On August 17, 2021, the long-awaited decision in Donovan v. State Farm was entered by the Supreme Court. The Majority Opinion by Chief Justice Baer will have long-standing effects on the Pennsylvania insurance industry.
The facts were stipulated. In July 2015, Corey Donovan suffered significant injuries due to a collision between a motorcycle, which he owned and was operating, and an underinsured tortfeasor vehicle. Corey recovered the $25,000 policy limit under the tortfeasor’s policy. He also recovered the $50,000 UIM coverage limits available under the policy insuring Corey’s motorcycle (“Motorcycle Policy”), which was issued by State Farm. Corey next sought coverage under a policy issued by State Farm to his mother, Linda Donovan, under which he was insured as a resident relative (“Linda’s Auto Policy”). Linda’s Auto Policy insured three automobiles but not Corey’s motorcycle. Linda’s policy had a UIM coverage limit of $100,000 per person, and Linda signed the waiver of stacked UIM coverage on her policy which complied with the waiver form mandated by Section 1738(d) of the MVFRL.
The Majority Opinion stated, “this statutorily-mandated waiver repeatedly references the limits of ‘the policy’ rather than overtly addressing the effect of the waiver when multiple insurance policies apply for purposes of inter-policy stacking.” As discussed at length in the Craley opinion, the Supreme Court in Donovan questioned whether the form’s language provides insureds with the necessary information to allow a knowing waiver of inter-policy stacking due to the form’s use of the singular term “policy.”
The Donovan Court ruled on three issues. First, the Court held the insured’s signature on the waiver form mandated by 75 Pa.C.S. § 1738(d) failed to result in the insured’s valid waiver of inter-policy stacking of underinsured motorist (“UIM”) coverage when the relevant policy insured multiple vehicles. Then, after deeming the waiver invalid as applied to inter-policy stacking for multi-vehicle policies, in light of this Court’s decision in Craley v. State Farm, 895 A.2d 530 (Pa. 2006), the Court re-affirmed the virtual abolition of the household vehicle exclusion first held in Gallagher v. GEICO, 201 A.3d 131 (Pa. 2019). Lastly, after concluding that the household vehicle exclusion was unenforceable absent a valid waiver of inter-policy stacking, the Court held that the State Farm’s policy’s “coordination of benefits” provision for unstacked UIM coverage does not apply, in this instance, because there is not a valid waiver of inter-policy stacking.
More specifically on those three issues, the Donovan Court first opined that it is possible to waive inter-policy stacking. However, the Court held that the statutory form in Sec. 1738 is invalid to do so. However, the legislature is free to provide a valid procedure or form to waive inter-policy stacking. The Donovan Court went back to the Craley decision and stated that “some form of knowing waiver must occur before we allow enforcement of an inter-policy stacking waiver.” Craley, 895 A.2d at 541. The Court held in Craley, “that the Section 1738(d) form was phrased in terms of intra-policy stacking involving multiple vehicles on a single policy, rather than inter-policy stacking of multiple policies.” The Donovan Court highlighted that the singular language in the waiver referencing once “policy” versus “policy or policies.” 75 Pa.C.S. § 1738(d).
The Donovan Court affirmed the holding from Craley wherein they held, “[the Sec. 1738 form] was enforceable as a knowing waiver of inter-policy stacking in single-vehicle policies. Specifically, we concluded that [the insured] had knowingly waived inter-policy stacking because he ‘could not have thought he was receiving a reduced premium for waiving intra-policy stacking because there could be no intra-policy stacking with only one vehicle on ‘the policy.'” Craley, 895 A.3d at 542. However, as noted in Craley, the form, “does not, however, alert insureds that they are waiving the ability to stack the coverage for which premiums were paid in “this policy” on top of the coverage available under a separate policy. In other words, it does not provide the necessary knowing waiver of inter-policy stacked coverage, absent the single-vehicle situation in Craley.”
Once the Donovan Court concluded that the Section 1738(d) waiver form signed by Linda Donovan was not a valid waiver of inter-policy UIM stacking in a multi-vehicle policy, the Court re-affirmed the Gallagher decision and held that the household vehicle exclusion could not be enforced because it was “inconsistent with the unambiguous requirements” for waiving stacking set forth in Section 1738.
The Court compared Donovan and Gallagher and noted that in both cases, “the insured did not validly waive inter-policy stacking. Whether the insured did not sign a waiver, as in Gallagher, or signed a deficient waiver as to inter-policy stacking, as in the case at bar, the result is the same: the policy defaults to inter-policy stacking of UM/UIM coverage. In either case, the household vehicle exclusion cannot operate as a de facto waiver of inter-policy stacking because it fails to provide the insured with a knowing waiver of that coverage.
After concluding that the Section 1738(d) waiver provided in Linda’s Auto Policy was unenforceable for inter-policy stacking and, as a result, that the household vehicle exclusion contained in the policy also was unenforceable to waive inter-policy stacked coverage, the Court held that the policy’s “coordination of benefits” provisions was also not enforceable. The coordination of benefits provision provided, that “the maximum amount that may be paid from all such policies combined is the single highest applicable limit provided by any one of the policies.”
The Court noted that if this provision was applicable to Corey’s coverage, the “single highest applicable limit” would be the $100,000 provided by Linda’s Auto Policy. The Court stated, “in effect, this implements the waiver of inter-policy stacked coverage as it eliminates the addition of the coverage provided by Linda’s Auto Policy to the coverage provided by Corey’s Motorcycle Policy.” The Court again noted that while Linda’s waiver is valid as to intra-policy stacking, it is not valid as a waiver of inter-policy stacking. “Based upon the same reasoning as in Gallagher, we conclude that the coordination of benefits provision cannot operate as a de facto waiver of inter-policy stacking… we simply cannot apply the coordination of benefits provision to implement a stacking waiver, when Linda did not validly waive inter-policy stacking.”
This decision all but abrogates any attempt under the current law to waive inter-policy stacking unless the policy has only one vehicle. Also, the case indicated that the Supreme Court has and will continue to abrogate the household exclusion in virtually any factual scenario. Lastly, this decision emboldens the Plaintiffs’ bar to challenge to the Supreme Court other long-held to be valid clauses and exclusions in insurance policies in an attempt to further eliminate those provisions.
Questions regarding this issue can be directed to David Friedman.
