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PA Supreme Court Enforces “Household Exclusion” to Preclude Recovery of UIM Benefits Following Motorcycle Accident, by Michael F. Schleigh, Esq.
June 22, 2009

On June 22, 2009, the Pennsylvania Supreme Court affirmed the validity of the “household exclusion” clause as it operates to preclude recovery for injuries sustained in a motorcycle accident. Specifically, the Court found that the policy provision did not violate the intent behind Pennsylvania’s Motor Vehicle Financial Responsibility Law (“MVFRL”) and enforced the right of insurers to determine what risks to underwrite.

In Erie Ins. Exchange v. Baker, 972 A.2d 507 (Pa. 2009), the Court ruled that the “Household Exclusion” of an auto policy should be applied before an insured can ever seek stacking of UIM benefits pursuant to the Motor Vehicle Financial Responsibility Law (“MVFRL”) when the accident involved a vehicle not covered by the policy containing the household exclusion.

In this matter, the Pennsylvania Supreme Court clarified that before the Underinsured benefits of two policies issued to the same insured can stack (thus allowing additional recovery), both of the policies must first provide coverage for the loss which occurred. The Court specifically found that where one policy covered the motorcycle involved in the loss, and the other did not by virtue of a “household exclusion”, that the second policy did not provide coverage for the loss in the first place, and no violation of the Underinsured Benefits Stacking provisions of the Pennsylvania Motor Vehicle Financial Responsibility Law (“MVFRL”) occurred.

Mr. Baker insured three cars under an auto policy (“the Erie Policy”) through Erie Insurance Exchange (“Erie”). He elected to pay a higher premium under his Erie Policy to have the right to stack Underinsured Motorist coverage (“UIM”) for covered losses. He did not insure his motorcycle under the Erie policy. The Erie Policy contained a household exclusion with the following language:

This insurance does not apply to... damages sustained by anyone we protect while occupying or being struck by a motor vehicle owned by you or a relative, but not insured for Uninsured or Underinsured Motorists Coverage under this policy.

Mr. Baker insured his motorcycle under a policy with Universal Underwriters Insurance Company (“Universal”), which provided $15,000 in UIM benefits. Mr. Baker was injured in a multi-vehicle accident while riding his motorcycle. He obtained a recovery from the tortfeasor who harmed him, but the recovery was insufficient to fully compensate him for his damages. Mr. Baker recovered full UIM limits from Universal.

Mr. Baker then applied for UIM benefits under his Erie policy and was denied due to lack of coverage via application of the household exclusion. Plaintiff’s counsel and various amici argued that the household exclusion constituted an improper waiver of the statutorily mandated offer of stacking of UIM benefits as required by the MVFRL.

Erie and other amici argued that “household exclusion” was a proper exclusion which serves the important purpose of limiting an insurer’s exposure to losses related to accidents involving vehicles owned by the insured which were not under the policy, and thus not an underwritten risk. It was further argued that the household exclusion was proper as it would not limit recovery if an insured were in non-household vehicles such as taxis, buses, etc. Lastly and convincingly, it was argued that the MVFRL does not prevent insurer’s from limiting the risk that they are underwriting, but instead states that it must offer UIM benefits related to that risk and provide for the possibility that such limits will be stacked if the insured does not elect to waive such coverage in exchange for paying lower premiums for the covered risks.

The Supreme Court agreed with Erie that the cart could not be put before the horse. As a matter of contract, insurers can determine what risks to underwrite. The policy must be construed to determine whether UIM coverage existed, and if so, then the Court should analyze whether the policy conformed with the MVFRL. The Court determined that the household exclusion was proper and did not violate public policy, thus was enforceable. With the household exclusion found applicable, the Court found that no violation of the MVFRL could exist.