising automobile insurance costs was thereby furthered.

Implications of the ‘Mione’ Decision

The most important implication of the Mione decision is the confirmation that the household exclusion remains valid and enforceable in Pennsylvania in certain circumstances. Given that the exclusion may no longer be considered to have been eradicated across the board by the unfortunately worded Gallagher opinion, going forward, order has been restored by the Mione decision and each household exclusion case will again have to be considered against the more recent appellate precedent on the issue.

Also, prior to the Mione decision, it appeared almost certain that the regular use exclusion found in automobile accident cases was also on its way to being eradicated as a matter of course by the Pennsylvania Supreme Court under an argument that the regular use exclusion also allegedly acted as a de facto waiver of coverage. This was so based upon the Pennsylvania Supreme Court’s penchant for engaging in exclusion-umpiring and for legislating new law through its application of the “flimsy” de facto waiver rationale.

However, with Mione and the question of whether the de facto waiver rationale was of any continuing validity, the eradication of the regular use exclusion is no longer a certainty.

It remains to be seen how the Supreme Court will address the validity of that exclusion. That issue is currently pending before the court in the case of Rush v. Erie Insurance Exchange and a decision is expected to be handed down in that matter sometime later this year in what will hopefully be a tightly worded opinion providing clear appellate guidance limited to the facts before the court.

Daniel E. Cummins is the managing partner of the Clarks Summit law firm of Cummins Law, a civil litigation practice. He also conducts mediations of civil litigation matters through Cummins Mediation Services. Cummins is also the sole creator and writer of the Tort Talk Blog (www.TortTalk.com), which is designed to provide continuing updates on important cases and trends in Pennsylvania civil litigation law. He can be reached at dancummins@CumminsLaw.net.