Pennsylvania UM and UIM Coverage

Out of the Frying Pan and Into the Fire? Insurers Face Post-Koken Decisions

by John A. Orlando and Christopher E. Ballod

For decades, all uninsured (“UM”) and underinsured (“UIM”) motorist claims have been subject to the Pennsylvania Insurance Department’s mandatory arbitration requirement. That meant that every unsettled UM or UIM claim made against a policy issued in Pennsylvania had to be resolved by arbitration, no matter how large or small the claim. On December 30, 2005, the Pennsylvania Supreme Court changed all that. Ruling that the Insurance Department had been overstepping its authority for some forty years, the Court in Insurance Federation v. Koken held that insurers no longer have to include an arbitration clause in their policies.

Insurers can now issue policies that will enable them to litigate UM/UIM cases in the courts, or resolve claims through arbitration (if a reasonable arbitration process can be agreed upon). Also, insurers will now have the ability to reserve the right to a meaningful appeal of an arbitration panel’s decision, a process seriously flawed under the former scheme. The days of having to swallow hard and live with an unreasonable process and/or an undesirable panel are gone.

The glass is also half empty, however. New and troubling practical and legal questions arise. UM/UIM insurers may find themselves as named defendants in third-party tort litigation involving multiple parties. In that event, UM/UIM jurors will know about insurance coverage, and there is a concern that such knowledge might prejudice or inflate their verdict. Other procedural issues such as venue and the possibility of removal to Federal Court must also be considered. All of this will play out against the backdrop of a judiciary that openly opposed the Koken litigation because of their perception that UM/UIM cases will clog the courts.

History of the Mandatory Arbitration Provision Requirement

The General Assembly has never addressed the arbitration of UM/UIM claims. Instead, the Insurance Department, reacting to the Legislature’s passage of the 1963 Uninsured Motorist Act, promulgated “Regulation 14,” effective January 1, 1964. Regulation 14 included several forms, one of which contained as a condition a general arbitration provision. The provision required that UM claims be resolved by arbitration following the rules of the American Arbitration Association.

Regulation 14 was the groundwork for the mandatory arbitration requirement the Insurance Department enforced until Koken. When the General Assembly passed the Motor Vehicle Responsibility Law in 1984 requiring that all motor vehicle insurers offer UIM coverage in addition to UM coverage, the Insurance Department reacted by requiring that all UIM claims be arbitrated in the same fashion as UM claims. Again, the statute was silent as to the process for resolution of claims, so the Insurance Department’s action was based on a belief in its implied authority to define the method of claims resolution. As a result of its belief in its implied authority to mandate the method of UM/UIM claims resolution, the Insurance Department rejected any motor vehicle insurance policy that did not contain a provision requiring arbitration of UM/UIM claims.

Insurance Federation of Pennsylvania v. Koken

The Insurance Federation of Pennsylvania challenged the mandatory arbitration scheme in the court system after years of efforts to persuade the Insurance Department that change was needed. Although mandatory arbitration initially made sense, generous arbitration panels not subject to judicial review resulted in the routine award of amounts in excess of the value of the tort claims.

The prescribed arbitration method compounded the problem. Although the original format utilized the rules of the American Arbitration Association, the Insurance Department later mandated a process whereby the parties were bound to the decision of a panel consisting of two arbitrators selected by the parties, and one neutral arbitrator selected by the parties’ arbitrators. Often, there was little or nothing a party could do if they perceived that an arbitrator was biased or inappropriate for the case.

The process was further flawed in that, effectively, no judicial review was possible. Efforts to remove the proceedings from the purview of the egregiously limiting Pennsylvania Uniform Arbitration Act by inserting language into the policy placing the proceedings under the 1927 Arbitration Act were only a marginal improvement. Under the 1927 Act, a party was required to prove fraud or bias on the part of an arbitrator or to show an error of law that would have resulted in a judgment not withstanding the verdict in a civil action in order to obtain judicial review. Both are very difficult standards to meet. Thus, parties were stuck with large awards with no effective right of review.

The Insurance Federation of Pennsylvania directed its challenge at the Insurance Department’s authority to require mandatory arbitration. The Federation argued that the General Assembly did not expressly grant such power to the Insurance Department. Nor did the motor vehicle legislation impliedly grant the Insurance Department the power to require mandatory arbitration.

The Federation first filed a petition with the Insurance Department seeking a declaratory order on the subject. When the Insurance Department denied the petition, the Federation appealed to the Commonwealth Court, the state appellate court handling appeals from state agency decisions. The Commonwealth Court affirmed the Insurance Department’s decision, and the Federation was granted leave to appeal to the Supreme Court of Pennsylvania.

The Pennsylvania Association of Trial Lawyers of America (“PaTLA”) joined in defense of the Insurance Department’s position that it had the implied power to require arbitration by virtue of the motor vehicle legislation. The Insurance Department and PaTLA argued that the Legislature intended for beneficiaries of motor vehicle policies to quickly receive their benefits, and, pursuant to its regulatory authority, the Insurance Department determined that arbitration was the best way to insure this legislative aim.

The Supreme Court disagreed. Recognizing that the Insurance Department had no express authority, the Court also held that the Insurance Department exceeded its implied authority by enacting regulations that covered “more than mere matters of detail for the implementation of [this] statute.” In short, it held that the Insurance Department does not have the authority to require insurers to have mandatory arbitration provisions in their policies.

What Koken Means

Insurers can now remove the mandatory arbitration provisions from their policies. By default, however, UM/UIM cases will then go to the court system. Still, the insurer and the claimants are not precluded from agreeing to arbitration or mediation. The parties will have the flexibility to work out mutually agreeable procedures for the resolution of claims.

However, if the parties cannot agree to alternative dispute resolution, the insurer faces new risks in the court system.

Absent an agreement to conduct alternative dispute resolution, an insurer will find itself a named defendant, possibly before a jury. Despite the fact that the Pennsylvania Rules of Evidence bar the admission of evidence of applicable liability insurance, in insurance contract disputes (such as UM/UIM litigation in the future), the terms and conditions of insurance are admissible. If the UM/UIM claim is tried as a part of a tort action against a third party, the jury will be allowed to hear evidence of insurance coverage, potentially prejudicing and inflating the verdict against the tortfeasor as well as the UM/UIM insurer.

In future UM/UIM litigation, an out-of-state insurer may have the ability to remove the case to Federal Court under diversity of citizenship jurisdiction (if all the other requirements are met). If the perception is believed that the Federal Courts are friendlier to defendants than certain county courts within the state system, removal could be a benefit in larger cases. To defeat removal, however, plaintiffs may combine the UM/UIM claim with an action against a Pennsylvania-resident uninsured or underinsured tortfeasor so as to destroy the requisite diversity of citizenship.

Within the state court system, venue is also an unresolved issue. Claimants may bring hybrid third-party and UM/UIM actions in counties where there is a perception that jurors are more likely to award higher verdicts. Since venue as to all defendants is (generally) proper in any county in which any one defendant regularly conducts business, third-party auto cases which previously had to have been filed in suburban and rural counties may be filed in urban venues as a part of a hybrid third-party/UM/UIM case.

Another alternative for insurers in the post-KokenCommonwealth is to modify arbitration provisions to allow them to select which claims will be arbitrated. The insurer can then evaluate the playing field before deciding to go ahead with arbitration. The arbitrators, the forum, the rules and procedures can all be considered and weighed against the litigation alternative. The problem lies in the potential for claimants to assert bad faith claims when there is a perception that an insurer is choosing not to arbitrate in certain geographic areas.

Conclusion

While Insurance Federation of Pennsylvania v. Koken has changed the long-standing landscape of UM/UIM claims, it is too soon to tell what shape future resolution of these claims will take. Insurers need sharp, experienced counsel to weigh the options. Although insurers are now released from the Insurance Department’s broken scheme of mandatory arbitration without meaningful review, it may be some time before the benefits of the new freedom to define the resolution methods for UM/UIM claims surmounts the considerable risks.

John Orlando has extensive trial experience on a variety of cases such as product liability, construction accident, automobile and trucking accident and premises liability cases. He can be contacted at 215-864-7176 or orlandoj@whiteandwilliams.com.

Chris Ballod practices in the areas of product liability, construction related liability, appellate and commercial litigation. He can be contacted at 215-864-7129 or ballodc@whiteandwilliams.com.