Luko v. Lloyd's London

Citations: 573 A.2d 1139; 393 Pa. Super. 165; 1990 Pa. Super. LEXIS 907

Court: Supreme Court of Pennsylvania; May 1, 1990; Pennsylvania; State Supreme Court

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In the case of Michael Luko and Independent Pier Company v. Lloyd's London and The Institute of London Underwriters, the Pennsylvania Superior Court addressed an appeal regarding a declaratory judgment action where summary judgment was granted to Independent Pier Company and Michael Luko. The central question was whether coverage provided by the Pennsylvania Insurance Guaranty Association (PIGA) could serve as underlying insurance for an excess insurer when the primary insurer became insolvent. The court determined that the PIGA Act was not intended to substitute for underlying insurance in this context, leading to the affirmation of the lower court's decision.

Luko, a longshoreman, sustained serious injuries on March 8, 1981, while working for Independent Pier Company and subsequently filed a lawsuit against Independent Terminal Company. Both Independent Terminal and Independent Pier were insured under a policy from Midland Insurance Company, which had a liability limit of $1,000,000 per occurrence. They also had an umbrella policy from a consortium including Lloyd's London, covering up to $10,000,000 per occurrence. After Midland was declared insolvent on April 30, 1986, the court referenced the PIGA Act, which ensures payment for claims of an insolvent insurer, but only for amounts exceeding $100 and less than $300,000. The ruling emphasized that PIGA's obligations do not extend to substituting for underlying insurance in cases involving excess policies with specific clauses regarding the absence of underlying coverage.

A covered claim is defined as an unpaid claim under a property and casualty insurance policy from an insolvent insurer (40 P.S. 1701.103(5)(a)). Following Midland's insolvency, Independent Pier sought reimbursement from the Pennsylvania Insurance Guaranty Association (PIGA) for a claim by Luko, but PIGA required Independent Pier to first seek coverage from the Consortium based on a non-duplication provision. This provision mandates exhausting rights under any other applicable insurance policy before claiming from PIGA, with any recovery under such policy reducing the covered claim amount (40 P.S. 1701.503(a)). 

When the Consortium did not respond to Independent Pier’s inquiries regarding coverage, a declaratory judgment action was initiated on March 23, 1988, to determine the responsibilities of the insurers involved. Luko was later added as a plaintiff. The Consortium claimed no coverage for the first $1,000,000 of liability, citing reliance on underlying coverage, while PIGA denied obligation due to an exclusion in Midland's policy for employee injury claims and asserted its coverage was limited to amounts exceeding Midland's $25,000 deductible but less than $100,000. 

Defendants attempted to remove the case to U.S. District Court, but this was denied, and the case was remanded to the Court of Common Pleas. On October 14, 1988, Independent Pier and Luko filed a motion for summary judgment, arguing that the Consortium’s policy covered losses above $100,000 without underlying insurance and that PIGA was required to cover amounts over $25,000 up to $100,000. The trial court granted summary judgment, declaring that the Consortium must cover amounts exceeding $100,000 and PIGA must cover amounts from $25,100 to $100,000. Both defendants appealed the order issued on April 12, 1989.

The Consortium contests the court's ruling that a contract clause necessitates it to provide coverage equivalent to that of the Midland policy upon Midland's insolvency. PIGA argues that an exclusion in the Midland policy would entirely negate Luko's claim, thus exempting PIGA from coverage obligations. The Consortium presents a two-pronged challenge to the trial court's decision. First, it claims the trial court wrongly interpreted the contract, asserting that if no underlying insurance exists, its liability should start at $100,000. The Consortium acknowledges this issue pertains solely to contract interpretation, emphasizing that the Supreme Court of Pennsylvania dictates that such interpretations are performed by the court to ascertain the parties' intent through the contract's language. Ambiguous provisions favor the insured, while clear language must be upheld. After reviewing the insurance contract and associated documents, it is determined that the language is unambiguous, confirming the Consortium's obligation to cover $100,000 when no underlying insurance is present. The contract outlines limits, specifying $10 million per occurrence and annual aggregate, with coverage beginning at $100,000 when no underlying insurance exists. The trial court identified ambiguities due to conflicting clauses but concluded that typewritten provisions take precedence over printed ones, affirming the $100,000 threshold. Secondly, the Consortium argues that if its liability is triggered by the primary insurer's insolvency, it should start at $300,000, the maximum limit of PIGA's statutory obligations. PIGA counters that it cannot serve as the Consortium's underlying insurer. The court agrees with PIGA, establishing that the PIGA Act's guaranty does not qualify as "other valid and collectible insurance," confirming the Consortium's liability initiates at $100,000.

PIGA's liability arises only when specific conditions of the PIGA Act are satisfied: 1) the claim must be classified as a "covered claim" as defined in the Act; 2) the extent of PIGA's obligation on the covered claim must be established; and 3) the claimant must exhaust their rights under their insurance policy. The court's prior interpretations, particularly in Blackwell v. Pennsylvania Insurance Guaranty Association, clarify that if a tortfeasor's insurer becomes insolvent, the claimant may seek recovery from their own insurer under uninsured motorist provisions. However, any amounts received from other insurance will reduce the recovery from PIGA, as it is not intended to serve as a substitute for underlying coverage. The court rejected the Consortium's argument to treat PIGA as an underlying insurer, emphasizing that the Act’s purpose is to restore claimants to the position they would have been in if their insurer had not become insolvent, not to protect other insurers. Additionally, the Act explicitly states that "covered claims" do not include amounts owed to insurers. The trial court correctly found that PIGA's assertion that Independent Pier was not entitled to recover under the Midland policy was unfounded, as the policy indeed covers employees, including the claim of employee Luko. The contract's interpretation supports the trial court's determination that Independent Pier and Independent Terminal Company are named insureds under the Midland policy.

The insurance policy includes an exclusion clause stating that it does not cover bodily injury to any employee of the insured during their employment or any obligation to indemnify another for damages from such injury. However, a special endorsement modifies this standard exclusion by extending coverage to employees of the named insured while performing their duties. This modification, being a clearly defined contractual provision, overrides the standard exclusion. The policy delineates that coverage applies separately to each insured, which includes Independent Terminal Company, against whom Luko, an employee of Independent Pier Company, seeks damages. Although Luko is not an employee of Independent Terminal Company, the severability clause ensures his injury claims are covered under this entity. The dissenting opinion argues that the umbrella policy should not provide coverage in the event the underlying insurance becomes insolvent and emphasizes that any potential coverage would not exceed $300,000 due to existing coverage from the Pennsylvania Insurance Guaranty Association. Luko was injured on March 8, 1981, while working for Independent Pier Company, and filed a claim against Independent Terminal Company on March 2, 1983.

The policy included a deductible of $25,000 and liability limits of $1,000,000 per occurrence. Independent Pier Company and Independent Terminal Company were covered by umbrella policies from Lloyd's, with coverage limits of $10,000,000, designed to exceed the $1,000,000 coverage from Midland Insurance Company. These umbrella policies provided coverage for claims exceeding $100,000 if not covered by underlying insurance. After Midland Insurance Company was declared insolvent, the merged entity, Independent Pier Company, sought coverage from the Pennsylvania Insurance Guaranty Association (P.I.G.A.), which directed them to Lloyd's. A dispute arose between P.I.G.A. and Lloyd's, leading to Independent Pier Company filing for a declaratory judgment, adding Luko as a necessary party. The trial court ruled P.I.G.A. was liable for claims up to $100,000, while Lloyd's was responsible for amounts exceeding that. Both parties appealed, with the majority affirming the trial court's decision. It was contended that Lloyd's liability was strictly limited to excess coverage beyond Midland's $1,000,000 policy and did not extend to cover the insolvency of Midland. Lloyd's policy explicitly required that the underlying limit be met before its coverage would apply, and insolvency did not alter this requirement. P.I.G.A. must first establish that Midland provided coverage before assuming any liability.

P.I.G.A. asserts that Midland's policy does not cover Luko's claim due to an exclusion for bodily injury to any employee arising from their employment with the insured. P.I.G.A. claims Luko was an employee of the insured, thus excluding his claim. However, the policy defines "insured" based on the "Persons insured" provision, which applies separately to each insured against whom a claim is made. Luko was employed by Independent Pier Company, a named insured, but his claim was against Independent Terminal Company, which was not his employer. Therefore, for insurance obligations, Independent Terminal Company is considered "the insured," and Luko's claim is treated as a third-party claim. The severability clause clarifies that "the insured" in the exclusion refers solely to the entity related to the specific claim. Although P.I.G.A. cites a case that reached a different conclusion, recent rulings in other jurisdictions support a narrower interpretation of "insured" based on the severability clause. Midland's policy provides coverage to Independent Terminal Company up to one million dollars. Due to Midland's insolvency, P.I.G.A. must assume its obligations, capped at three hundred thousand dollars by statute. Consequently, P.I.G.A. qualifies as an underlying insurer required to cover Independent Terminal Company, while Lloyds' excess coverage would only apply to liabilities exceeding three hundred thousand dollars. The dissenting opinion argues that P.I.G.A. must provide primary coverage within statutory limits, with Lloyds covering amounts above one million dollars, aligning with the clear terms of the policies.