Third Circuit Upholds Household Vehicle Exclusion for Uninsured Dirt Bike, Overturning District Court Ruling

The Gallagher decision initially led to widespread uncertainty and confusion. However, Pennsylvania Courts have since given its holding substantial clarity and limitation, as this recent precedential decision from the Third Circuit demonstrates. 

Fifteen-year-old Levi Werley was seriously injured while riding an uninsured dirt bike on private property in Kempton, Pennsylvania. The tortfeasor, who was also 15 years old, struck the dirt bike while driving a Jeep CJ-7. The Jeep was insured under a policy providing $100,000 in bodily injury coverage, which was paid, in full. 

Levi then sought payment of UIM benefits under the two Mid-Century policies in the Werley household. The one policy belonged to Levi’s parents and insured four vehicles, providing $250,000/$500,000 in UIM benefits. The second policy belonged to Levi’s father and sister and insured one vehicle, similarly providing $250,000/$500,000 in UIM benefits. Stacking had been waived under both policies. However, pursuant to Donovan v. State Farm Mut. Auto. Ins. Co., 526 A.3d 1145, 1157 (Pa. 2021), the stacking waiver executed for the multiple-vehicle policy was invalid as to inter-policy stacking or stacking amongst separate policies. As stated, the dirt bike Levi was riding at the time of the accident was completely uninsured, so it had no coverage of any kind, including UIM benefits. 

Although both household policies contained household vehicle exclusions, their language materially differed. Specifically, the household vehicle exclusion of the single-vehicle policy applied only to an accident involving a “car.” Because Mid-Century determined that the dirt bike did not meet the definition of a “car” under the policy, it paid Levi the $250,000 UIM limit. In contrast, the household vehicle exclusion under the multiple-vehicle policy applied to any accident involving a “vehicle,” which included a dirt bike. Accordingly, Mid-Century denied coverage based upon the household vehicle exclusion and subsequently filed an action for declaratory judgment in the Eastern District Court of Pennsylvania. 

In a 55-page opinion, the District Court decided in favor of Levi and invalidated Mid-Century’s household vehicle exclusion under the multiple-vehicle policy, concluding that it acted as an impermissible de facto waiver of stacking in violation of 75 Pa. C.S.A. § 1738 and Gallagher v. GEICO Indemnification Co., 201 A.3d 131 (Pa. 2019). Central to the District Court’s decision was Mid-Century’s payment of UIM benefits under the single-vehicle, household policy because such payment meant that Levi was no longer seeking UIM benefits in the first instance. Instead, Levi had recovered UIM benefits he was now seeking to stack upon, differentiating this case from the Supreme Court’s recent holding in Erie Ins. Exch. v. Mione, 289 A.3d 524 (Pa. 2023), where the host vehicle had no UIM coverage and both the household polices excluded UIM coverage under their household vehicle exclusion. 

On appeal, a unanimous panel of the Third Circuit issued a precedential decision vacating the District Court’s order, holding that the household vehicle exclusion was valid under these facts, pursuant to recent Pennsylvania Supreme Court precedent. See Mione, supra; Rush v. Erie Ins. Exch., 308 A.3d 780 (Pa. 2024). The Third Circuit rejected the District Court’s holding that the uninsured status of the dirt bike was irrelevant, finding that the Werleys’ failure to insure the dirt bike meant that they had no reasonable expectation of coverage, thus, “application of the household vehicle exclusion here deprived the Werleys of nothing for which they had bargained.” According to the Third Circuit, a household vehicle exclusion is invalid only if: (1) a policy insures the vehicle involved in the accident, (2) that policy provides UIM coverage on that vehicle, and (3) the household vehicle exclusion of a second policy sought to stack on top of the first policy would exclude UIM coverage for that vehicle. Because no policy insured the dirt bike, the Third Circuit concluded that the household vehicle exclusion of the multiple-vehicle policy was applied validly. 

This case and other recent decisions are evidence that the household vehicle exclusion remains a valid and enforceable exclusion for Pennsylvania insurers with its application prohibited in only very limited circumstances.  

^{Legal Update for Insurance Services, September 9, 2024, has been prepared for our readers by Marshall Dennehey. It is solely intended to provide information on recent legal developments and is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. We welcome the opportunity to provide such legal assistance as you require on this and other subjects. If you receive the alerts in error, please send a note to tamontemuro@mdwcg.com. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2024 Marshall Dennehey. All Rights Reserved.}