West American Insurance Company v. Park, Suzanne Suzanne Park

933 F.2d 1236, 1991 U.S. App. LEXIS 10751, 1991 WL 86892

• Court: Court of Appeals for the Third Circuit
• Decided: May 29, 1991
• Docket: 90-1490
• Status: Published

Opinions

OPINION OF THE COURT

STAPLETON, Circuit Judge.

In this diversity of citizenship, declaratory judgment action, appellee-plaintiff West American Insurance Company asks us to predict that the Supreme Court of Pennsylvania would not enforce the terms of a policy that West American wrote for appellant-defendant Suzanne Park. West American argues that section 1736 of the Pennsylvania Motor Vehicle Financial Responsibility Law (“MVFRL”), 75 Pa.Cons.Stat. Ann. § 1736 (Purdon supp. 1990), prohibits the aggregation or “stacking” ¹ of uninsured/underinsured motorist coverage to exceed the liability coverage carried by the insured, a proposition upon which Pennsylvania courts have not authoritatively ruled. On cross-motions for summary judgment, the district court determined that the Supreme Court of Pennsylvania would so hold and entered judgment for West American. The district courts that have considered the issue are split.² Because we conclude that the Supreme Court of Pennsylvania would find West American estopped from challenging the legality of its own policy, we will reverse without considering whether the policy does in fact violate the MVFRL.

I.

Factual Background and Contentions of the Parties

The following facts have been stipulated. On June 3, 1988, Suzanne Park was operating her husband’s 1986 Mercury Topaz automobile when she was allegedly injured by an uninsured motorist. At that time the Mercury was insured under a West American policy which also covered her husband’s 1983 Ford Escort. The policy had a limit of coverage for liability to third persons of $100,000 and also provided uninsured/underinsured motorist coverage of $100,000 for each vehicle. West American charged separate premiums for the uninsured/underinsured motorist coverage for each automobile.

After the accident, Suzanne Park initiated a claim against West American for uninsured motorist benefits. On February 22, 1990, West American, a California corporation with its principal place of business in California, commenced this action in the district court seeking a declaratory judgment against Park, a citizen of Pennsylvania, as to the limits of uninsured motorist coverage under the policy.

Park claims that she may stack the $100,-000 worth of uninsured motorist coverage provided for each of the vehicles so that she may potentially recover up to $200,000 of uninsured motorist coverage benefits. West American asserts that section 1736 of the MVFRL prevents Park from stacking the uninsured motorist coverage benefits to exceed the maximum amount available to third parties under the liability portion of the policy, i.e., $100,000. Section 1736 states that:

The [uninsured/underinsured motorist] coverages provided under this subchap-ter may be offered by insurers in amounts higher than those required by this chapter but may not be greater than the limits of liability specified in the bodily injury liability provisions of the insured’s policy.

75 Pa.Cons.Stat.Ann. § 1736 (Purdon supp. 1990). West American contends that although stacking is authorized by the policy, “[i]n instances such as this case in which [the] stacking allowed by a policy would run afoul of the express statutory limitation of [section] 1736, the public policy behind the statute must prevail.” Appellee’s Brief at 17. Two intermediate Pennsylvania courts have indicated that section 1736 is intended to prevent

an insured from providing greater coverage, via uninsured/underinsured coverages, for himself and his additional insureds than the amount of coverage he provides for others injured through his negligence.

Tallman v. Aetna Cas. & Sur. Co., 372 Pa.Super. 593, 539 A.2d 1354, 1358-59 allocatur denied, 520 Pa. 607, 553 A.2d 969 (1988) (quoting Wolgemuth v. Hurleysville Mut. Ins. Co., 370 Pa.Super. 51, 535 A.2d 1145, 1147 n. 3, allocatur denied, 520 Pa. 590, 551 A.2d 216 (1988)). The district court agreed with West American, and this appeal followed.

II.

Subject Matter Jurisdiction and Standard of Review

West American and Park are citizens of different states and the amount in controversy exceeds $50,000. Thus, the district court had subject matter jurisdiction under 28 U.S.C. §§ 1332(a)(1) and 2201(a), and we have jurisdiction under 28 U.S.C. § 1291. Federal court jurisdiction exists even though the ultimate resolution of the dispute will come only in an arbitration proceeding to determine Park’s damages. See Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240-43, 57 S.Ct. 461, 463-65, 81 L.Ed. 617 (1937); Myers v. State Farm Ins. Co., 842 F.2d 705, 708 (3d Cir.1988) (under Pennsylvania law, legal question of coverage properly decided by court before question of liability within that coverage is decided at arbitration). See also McNeese v. Board of Education for Community School Dist. 187, 373 U.S. 668, 673 n. 5, 83 S.Ct. 1433, 1436, n. 5, 10 L.Ed.2d 622 (1963); Baltimore Bank for Cooperatives v. Farmers Cheese Cooperative, 583 F.2d 104, 111 (3d Cir.1978). As the cross-motions for summary judgment were submitted on stipulated facts, only issues of state law remained for the district court to resolve and the standard of our review is plenary. Salve Regina College v. Russell, — U.S. -, 111 S.Ct. 1217, 1221, 113 L.Ed.2d 190 (1991); Compagnie Des Bauxites v. Insurance Co. of America, 724 F.2d 369, 371 (3d Cir.1983).

III.

Discussion

West American claims that Park should be denied recovery on public policy grounds because section 1736 prohibitions insurers from offering uninsured/underinsured motorist coverage in excess of liability coverage. In other words, West American claims that it should be excused from fulfilling Park’s reasonable expectations and its own obligations under the policy’s plain language, because it violated the MVFRL.³ Assuming that West American did violate the MVFRL, as it contends, we conclude that the courts of Pennsylvania would find it estopped from denying the existence of uninsured motorist coverage it in fact issued.

Pennsylvania insurance law incorporates principles of equitable estoppel. As one Pennsylvania court expressed it,

Reduced to its essence, equitable estop-pel is a doctrine of fundamental fairness intended to preclude a party from depriving another of a reasonable expectation, when the party inducing the expectation knew or should have known that the other would rely to his detriment upon that conduct.

Straup v. Times Herald, 283 Pa.Super. 58, 423 A.2d 713, 720 (1980). As the Supreme Court of Pennsylvania has cogently put it:

[t]he reasonable expectation of the insured is the focal point of the insurance transaction_ Courts should be concerned with assuring that the insurance public’s reasonable expectations are fulfilled. Thus, regardless of the ambiguity, or lack thereof, inherent in a given set of insurance documents ... the public has a right to expect that they will receive something of value in return for the premium paid.

Collister v. Nationwide Life Ins. Co., 479 Pa. 579, 388 A.2d 1346, 1353 (1978), cert. denied, 439 U.S. 1089, 99 S.Ct. 871, 59 L.Ed.2d 55 (1979).⁴

In the Collister case, a life insurance applicant died after he sent in an application for life insurance and the first premium, but before the insurer had accepted or rejected the application. Disregarding plain language in the application that made coverage conditional on insurer receiving a completed medical exam, the Pennsylvania Supreme Court concluded that the reasonable expectations of the insured, specifically the expectation that he would receive something upon paying the first premium, controlled. It held that those expectations created a temporary insurance contract until the insurer either accepted or rejected the application. In essence, the principles of equitable estoppel were used to bar the insurer from both accepting the first premium and denying that coverage existed.

Collister and subsequent insurance cases expand traditional notions of equitable es-toppel so that the insurer is bound not only by the expectations that it creates, but also by any other reasonable expectation of the insured. The insured’s reasonable expectations control, even if they are contrary to the explicit terms of the policy. State Farm Mut. Auto Ins. Co. v. Williams, 481 Pa. 130, 392 A.2d 281, 286-87 (1978). If the insurer wishes to change the reasonable expectations of the insured, it must do more than insert the condition in the policy. Tonkovic v. State Farm Mut. Auto Ins. Co., 513 Pa. 445, 521 A.2d 920, 925 (1987).

Thus, the Supreme Court of Pennsylvania has consistently applied equitable estop-pel to prevent an insurer from attempting to frustrate the reasonable expectations of the insured. We predict that it would apply that doctrine to achieve that objective in context of the facts of this case, even though the result may be to provide Park with more underinsured motorist protection than the legislature intended her to have, i.e., more underinsured motorist protection than the liability protection for which she had contracted. The Pennsylvania courts on more than one occasion have applied equitable estoppel to bar arguments supported by legislatively established public policy.

In Fraternal Order of Police, E.B. Jermyn Lodge #2 v. Hickey, 499 Pa. 194, 452 A.2d 1005 (1982) (plurality), the Supreme Court found that the City of Scranton and its officers were estopped from claiming that a provision of its collective bargaining agreement with its policemen was illegal. The plurality applied equitable estoppel noting that the City had theretofore received the benefit of the agreement:

the statutorily mandated obligation to bargain in good faith is not met by permitting the governmental employer to avoid the performance of a term by questioning its legality after having received the advantages that flowed from that term’s acceptance.

452 A.2d at 1007-08. See also Scranton v. Local Union No. 669, 122 Pa.Cmwlth. 140, 551 A.2d 643, 646 (1988) (“where an employer voluntarily agrees to perform an act ... it cannot later contend that the act is illegal and refuse to perform it; indeed it will be estopped from doing so.”)

More recently, Pennsylvania’s Commonwealth Court has applied equitable estoppel to bar a party from asserting that the position advocated by its opponent would violate the Health Care Facilities Act. In Laurel Mobile H. Serv. v. Health Department, 121 Pa.Cmwlth. 291, 550 A.2d 616 (1988), one health care provider attempted to argue that another provider was violating the Act by providing CT scanning services without proper state authorization. The court held that the first provider was estopped to so argue because it had benefited from receiving CT services under the same arrangement it now sought to challenge:

[The hospital] never asserted the illegality or impropriety of the assignment of contracts, but instead accepted and paid for the [medical] services provided by the Laurel without objection. Having accepted the benefits, [the hospital] is now estopped from asserting that the arrangement was prohibited.

550 A.2d at 620-21.

We conclude that the courts of Pennsylvania would find this case a far more compelling one for application of the doctrine of equitable estoppel than Hickey or Laurel Mobile. West American wrote the policy that it now seeks to challenge and received premiums for the coverage it now tries to contest. Moreover, the Pennsylvania legislature has determined that the most effective means of securing the desired objective of this portion of the MVFRL is to impose a duty on all insurers not to issue uninsured/underinsured coverage above a prescribed amount. We would expect a Pennsylvania court fashioning an equitable remedy in a situation of this kind to take note of that legislative decision and to choose a result that will not reward an insurer for violating what the insurer claims to be the proper interpretation of § 1736.

IV.

Conclusion

Pennsylvania law will not allow an insurer to use the explicit language of an insurance policy to defeat the reasonable expectations of the insured. West American seeks to use a provision of Pennsylvania law, prohibiting certain conduct by insurers, to defeat both the reasonable expectations of the insured and the explicit terms of the policy it wrote. We are confident that the Pennsylvania Supreme Court would not allow an insurer to challenge the legality of a policy which it wrote, for which it collected premiums, and on which it gave the insured every reason to rely. Accordingly, we will reverse the order of June 19, 1990, of the district court and remand with instructions to enter a judgment declaring that West American is responsible for such damages as Park can establish up to a limit of $200,000.

1 . "Stacking is where a claimant adds all available policies together to create a greater pool in order to satisfy his actual damages." 12A Couch on Insurance 2d § 45:651 at 207 (1981). It "permits the total amount of uninsured motorist coverage provided for all vehicles listed in an insurance policy to be applied to the damages resulting from an accident involving only one of the vehicles.” Rhody v. State Farm Mut. Ins. Co., 771 F.2d 1416, 1418 (10th Cir.1985).

2 . Compare Chartan v. Chubb Corp., 725 F.Supp. 849 (E.D.Pa. 1989), reconsideration denied, 759 F.Supp. 1125 (E.D.Pa. 1990) (stacking of uninsured motorist benefits in excess of liability coverage prohibited by section 1736); West American Ins. Co. v. Park, 1990 WESTLAW 87284 (U.S.D.C., E.D.Pa. June 18, 1990) (same), with West American Ins. Co. v. Antoniolo, 1990 WESTLAW 143072 (U.S.D.C., E.D.Pa. Oct. 1, 1990) (stacking of uninsured motorist benefits in excess of liability coverage permitted under section 1736); Byers v. Amerisure Ins. Co., 745 F.Supp. 1073 (E.D.Pa. 1990) (same); Maryland Cas. Co. v. Fitze, 744 F.Supp. 628 (M.D.Pa.1990) (same); North River Ins. Co. v. Tabor, 744 F.Supp. 625 (M.D.Pa.1990) (same).

3 . Pennsylvania Insurance Guideline C-2 requires that West American "make it clear in [its] policies that an insured ... may add together the limits of uninsured motorist coverage for multiple vehicles covered under the insured’s policy[.]” But this guideline did not require West American to violate section 1736 as West American construes it. West American could have complied with the guideline and with its own interpretation of the MVFRL either by requiring Park to purchase $200,000 of liability coverage or by selling her only uninsured coverage in an amount that, when stacked, would equal her liability coverage.

4 . This rationale also underlies Pennsylvania courts’ preference for stacking (even under policies which expressly prohibit stacking):

the intended beneficiary of an uninsured motorist policy is entitled to multiple coverage when multiple premiums have been paid. [This] rationale is grounded in the belief that a person has reasonable expectations when he pays separate premiums that he has obtained coverage under separate policies, and therefore is entitled to benefits under each.

Utica Mut. Ins. Co. v. Contrisciane, 504 Pa. 328, 473 A.2d 1005, 1010 (1984) (citation omitted).