Nationwide Ins. Co. v. Schneider

• Decision Date: 19 November 2008
• Docket Number: No. 11 MAP 2007.,11 MAP 2007.
• Citation: 960 A.2d 442
• Parties: NATIONWIDE INSURANCE COMPANY, Appellant v. Paul P. SCHNEIDER, Appellee.
• Court: Pennsylvania Supreme Court

960 A.2d 442

NATIONWIDE INSURANCE COMPANY, Appellant v. Paul P. SCHNEIDER, Appellee.

No. 11 MAP 2007.

Supreme Court of Pennsylvania.

Argued April 15, 2008.

Decided November 19, 2008.

James C. Haggerty, Esq., Swartz Campbell, L.L.C., Philadelphia, for Nationwide Insurance Company.

Craig R.F. Murphey, Esq., MacDonald, Illig, Jones & Britton, L.L.P., Erie, for Pennsylvania Defense Institute.

S. Stanton Miller, Jr., Esq., Dunn & Miller, Media, for Paul P. Schneider.

Scott B. Cooper, Esq., Melissa Nicole Miller, Esq., Schmidt Kramer, P.C., Harrisburg, for amicus curiae Pennsylvania Trial Lawyers Association.

BEFORE: CASTILLE, C.J., and SAYLOR, EAKIN, BAER, TODD and McCAFFERY, JJ.

OPINION

Justice SAYLOR.

We allowed appeal to determine whether the Motor Vehicle Financial Responsibility Law requires primary underinsured motorist benefits to be exhausted before secondary coverage is implicated and to consider the enforceability of a consent-to-settle clause in an underinsured motorist policy.

In October 1996, police officer Paul P. Schneider ("Appellee") suffered injury when his cruiser was struck by a vehicle driven by Ayanna Lee Cooper. At that time, Ms. Cooper maintained a policy of insurance issued by American Independent Insurance Company providing, inter alia, up to $15,000 in liability coverage. Appellee's employer, Upper Darby Township, maintained a policy with Granite State Insurance Company, which included underinsured motorist ("UIM") coverage subject to a one million dollar limit.

Appellee lodged a civil action against Ms. Cooper, defended by American Independent, which offered to settle at the $15,000 limit in exchange for a general release. Granite State gave its consent, upon being informed by Appellee of the claim and offer. Appellee accepted the settlement in May 1999, executing the release and receiving payment.

Subsequently, Appellee pursued a claim for UIM benefits under the Granite State policy. On December 21, 2001, those parties (with Granite State acting on behalf of itself and Upper Darby Township) consummated a structured settlement having a present value of $750,000, or $250,000 less than the policy limit. This settlement also contained a general release.

Two months later, Appellee sought secondary UIM benefits under his personal automobile insurance policy issued by Appellant, Nationwide Insurance Company, which provided for up to $200,000 in stacked UIM coverage. The policy contained an exhaustion clause prescribing that "[n]o payment will be made until the limits of all other auto liability insurance and bonds that apply have been exhausted by payment." The policy also included consent-to-settle provisions, indicating that an insured must "preserve and protect Nationwide's right to subrogate against any liable party" and obtain Nationwide's written consent to settle any legal action brought against a liable party or release any party.¹ Correspondingly, an express exclusion indicated that coverage would not apply to "[b]odily injury of any insured if the insured settles, without our written consent with a liable party." Appellee attempted to address the contractual exhaustion requirement by extending to Nationwide a "credit" of $1,015,000, the combined amount of limits of Ms. Cooper's liability policy and the primary UIM coverage from Granite State, explaining that he would not seek any benefits from Nationwide unless he could prove that his damages exceeded this amount. After Nationwide denied Appellee's claim, he made a demand for arbitration, as provided in the policy.

In response, Nationwide filed a declaratory judgment action seeking, in the relevant counts, a determination that it had no obligation to pay secondary UIM benefits to Appellee due to his failure to exhaust his primary UIM benefits and obtain Nationwide's consent to settle his primary UIM claims, as required by the policy. Nationwide contended that exhaustion was required not only by the terms of the policy, but also under pertinent priority-of-recovery provisions of the Motor Vehicle Financial Responsibility Law,² which provides as follows in the UM/UIM context:

(a) General rule.—Where multiple policies apply, payment shall be made in the following order of priority:

(1) A policy covering a motor vehicle occupied by the injured person at the time of the accident.

(2) A policy covering a motor vehicle not involved in the accident with respect to which the injured person is an insured.

(b) Multiple sources of equal priority.-The insurer against whom a claim is asserted first under the priority set forth in Subsection (a) shall process and pay the claim as if wholly responsible. The insurer is thereafter entitled to recover contribution pro rata from any other insurer for the benefits paid and the costs of processing the claim.

75 Pa.C.S. § 1733.

Nationwide pursued summary judgment, and Appellee responded with a cross-motion, arguing that there was no need for exhaustion of primary UIM benefits, as he had extended a credit to Nationwide for the full amount of those benefits as required by Boyle v. Erie Insurance Company, 441 Pa.Super. 103, 656 A.2d 941 (1995). Additionally, Appellee asserted that, pursuant to Nationwide Mutual Insurance Company v. Lehman, 743 A.2d 933 (Pa.Super.1999), the insurer was required to establish that its interests were prejudiced by Appellee's failure to obtain its consent to settle.

The common pleas court awarded summary judgment in Nationwide's favor. See Nationwide Ins. Co. v. Schneider, 69 Pa. D. & C.4th 94 (2004). Initially, the court summarized the circumstances as follows:

It is altogether undisputed that defendant never provided plaintiff with notice of this accident nor of his intention to pursue UIM benefits under the Nationwide policy [during the five-year period between the accident and the demand on Nationwide]. There is also no question that he did not seek plaintiff's permission to settle either of the previous claims for benefits arising from the injuries sustained in this accident. There was also no question in this action that the applicable terms and conditions set forth in the within Nationwide policy clearly and expressly provided that no payment of underinsured motorist benefits would be made until the limits of all other applicable automobile liability coverage and bonds had been exhausted by payments.

Id. at 100. Relative to the exhaustion requirement, the common pleas court first agreed with Nationwide that Section 1733 of the MVFRL requires "exhaustion of one category of benefits before the next may be pursued." Id. at 104. The court also observed that Boyle and other cases relied upon by Appellee involved the failure to exhaust third-party liability benefits before pursuing primary UIM benefits. Unlike the third-party/primary-UIM context, the court indicated that primary UIM benefits must be exhausted before secondary or excess UIM benefits may be obtained pursuant to Section 1733. See id. at 113, 656 A.2d 941 (citing, inter alia, State Farm Ins. Co. v. Ridenour, 435 Pa.Super. 463, 470, 646 A.2d 1188, 1191 (1994)). Finally, the court rejected Appellee's extension of "credit" to Nationwide, explaining that "neither the spirit nor the language of the cited authorities would authorize" such a credit. Id. at 114, 656 A.2d 941.

Addressing the requirement of consent to settle, the court distinguished Lehman on the ground that the insured in that case had provided the insurer with notice of the accident and sought consent to settle. See Schneider, 69 Pa. D. & C.4th at 107. Further, the court emphasized that Appellee's claim was for excess as opposed to primary UIM benefits, since Appellee settled for less than the limits of the primary UIM coverage. See id. at 109. Under these circumstances, the court held that Lehman did not require Nationwide to prove prejudice arising from Appellee's failure to obtain its consent in order to support a denial of coverage under the express policy terms. See id.

On appeal, after an initial affirmance by a three-judge panel of the Superior Court, a unanimous en banc panel reversed on reargument. See Nationwide Ins. Co. v. Schneider, 906 A.2d 586 (Pa.Super.2006). Initially, the court differed with the common pleas court's conclusion that Section 1733 of the MVFRL requires exhaustion, reasoning that Section 1733 "makes no mention of exhaustion of limits." Id. at 591. The court further stressed that Appellee had followed the statutory order of priority by first pursing recovery from the insurer of the vehicle Appellee occupied at the time of the accident, suggesting that this is all that was required by the provisions of Section 1733. See id. at 591.

Regarding the contractual exhaustion clause, the court looked to Boyle, in which the Superior Court previously had explained that an exhaustion clause is properly construed as protecting the insurance company "against a demand by its insured to fill the `gap' after a weak claim has been settled for an unreasonably small amount." Schneider, 906 A.2d at 593-94 (quoting Boyle, 441 Pa.Super. at 108, 656 A.2d at 943). In Boyle and Schneider, however, the court further indicated that the clause also serves to protect an injured insured against delay in recovery. See id. The court explained that, in Boyle, to balance these interests, it had determined that the exhaustion clause should be construed as a "threshold requirement" and not as a bar to recovery of UIM benefits. Id. Indeed, the court reasoned that strict enforcement of an exhaustion clause

would delay recovery when prompt payment was needed, would lessen the insured's recovery by requiring him or her to pay additional costs, and would unnecessarily burden the judicial system.["]Where the best settlement available is less than the [tortfeasor's] liability limits, the insured should not go to trial in order to determine the issue of damages.["]

Schneider, 906 A.2d at 595 (quoting Boyle, 441 Pa.Super. at 108, 656 A.2d...