Legal Updates for Coverage and Bad Faith

Edited by Allison L. Krupp, Esq.

PA Supreme Court Overturns Decades of Case Law Addressing Household Vehicle Exclusion

Court holds HHE violates § 1738 when insured selected and paid for stacking under two policies issued by a single insurer 

By Christopher Woodward, Esq.

Gallagher v. GEICO Indem. Co., No. 35 WAP 2017 (Pa. Jan. 23, 2019)

In a recent decision, the Pennsylvania Supreme Court declared that the household vehicle exclusion contained in a GEICO policy acted as a de facto stacking waiver and that it violated the mandate of Section 1738 of Pennsylvania’s Motor Vehicle Financial Responsibility Law (MVFRL). This decision overturns decades of Pennsylvania case law from state and federal courts that have consistently upheld such exclusions. The breadth and scope of the Supreme Court’s surprising decision is not yet clear.

By way of brief background, Gallagher owned two automobiles and a motorcycle and insured all three vehicles through GEICO. GEICO issued two policies: one to cover the automobiles and one to cover the motorcycle. The two policies provided for stacked underinsured motorists (UIM) benefits. The policy covering Gallagher’s automobiles contained a “household vehicle exclusion,” which stated: “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, relying upon 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.

Gallagher sued GEICO. 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 vehicle exclusion “impermissibly narrows and conflicts with the mandates of the MVFRL.” Section 1738 of the MVFRL provides for stacked UM/UIM coverage as the default coverage unless the insured signs a waiver of stacked coverage. Gallagher argued that he was entitled to stacked UIM coverage since he did not execute a stacking waiver and that the household vehicle exclusion operated as a “disguised waiver of stacking.”

GEICO argued that, by virtue of the household vehicle exclusion, the automobile policy did not provide UIM coverage to Gallagher while operating his motorcycle. Since there was no UIM coverage in the first place, 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. Because Gallagher did not sign a stacked coverage 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 vehicle 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 already aware of all of the household vehicles prior to the loss at issue.

In footnotes, the Supreme Court acknowledged its prior decisions upholding the identical household vehicle exclusion, but it sidestepped issues of stare decisis by determining 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 scope and breadth of the Majority’s decision and just how great that impact will be is likely to be litigated in the years to come.