AUGUST 2011 BAD FAITH CASES COURT REFUSED TO DISMISS BAD FAITH CLAIMED BASED UPON UIM COVERAGE IN COMMERCIAL FLEET POLICY; ALSO FINDING NONCOMFORMING WAIVER (Middle District)

In Douglas v. Discover Property & Casualty Insurance, the court was faced with cross summary judgment motions stemming from the injured party’s attempt to obtain underinsured motorist (“UIM”) benefits from the insurer.  The injured party was involved in a 2005 car accident and subsequently settled a claim with the third-party tortfeasor. At the time of the accident, however, the injured party was driving a car provided by Abbott Laboratories, who maintained an automobile insurance policy with Discover Property & Casualty.  The injured party sought a declaratory judgment against the carrier, arguing that the insured’s waiver of UIM protection is void under section 1731 of Pennsylvania’s Motor Vehicle Financial Responsibility Law, seeking damages for bad faith, and requesting the appointment of a special master to adjudicate a potential class action.

The court initially ruled on the issue of the insured’s UIM coverage under 1731.  First, the court found that, although 1731 is a consumer protection statute, it applies to commercial fleet policies.  Relying on the Third Circuit’s decision in Travelers Indemnity Company of Illinois v. DiBartolo, the court ruled that Pennsylvania law does not mandate commercial stacking of UIM policies, but it does require a driver to receive UIM benefits in the event that a waiver of UIM coverage does not comply with 1731.  Furthermore, the court elaborated that the “[p]urchase of . . . UIM coverage is optional, although to refuse such coverage, an insured must sign rejection forms whose precise language is dictated by statute.”  The court held that, because the carrier’s waiver did not substantially comply with 1731, the waiver was void, requiring the provider to give UIM benefits to the injured complainant.As a corollary, the court also rejected the insurer’s contention that the carrier’s policy was issued for delivery in Illinois, and that state’s law should apply.  The court ruled that the carrier’s policy was issued for delivery in Pennsylvania because the insurer “clearly issued the policy to [the carrier] in order to cover corporate vehicles registered in Pennsylvania.”  Moreover, the court held, the policy itself “is replete with references to Pennsylvania law,” clearly evincing the fact that it was created to insure the carrier’s vehicles operating in Pennsylvania.

Second, the court ruled on the provider’s contention that “only named insureds and relatives can reform an insurance policy.”  The court held that the purpose of the policy was to insure the carrier’s employees while they were driving, proving the injured party’s eligibility to compel UIM benefits.  As such, it would be improper to rule that the injured employee is only eligible for those benefits that the carrier wished to provide him.  The court ruled that, even though the insured may not have wished to provide UIM benefits, it did not properly waive such coverage in conformance with Pennsylvania law.  Consequently, the complainant was eligible for UIM coverage under the carrier’s policy.

Third, the court examined the injured’s bad faith claim.  In its defense, the insurer argued that it relied on relevant Pennsylvania case law in declining to pay UIM benefits.  However, the injured complainant contented that the insurer willfully ignored the conditions of 1731 in bad faith.  The court found that there were lingering disputed issues of material fact and that a jury could potentially rule in favor either party.  Therefore, the court denied the parties’ summary judgment motions on the issue of bad faith.

Lastly, all of the named defendants, other than the insurer, filed for summary judgment on the issues of their 1731 violations and alleged bad faith.  The court denied the parties’ motions and apprised the claimant that its request for a special master to expedite its potential class action claim would be decided during a later case management conference.

Date of Decision: August 12, 2011

DOUGLAS v. DISCOVER PROPERTY & CASUALTY INSURANCE COMPANY, No. 3:08cv1607, U.S. District Court for the Middle District of Pennsylvania, 2011 U.S. Dist. LEXIS 89951, 810 F.Supp. 2d 724 (M.D. Pa. Aug. 12, 2011) (Munley, J.)