July 6, 2009 

Written By Attorneys Elizabeth Dill and C. Scott Rybny

Note: This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.

In Erie Insurance Exchange v. Baker, the Pennsylvania Supreme Court held that the "household exclusion" in a motor vehicle insurance policy was valid, enforceable, and allowed an insurer to deny underinsured motorist (UIM) benefits where the policy at issue did not cover vehicles involved in the accident, notwithstanding the stacking provisions of Pennsylvania's Motor Vehicle Financial Responsibility Law (MVFRL). Erie Insurance Exchange v. Baker, 2009 WL 1741756 (Pa. June 22, 2009).

Baker arose out of a June 1999, motor vehicle accident. At the time of the accident, Baker's motorcycle was insured by Universal Underwriters Insurance Company. Baker also maintained a separate automobile insurance policy through Erie, which covered the three other automobiles that he owned, but not the motorcycle. Id. Baker did not waive his right to stack coverage under either policy. The tortfeasor's insurance was insufficient to cover payment for all of Baker's injuries. Id. As such, Baker sought UIM coverage under both his Universal and Erie policies. Universal paid Baker the UIM policy limits. Id. Erie denied Baker's UIM claim based on the policy's "household exclusion."

Erie argued that the exclusion's plain language precluded coverage for Baker's injuries because, at the time of the accident, he was operating a vehicle that he owned but was not insured for UIM coverage under the Erie policy. Both the trial court and Superior Court accepted Erie's arguments and interpretation of the both the policy and MVFRL. Id. Baker subsequently appealed to Pennsylvania's Supreme Court.

In his appeal, Baker argued that the exclusion was invalid because it violated Section 1738 of the MVFRL, relating to stacking of UIM benefits. Id. at *2. Section 1738(a) provides, in relevant part, that when one or more vehicles are insured under one or more policies providing UM/UIM coverage, the stated limit for coverage shall apply separately to each vehicle. The limits for coverage available to the insured shall be the sum of the limits for each motor vehicle insured under the policy or policies. Section 1738(b) allows an insured to waive stacked UIM coverage, but such a waiver must comply with the strict requirements set out in Section 1738(d). Baker argued: (1) he was entitled to the sum of the limits for each of his vehicles because he did not execute a waiver of stacked benefits on either of his policies and paid higher premiums for that election, and (2) that Erie's household exclusion, which he alleged was buried in the policy, operated as a disguised waiver that was invalid because it did not comply with the explicit requirements for waiver under Section 1738(d). Id.

Erie presented two main arguments in response. First, Erie argued that if the exclusion was invalidated, Erie would be paying on a risk that it did not knowingly insure and for which it did not collect a premium. Id. Secondly, and most importantly to the Court, Erie argued that Section 1738's stacking provisions were not applicable because the household exclusion operated to preclude UIM coverage for Baker's motorcycle in the first place. Id.

In an opinion written by Justice Greenspan, the majority noted that an insured's failure to read an insurance contract could not provide grounds to nullify a policy provision. Therefore, the Court dismissed outright Baker's argument that the exclusion should not apply to him because it was "buried" in the policy. Id. at *3.

While the Court found Baker's disguised waiver argument to be "initially interesting", the majority agreed with Erie's assertion that the MVFRL was not implicated at all because the household exclusion precluded its application. Baker was injured while driving a vehicle that he owned but did not insure with Erie. Therefore, he was not entitled to stack the coverages of the three vehicles insured by Erie because there was no UIM coverage to stack. Id. Thus, the Court decided the case based on the plain language of the household exclusion, which it found to clearly preclude coverage under the circumstances presented.

The Court found that two of its previous decisions regarding the household exclusion, Eichelman v. Nationwide Insurance Co., 551 Pa. 558, 711 A.2d 1006 (1998); and Prudential Property & Casualty Insurance Co. v. Colbert, 572 Pa. 82, 711 A.2d 1006 (2002), were directly on point and controlling. The Court noted that in both cases, it rejected the argument that household exclusions contravene public policy. Id. at *4. While the Court recognized the practical difficulties faced by motorcyclists in finding adequate insurance coverage, it stated that such concerns were not a proper basis for invalidating an otherwise valid policy exclusion. In addition, the Court noted that household exclusions are important mechanisms for insurers to protect themselves from being forced to pay out on unknown risks for which they do not collect any premiums.

Justice Greenspan was joined in this decision by Chief Justice Castille, Justice Eakin and Justice Saylor, who filed a separate opinion, concurring with the result only. Justice Baer filed a lengthy dissenting opinion, in which Justice Todd and Justice McCaffery joined. Justice Baer agreed with Baker that the household exclusion operated as a waiver of stacking in express contravention of the specific statutory provisions regarding waiver of such benefits as set out by Section 1738 of the MVFRL, and was therefore invalid. Id. at *5.

The Supreme Court's holding should provide some comfort to Pennsylvania insurers seeking to enforce household exclusions in their policies.