Just How Hard Does Gallagher Hit the Household Vehicle Exclusion?

In January of this year, the Pennsylvania Supreme Court issued a significant decision in Gallagher v. GEICO Indem. Co., 2091 Pa. LEXIS 345 (Pa. Jan. 23, 2019), in which it declared that the household vehicle exclusion contained in a GEICO policy acted as a disguised stacking waiver and it violated the mandate of Section 1738 of Pennsylvania’s Motor Vehicle Financial Responsibility Law (MVFRL). This decision represents a significant departure from the Supreme Court’s prior rulings on this issue, which had repeatedly and routinely upheld and applied such exclusions. The breadth and scope of the Supreme Court’s surprising ruling is yet to be clarified.

Gallagher owned two automobiles and a motorcycle and insured all three vehicles through GEICO, which issued two policies: one to cover the automobiles and one to cover the motorcycle. The two policies provided stacked underinsured motorists (UIM) benefits. The policy covering Gallagher’s automobiles contained a “household vehicle exclusion,” stating: “This coverage does not apply to bodily injury while occupying or from being struck by a vehicle owned or leased by you or a relative that is not insured for Underinsured Motorists Coverage under this policy.”

After sustaining injuries in an accident with an underinsured motorist while operating his motorcycle, Gallagher submitted first- and second-tier UIM claims under his GEICO policies. GEICO paid the UIM limits under his motorcycle policy but denied his claim for stacked UIM benefits under the automobile policy, citing the household vehicle exclusion. GEICO took the position that, since he was occupying his motorcycle at the time of the accident, and since his motorcycle was not insured under the automobile policy, the household vehicle exclusion applied to preclude Gallagher’s UIM claim under the automobile policy.

In considering the coverage issue, the trial court granted summary judgment in favor of GEICO, and the Superior Court affirmed. On appeal to the Pennsylvania Supreme Court, Gallagher argued that the household exclusion “impermissibly narrows and conflicts with the mandates of the MVFRL.” Section 1738 of the MVFRL specifies stacked UM/UIM coverage as the default coverage unless the insured signs a statutorily compliant stacking waiver. Gallagher argued he was entitled to stacked UIM coverage since he did not execute a stacking waiver and the household vehicle exclusion operated as a de facto stacking waiver, which did not comply with the requirements of the MVFRL.

GEICO argued that, by virtue of the household exclusion, the automobile policy did not provide UIM coverage to Gallagher while operating his motorcycle. Since there was no UIM coverage in the first instance, application of Section 1738 and/or the question of whether stacking applied was moot.

Ultimately, the Supreme Court determined that the household vehicle exclusion was “inconsistent with the unambiguous requirements” of Section 1738 as “it acts as a de facto waiver of stacked UIM coverage provided for in the MVFRL.” The Supreme Court reasoned that Section 1738 provides for stacked UM/UIM coverage as default coverage unless the insured executes a waiver. GEICO could not rely upon an exclusion which “strips an insured of default UM/UIM coverage” absent that waiver. The Supreme Court did not address GEICO’s argument that the household exclusion operated to preclude UIM coverage under the automobile policy entirely and does not implicate Section 1738. The court did, however, note that GEICO had issued both policies and, therefore, could not argue that it was not aware of all of the household vehicles prior to the loss at issue.

In its footnotes, the Supreme Court acknowledged its prior decisions upholding the identical household vehicle exclusion, but avoided issues of stare decisis by noting that the cases relied upon by GEICO and the Superior Court were not binding precedent upon the Supreme Court. Perhaps in an effort to mitigate the impact of its ruling, the Supreme Court commented that insurers can “require disclosure of all household vehicles and policies as part of its application process.” In a strongly-worded dissenting opinion, Justice Wecht pointed out the practical issues associated with the majority’s decision and its potential impact on the insurance industry.

The majority’s ultimate holding seems to turn on the unique facts before it: there were two insurance policies issued by the same insurer; the claimant was the named insured on both policies; the insurer required issuance of both policies; and the claimant-named insured selected and paid for stacking under both policies. The court’s focus on these specific facts, and the fact that the issues certified on appeal were also framed around these facts, should render the sweeping statement at the close of the majority’s opinion—that “the household vehicle exclusion violates the MVFRL”—mere dicta. Regardless, the scope and breadth of the majority’s ruling will likely be hotly litigated in the coming years by insurers and insureds alike.

*Allison is a shareholder in our Harrisburg, Pennsylvania office. She can be reached at 717.651.3510 or alkrupp@mdwcg.com. Christopher is an associate, also in our Harrisburg office. He can be reached at 717.651.3708 or cwwoodward@mdwcg.com.

^{Defense Digest, Vol. 25, No. 2, June 2019. Defense Digest is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2019 Marshall Dennehey Warner Coleman & Goggin. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.}