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In a class action against an insurance carrier, a Pennsylvania trial court has ruled that the Pennsylvania Supreme Court's decision in Gallagher v. Geico Indemnity, holding that household exclusions in automobile insurance policies cannot be enforced, should be applied retroactively.

The Case

Keith Rutt alleged that, on Aug. 20, 2016, while he was riding his motorcycle (which was insured under an insurance policy issued to him by the Agency Insurance Co. of Maryland), he was injured in a motor vehicle accident due to the negligence of the driver of the other vehicle involved, which was insured under an insurance policy issued by State Farm Mutual Automobile Insurance Co.

According to Rutt, his claims for his injuries exceeded the combined limits of both the liability coverage under the State Farm policy and the underinsured motorist (UIM) coverage under the Agency Insurance policy. Rutt said that he received the policy limits of $50,000 under the State Farm policy, and was litigating his UIM claim under the Agency policy.

Rutt made a claim on Donegal Mutual Insurance Co., which had issued an insurance policy to Rutt on two cars, seeking recovery of UIM benefits under that policy. Donegal denied Rutt's claim on the basis of the household exclusion in its policy, which excluded UIM coverage for bodily injury sustained while occupying or when struck by "any motor vehicle you own or lease which is not insured for this coverage under this policy."

On Jan. 19, 2019, the Pennsylvania Supreme Court issued its decision in Gallagher, holding that household exclusions cannot be enforced as they "act[] as a de facto waiver of stacked UIM coverage provided for in the [Pennsylvania Motor Vehicle Financial Responsibility Law ('MVFRL')]."

Rutt filed a class action complaint against Donegal on March 19, seeking declaratory judgment and asserting a breach of contract claim against Donegal.

Donegal filed a preliminary objection in the nature of a demurrer on April 15, arguing that Gallagher should not be applied retroactively in this case. It maintained that Gallagher was distinguishable as the two policies at issue in Gallagher were both issued by the same insurance provider whereas Rutt's motorcycle was insured under the Agency Insurance policy and his cars were insured under the Donegal policy.

The Court's Decision

The Lancaster County Court of Common Pleas denied Donegal's objection, holding that Gallagher applied retroactively.

In its decision, the court first rejected Donegal's attempt to distinguish Gallagher, reasoning that Gallagher specified that all household vehicle exclusions violated the MVFRL, rather than limiting its holding to cases where both policies were issued by the same insurance provider.

The court then rejected Donegal's contention that even if Gallagher applied to these facts, it should not be applied retroactively because it introduced a new rule of law by breaking from precedent. The court pointed out that the U.S. District Court for the Eastern District of Pennsylvania concluded that Pennsylvania law required that Gallagher should be applied retroactively as it did not introduce a new rule of law or overrule prior binding precedent, in Butta v. Geico Casualty (noting that there had been no prior Pennsylvania Supreme Court majority holding addressing whether household vehicle exclusions violated Section 1738 of the MVFRL). The court said that it was persuaded by the reasoning of the district court in Butta.

The court also noted that on Sept. 4, the Pennsylvania Supreme Court vacated the trial court's order in Petra v. Pennsylvania National Mutual Casualty Insurance and remanded for reconsideration in light of Gallagher. 

Therefore, the court concluded, given that the Supreme Court directed the trial court to consider Gallagher on remand of Petra, Gallagher also had to be applied retroactively in Rutt's class action.

The case is Rutt v. Donegal Mutual Insurance.

Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. Meyerowitz is the director of the Insurance Coverage Law Center and editor-in-chief of journals on insurance law, banking law, bankruptcy law, energy law, government contracting law, and privacy and cybersecurity law, among other subjects. He can be contacted at [email protected].