North River Insurance Company v. E. James Tabor, Administrator for the Estate of Todd Tabor

Citations: 934 F.2d 461; 1991 U.S. App. LEXIS 10702; 1991 WL 86882Docket: 90-5709

Court: Court of Appeals for the Third Circuit; May 29, 1991; Federal Appellate Court

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In the case of North River Insurance Company v. E. James Tabor, the Third Circuit Court addressed issues of stacking underinsured motorist coverage and the enforceability of a set-off provision in an insurance contract under Pennsylvania law. The court referenced its prior decision in West American Ins. Co. v. Park, which established that an insurer could be estopped from challenging the legality of its policy when it allowed stacking of uninsured motorist coverage. The court concluded that a similar rationale applied to the case at hand, affirming the district court's judgment allowing stacking of underinsured motorist coverage without further discussion, as it found no meaningful distinction between the two types of coverage.

Additionally, the court examined whether a clause in North River's insurance policy that permitted the reduction of underinsured motorist benefits by amounts paid by other liable parties was contrary to public policy as expressed in the Pennsylvania Motor Vehicle Responsibility Law (MVFRL). The district court had determined that the Supreme Court of Pennsylvania would find such a set-off provision invalid, leading to a judgment in favor of Tabor's estate. The court noted the existing split among jurisdictions regarding the enforceability of similar set-off provisions, referencing contrasting cases that either upheld or invalidated such clauses. The factual background clarified that Todd Tabor's estate received $250,000 from Aetna Life and Casualty, and that North River’s policy provided $100,000 of underinsured motorist coverage per vehicle, which included the disputed offset provision.

Tabor's estate is entitled to stack underinsured motorist coverage across three vehicles, providing a total coverage of $300,000 from North River. Having already received $250,000 from Aetna, the estate asserts that the set-off clause, which North River argues reduces its liability to $50,000, is unenforceable based on public policy. The estate claims its total damages exceed $300,000 and believes that combining the liability coverage from Aetna with the stacked underinsurance will cover $550,000 of its damages. In contrast, North River's interpretation of the contract implies that $250,000 must be deducted from the $300,000, leaving a potential shortfall for the estate.

The legal framework distinguishes two types of underinsured motorist coverage: the "gap" theory, which fills the shortfall between the tortfeasor's liability and the insured's underinsured motorist coverage, and the "excess" theory, which allows recovery up to the policy limits regardless of any other recoveries. Under Pennsylvania law, all insurance policies must include underinsured motorist coverage unless expressly rejected by the insured. This coverage is mandated to protect individuals injured by drivers whose liability insurance limits are insufficient to cover their damages. Thus, a person with $100,000 underinsured coverage who suffers a $300,000 loss due to a driver with $100,000 liability insurance would still be entitled to recover under their policy.

An insurer's inclusion of a set-off provision, like that in the North River policy, undermines underinsured motorist protection and contradicts Pennsylvania's statutory intent for "excess" coverage. The statute mandates that insurers provide coverage for cases where third-party liability is insufficient to cover an injured party's losses, which must be assessed based on those actual losses. Therefore, a set-off provision that limits this coverage is against public policy and unenforceable. Under the Motor Vehicle Financial Responsibility Law (MVFRL), insurers are required to offer minimum underinsured coverage of $15,000 per person and $30,000 per accident, distinguishing it from previous laws where such coverage was not mandated. Pre-MVFRL cases upheld set-off provisions based solely on contract interpretation, where underinsured motorist coverage was not required by statute. However, under the MVFRL, coverage terms must comply with statutory requirements, and insurers cannot contractually limit coverage to a "gap" basis. The current legal framework promotes broad underinsured motorist coverage, making previous rulings irrelevant to the present context.

North River's efforts to limit underinsured motorist coverage through its offset provision and the definition of "underinsured motorist vehicle" are ineffective. The Superior Court in Davis v. Erie Ins. Group rejected the argument that a policy liberalization clause could create "gap" coverage, affirming a judgment that provided $15,000 in underinsured coverage despite the insured recovering $50,000 from another driver. Pennsylvania courts have consistently interpreted legislative intent under the MVFRL to ensure maximal coverage for injured insureds, reinforcing the notion that insurers cannot reduce coverage contrary to statutory goals. Previous rulings have emphasized that insureds pay for multiple premiums and should reasonably expect corresponding coverage, as seen in cases like Williams, where an insured with $300,000 in coverage is entitled to that full amount. The unfairness presented by the set-off provision, which would limit the Tabors' total coverage to $50,000 despite purchasing $300,000, would be unacceptable to the Pennsylvania Legislature and Supreme Court. The Pennsylvania Supreme Court would likely disallow provisions that negate underinsured coverage based on partial recoveries from negligent parties. Additionally, the case of Bateman v. Motorists Mut. Ins. Co. supports this conclusion through contractual interpretation, illustrating that set-off provisions cannot unjustly limit the insured's benefits when total settlements exceed the coverage amount.

A panel of arbitrators initially sided with Motorists Mutual, a decision that was upheld by both the Court of Common Pleas and the Superior Court. However, the Supreme Court reversed the Superior Court's ruling, determining that a set-off clause in the insurance policy was ambiguous. The court ruled that Bateman's estate was entitled to $50,000 in underinsured motorist coverage. The insurer contended that the phrase "Any amounts otherwise payable for damages under this coverage" indicated that any recovery from other parties would reduce the underinsurance coverage limit. They argued that since Bateman's estate received $50,000 from other parties, the underinsurance claim should be dismissed. 

However, the court highlighted the significance of the word "otherwise," which it interpreted to mean "in a different way or manner," suggesting that the only damages payable under the policy were those for underinsurance, not affected by other recoveries. This interpretation rendered the insurer's position impossible and the clause ambiguous. Conversely, Bateman's estate argued that "damages otherwise payable" referred to the total damages (over $128,334) minus the $78,334 recovered, leaving $50,000 owed by the insurer. Given the ambiguity of the policy language, the court favored Bateman's estate's interpretation. Consequently, it was determined that North River is liable for up to $300,000 in underinsured motorist coverage, contingent on actual damages incurred.

The estate of Todd Tabor is entitled to stack underinsured motorist coverage beyond the liability coverage, as established in West American Ins. Co. v. Park. The Supreme Court of Pennsylvania is likely to deem set-off provisions unenforceable due to their conflict with public policy under the Motor Vehicle Financial Responsibility Law (MVFRL). Even if the Court does not rule that set-offs are void, the provision in question is considered ambiguous and ineffective for offsetting underinsurance coverage against settlement amounts received, leading to the affirmation of the district court's judgment.

North River asserts that stacking is not permitted, but this argument is rejected. They contend that if stacking is allowed, their maximum exposure would be $50,000 after accounting for $250,000 paid by Aetna. Previous pre-MVFRL cases that approved set-off and anti-stacking provisions acknowledged that Pennsylvania law did not mandate underinsured motorist coverage. However, it can be inferred that the Legislature intended for set-off provisions to be invalidated with the adoption of mandated "excess" underinsurance coverage.

The policy defines an "Underinsured Motor Vehicle" as one with liability limits lower than the policy's underinsurance coverage. It is noted that even though the decision in Davis is not from the Supreme Court, it is relevant because the underinsured coverage was at the statutory minimum of $15,000. North River recognizes this minimum requirement, and the approach taken by Nationwide Mut. Ins. Co. is rejected, as it allowed set-offs that did not diminish coverage below the statutory floor. This stance is inconsistent with Pennsylvania courts' treatment of anti-stacking provisions, which have been invalidated despite not affecting the legally required minimum coverage. The policy's set-off clause states that amounts payable for damages will be reduced by sums paid for bodily injury by responsible parties.