New Jersey and Pennsylvania Insurance in Brief
July 21, 2009

Below are seven recent case law updates.

PIP / RIGHT OF REIMBURSEMENT
Fernandez v. Nationwide Mutual Fire Insurance Co.
Supreme Court of New Jersey
A-54 September Term 2008
Decided: July 19, 2009

PIP carrier’s statutory right to reimbursement has priority over insured’s right to be made whole where tortfeasor’s insurance does not fully cover insured’s damages.

Sebastian Fernandez was injured on February 2, 2004 when he was involved in an accident with a commercial vehicle owned by Gro Pro Waste Services, Inc. and operated by Peter Garofalo.  The tortfeasor’s vehicle was insured by Proformance Insurance Company under a liability policy with limits of $1,000,000.  Fernandez suffered serious injuries and incurred medical expenses of nearly $600,000 as a result of the accident.  Nationwide, Fernandez’s personal auto insurer, paid its PIP coverage limit of $250,000.  Fernandez filed a lawsuit against the tortfeasors and Nationwide filed intercompany arbitration against Proformance to recover the PIP benefits it paid to Fernandez.

The New Jersey Supreme Court affirmed an Appellate Division ruling that even though Fernandez would not be made whole for his injuries, the cost of providing PIP benefits to the victim is required to be borne by the insurer of the responsible party, Garofalo and Gro Pro.


UM/UIM / STEP-DOWN CLAUSE / APPLICATION OF SCUTARI AMENDMENT
Hand v. Philadelphia Insurance Company
Superior Court of New Jersey, Appellate Division
Docket No. A-1957-07T1
Decided: July 1, 2009

Retroactive application of prohibition against step-down clauses in UIM policy not allowed where policy expired prior to date of amendment invalidating such clauses.

On January 19, 2005, a SUV driven by Leroy Gorman crossed the median of state highway 42 and collided with a car owned by Steininger Behavioral Care, the employer of Donna Hand.  Hand, a passenger in the vehicle, was seriously injured.  Philadelphia Insurance Company (“PIC”) issued a commercial auto policy to Steininger which provided UM/UIM coverage with $1,000,000 limits.  Hand qualified as an additional insured for purposes of UIM coverage under the policy because she was occupying a “covered auto” under the policy.  The policy included a step-down clause which limited the amount of UM/UIM coverage available to an additional insured on the PIC policy to the amount of any policy providing coverage to that additional insured as an individual named insured.  Hand was an individual named insured on a policy issued by AAA Midatlantic Insurance Company with UIM limits of $100,000.  Gorman’s liability policy limits of $100,000 were made available to Hand.  PIC, applying the step-down provision of the Steininger policy found that since Hand’s personal UIM limits with AAA of $100,000 were equal to that of the tortfeasor, Gorman, Gorman’s vehicle was not underinsured.

On April 2, 2007, Hand filed her complaint seeking to compel arbitration.  On April 27, 2007, PIC filed its answer, asserting the step-down provision as a defense.  The Governor of New Jersey signed into law what is known as the “Scutari Amendment” which prohibited the use of step-down provisions in motor vehicle policies issued to corporate or business entities to lower UM/UIM limits for employees to the limits of the employees’ personal policies.

The court found that the Legislature impliedly intended to reform all commercial auto policies in existence on the effective date of the amendment and to provide an immediate remedy to those making a claim for coverage under their employer’s UM/UIM policy provisions as of that date.  However, retroactive application of the amendment to the facts before the court involving a UIM policy that expired years before the amendment was passed “would work a manifest injustice” to PIC and other insurers.


PERSONAL AUTO / HOUSEHOLD EXCLUSION / UIM
Erie Insurance Exchange v. Baker
Supreme Court of Pennsylvania
No. 26 WAP 2008
972 A.2d 507
Decided: June 22, 2009

Household exclusion upheld; precluded payment of UIM benefits.

In 1999, Eugene Baker was involved in an accident while operating his motorcycle.  The motorcycle was insured by Universal Underwriters Insurance Company.  Baker owned three motor vehicles which were insured by Erie Insurance Exchange.  His Erie policy included $100,000/$300,000 in UIM coverage on each of these vehicles.  He did not sign a stacking waiver.

Universal Underwriters paid its UIM limits to Baker, who then sought UIM benefits from Erie.  Erie denied coverage, citing its policy’s “household exclusion” which precludes coverage when an insured is occupying a vehicle owned by the insured but not insured for UIM benefits under the Erie policy. 

Baker alleged that the Pennsylvania Motor Vehicle Financial Responsibility Law precluded application of the household exclusion to prevent inter-policy stacking when he did not sign a valid stacking waiver but instead chose to pay a higher premium.

The court, in upholding the exclusion, noted that invalidating an applicable, unambiguous exclusion which was designed to preclude unpaid coverage of unknown risk.


COMMERCIAL GENERAL LIABILITY / OCCURRENCE / DAMAGE TO INSURED’S PRODUCT
Pennsylvania National Mutual Casualty Ins. Co. v. Parkshore Development Corp.
United States District Court for the District of New Jersey
C.A. No. 07-1331
Decided: June 17, 2009

Court upholds decision granting summary judgment to insurer on basis that damage to insured’s own work caused by later discovered defects in work not an ‘occurrence’.

Parkshore was the developer and general contractor for the Catalina Cove Condominiums.  The last unit was completed in 1998.  In 2006, the Catalina Cove Condominium Association filed suit against Parkshore and other defendants, asserting negligence and breach of contract after the condos sustained water infiltration problems resulting in substantial damage to the condominium’s common elements.

Parkshore submitted a claim for defense and indemnification to Pennsylvania National Mutual Insurance Company (“PNI”), its liability insurer.  PNI disclaimed coverage, finding that the policy requirements of “occurrence” and “property damage” had not been met.

On a motion for reconsideration of a grant of summary judgment in PNI’s favor, Parkshore claimed that the court failed to address the distinction between a construction defect present at the time of closing and consequential damages sustained later as a result of the construction defect.  The court denied the motion for reconsideration, finding that it had properly interpreted existing New Jersey state case law which held that damages to the work product of the insured alone is not an “occurrence” as that term is defined in the policy.  


INSURANCE POLICY / CHOICE OF LAW / CGL / BREACH OF CONTRACT / OCCURRENCE
Specialty Surfaces International, Inc. v. Continental Casualty Co.
United States District Court for the Eastern District of Pennsylvania
C.A. No. 08-2089
Decided: May 21, 2009

Law of state where named insured domiciled applied to dispute filed against it and wholly-owned subsidiary in jurisdiction where subsidiary located; Pennsylvania law applied to preclude coverage for action sounding in breach of contract.

Specialty Surfaces International and its wholly-owned subsidiary, Empire and Associates, manufacture and sell vertically-draining synthetic athletic playing fields.  Several fields were installed for the Shasta Union School District in California.  Shasta sued plaintiffs and others in California state court for breach of contract after the field’s drainage systems allegedly failed, rendering the fields unusable.

Specialty and Empire demanded a defense from their CGL insurer, Continental Casualty.  Continental decided to defend under a reservation of rights after Shasta filed an amended complaint adding allegations of negligence.  The insureds contended that California law should apply to the coverage dispute because Empire is a California corporation which only performs work in California.  Specialty is a Pennsylvania-domiciled corporation, the policy was negotiated and delivered in Pennsylvania and its risks are spread throughout the country, compelling the application of Pennsylvania law by the court.

After determining that Pennsylvania law applied, the court noted recent cases applying Pennsylvania law made it reasonably clear that a breach of contract cannot be classified as an occurrence.  Thus, Continental was not obligated to defend or indemnify Specialty or Empire.


OTHER INSURANCE
W9/PHC REAL ESTATE LP v. FARM FAMILY CASUALTY INSURANCE CO.
Superior Court of New Jersey, Appellate Division
970 A.2d 382
Decided: May 20, 2009

In matter of first impression, court applies majority rule to application of pro-rata and excess other insurance clauses.

In making a determination of the priority of coverage as between two general liability insurance policies, the court noted that the issue of allocation of loss among insurers where one policy has an other insurance clause calling for a pro-rata sharing of the loss, while the other policy has an other insurance clause providing for excess coverage, has been unresolved by New Jersey courts.

The court adopted the rule of the majority of jurisdictions and held that where one policy has a pro-rata other insurance clause and the other contains an excess clause, the pro-rata clause is primary and that of the other policy is excess.


COMMERCIAL AUTO / UIM / STACKING
State Auto Prop. & Cas. Ins. Co. v. Pro Design, P.C.
U.S. Court of Appeals for the Third Circuit (on appeal from M.D. of Pa.)
No. 08-3006
Decided: May 12, 2009

Third Circuit predicts Pennsylvania Supreme Court would find  initial waiver of stacked UIM benefits valid despite addition of vehicles to the policy.

On October 28, 2006 Ronald and Christine Dillman were involved in an automobile accident while riding in a vehicle insured under a Business Auto Policy issued by State Auto.  On June 6, 2001, at the inception of a single vehicle policy, Ronald Dillman, on behalf of Pro Design, P.C., signed a form indicating that Pro Design waived stacked UIM benefits in exchange for a lower premium.  The policy was renewed on an annual basis in 2002, 2003 and 2004.  Additional vehicles were later added to the policy in 2004 and 2005, but State Auto did not give Pro Design the opportunity to sign additional stacking waivers when the additional vehicles were added.

The Dillmans asserted that they had $105,000 in UIM coverage available based on three vehicles multiplied by the $35,000 UIM policy limit.  State Auto disagreed, asserting that the June 2001 stacking waiver remained valid.

The Third Circuit reviewed ambiguities that existed in Pennsylvania Supreme Court opinions and predicted that the Supreme Court would extend prior decisions and find that the addition of vehicles to the single-vehicle policy issued by State Auto was not a “purchase” of insurance which would require a new waiver of stacking.

Hyperlinks to cases are included where available.  If you have any questions about the cases briefed above, please contact Christine Sheridan Celia at 215-587-9400 or ccelia@dmvlawfirm.com.