State Farm Mutual Automobile v. Coviello

Decision Date29 November 2000
Docket NumberNo. 99-4066,99-4066
Parties(3rd Cir. 2000) STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, APPELLANT v. LEONARD COVIELLO; MARY COVIELLO, h/w; ANN COVIELLO
CourtU.S. Court of Appeals — Third Circuit

Teresa F. Sachs, Esq., [ARGUED], Britt, Hankins, Schaible & Moughan, Philadelphia, PA, Counsel for Appellant.

Johanna L. Geib, Esq. [ARGUED], Scranton, PA, Counsel for Appellees.

Before: ROTH, McKEE and RENDELL, Circuit Judges.

OPINION OF THE COURT

RENDELL, Circuit Judge.

I. Introduction

In this appeal we address the arbitrability of a dispute regarding coverage under an automobile insurance policy. The insurer, State Farm Mutual Automobile Insurance Company "State Farm"), argues that the dispute should be settled in the courts, while the insured, Mary Coviello ("Coviello"), insists that it should be settled via arbitration, pursuant to an arbitration clause in the relevant insurance policy. The District Court credited Coviello's arguments, concluding that "the arbitration clause clearly encompasses [the] coverage dispute" between the parties, and therefore dismissed State Farm's declaratory judgment action. App., Vol. I, at A-12.

State Farm contends that resolution of the parties' dispute turns on a question of public policy, and urges us to reverse the District Court based on the broad proposition that under Pennsylvania law, the courts - and not arbitrators - should assume jurisdiction over such matters. Alternatively, State Farm argues that the District Court erred in ruling that the dispute falls within the scope of the relevant arbitration provision. We agree with State Farm that resolution of the parties' disagreement hinges on a question of public policy; moreover, we believe that whether this dictates that the dispute should be heard in the courts is a question that could have broad future implications, and is worthy of our consideration. However, we base our decision on an alternative ground presented by the parties, namely, the scope of the arbitration provision. In our view, the Pennsylvania courts would conclude that they should take jurisdiction over this matter because the arbitration clause issue does not encompass the parties' coverage dispute. We will reverse and remand.

II. Facts and Procedural Background

The parties have stipulated to many of the relevant facts in this case, and no material facts are in dispute. On June 23, 1998, Coviello was injured in a single-vehicle accident in Dickson City, Pennsylvania. She was a passenger in automobile operated by her husband, Leonard Coviello. The Coviellos admit that Leonard was at fault in the accident, which is not surprising given that the accident did not involve any other vehicles. Coviello and her husband were the registered owners of the automobile that was involved in the accident, and they held an insurance policy with State Farm that covered their automobile. Coviello made a liability claim against Leonard under this policy and received the $ 100,000 policy limit.

At the time of the accident, Ann Coviello, the Coviellos' daughter, resided with her parents. Ann had her own automobile and was the name insured on a separate insurance policy, also issued by State Farm. Coviello seeks underinsured motorist benefits under her daughter Ann's policy, based on the reasoning that the vehicle she and her husband Leonard owned, and which Coviello occupied at the time of the accident, qualifies as an "underinsured motor vehicle" under Ann's policy. State Farm does not contest that Coviello qualifies as "an insured" person under her daughter Ann's policy.

State Farm, however, denies that Ann's policy provides underinsured motorist coverage to Coviello under these circumstances. State Farm points to what is commonly called the "family vehicle exclusion" in Ann's policy, which states that "an underinsured motor vehicle does not include a land motor vehicle . . . (2) furnished for the regular use of you, your spouse or any relative." App., Vol. II, at A-45 (emphasis added). The parties have stipulated that Coviello is a "relative" of Ann within the meaning of her daughter's policy.

State Farm filed a complaint in the District Court on April 12, 1999, seeking a declaration that Coviello is not entitled to underinsured motorist coverage under Ann's policy because the "family vehicle exclusion" is applicable and should bar her claim for benefits. Coviello filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1) and 12(b)(6), arguing that the dispute between the parties is subject to arbitration under the terms of the policy. On November 22, 1999, the District Court granted the Coviellos' motion to dismiss. State Farm moved for reconsideration, which the District Court denied on February 17, 2000.

III. Jurisdiction and Standard of Review

We have jurisdiction over this appeal pursuant to 28 U.S.C. 1291. See Nationwide Ins. Co. v. Patterson, 953 F.2d 44, 45-46 (3d Cir. 1991) (holding that appellate jurisdiction exists under 29 U.S.C. 1291 even when the practical effect of a district court's order is that the parties would submit their dispute to arbitration). Our review of a motion to dismiss is plenary. See, e.g., Semerenko v. Cendant Corp., 223 F.3d 165, 173 (3d Cir. 2000). However, we are mindful that when reviewing any factual determinations that the District Court made in interpreting the relevant insurance policy, we apply a clear error test. See, e.g., Ram Constr. Co. v. Am States Ins. Co., 749 F.2d 1049, 1053 (3d Cir. 1984).

IV. Discussion
A.

This diversity action is governed by substantive state law. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78-80, 82 L. Ed. 1188, 58 S. Ct. 817 (1938). The parties agree that Pennsylvania law applies.1 In the absence of an agreement to the contrary, we will presume that the parties' dispute is governed by the principles of common law arbitration. See, e.g., Borgia v. Prudential Ins. Co., 561 Pa. 434, 750 A.2d 843, 846-47 (Pa. 2000). When ascertaining Pennsylvania law, the decisions of the Pennsylvania Supreme Court are, of course, the authoritative source. See, e.g., Connecticut Mut. Life Ins. Co. v. Wyman, 718 F.2d 63, 65 (3d Cir. 1983). If the Pennsylvania Supreme Court has not yet passed on the issue before us, we must consider the pronouncements of the lower state courts, see id., as well as federal appeals and district court cases interpreting state law, see, e.g., Boyanowski v. Capital Area Intermediate Unit, 215 F.3d 396, 406 (3d Cir. 2000).

State Farm urges that, regardless of whether the policy declares that the parties' dispute should proceed to arbitration, State Farm's declaratory judgment action should not have been dismissed because the instant dispute involves a question of public policy that should be decided by the courts, and not by an arbitrator. In State Farm's view, the only way that Coviello can prevail in her pursuit of underinsured motorist benefits is if the "family vehicle exclusion" in Ann's policy does not apply. State Farm argues that the only way the exclusion would not apply to the facts of this case is if the exclusion itself were declared invalid and unenforceable as against the public policy underlying the Pennsylvania Motor Vehicle Financial Responsibility Law ("MVFRL"). Relying principally on Warner v. Continental/CNA Insurance Cos., 455 Pa. Super. 295, 688 A.2d 177 (Pa. Super. Ct. 1997), in which the Pennsylvania Superior Court stated that "both this Court and the [Pennsylvania] Supreme Court have repeatedly approved the use of a declaratory judgment action despite the presence of an arbitration agreement, where the disputed issue is whether a particular provision of an insurance policy is contrary to a constitutional, legislative, or administrative mandate," 688 A.2d at 181, State Farm asserts that the courts, and not an arbitrator, should exercise jurisdiction over Coviello's public policy challenge to the exclusion.

Coviello responds that Warner is inapplicable, because she is not asserting a challenge based on public policy grounds. Rather, she states that her position "is based on Pennsylvania appellate court precedent -- not public policy." Appellee's Br. at 9. She also argues that, even if the applicability of the exclusion to her case raises public policy issues, arbitration is nonetheless the appropriate forum, in accordance with our decision in Nationwide Insurance Co. v. Patterson, 953 F.2d 44 (3d Cir. 1991).

As we assess Coviello's arguments, we think it is clear that she is challenging the applicability of the "family vehicle exclusion" on public policy grounds. The only way that Coviello can succeed on her claim is if the exclusion is invalidated.2 According to the "Pennsylvania appellate court precedent" that Coviello relies upon, the exclusion should be invalidated only if, under the circumstances of a particular case, it violates public policy as expressed by the Pennsylvania MVFRL. See Marroquin v. Mut. Benefit Ins. Co., 404 Pa. Super. 444, 591 A.2d 290, 296 (Pa. Super. Ct. 1991) (finding the exclusion "invalid and unenforceable as being void as against public policy" in the specific factual circumstances presented by the parties). The Pennsylvania Supreme Court also has left no doubt that the enforceability of the exclusion is a question of public policy. See, e.g., Eichelman v. Nationwide Ins. Co., 551 Pa. 558, 711 A.2d 1006, 1008 (Pa. 1998) (explaining that "the present dispute centers on whether the [family vehicle] exclusion provision violates public policy"). In the many cases that have assessed the exclusion, the Pennsylvania courts have often upheld the exclusion, see, e.g., Eichelman, 711 A.2d at 1010; Paylor v. Hartford Ins. Co., 536 Pa. 583, 640 A.2d 1234, 1241 (Pa. 1994), but they also have invalidated it under certain circumstances, see, e.g., Marroquin, 591 A.2d at 296. What is abundantly clear, however, is that the only way that the...

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