North River Ins. Co. v. Tabor

Decision Date29 May 1991
Docket NumberNo. 90-5709,90-5709
PartiesNORTH RIVER INSURANCE COMPANY, Appellant, v. E. James TABOR, Administrator for the Estate of Todd Tabor.
CourtU.S. Court of Appeals — Third Circuit

C. Roy Weidner, Jr. (argued), David J. Lanza, Johnson, Duffie, Stewart & Weidner, Lemoyne, Pa., for appellee.

Henry H. Janssen, Tanya M. Sweet, Michael G. Sabo, Rapp, White, Janssen & German, Ltd., Philadelphia, Pa., for amicus curiae Sea Ins. Co., Ltd.

Christine M. Brenner (argued), Marshall, Dennehey, Warner, Coleman & Goggin, Philadelphia, Pa., for appellant.

Before STAPLETON, GREENBERG, and SEITZ, Circuit Judges.

OPINION OF THE COURT

GREENBERG, Circuit Judge.

In our opinion in West American Ins. Co. v. Park, 933 F.2d 1236 (3d Cir.1991), we have concluded that West American was estopped from challenging the legality of its own policy under Section 1736 of the Pennsylvania Motor Vehicle Responsibility Law ("MVFRL"), because the policy permitted the insured to stack uninsured motorist coverage to exceed her liability coverage. In this diversity of citizenship declaratory judgment action under Pennsylvania Law between appellant-plaintiff, North River Insurance Company, and appellee-defendant the estate of Todd Tabor, dealing with underinsured motorist coverage rather than uninsured motorist coverage, essentially the same stacking issue is presented. Inasmuch as we find no meaningful difference between the two coverages with respect to stacking, and there being no factual differences to distinguish the cases so that the basis for estoppel present in Park is present here, we find our discussion in Park fully determinative of the stacking issue presented herein and thus we will affirm the judgment of the district court allowing stacking without further discussion. 1

In this case, however, an additional issue is raised, and we are called upon to predict whether the Supreme Court of Pennsylvania would rule invalid, as contrary to the public policy embodied in the MVFRL, an insurance contract clause providing for the set-off or reduction of underinsured motorist coverage benefits "by all sums paid ... by or on behalf of persons or organizations who may be legally responsible." This issue cannot be decided on the estoppel rationale adopted in Park, as here North River obviously does not seek to contradict its policy. On cross-motions for summary judgment, the district court determined that Supreme Court of Pennsylvania would so rule and entered judgment for Tabor's estate. North River Ins. Co. v. Tabor, 744 F.Supp. 625 (M.D.Pa.1990). The courts that have considered the issue are split. Compare, e.g., Lytle v. Allstate Ins. Co., 72 Erie L.J. 46 (Ct.C.P. Erie County 1989) (set-off provision enforceable); Nationwide Mut. Ins. Co. v. Hampton, 1990 WESTLAW 87276 (U.S.D.C., E.D.Pa. June 18, 1990) (set-off provision enforceable to extent statutorily-mandated floor for underinsured motorist coverage not affected), with, e.g., North River Ins. Co. v. Tabor, 744 F.Supp. 625 (set-off provision unenforceable); Conrad v. Progressive Cas. Ins. Co., 48 Pa. D. & C.3d 71 (Blair County 1987) (same).

I.

Factual Background and Contentions of the Parties

The district court's concise recitation of the undisputed facts in this case is as follows:

Defendant James E. Tabor is the administrator for the estate of Todd J. Tabor who was killed in an automobile accident. Aetna Life & Casualty Company insured the host vehicle in which the decedent, who was a passenger, was killed. That company paid to the estate $250,000 in liability coverage. The Tabors have a personal automobile policy [with North River Insurance Company] which provides coverage for three vehicles owned by them and $100,000 of underinsured motorist coverage for [each vehicle] per accident with bodily injury....

744 F.Supp. at 626.

"The policy in question contains an express offset provision entitling [North River] to reduce the underinsured motorist benefits owing under its own policy by the liability coverage amounts already paid by other companies, in this case Aetna." Id. at 627.

As Tabor's estate is under Park entitled to stack the underinsured motorist coverage on the three Tabor vehicles to achieve a total of $300,000 coverage from North River, and as Tabor's estate has already received $250,000 from Aetna, the question of set-off arises. Tabor's estate claims that the set-off clause is unenforceable as contrary to public policy and accordingly the additional $300,000 in stacked coverage is available to satisfy its remaining damages which it asserts are at least $300,000. North River, however, argues that, pursuant to its contract with the Tabors, the $250,000 received from Aetna must be set-off against the $300,000 in stacked underinsured motorist coverage, so that its liability to Tabor's estate for underinsured benefits cannot exceed $50,000. 2 Under the view held by Tabor's estate, the combination of the tortfeasor's liability coverage with Aetna and the Tabors' underinsurance coverage will satisfy $550,000 of the damages it claims; North River's view, since we are allowing stacking, potentially leaves $250,000 of these damages unsatisfied. For the reasons that follow, we find the North River position untenable under the MVFRL.

As noted by Judge Smith in Conrad v. Progressive Cas. Ins. Co., 48 Pa. D. & C.3d 71, there are two types of underinsured motorist coverage. Under the first the coverage places the insured party in the same position that he would have been in had the tortfeasor carried liability insurance in the amount of the insured's underinsured motorist policy limit. See Higgins v. Fireman's Fund Ins. Co., 160 Ariz. 20, 22, 770 P.2d 324, 326 (1989). Under this "gap" theory of underinsured motorist coverage--so-called because the coverage merely fills the "gap" between the tortfeasor's liability coverage and the injured party's underinsured motorist coverage, Conrad, 48 Pa. D. & C.3d at 74--, a driver is considered "underinsured" when his liability coverage does not at least equal the uninsured/underinsured coverage carried by the injured insured. See, e.g., Raggio v. Volkswagen Ins. Co., 327 So.2d 505, 511 (La.Ct.App.1976).

Under the second view, underinsured motorist coverage supplies a fund for full compensation to the injured insured and thus the insured is entitled to compensation from his insurer regardless of any recovery obtained from other sources. The insured may therefore recover underinsured motorist benefits until his policy limits are reached or he is fully compensated for his damages, whichever comes first. See Hamilton v. Farmers Ins. Co. of Washington, 107 Wash.2d 721, 727, 733 P.2d 213, 216 (1987). Under this "excess" theory of underinsured motorist coverage--i.e., the injured insured's coverage being reckoned as "excess" over and above the liability policy of the tortfeasor, Conrad, 48 Pa. D. & C.3d at 74--, a tortfeasor is "underinsured" when his liability coverage does not at least equal the damages suffered by the injured insured.

Under 75 Pa. Cons. Stat. Ann. Sec. 1731(a) (Purdon Supp. March 1990), every insurance policy issued in Pennsylvania must include "underinsured motorist coverage" unless it is rejected by the insured. Section 1731(c) defines "underinsured motorist coverage" so as to make clear that an insurer must provide coverage for all "persons who suffer injury ... and are legally entitled to recover damages therefore from owners or operators of underinsured motor vehicles." Since section 1702 of the MVFRL defines any "underinsured motor vehicle" as any "motor vehicle for which the limits of available liability insurance ... are insufficient to pay losses and damages," it follows that insurers must provide protection for all persons injured by a motor vehicle having less liability insurance than the loss and damages sustained. This would include, for example, a person who has purchased for herself $100,000 per person in underinsured motorist coverage and who suffers a $300,000 loss at the hands of a driver who has purchased $100,000 liability coverage. If an insurer were entitled to include a set-off provision such as that in the North River policy, a person so injured would have no underinsured motorist protection, a result clearly inconsistent with the statutory text. For this reason, we read the statute as reflecting a legislative choice in favor of "excess" underinsured motorist protection.

As the court in Conrad noted: "The legislative mandate to insurance carriers issuing motor vehicle insurance policies in Pennsylvania was to provide coverage to insureds for those cases when third party liability limits were inadequate or not enough to satisfy an injured parties' [sic] losses," and "[a] determination of inadequacy can only be made by reference to the injured party's losses and damages." 48 Pa. D. & C.3d at 79-80. A set-off provision preventing Pennsylvania's statutory scheme from having its desired effect--i.e., to require insurers to provide underinsured motorist coverage in excess to the tortfeasor's liability coverage--is therefore contrary to public policy and unenforceable.

Moreover, under the MVFRL as applicable to this case, as opposed to prior Pennsylvania law, insurers are required to offer underinsured coverage of at least $15,000 per person, $30,000 per accident. See 75 Pa. Cons. Stat. Ann. Secs. 1702, 1715(c), 1731(a) (Purdon Supp.1990). This alone distinguishes the pre-MVFRL cases upholding set-off provisions with regard to underinsurance coverage, as in those cases the issue was one merely of construing a contract. See, e.g. Kovaleski v. Erie Ins. Group, 398 Pa.Super. 519, 530-31, 581 A.2d 585, 591 (1990); Sparler v. Fireman's Ins. Co. of Newark, 360 Pa.Super. 597, 521 A.2d 433 (1987); Votedian v. General Accident Fire & Life Assur. Corp., 330 Pa.Super. 13, 478 A.2d 1324 (1984). Thus, as noted by Votedian, underinsured motorist coverage not then...

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