On December 14, 1998, the Superior Court of Pennsylvania, in Winslow-Quattlebaum v. Maryland Insurance Group, No. 1198 Philadelphia 1998 (December 14, 1998), invalidated underinsured motorist coverage rejection forms utilized in connection with assigned risk policies in Pennsylvania. This decision has a potentially broad ranging impact upon assigned risk and voluntary auto in Pennsylvania. If upheld on appeal, it will act to invalidate forms used by most insurers in Pennsylvania for rejection of uninsured and underinsured motorist coverages under the Pennsylvania Motor Vehicle Financial Responsibility Law, 75 Pa. C.S.A. Section 1701, et seq.

(a) Generally

In Pennsylvania, effective July 1, 1990, uninsured motorist (UM) and under- insured motorist (UIM) coverages become optional. The Pennsylvania Motor Vehicle Responsibility Law, 75 Pa.C.S.A. § 1701(b) et seq. established a specific procedure for waiver of such coverages. These coverages could be waived provided a specific form of waiver (as set forth in § 1731 (b) for UM coverage and 1731 (c) for UIM coverage) was used. With respect to these waivers, § 1731 (c.1) further requires separate sheets for the UM and UIM registration forms. Specific compliance with the waiver forms requirement is mandated. 75 Pa.C.S.A. § 1731 (c.1). Thus, failure to use the specific form authorized by the statute for rejection of coverage results in an automatic reformation of the policy to include coverage (at the liability limits).

(b) Lucas Decision

As noted, § 1731 (c.1) of the Financial Responsibility Law requires that the forms used to reject UM and UIM coverages, "specifically comply" with the statutory mandate. In this regard, the Financial Responsibility Law requires that the rejection forms be printed on "separate sheets." In Lucas v. Progressive, 451 Pa.Super. 492, 680 A.2d 873 (1996), the plaintiff challenged the propriety of UM and UIM rejections printed on the same sheet of paper. The Superior Court found the forms to be invalid, thereby reforming the policies to add coverage where same-sheet rejections were used. In Winslow-Quattlebaum, the Superior Court took this rationale one step further, potentially drastically affecting UM and UIM coverage situations in Pennsylvania.

(c) Winslow-Quattlebaum Decision

(1) Superior Court

In Winslow-Quattlebaum, the plaintiff challenged the propriety of the under- insured motorist rejection form utilized with Assigned Risk policies. The Assigned Risk Plan utilizes rejections for UM and UIM coverages (as authorized by the Insurance Department Regulations¹) which place the coverage rejection and the stacking rejection for that coverage on the same sheet or paper. In addressing the issues, the court cogently summarized the position of the plaintiff:

Appellant alleged that she was entitled to underinsured motorist coverage since the rejection of underinsured motorist protection was not on a piece of paper that was separate from her rejection of stacked underinsurance coverage limits. She maintained that this lack of separation rendered her rejection of underinsured benefits coverage void under 75 Pa.C.S.A. § 1731 (c.1).

Slip Opinion at 3. Relying upon the decision in Lucas, the Superior Court invalidated the Assigned Risk Plan forms and stated:

The Statute clearly mandates that rejection of uninsured motorist coverage and underinsured motorist coverage be on a separate sheet, Lucas, supra. The statute expressly states that a rejection form that does not specifically comply with its mandates is void. Herein, it is not disputed that the rejection of under- insured motorist benefits was not on separate piece of paper. Instead, it had other rejection language on it. If there is other language on a piece of paper, we simply cannot see how the documents could comply specifically with the statutory language requiring the rejection to be on a separate sheet.

Slip Opinion at 5. This decision may have wide ranging impact in Pennsylvania:

In Winslow-Quattlebaum, the Maryland Insurance Group sought both Reconsideration and Reargument en banc. This request was denied. A Petition for Allowance of Appeal is presently pending before the Supreme Court of Pennsylvania.

(2) Propriety of Decision

The Winslow-Quattlebaum decision contains little actual analysis. Instead, the court merely states:

The legislature obviously intended that an insured consider separately the weighty decision of whether to reject underinsured motorist coverage. The importance of the rejection is underinsured when the paper contains other information and certainly, other rejection language.

Slip Opinion at 5. Thus, the court found that the inclusion of language on the rejection of coverage form, referencing rejection of stacking, did not "specifically comply" with the statutory requirements. In this, the Superior Court arguably, misinterpreted the Financial Responsibility Law.

Section 1731 of the Financial Responsibility Law pertains to rejection of uninsured and underinsured motorist coverages. Section 1731 (c.1) requires that the uninsured and underinsured forms be printed on separate sheets. 75 Pa.C.S.A. § 1731 (c.1). Thus, the legislature specifically mandated that the uninsured and underinsured rejections be separate and distinct. There is no statutory requirement that a rejection of coverage form contain no other language. The Superior Court in Winslow-Quattlebaum grafted onto the statute additional requirements and do not otherwise exist in the Law.

The Financial Responsibility Law permits, also, the rejection of stacking of UM and UIM coverages. The requirements pertaining to these rejections are found within § 1738 of the Law. A specific form is required. No specific requirement for separate sheets is mandated. However, it should be noted that all reference to stacking rejections is contained within § 1738. Section 1731 (and its requirement regarding rejection of coverages) is not applicable thereto. Section 1731 does not incorporate or reference the § 1738 stacking rejection. Thus, the "separate sheet" requirement of § 1731 pertains only to the rejections of uninsured and underinsured motorist coverages; § 1731 does not apply to relation of the rejection of coverage to the rejection of stacking. Thus, the holding in the Winslow-Quattlebaum decision is flawed. In fact, the two forms are not referenced together in the Statute.³

Two other courts have previously considered the issue addressed by the Superior Court in Winslow-Quattlebaum. In Estate of Franks v. Allstate Insurance Company, 895 F. Supp. 77 (M.D. Pa. 1995), the United States District Court for the Middle District considered a challenge to the rejection of underinsured motorist coverage identical to that of Winslow-Quattlebaum. In rejecting the plaintiff's argument, the court stated:

Rather than reading that each waiver form must be printed on its own page, the language of § 1731(c.1) is that the forms for uninsured motorist protection must be printed "on separate sheets." This provision can be read to mean that these two forms cannot be printed on the same page, but without requiring that they be separate from other provisions. In fact, the language following "separate sheets" supports this reading: there is no reason to print a waiver "in prominent type and location" if the waiver is the only form printed on a page. Plaintiff's interpretation of this provision would render the "in prominent type and location" language meaningless. But see 1 Pa. Cons. Stat. Ann. § 1921(a) ("Every statute shall be construed, if possible, to give effect to all of its provisions").

A reading of the entire sentence, then, leads to the conclusion that the forms set forth in § 1731(b) and (c) may not be printed on the same page, but are not required to be printed on their own page.

895 F.Supp. at 81. The court in Winslow-Quattlebaum considered, but rejected, this rationale.

Similarly, in Nationwide Mutual Insurance Company v. Monteith, 1997 WL 8720 (E.D. Pa. 1997), the United States District Court for the Eastern District of Pennsylvania considered the insured's contention that the inclusion of limits elections and stacking rejection on the coverage rejection form was inappropriate. The court cogently summarized the position of the insured:

Defendants [insureds] interpret this language [§ 1731] to mean that any rejection forms for uninsured or underinsured motorist coverage must appear on a separate sheet apart from any other provision.

1997 WL 87280 *2. In rejecting this position, the court stated:

Giving the first sentence of § 1731(c.1) i.e., "[i]nsurers shall print the rejection forms required by subsections (b) and (c) on separate sheets in prominent type and location" its plain meaning can only lead to the conclusion that the legislature intended that the rejection form contained in subsection (b) (uninsured coverage) was to be on a separate sheet of paper from the rejection form contained in subsection (c) (underinsured coverage). The legislature obviously wanted to make sure that an insured recognized and considered the important differences between waiving underinsured coverage. Therefore, it required that the waivers be on separate sheets of paper from each other. There is no evidence in the first sentence of § 1731(c.1) nor in any other part of § 1731 for that matter of any legislative intent to require that each waiver appear on a separate sheet of paper from any provision period. Defendant's [insured's] interpretation of the first sentence simply stretches its plain meaning too far.

1997 WL 87280 *3. The Superior Court declined the opportunity to follow this rationale.

The decision of the Superior Court in Winslow-Quattlebaum is currently the law in Pennsylvania. The decision, however, is certainly subject to further challenge. If review is granted by the Supreme Court, a reasonable likelihood (and hope) for reversal exists. In the meantime, a decision needs to be made as to the manner in which Winslow-Quattlebaum issues are to be addressed.

(d) Impact of Decision

The decision of the Superior Court in Winslow-Quattlebaum invalidated the uninsured and underinsured motorist coverage rejection forms required for use in Assigned Risk Plan policies. As such, on its face, it is limited to Assigned Risk policies. The rationale employed by the court, however, would extend to all rejections, in the assigned risk or voluntary markets, which include other provisions or rejections in the § 1731 rejection of coverage form. Since most, if not all, insurers utilize forms which fall into this category, the decision in Winslow-Quattlebaum effectively invalidates nearly every rejection utilized by insurers and signed by insureds since 1990.

(e) Remedy of Claimants

The Supreme Court of Pennsylvania has held that violations of the requirements of the Financial Responsibility Law do not necessarily give rise to remedial action. See Salazar v. Allstate, 702 A.2d 1038(Pa. 1997); Donnelly v. Bauer, 720 A.2d 447 (Pa. 1998). Unless the Financial Responsibility Law provides a specific remedy for an alleged violation of its terms, a claimant may seek no redress. In Winslow-Quattlebaum, however, the court has held that the rejection forms at issue violate §1731 of the Financial Responsibility Law. Section 1731 provides that the failure of a rejection form to specifically comply with its requirements mandates the provision of uninsured and underinsured motorist coverage at limits equal to liability coverages. As such, a remedy, namely reformation of the policy to provide uninsured or underinsured motorist coverage, is available to claimants.

(f) Response of Insurers

(1) Generally

The Winslow-Quattlebaum decision, as noted, effectively invalidates all rejections of uninsured and underinsured motorist coverages which include rejection of stacking thereon. Further review of the decision is being sought. According, during the pendency of the appeal, insurers need to determine the manner in which to proceed. At present, insurers may reasonably await the final outcome of the appellate process without fear of valid bad faith claims.⁴ Nonetheless, a course of action for addressing claims asserted by reason of the Winslow-Quattlebaum case needs to be established.

(2) Voluntary Stay

In any case where a claimant seeks uninsured or underinsured motorist coverage by reason of the Winslow-Quattlebaum decision, an effort should first be made to obtain an agreement with the claimant for a voluntary stay pending final appellate review of the case. When faced with the prospect of litigation of the issue in the trial or appellate courts, many claimants will voluntarily agree to stay any proceedings pending final appellate review. If such a stay cannot be agreed upon, litigation of the coverage issues may be necessary.

(3) Adjudication of Issue

(i) Generally

In some circumstances, if a claimant insists upon pursuing an uninsured or underinsured claim, litigation of the issue may be needed. In this regard, the issue should be litigated in court and not within the arbitration forum. Specifically, declaratory relief should be requested from the courts with respect to the propriety of the rejection forms and the need to provide coverage.

(ii) Forum

In claims arising under the Winslow-Quattlebaum decision, recovery of uninsured or underinsured motorist benefits will be sought by claimants under policies issued without any such coverage.

Since the policy was issued without uninsured or underinsured motorist coverage, it contains no uninsured or underinsured motorist endorsements. Absent any endorsements, there is no arbitration clause. Without an arbitration clause, there is no basis for the selection of an arbitration panel or the arbitration of any such claims. See McFarley v. American Independent Insurance Company, 444 Pa. Super. 1911, 663 A.2d 738 (1995). As such, contested claims should not be submitted voluntarily to arbitrators.

Instead, a declaratory judgment action, requesting declaratory and injunctive relief, should be instituted. Such an action should be commenced in the appropriate state or federal court. In light of the above noted federal court decisions in Franks and Monteith, federal court is a preferable forum (if diversity and amount in controversy sufficient to establish jurisdiction exists).

(g) Bad Faith Implications

Pennsylvania recognizes a bad faith cause of action within the context of uninsured and underinsured motorist claims. See 42 Pa. C.S.A. § 8371. Bad faith is defined by the Pennsylvania courts as the withholding of policy proceeds without a reasonable basis for doing so. Terletsky v. Prudential, 649 A.2d 680 (Pa. Super. 1994). Reckless indifference to the interests of an insured may support an award of punitive damages. Klinger v. State Farm, 116 F.2d 230; Polselli v. Nationwide, 23 F.3d 747 (3d. Cir. 1994). In the situation posed by claims asserted by reason of the Winslow-Quattlebaum decision, there should be no basis for the imposition of penalties recognized by the bad faith statute.

Review of the Winslow-Quattlebaum decision is pending.⁵ Nonetheless, the Superior Court decision in Winslow-Quattlebaum, unless and until reconsidered or overruled by the Supreme Court, constitutes the law in Pennsylvania. See Baker v. Aetna, 309 Pa. Super. 81 454 A.2d 1092 (1982). However, claims asserted under the Winslow-Quattlebaum decision may be resisted pending final appellate review. While further review of a decision is being sought, a reasonable basis exists for resisting claims pending that further review. See Wingeart v. State Farm, 340 Pa. Super. 420, 490 A.2d 849 (1985). The reasonableness of an insurer's actions in this regard was addressed in connection with counsel fee claims asserted under the Pennsylvania No-Fault Motor Vehicle Insurance Act, 40 P.S. § 1009.101 et seq.(repealed). Under the Act, a claimant could be awarded counsel fees against an insurer where the insurer denied payment of a claim without a reasonable basis. 40 P.S. § 1009.107(3). In Rago v. State Farm, 513 A.2d 391 (Pa. Super. 1986), the court recognized that attorneys fees were generally to be awarded where an insurer refused payment after the Superior Court filed an opinion holding the claim payable. 513 A.2d at 395. The court further noted, however, that this general rule has an exception. In this regard, the court stated:

However, the general rule has an exception. Where an issue under the No-Fault Act is accorded review by Pennsylvania Supreme Court, the insurer can assert that it possessed a reasonable basis for denying benefits before the Supreme Court rendered its decision.

513 A.2d at 395. As such, an insurer resisting claims asserted under Winslow-Quattlebaum pending final appellate review can be said to possess a reasonable basis for doing so. No extra-contractual bad faith exposure should exist.

(h) Conclusion

The Winslow-Quattlebaum decision of the Superior Court materially changes the standard practice employed by most insurers for waiver of UM and UIM coverages under the Pennsylvania Motor Vehicle Financial Responsibility Law. The importance of the decision cannot be overestimated. Insurers and counsel need to be mindful of the decision and its potential ramifications.

ENDNOTES

1. See 38 Pa. Code § 68.103, Appendix A.

2. As noted more fully herein, this decision may also apply to any voluntary marked forms where the rejection of stacking language was also included in the rejection of coverage form. This practice was not uncommon among insureds in the voluntary market in Pennsylvania.

3. The regulations, as noted, do reference the two rejections and, in fact, provide for them to be on the same page. See 31 Pa. Code§ 68.103, Appendix A.

4. No doubt, claimants will assert that failure to immediately reform all auto policies issued pursuant to forms invalidated by reason of the Winslow-Quattlebaum decision is bad faith. However, as noted more fully below, awaiting final appellate review of the decision is not a bad faith action.

5. The Pennsylvania Defense Institute will participate as an Amicus Curiae if review is granted.