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Rarick v. Federated Service Insurance Co.

United States District Court, E.D. Pennsylvania

July 10, 2018

BRYAN RARICK, individually and on behalf of a class of similarly situated persons, Plaintiff,


          Joseph F. Leeson, Jr. United States District Judge.

         While driving a truck owned and insured by his employer, Keystone Automotive Operations, Inc., Plaintiff Bryan Rarick was injured in a car accident in 2011. He sought to recover for his injuries from the truck's insurer, Defendant Federated Mutual Insurance Co., under the Uninsured Motorist/Underinsured Motorist (“UM/UIM”) provisions of Keystone's policy. Federated denied his claim because Keystone had rejected UM/UIM coverage for all those insured by its commercial policy, except owners, managers, and their families. Rarick brought this action challenging Federated's denial of benefits as a violation of Pennsylvania insurance law. This opinion addresses cross-motions for Summary Judgment filed by Rarick and Federated. For the reasons set forth below, this Court denies Rarick's Motion for Partial Summary Judgment and grants Federated's Motion for Summary Judgment.


         The following facts are taken from the Joint Stipulation of Facts.

         On June 27, 2011, Rarick was driving a truck owned by his employer, Keystone Automotive Operations, Inc. (“Keystone”). Stip. Facts ¶ 1, ECF No. 62. Keystone was the holder of a commercial automotive insurance policy issued by Federated, intended to cover the vehicles owned by Keystone. Id. ¶ 2. It is important to note from the outset that a default insurance policy carries with it Uninsured Motorist and Underinsured Motorist (“UM/UIM”) benefits pursuant to the Pennsylvania Motor Vehicle Financial Responsibility Law (“MVFRL”). See 75 Pa. Cons. Stat. § 1731(a). In order for these benefits to be excluded from a policy, they must be properly rejected pursuant to the MVFRL. See Id. §§ 1731(b)-(c).While operating a vehicle covered by the policy, Rarick was involved in an accident. Stip. Facts ¶ 1. Rarick filed a claim under the Federated policy on January 18, 2013, which Federated denied by letter on January 25, 2013 because the policy excluded UM/UIM benefits for employees. Id. ¶ 3, 5. Rarick then requested a copy of the UM/UIM section of the policy. Id. ¶ 6. After commencing this action against Federated, Rarick requested, via email, a copy of the UM/UIM rejection form for the Keystone policy. Id. ¶ 9. Federated provided the forms the following day, August 6, 2013. Both the UM/UIM rejection form and the UM/UIM Endorsements and Declarations attached to the Keystone Policy state that UM/UIM coverage has been rejected for employees but elected for directors, officers, partners, owners, and their family members. See Stip. Facts Ex. A at 39; Stip. Facts Ex. I at 1-2. Rarick is not a director, officer, partner, or owner, of Keystone, nor is he a family member of such. Stip. Facts ¶ 15-16.

         Rarick filed this action primarily claiming that the coverage scheme created by Federated is unlawful under the MVFRL. See Notice of Removal Ex. A. ¶ 37-38, ECF No. 1 [hereinafter “Complaint”]. He asserts that UM/UIM benefits must be either rejected for all insureds under a policy or accepted for all insured under a policy. See Pl.'s Supp. Mem. 5, 11-15, ECF No. 65-1. Rarick has since filed a Motion for Partial Summary Judgment on the grounds that (1) the coverage scheme is unlawful under the MVFRL, (2) the delayed production of the rejection form means that Federated is estopped from relying on it, and (3) the policy is ambiguous. See Id. 2-3.

         Federated filed a Motion for Summary Judgment on the grounds that (1) Rarick does not have standing to challenge the rejection of UM/UIM benefits, (2) the UM/UIM rejection is compliant in both form and substance, (3) the rejection is unambiguous, and (4) Federated is not estopped from asserting the valid rejection as a defense. See Def.'s Supp. Mem. 2-3, ECF No. 66-1.


         Summary judgment “should be rendered if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c); Turner v. Schering-Plough Corp., 901 F.2d 335, 340 (3d Cir. 1990). A disputed fact is “material” if proof of its existence or nonexistence would affect the outcome of the case under applicable substantive law, and a dispute is “genuine” if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 257 (1986). The party moving for summary judgment bears the burden of showing the absence of a genuine issue as to any material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).

         Once such a showing has been made, the non-moving party must go beyond the pleadings with affidavits, depositions, answers to interrogatories or the like in order to demonstrate specific material facts which give rise to a genuine issue. Fed.R.Civ.P. 56; Celotex, 477 U.S. at 324; Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986) (stating that the non-moving party “must do more than simply show that there is some metaphysical doubt as to the material facts”). The party opposing the motion must produce evidence to show the existence of every element essential to its case, which it bears the burden of proving at trial, because “a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial.” Celotex, 477 U.S. at 323; see also Harter v. G.A.F. Corp., 967 F.2d 846, 851 (3d Cir. 1992). “Inferences should be drawn in the light most favorable to the non-moving party, and where the non-moving party's evidence contradicts the movant's, then the non-movant's must be taken as true.” Big Apple BMW, Inc. v. BMW of N. Am. Inc., 974 F.2d 1358, 1363 (3d Cir. 1992), cert. denied, 507 U.S. 912 (1993).

         III. ANALYSIS

         A. A third-party beneficiary has standing to challenge the statutory validity of a waiver of UM/UIM benefits.

         Federated alleges that Rarick does not have statutory standing to challenge the rejection of UM/UIM benefits. See Def.'s Supp. Mem. 20, ECF No. 66-1. Federated argues that only those who appear as a “named insured” in the policy have standing to challenge the rejection. Id.

         Pennsylvania courts recognize that “a party seeking judicial resolution of a controversy in this Commonwealth must, as a prerequisite, establish that he has standing to maintain the action.” Nye v. Erie Ins. Exch., 470 A.2d 98, 100 (Pa. 1983) (citing William Penn Parking Garage, Inc. v. City of Pittsburgh, 346 A.2d 269, 280-81 (Pa. 1975)). “A person who is not adversely affected in any way by the matter he seeks to challenge is not aggrieved thereby. . . .” Id. Because this Court is sitting in diversity and hearing a state law question, it must keep in mind that “[w]hen the state's highest court has not addressed the precise issue presented, a federal court must predict how the state's highest court would resolve the issue.” Travelers Indem. Co. v. Stengel, 512 Fed.Appx. 249, 250-51 (3d Cir. 2013) (citing Orson, Inc. v. Miramax Film Corp., 79 F.3d 1358, 1373 (3d Cir. 1996)). Here, the Pennsylvania Supreme Court has not addressed this issue, and thus, it is the duty of this Court to predict how the Pennsylvania Supreme Court would rule.

         Federated argues that recent Pennsylvania Superior Court cases stand for the proposition that individuals who are not named insureds on a policy, like Rarick, do not have standing to challenge a waiver of UM/UIM benefits by a named insured. See Def.'s Supp. Mem. 20. Federated first cites to Peters v. National Interstate Insurance Co., a 2015 case that involved an employee who was attempting to make a claim against his employer's insurer for UM/UIM benefits following an accident. 108 A.3d 38, 41 (Pa. Super. Ct. 2014). The court began by noting that “an injured person who makes a claim for uninsured motorist benefits under a policy to which he is not a signatory is . . . a third party beneficiary.” Id. at 46 (citing Egan v. USI Mid-Atlantic, Inc., 92 A.3d 1, 20 (Pa. Super. Ct. 2014)).[1] Further, the court concluded that because the employee was not a “named insured, ” he had no “legally cognizable claim of UIM coverage”[2] where the coverage had been rejected by a named insured. Id. (citing Been v. Empire Fire & Marine Ins. Co., 751 A.3d 238 (Pa. Super. Ct. 2000)).

         However, Peters did not reach the issue that is central to Rarick's claim because the Pennsylvania MVFRL did not apply to the driver, an Ohio resident, nor the car, an Ohio-registered vehicle that was principally garaged in Ohio. Id. at 45. While Peters stated that a third- party beneficiary has “no legally cognizable claim of UIM coverage” where it had been rejected, the court did not decide whether the rejection of the UIM benefits was legally adequate. Id. (“However, we need not reach the question of the legal adequacy of the rejection form, because, as we have already decided, the Pennsylvania MVFRL does not apply to Appellees.”). By challenging Federated's ability to bifurcate the company and provide UM/UIM coverage to only part of its personnel, Rarick is essentially challenging the validity of the UM/UIM waiver. Therefore, the holding of Peters does not apply to Rarick's claim.

         Federated then cites Petty v. Federated Mutual Insurance Co. for the proposition that third-party beneficiaries do not have standing to challenge the rejection of UM/UIM benefits. Federated cites specifically to a footnote, which states that the court could have used “an alternate basis” to affirm the judgment. 152 A.3d 1020, 1026 n.3 (Pa. Super. Ct. 2016). The court's primary basis for affirming the lower court was that the waiver of the UM/UIM benefits was valid under the MVFRL. Id. at 1025-26. However, the court stated in the footnote that, in the alternative, because “[a]ppellants were not named insureds, and [a named insured] had properly waived UIM coverage, [a]ppellants had no legally cognizable claim to a UIM benefit that did not exist.” Id. at 1026. The court found that an employee could not make a claim for benefits that did not exist by virtue of a valid waiver. See Id. at 1026 n.3. While Petty decided the validity of the waiver prior to addressing the issue of standing in a footnote, this Court has not yet decided the validity of the waiver. Therefore, the alternative basis proposed by the footnote in Petty is not dispositive of the matter of standing as it is predicated on the finding of a valid waiver.

         Other courts have found that third-party beneficiary employees have standing to challenge the validity of a waiver made by the named insured, the employer. In 2007, the District Court for the Western District of Pennsylvania, applying Pennsylvania law, held that a third- party beneficiary “clearly . . . has standing in this instance to argue either that [defendant] failed to execute a valid waiver . . . or that the statutory limitation of UIM benefits . . . is invalid.” Yocum v. Federated Mut. Ins. Co., No. 2:05cv1789, 2007 WL 2743865, at *4 (W.D. Pa. Sept. 18, 2007). The Yocum case is factually similar to the situation before this Court. An employee of a heating and cooling company insured by Federated was struck by an underinsured motorist while the employee was acting within the scope of his employment. Id. at *2. Because the underinsured motorist's policy did not cover the extent of the employee's injuries, the employee submitted a claim for UIM benefits under his employer's policy with Federated. Id. Federated denied the claim because the heating and cooling company had rejected UIM benefits. Id. The court found that the injured employee had standing to seek declaratory relief as to the validity of the UIM rejection. Id.

         In 2011, the Middle District of Pennsylvania, again applying Pennsylvania law, found that a third-party beneficiary was eligible for both “those benefits that [defendant], as the insured, wished to provide him, ” and “those benefits which [defendant] may not have wished to provide him but which [defendant] did not disclaim in conformance with Pennsylvania law.” Douglas v. Discover Prop. & Cas. Ins. Co., 810 F.Supp.2d 724, 732 (M.D. Pa. 2011). Similar to Yocum, Douglas involved an employee attempting to claim UIM benefits as a third-party beneficiary from his employer's policy following an accident involving a company vehicle. Id. at 726.

         Pennsylvania courts have allowed similar claims challenging the validity of a waiver by third-party beneficiaries to continue without mention of a standing issue, including National Union Fire Ins. Co. v. Irex Corp, No. 96-3902, 1997 WL 1133511, at *1 (Pa. Ct. Com. Pl. June 11, 1997). There, the estate of the decedent was allowed to maintain a claim, as a third-party beneficiary, challenging the validity of a UM/UIM waiver signed by the decedent's employer. Id. at *5-6; see also Heller v. Pennsylvania League of Cities & Municipalities, 32 A.3d 1213, 1215 (Pa. 2011) (allowing Borough employee, as a third-party beneficiary, to challenge validity of provision of UIM benefit waiver in policy issued to Borough without commenting directly on issue of standing); Peele v. Atl. Express Transp. Grp., Inc., 840 A.2d 1008, 1009-10 (Pa. Super. Ct. 2003) (allowing two employees, as third-party beneficiaries, to challenge the applicable UM/UIM coverage limits of employer's policy).

         These cases are not inconsistent with those cited by Federated against Rarick's standing. As stated previously, Peters never reached the issue of the validity of the rejection because the MVFRL did not apply to the Ohio driver or the Ohio-garaged car. It follows that a third-party beneficiary would not have a claim to benefits when benefits are validly waived. Therefore, the right of a third-party beneficiary to challenge the validity of the waiver does not conflict with the inability of a third-party beneficiary to make a claim where the MVFRL does not apply. Furthermore, Petty had addressed the issue of standing only after concluding that the waiver was valid.

         Neither Petty nor Peters repudiate the holdings in Yocum and Douglas that a third-party beneficiary may challenge the validity of a rejection of UM/UIM benefits. See Id. (discussing an “alternate basis” for the order affirming where the waiver has already been adjudicated as “valid”); Peters, 108 A.3d at 46 (stating court did not reach the question of validity of rejection because statute was wholly inapplicable). Therefore, because he challenges the validity of Keystone's rejection of UM/UIM benefits, Rarick has standing.

         Federated makes the policy argument that allowing a non-named insured to challenge “UM and UIM rejection forms directly contravenes the cost containment objectives of the MVFRL.” Def.'s Supp. Mem. 25. Federated asserts that insurance companies would be required to provide post hoc “gratis coverage” to a third-party beneficiary through reformation of the contract if the beneficiary is afforded standing in a suit such as the one before this Court. Id. at 25-26 (citing O'Connell v. Progressive Ins. Co., No. 200906570, 2012 WL 12023357, at *7 (Pa. Ct. Com. Pl. Aug. 10, 2012)). However, Federated's attempt to characterize the claim as “chang[ing] the coverage decisions made by the named insured” is misleading. Id. at 25. Rarick's claims do not challenge his employer's decision to reject coverage for employees. Rather, the claims challenge the legal validity of the rejection itself.

         Contrary to Federated's contention, allowing a third-party beneficiary to challenge the validity of a rejection does not mean the named insured is “financially penalized for coverages they consciously decided to reject, ” id.; rather, allowing third-party beneficiaries standing to challenge the rejection provides assurance that the mandate of specific compliance with § 1731 of the MVFRL is met. The MVFRL requires rather strict compliance with the statutorily-provided rejection form. See American Int'l Ins. Co. v. Vaxmonsky, 916 A.2d 1106, 1110-11 (Pa. Super. Ct. 2006) (holding UIM rejection as null and void where insurer omitted word “all” in front of phrase “all losses and damages”). If a third-party beneficiary did not have standing to challenge the validity of the rejection, statutorily invalid rejections would go largely unchallenged.

         Therefore, this Court, in undertaking an analysis to predict the outcome of such an issue before the highest court in Pennsylvania, finds that Rarick has the requisite standing to maintain his claims against Federated.

         B. Title 75 of Pennsylvania Consolidated Statutes section 1731, which requires UM/UIM benefits to be provided unless properly rejected, applies to commercial fleet policies.

         Federated argues, in support of its Motion for Summary Judgment, that MVFRL § 1731 does not apply to commercial auto policies. See Def.'s Supp. Mem. 26. This argument rests, in large part, on a 2007 Pennsylvania Supreme Court decision analyzing the applicability of MVFRL § 1738 to a commercial fleet policy. Id. at 27-28 (citing Everhart v. PMA Ins. Grp., 938 A.2d 301, 301 (Pa. 2007)). As stated previously, “[w]hen the state's highest court has not addressed the precise issue presented, ” it is the duty of this Court to “predict how the state's highest court would resolve the issue.” Travelers Indem. Co. v. Stengel, 512 Fed.Appx. 249, 250-51 (3d Cir. 2013) (citing Orson, Inc. v. Miramax Film Corp., 79 F.3d 1358, 1373 (3d Cir. 1996)). Federated contends that the Pennsylvania Supreme Court has addressed the issue of § 1731's applicability through the reasoning in Everhart. See Def.'s Supp. Mem. 29. However, Everhart dealt with § 1738, the provision that requires mandatory stacking of coverage. Everhart, 938 A.2d at 304. Here, we are addressing the applicability of § 1731. See Def.'s Supp. Mem. 26. For the reasons set forth below, I conclude that MVFRL § 1731 applies to commercial policies.

         “[T]he MVFRL is to be liberally construed in order to afford the greatest possible coverage to injured claimants.” Allstate Prop. & Cas. Co. v. Squires, 667 F.3d 388, 396 (3d Cir. 2012) (citing Houston v. SEPTA, 19 A.3d 6, 14 (Pa. Commw. Ct. 2011)). “In close or doubtful insurance cases, a court should resolve the meaning of ...

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