Appeal from the Order of the Superior Court at No. 1129 EDA 2004 entered on 8/17/06 which reversed the Delaware County Court of Common Pleas Civil Division order at No. 03-01680 entered on 4/6/04.
The opinion of the court was delivered by: Mr. Justice Saylor
CASTILLE, C.J., SAYLOR, EAKIN, BAER, TODD, McCAFFERY, JJ.
We allowed appeal to determine whether the Motor Vehicle Financial Responsibility Law requires primary underinsured motorist benefits to be exhausted before secondary coverage is implicated and to consider the enforceability of a consent-to-settle clause in an underinsured motorist policy.
In October 1996, police officer Paul P. Schneider ("Appellee") suffered injury when his cruiser was struck by a vehicle driven by Ayanna Lee Cooper. At that time, Ms. Cooper maintained a policy of insurance issued by American Independent Insurance Company providing, inter alia, up to $15,000 in liability coverage. Appellee's employer, Upper Darby Township, maintained a policy with Granite State Insurance Company, which included underinsured motorist ("UIM") coverage subject to a one million dollar limit.
Appellee lodged a civil action against Ms. Cooper, defended by American Independent, which offered to settle at the $15,000 limit in exchange for a general release. Granite State gave its consent, upon being informed by Appellee of the claim and offer. Appellee accepted the settlement in May 1999, executing the release and receiving payment.
Subsequently, Appellee pursued a claim for UIM benefits under the Granite State policy. On December 21, 2001, those parties (with Granite State acting on behalf of itself and Upper Darby Township) consummated a structured settlement having a present value of $750,000, or $250,000 less than the policy limit. This settlement also contained a general release.
Two months later, Appellee sought secondary UIM benefits under his personal automobile insurance policy issued by Appellant, Nationwide Insurance Company, which provided for up to $200,000 in stacked UIM coverage. The policy contained an exhaustion clause prescribing that "[n]o payment will be made until the limits of all other auto liability insurance and bonds that apply have been exhausted by payment." The policy also included consent-to-settle provisions, indicating that an insured must "preserve and protect Nationwide's right to subrogate against any liable party" and obtain Nationwide's written consent to settle any legal action brought against a liable party or release any party.*fn1 Correspondingly, an express exclusion indicated that coverage would not apply to "[b]odily injury of any insured if the insured settles, without our written consent with a liable party." Appellee attempted to address the contractual exhaustion requirement by extending to Nationwide a "credit" of $1,015,000, the combined amount of limits of Ms. Cooper's liability policy and the primary UIM coverage from Granite State, explaining that he would not seek any benefits from Nationwide unless he could prove that his damages exceeded this amount. After Nationwide denied Appellee's claim, he made a demand for arbitration, as provided in the policy.
In response, Nationwide filed a declaratory judgment action seeking, in the relevant counts, a determination that it had no obligation to pay secondary UIM benefits to Appellee due to his failure to exhaust his primary UIM benefits and obtain Nationwide's consent to settle his primary UIM claims, as required by the policy. Nationwide contended that exhaustion was required not only by the terms of the policy, but also under pertinent priority-of-recovery provisions of the Motor Vehicle Financial Responsibility Law,*fn2 which provides as follows in the UM/UIM context:
(a) General rule.--Where multiple policies apply, payment shall be made in the following order of priority:
(1) A policy covering a motor vehicle occupied by the injured person at the time of the accident.
(2) A policy covering a motor vehicle not involved in the accident with respect to which the injured person is an insured.
(b) Multiple sources of equal priority.--The insurer against whom a claim is asserted first under the priority set forth in Subsection (a) shall process and pay the claim as if wholly responsible. The insurer is thereafter entitled to recover contribution pro rata from any other insurer for the benefits paid and the costs of processing the claim.
Nationwide pursued summary judgment, and Appellee responded with a cross- motion, arguing that there was no need for exhaustion of primary UIM benefits, as he had extended a credit to Nationwide for the full amount of those benefits as required by Boyle v. Erie Insurance Company, 441 Pa. Super. 103, 656 A.2d 941 (1995). Additionally, Appellee asserted that, pursuant to Nationwide Mutual Insurance Company v. Lehman, 743 A.2d 933 (Pa. Super. 1999), the insurer was required to establish that its interests were prejudiced by Appellee's failure to obtain its consent to settle.
The common pleas court awarded summary judgment in Nationwide's favor. See Nationwide Ins. Co. v. Schneider, 69 Pa. D.&C.4th 94 (C.P. Del. 2004). Initially, the ...