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Household Exclusion Enforced: Gallagher Distinguished

The Western District of Pennsylvania recently granted an insurer’s motion for judgment on the pleadings after holding that the Pennsylvania Supreme Court’s decision in Gallagher does not require an insurer to provide UIM coverage under an automobile insurance policy which provides stacked UIM coverage for an accident which occurs when the insured occupies a vehicle which is covered under a different policy which was issued by a different insurer and which does not provide UM/UIM coverage.  Rather, the Court held that the “household vehicle exclusion” may be applied to bar coverage. See Dunleavy, et al. v. Mid-Century Ins. Co., 2020 WL 2536816 (W.D. Pa. May 19, 2020). 

In Dunleavy, the insured was operating a motorcycle when he was struck by an automobile, resulting in serious injuries.  The insured had rejected UM/UIM coverage on his motorcycle insurance policy.  However, he had a separate policy with a different insurer which provided UM/UIM coverage for his automobiles, which provided stacked UM/UIM coverage.  The insured asserted a UIM claim under the automobile insurance policy.  The automobile policy had a household vehicle exclusion, which stated that UIM coverage did not apply to injuries sustained while an insured occupied a motor vehicle owned by the insured that is not insured for coverage under the automobile policy.  Citing the household vehicle exclusion in the automobile policy, the insurer denied UIM coverage.

After the Pennsylvania Supreme Court issued its decision in Gallagher v. GEICO Indemnity Co., 201 A.3d 131 (Pa. 2019) – holding that  the household exclusion is invalid in circumstances in which it acts as a de facto waiver of stacking – the insured challenged the denial by bringing a lawsuit for breach of contract, bad faith, and violation of the UTPCPL.  The insurer brought a counterclaim for declaratory judgment and then moved for judgment on the pleadings.

In granting the insurer’s motion for judgment on the pleadings, the Court rejected the insured’s core allegation that the insurer’s reliance on the household vehicle exclusion to deny UIM coverage violated the holding in Gallagher.  The Court found that Gallagher was inapplicable because Gallagher only prohibits insurance companies from using the household vehicle exclusion as an end-run around the requirement of a signed form to waive stacked coverage – Gallagher “did not address, let alone invalidate, the use of the household vehicle exclusion to deny UIM coverage in the first instance.”  The Court recognized that, in order for Gallagher to apply, there must be UIM coverage in the first place.  Because it was undisputed that the insured waived UIM coverage on his motorcycle policy, there was no UIM coverage on which to “stack” the insurer’s automobile policy.  The Court compared the case to Eichelman v. Nationwide Ins. Co., 711 A.2d 1006 (Pa. 1998), in which the Pennsylvania Supreme Court upheld the application of the household vehicle exclusion when the plaintiff motorcycle driver waived UIM coverage for his motorcycle policy because allowing an insured to recover would “allow an entire family living in a single household with numerous automobiles to obtain underinsured motorist coverage for each family member through a single insurance policy on one of the automobiles in the household.”

The Court recognized that the election of UIM coverage is optional in Pennsylvania and that applying the household exclusion under the circumstances would serve to hold the insured to his voluntary choice.  The Court further found it significant that the insurer had no notice that its insured would be operating a motorcycle.  Had the insurer known, it could have adjusted its UIM premiums to account for the additional risk.  The Court reasoned that invalidating the household exclusion here would alter the cost and risk allocation in the insurance contract, and there was no basis for such an alteration.