Penn. Court Strikes Down Workers’ Comp Exclusion in UIM Policy

By | October 24, 2011

Pennsylvania Supreme Court stuck down an exclusion in an employer’s underinsured motorist policy. The policy from Penn PRIME had excluded underinsured motorist (UIM) coverage for a local police officer because he was injured during his employment and received workers’ compensation benefits.

The Pennsylvania high court reversed the appellate court’s ruling on the case. Pennsylvania Supreme Court’s ruling was issued on Oct. 19.

The case involves Sugarcreek Borough resident Frank Heller. He was working as a police officer at the borough when he got into an auto accident with an underinsured motorist on Oct. 31, 2002. Heller sustained severe injuries.

Workers’ compensation covered Heller’s medical expenses and two-thirds of his salary. Sugarcreek Borough paid him the remainder of his salary, according to the court documents.

Heller recovered the $25,000 policy limit from Allstate Insurance, the insurer for the driver responsible for the accident. However, Heller’s losses and damages far exceeded the liability coverage.

Accordingly, Heller notified his insurer of a potential UIM claim and sought UIM benefits from the borough pursuant to a policy issued by Pennsylvania Pooled Risk Insurance for Municipal Entities (Also known as Penn PRIME). The borough’s policy provided UIM coverage up to $100,000 per person or per accident.

But Penn PRIME denied Heller’s claim pursuant to a policy exclusion, which states that UIM coverage does not apply to any claim by anyone eligible for workers’ comp benefits that are the statutory obligation of the member.

Violation of Public Policy

The high court disagreed with Penn PRIME. It stated in the ruling, “we conclude that a workers’ compensation exclusion in an employer-sponsored insurance policy violates public policy and is, therefore, unenforceable. Accordingly, we reverse the order of the Commonwealth Court.”

The court also noted that if the exclusion is upheld the UIM coverage would be illusory. The court cited Heller’s contention that “virtually all” UIM claims will be made by the borough employees eligible for workers’ comp, leaving a “shallow pool” of individuals to whom coverage would apply. Heller maintained that Penn PRIME received a windfall by charging a premium for “illusory coverage.”

Heller also argued that the recovery of UIM benefits is essential for him to be made whole because workers’ comp provided only a partial benefit.

Illusory Coverage

Pennsylvania Supreme Court sided with Heller. The court stated, “we find that while the exclusionary provision does not facially violate the cost containment policy of the Motor Vehicle Financial Responsibility Law, its inclusion in an employer-sponsored policy operates to foreclose the majority of expected claims. Thus, the exclusion renders the coverage illusory, and the insurer receives a windfall by charging a premium for the coverage.”

Moreover, the court stated, where a third-party tortfeasor causes a work-related injury, the state law dictates that the ultimate burden for the payment of benefits must rest upon the tortfeasor or the UM/UIM carrier.

The court said Penn PRIME’s exclusion reverses this legislative priority by frustrating the right of subrogation, thereby ensuring that the burden for the payment of benefits remains on the employer and its workers’ comp carrier. “Since the workers’ comp exclusion operates to render the instant UIM coverage illusory and runs counter to the intended compensatory scheme established by the state’s General Assembly, we find it void as against public policy.”

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