The Supreme Court Takes On Car Insurance - DD 3/06

Defense Digest

The Supreme Court Takes On Car Insurance

As 2005 turned to 2006, the Pennsylvania Supreme Court issued two important decisions regarding automobile insurance policies. First, in Insurance Federation of Pennsylvania v. Koken, 2005 Pa. LEXIS 3209 (Pa. 2005), the Court held that the Pennsylvania Insurance Department did not have the authority to mandate binding arbitration in uninsured motorist (UM) and underinsured motorist (UIM) coverage disputes. In State Farm Mutual v. Foster, 2005 Pa. LEXIS 3214 (Pa. 2005), the Court held that the failure of an insured to notify the police after an accident permitted the insurer to void coverage—regardless of whether the carrier was prejudiced by that failure.

Insurance Federation v. Koken

In Insurance Federation, Liberty Mutual Insurance Company filed a revision to its automobile insurance policy, which eliminated the policy provision requiring binding arbitration for disputes over UM or UIM coverage. The Insurance Department rejected the revision. While Liberty Mutual did not challenge the decision, the Insurance Federation filed a declaratory judgment action, seeking an order that the Insurance Department does not have the authority to require policies to contain the arbitration provision.

After the Insurance Commissioner issued an opinion that the Department had the authority to require the provision, the Insurance Federation appealed the decision to the Commonwealth Court. The Commonwealth Court, citing to Prudential Property and Casualty Ins. Co. v. Muir, 99 Pa. Commw. 620, 513 A.2d 1129 (Pa. Cmwlth. 2002), affirmed that decision. The court in Muir had held that the Department had the implied authority to require the provision, under the Uninsured Motorist Clause Act (UM Act), 40 P.S. § 2000. That implied authority was premised on the theory that the Department had the duty to approve only those policies which provide "proper protection to the victims of uninsured motorists." The Commonwealth Court deferred to the Commissioner’s contention that this end was best accomplished by requiring arbitration as an expeditious and cost-effective way of getting to innocent injured persons the insurance proceeds to which they are entitled.

The Supreme Court disagreed. It defined the case as asking two questions: (1) whether the Department had the authority under statute to require mandatory arbitration; and (2) whether, in the alternative, such a provision is unconstitutional as infringing on the litigant’s right to access the courts.

The Supreme Court held that, as laudable as this desire may be, nothing in Pennsylvania’s Motor Vehicle Financial Responsibility Law (MVFRL) entitled the Department to "change the normal course of judicial proceedings simply because arbitration is less costly and less time-consuming than traditional litigation." The Court, thus, concluded that the Insurance Department had no authority to require the arbitration provision.

Because it concluded that there was no authority to require arbitration, it found it did not have to address the question of whether that requirement was unconstitutional.

State Farm v. Foster

The issue which the Supreme Court faced in State Farm v. Foster was whether the failure of the insured to notify the police after an accident, as required by both the policy and the MVFRL, made her ineligible for UIM coverage—even in the absence of prejudice to the carrier.

While working as a highway flagger, the plaintiff was injured when she leaped out of the way of an unidentified car. She notified State Farm, faxing them a copy of the report of the incident she received from her employer, but she did not report the accident to the police or any other government agency. Both the policy of insurance and the MVFRL required the police be notified. State Farm denied coverage based on this failure to report the injury. The plaintiff argued that the failure of State Farm to even allege that it was prejudiced by this failure made that denial of coverage improper.

The trial court determined, on its own, that prejudice against State Farm existed. Judgment was entered in State Farm’s favor. The Superior Court affirmed but without reaching the question of prejudice. The Supreme Court granted review to determine whether the insurer must demonstrate prejudice when the insured fails to report the accident.

The Supreme Court reviewed the arguments of the plaintiff and noted that the requirement of reporting the accident is contained in the MVFRL and is the duty of the insured under the policy. The Court recognized that the requirement in the policy is consistent with the MVFRL’s provisions and the statute’s purpose of preventing fraudulent claims. Furthermore, even if the contract’s provision conflicted with the MVFRL, the statute’s language would control because the contract cannot alter statutory law.

Moreover, the plaintiff argued that requirement of the MVFRL was fulfilled by reporting it to her employer, doctor, and State Farm. The Court rejected this argument, finding that the statutory goal of fraud prevention is not achieved by reporting the accident to entities other than the police. The police are in the unique position to investigate accidents, care for accident victims, and ensure highway safety.

Further, in recognizing that the MVFRL controlled, the Court was able to make quick work of the issue of prejudice, as well. The Court recognized that "neither [the MVFRL’s] plain language, the case law interpreting it, nor its underlying policy require that prejudice must be established before uninsured coverage can be denied based on lack of police notification." As such, prejudice was not required in order for the carrier to deny coverage for the failure to report the accident.

Conclusion

For insurance companies, 2005 ended on a high note. Under Insurance Federation v. Koken, carriers now have the flexibility to exclude from their policies the previously mandated provision requiring arbitration for UM and UIM coverage disputes. Under State Farm v. Foster, insurers clearly do not have to establish prejudice in order to deny coverage where an insured fails to report the accident to police.

*Walt is an associate in our Cherry Hill, NJ office. He can be reached at (856) 414-6024 or wfkawalec@mdwcg.com.