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. e du/thir dc ir c uit_2001/158Filed July 18, 2001

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 00-4151

NATIONWIDE MUTUAL INSURANCE COMPANY

v.

WILLIAM COSENZA; ANGELINA C. COSENZA, h/w;

PATSY DEZII

William Cosenza; Angelina C. Cosenza; Patsy Dezii,

Appellants

On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civil No. 99-cv-03533) District Judge: Hon. Eduardo C. Robreno

Argued May 31, 2001

Before: SLOVITER, FUENTES and COWEN, Circuit Judges

(Filed: July 18, 2001)

David C. Corujo, Esq. (Argued)

Fronefield & de Furia

17 E. Front Street

P.O. Box 647 Media, PA 19063

Counsel for AppellantsJames C. Haggerty, Esq.

Scott J. Tredwell, Esq. (Argued) Christine P. Busch, Esq. Swartz, Campbell & Detweiler 1601 Market Street, 34th Floor Philadelphia, PA 19103

Counsel for Appellee

OPINION OF THE COURT

COWEN, Circuit Judge.

This appeal presents a question of first impr essio n relating to the construction and enforceability of an exclusion in an automobile insurance contract stati ng that

an insured cannot recover benefits under both the l iability coverage and the underinsured motorist coverage of the

insurance contract. The District Court exercised jurisdiction based on diversity of citizenship unde r 28 U.S.C. S 1332. We exercise appellate jurisdiction u nder 28 U.S.C. S 1291. We hold that, on the facts of this c ase, the "dual recovery" prohibition is invalid and unenforc eable pursuant to Pennsylvania's Motor Vehicle Financial Responsibility Law (MVFRL). 75 Pa. C.S.A. S 1701 et seq.

I

This case is a dispute about insurance coverage ari sing from the following facts. On July 16, 1995, Mrs. Co senza was driving a vehicle in which her husband and moth er (Ms. Dezii) were passengers when they collided with a vehicle driven by Angela Nicolucci. Mr. Cosenza and Dezii were very seriously injured in the crash and Mrs. C osenza sustained some injuries as well. They instituted su it in state court against Nicolucci. Nicolucci joined Mrs . Cosenza as a defendant, claiming that she was contributoril y negligent. Nationwide Insurance, the Cosenzas' insu r er and the appellee in this case, assumed the defense of M rs. Cosenza and consistently asserted her lack of fault . On the eve of trial, the suit was settled.

2Under the terms of the settlement, appellants recei ved

$15,000 from Nicolucci's insurer, the full amount o f coverage available under her liability policy. Mr . Cosenza and Dezii also received some payment under the liab ility portion of Nationwide's auto policy, but did not ex haust the full amount of the coverage available under that po licy. The Cosenzas' vehicle was covered by an auto insurance policy issued by Nationwide Insurance. That policy pr ovid ed $500,000 in liability coverage and $500,000 in underinsured motorist coverage. Mr. Cosenza also maintained an umbrella insurance policy that pr ovi ded an additional $1,000,000 in total liability coverage a nd $500,000 in underinsured motorist coverage. The settlement did not include any payments by Nationwi de under either the underinsured motorist portion of t he policy or under the umbrella policy.

Thereafter, the Cosenzas and Dezii, the appellants in this appeal, notified Nationwide of their intention to p roceed

with underinsured motorist arbitration under their auto insurance policy and the supplemental umbrella insu rance policy. They filed a petition in state court to com pel arbitration. In response, Nationwide filed a notice of removal of the proceedings to the district court an d also filed a complaint seeking a declaratory judgment pr eventing arbitration. Each of the parties moved for summary judgment with the following results:

1) The District Court determined that the di spute did

not fall within the insurance contract's arb itration clause and was, therefore, properly before t he court;

2) Mr. Cosenza and Dezii, who recover ed und er the liability portion, were prohibited fr om rec overing

underinsured motorist benefits for their own injuries under the auto policy or the umbrella policy ;

3) Mrs. Cosenza, who did not recover under t he liability coverage, was allowed to seek recovery under the underinsured motorist provision of the auto policy and the umbrella policy;

4) Mrs. Cosenza was prohibited from r ecover ing loss of consortium benefits for her husband's injuri es under the underinsured motorist provisions;

35) Mr. Cosenza was allowed to seek loss of c onsortium

benefits for his wife's injuries under the u nderinsured motorist provision;

6) The court determined that Nationwide was not entitled to a credit in the amount of paymen ts already received by the insureds pursuant to the sta te court

settlement.

Appellants appeal the District Court's ruling that this dispute is not subject to arbitration. Alter native ly, they appeal the court's holding that Mr. Cosenza and Dez ii are barred from recovering under the underinsured motor ist provision of the auto policy and under the umbr ell a policy. They also appeal the court's ruling that Mrs. Cosen za is barred from recovering loss of consortium damages b ased on her husband's injuries under the underinsur ed m otorist provision of the auto policy and under the umbr ell a policy. Nationwide purports to cross-appeal the district co urt's findings as to Mrs. Cosenza's eligibility for r eco very, Mr. Cosenza's right to recover for loss of consortium f or his wife's injuries, and the court's ruling that Nation wide is not entitled to a credit for payments made in the state court

settlement.

II

Before proceeding to a discussion of the substantiv e issues in this case there are two thr eshold issues that must be addressed - whether the district court had juris diction to

decide the issues raised in this case and whether t his Court can properly entertain Nationwide's purported cross -appeal of the adverse portions of the District Court's jud gment. As a federal court sitting in diversity, we are bound to adjudicate the case in accordance with applicable s tate law. See Erie Railroad v. Tompkins, 304 U.S. 64 (1938). Both parties agree that Pennsylvania law gover ns this d ispute.

A. Jurisdiction/Arbitrability of Claims Raised

To determine the arbitrability of a dispute a court must address two issues: 1) whether the parties for med an agreement to arbitrate; and 2) whether the dispute in question falls within the scope of that agreement. Messa v.

4State Farm Ins. Co., 641 A.2d 1167, 1168 (Pa. Super

.

1994). In this case, both parties concede the exist ence of an agreement to arbitrate. Thus, the sole question is whether the dispute regarding appellants' entitlement to se ek recovery under the underinsured motorist (UIM) prov ision of the contract falls within the scope of the arbit ration

agreement.

Appellants argue that the District Court did not ha ve jurisdiction to rule on the summary judgment motion s that are the subject of this appeal because the insuranc e contracts require arbitration of their claim.1 The UIM provision of the Cosenza's insurance policy pr ovid es:

RECOVERY

1. Before recovery, we and any party seeking protection under this [UIM] coverage must ag ree on two points:

a) whether there is a legal right to r ecove r damages

from the owner or driver of an underinsur ed motor vehicle; and if so,

b) the amount of such damages.

___________________________________________________ ______________

1. Nationwide argues that the appellants have not p roperly preserved this particular issue for appeal pursuant to F .R.A .P. 3(c)(1)(B), which requires an appellant's Notice of Appeal to "design ate the judgment, order, or part thereof being appealed." Appellants' Notice of Appeal designated the District Court's November 2, 2000 Or der, which did not address the arbitration issue, instead of its Octob er 27 Order, which did dispose of that issue. Appellants' failure to speci fically designate the October 27 Order for appeal is not fatal because a policy of liberal construction of notices of appeal prevails in the T hird Circuit where the intent to appeal an unmentioned or mislabeled rulin g is apparent and there is no prejudice to the adverse party. William s v. Guzzardi, 875 F.2d 46, 49 (3d Cir. 1989)("if from the notice of appeal itself and the subsequent proceedings . . . it appears that the ap peal was intended to have been taken from an unspecified . . . or der . . . , the notice may be construed as bringing up the unspecified or der for review."); Murray v. Commercial Union Insurance Co., 782 F .2d 432, 434- 35 (3d Cir. 1986)(exercising jurisdiction because despite the m islabeled Notice of Appeal, "in their appellate briefs all parties addr essed every issue presented").

5If agreement can't be reached, the matter wi ll go to

arbitration.

2. Questions between the injured party and u s regarding whether the injured party is an in sured under this coverage, or the limits of such c overage, are not subject to arbitration and shall be decided by a Court of law.

(Endorsement 2360, Underinsured Motorist Coverage - - Non-Stacked (Pennsylvania) App. 39a) (emphasis in original). Thus, according to the clear ter ms of t he arbitration agreement, questions regar ding whether a claimant is an "insured" for the purposes of UIM co verage or questions regarding the limits of UIM coverage a re to be decided by the courts. All other questions should b e submitted for arbitration.2

First, we consider if this case presents the questi on of whether the appellants are "insureds" for the purpo se of UIM coverage. The insurance policy defines an"insur ed" as "one who is described as entitled to protection und er each coverage." (App. 12a)(emphasis added). Accor dingly , we look to the section governing UIM coverage to deter mine whether the appellants are entitled to protection thereunde r. That coverage endorsement provides that Nationwide will pay "compensatory damages, including derivative claims, which are due by law to you or a relative fr om the owner or driver of an underinsured motor vehicle because of bodily injury suffered by you or a relative." (UIM Endorsement 23 60, App. 38a)(emphasis added). Thus, for the purposes o f this UIM coverage, an "insured" is the policy holder and relatives of the policy holder who are entitled by law to

___________________________________________________ ______________

2. Appellants also reference an arbitration provisi on found in the UIM coverage section of the auto insurance contract sta ting that "if we and the insured disagree about the right to r ecover da mages, or the amount of such damages . . ." arbitration will ensue. (App . 29a). However, this broader arbitration provision was "r eplaced" by En dorsement 2360 to the insurance policy, which states "[t]his endorsement replaces the policy's Underinsured Motorists coverage section. Coverage i s subject to all terms and conditions of the policy, except as changed by this endorsement." (App. 38a). Accordingly, we look to the arbitration provision set out in Endorsement 2360 to determine the arbitrability of the instant dispute.

6recover damages from the driver or owner of the

underinsured vehicle.

Nationwide argues that because appellants have recovered under the liability provisions and are pr ohibited by the policy language from also recovering under t he UIM provisions that there are no damages"due by law" an d thus, appellants do not fit within the definition o f an "insured." This argument misappr ehends the definit ion of an "insured" set out in the UIM pr ovisions. The de finition does not require that damages be due by law under t he insurance contract, as Nationwide argues. Instead, the definition requires only that damages be due by law from

the driver of an underinsured vehicle. Nowhere does Nationwide suggest that the appellants are not enti tled under the law to recover additional damages fr om N icolucci,

the driver of the underinsured vehicle. Even if Nat ionwide did advance such an argument, the issue of whether appellants are legally entitled to damages fr om Ni colucci is an issue that falls squarely within the agr eement to arbitrate, as set forth above. Further, Nationwide' s argument begs the question of who is an "insured" b ecause it argues that the appellants are not"insureds" bec ause Nationwide is correct about the underlying dispute regarding whether or not the dual r ecovery prohibi tion is enforceable. The question of whether that pr ovisio n is enforceable, however, is a separate and distinct qu estion from whether the appellants are "insur eds" under t he UIM

coverage.

The fallacy of Nationwide's argument is also demonstrated by the "limits of payment" pr ovision of the contract, which Nationwide references in support of its argument. That provision states, "[t]he insured may recover for bodily injury under the auto liability coverage or the underinsured motorist coverage of this policy, but not under both coverages." (UIM Endorsement 2360, App. 40a) (emphasis added). This provision forms the basis of Nationwide's argument that there ar e no damages "d ue by law" and that, therefore, appellants ar e not insur eds. However, this same provision effectively states tha t appellants are considered "insur eds" within the me aning of the UIM coverage. Thus, the underlying dispute in t his case

7cannot be characterized as a dispute regar ding whe ther the

injured party is an insured and cannot escape arbit ration

on that basis.

We must also consider whether this case pr esents a question regarding the limits of UIM coverage. We c onclude that the dispute does not fall within the arbitrati on agreement because it is clearly within the second p rong of the arbitration agreement as a dispute about the "l imits" of the coverage. The UIM Endorsement contains the foll owing provision:

LIMITS OF PAYMENT

Amounts Payable for Underinsured Motorists L osses

We agree to pay up to the limits stated in t he policy Declarations. The following applies to these limits:

***

4. The insured may recover for bodily injury under the Auto Liability coverage or the Underinsured Motorists coverage of this policy, but not under both coverages.

(UIM Endorsement 2360, App. 40a). According to the express terms of the UIM endorsement, the underlyin g dispute is a question between the injured parties a nd Nationwide regarding the limits of coverage and mus t, by the very terms of the insurance agreements, be deci ded by

a court of law.

Appellants argue that, in light of the important st ate law public policy favoring arbitration of automobile in surance disputes, this dispute must be dismissed by the cou rt and submitted to arbitration. Indeed, Pennsylvania publ ic policy does favor arbitration of insurance claims. Bor gia v. Prudential Insurance Co., 758 A.2d 843, 847-50 (Pa. 2000);

Brennan v. General Accident Fire and Life Assurance Corp., 574 A.2d 580 (Pa. Super. 1980). However , state cou rts have

not favored arbitration when to do so would contrav ene the express terms of a binding arbitration agreement. B rennan, 574 A.2d 580 (dismissing dispute as arbitrable, but disclaiming that it would have done so had ther e b een any limiting language in the arbitration clause); Messa v. State Farm Ins. Co., 641 A.2d 1167, 1168 (Pa. Super. 1994 )

8(scope of arbitrator's authority is limited by ter ms of

arbitration agreement). Therefore, despite Pennsylv ania's preference for arbitration of auto insurance disput es, the District Court properly concluded that the dispute in this case is specifically excluded from the arbitration agreement and appropriately maintained jurisdiction over the claim.

B. Nationwide's Purported Cross-Appeal

In its brief Appellee Nationwide asks this Court to reverse the District Court on every issue where its conclus ions were adverse to the insurance company. Specifically Nati onwide argues the District Court erred in holding that Mrs

. Cosenza is not excluded from seeking recovery under the UIM provision for her injuries, that Mr . Cosenza i s not precluded from seeking recovery under the UIM provi sion for loss of consortium due to Mrs. Cosenza's injuri es, and

that Nationwide is not entitled to a credit for its contribution to the tort settlement. However , Nati onwide failed to follow the procedures for lodging a cross -appeal on any of these issues. It is settled law that "what ( an appellee) may not do in the absence of a cross-appeal is to ` attack the decree with a view either to enlarging his own rights thereunder or of lessening the rights of his advers ary, whether what he seeks is to correct an err or or to supplement the decree with respect to a matter not dealt with below.' " Morley Constr. Co. v. Maryland Casua lty Co., 300 U.S. 185, 191, 57 S.Ct. 325 (1937)(quoting Unit ed States v. American Ry. Express Co., 265 U.S. 425, 4 35, 44 S.Ct. 560 (1924)). Because a reversal on any of the three adverse holdings would enlarge Nationwide's rights and lessen Appellants' rights, Nationwide was required to file a cross-appeal.

Nationwide responds that its failure to cr oss-appe al is immaterial because this Court may affirm the Distri ct Court on any basis which finds support in the r eco rd and/or that as long as the issue raised is mer ely an alternative argument relative to the judgment below , a cross-appeal on that issue is unnecessary. While th ese are accurate statements of law, they are inapplicable h ere because Nationwide is asking us to reverse the Dist rict Court, not to affirm on the basis of r ecord eviden ce. Additionally, Nationwide does not present any"alter native

9arguments relative to the judgment below." On the

contrary, it plainly asks us to reverse the Distric t Court's holdings and constrict the appellants' rights, whic h we cannot do in the absence of a properly filed cross- appeal. Because Nationwide failed to file a cross-appeal, n one of the

three issues on which the District Court ruled adve rsely to Nationwide are properly before us on appeal.

III

Due to Nationwide's failure to file a cr oss-appeal , the only remaining substantive issues revolve ar ound the ef fect of the insurance policy's "dual recovery" pr ohibition . A determination as to the proper construction and the validity of the dual recovery prohibition disposes of the th ree remaining substantive issues in this case. First, t he District Court concluded that the contractual prohibition on recovering under both the liability coverage and th e UIM coverage, precluded Mr. Cosenza and Ms. Dezii from seeking recovery for their own injuries under the U IM coverage and precluded Mrs. Cosenza from seeking re covery for loss of consortium based on her husband's injur ies under the UIM coverage.

Second, Mr. Cosenza also maintained an umbr ella insurance policy designed to protect against losses in excess of the amount covered by his other liability insurance policies, which provided an additional $1,000,000 in liability coverage and $500,000 in UI M coverage. The umbrella policy here included the lim itation that "[i]t is agreed that this endorsement is subje ct to the

terms and conditions of the underinsur ed motorist coverage included in [the auto policy] . . ." (App. 49a). Ac cordingly, when the District Court concluded that no recovery was available under the UIM coverage of the auto policy for any injuries suffered by Mr. Cosenza or Dezii, it also had to conclude that they could not seek recovery under th e umbrella policy. However, the converse is true as w ell. That is, if the dual recovery prohibition is unenforceab le or interpreted narrowly as allowing UIM coverage for t he appellants, they would be entitled to coverage unde r the umbrella policy as well.

10Third, the district court concluded that Mrs. Cosen za's

loss of consortium claim is ultimately based on bod ily injuries suffered by Mr. Cosenza and is therefore d erivative of his claim. Setting aside the dual recovery issue , under Pennsylvania law the success of a derivative claim is "always dependent upon the injured spouse's right t o recover." Scattaragia v. Shin Shen Wu, 495 A.2d 552 , 554 (Pa. Super. 1985). Thus, the District Court conclud ed that because Mr. Cosenza, as the injured spouse, had no right to recover under the UIM coverage or the umbr ella policy, Mrs. Cosenza could have no right to recover derivat ively under those same insurance contracts. Again, howeve r , because this conclusion is based on the assumption that Mr. Cosenza had no right of recovery under the UIM coverage or the umbrella policy, a reversal on that issue

necessitates a reversal on Mrs. Cosenza's derivativ e loss of consortium claim.3 Thus, a r esolution of the dual recovery issue effectively resolves all of the substantive i ssues in this

case.

A. The Express Terms of the UIM Insurance Coverage

Endorsement 2360 to Appellants' UIM insurance contract, which "replaces the policy's Underinsured Motorists coverage section," provides that"[t]he in sured may recover for bodily injury under the Auto Liabil ity coverage or the Underinsured Motorists coverage of this policy, but not under both coverages." (App. 38a & 40a) (emphasis added). Nationwide argues that this langu age clearly and unambiguously precludes Mr. Cosenza and Dezii, who have already received some payment under the liability coverage, from also recovering under the UIM coverage. Nationwide also argues that this dual rec overy prohibition precludes Mrs. Cosenza fr om recovering derivatively under the UIM coverage for loss of con sortium based on her husband's bodily injuries, because he recovered some damages under the liability coverage

.

When interpreting the terms of an insurance contrac t the court must generally attempt to effectuate the inte nt of the

___________________________________________________ ______________

3. It is undisputed that the UIM coverage includes coverage for derivative claims, such as a loss of consortium claim, based o n bodily injuries suffered by Mr. Cosenza.

11parties as manifested by the language of the writte n

instrument. Standard Venetian Blind Co. v. American Empire Ins. Co., 469 A.2d 563, 566 (Pa. 1983); Mohn v. American Cas. Co. of Reading, 326 A.2d 346, 451 (Pa

. 1974). To that end, courts must generally enforce t he clear, unambiguous terms of the policy. See, e.g., The Med ical Protective Co. v. Watkins, 198 F .3d 100 (3d Cir. 1 999); Madison Construction Co. v. Harleysville Mut. Ins. Co., 735 A.2d 100 (Pa. 1999). Nationwide argues that the ter ms of UIM coverage prohibiting dual recovery ar e clear a nd unambiguous and must therefore be enfor ced by this court.

The burden is on the insured to establish coverage under an insurance policy. Erie Ins. Exchange v. T ransam erica Ins. Co., 533 A.2d 1363, 1366-67 (Pa. 1987). As we concluded in the discussion on arbitrability above, appellants are clearly insureds under both the auto insurance policy and the umbrella policy. It is the insurer, however, that bears the burden of establishing the applicability of an exclusion in an insurance contr act, American States Ins. Co. v. Maryland Cas. Co., 628 A.2d 880, 887 (Pa. Super. 1993), and exclusions ar e alw ays strictly construed against the insurer and in favor of the insured. Selko v. Home Ins. Co., 139 F .3d 146, 152 n. 3 (3d Cir. 1983).

B. Invalidating Clear and Unambiguous Exclusions in

Insurance Contracts

Instead of arguing that the dual recovery provision is ambiguous, appellants' main avenue of attack is to argue that the provision is unenforceable as violative of public policy as evidenced by case law and the intent of t he Pennsylvania Motor Vehicle Financial Responsibility Law (MVFRL), 75 Pa. C.S.A. S 1701, et seq. Nationwide t akes the exactly contrary position and argues that not only is enforcement of the dual recovery pr ohibition consi stent with public policy, dual recovery is never allowed under Pennsylvania law regardless of whether the insuranc e contract at issue expressly prohibits it.

Pennsylvania courts have consistently held that"eve n clear and unambiguous insurance policy language may conflict with an applicable statute, [including] . . . the

12MVFRL." Kmonk-Sullivan v. State Farm Mut. Ins. Co., 746

A.2d 1118, 1121 (Pa. Super. 1999). See also Allwein v. Donegal Mut. Ins. Co., 671 A.2d 744, 752 (Pa. Super . 1996) (en banc). While courts do not have a license to r ewrite insurance contracts, insurers do not have a right t o rewrite or undercut state legislation or policy. Allwein, 6 71 A.2d at 752; Kmonk-Sullivan, 746 A.2d at 1121. In such situ ations, courts will not give effect to the contract pr ovis ion:

As a general rule, stipulations in a contrac t of insurance in conflict with, or repugnant to, statutory provisions which are applicable to, and cons equently form a part of, the contract, must yield to the statute, and are invalid, since contracts cannot chan ge existing statutory laws.

Id. See also George J. Couch, Couch on Insurance 2d (Rev. ed.) S 13.7 at 827 (1984). Accordingly, if the dual recovery prohibition contained in appellants' UIM coverage c onflicts with the MVFRL or the public policy inherent therei n, this

Court must declare it invalid and unenfor ceable.

The Pennsylvania Supreme Court has provided the following guidelines to assist in determining when an insurance contract provision is against public poli cy:

Public policy is to be ascertained by refer ence to the laws and legal precedents and not from gener al considerations of supposed public interest. It is only when a given policy is so obviously for or a gainst the public health, safety, morals or welfare tha t there is a virtual unanimity of opinion in regard to it , that a court may constitute itself the voice of the community in declaring what is or is not in accord wit h public policy. The phrase "public policy" has been used also when the courts have interpreted statutes br oadly to help manifest their legislative intent.

Paylor v. Hartford Ins. Co., 640 A.2d 1234, 1235 (1994)(emphasis added) (citations omitted). Other s tate courts have further elaborated that "in deciding wh ether to uphold an insurance policy exclusion, which operate s to deny coverage to an injured party, [our focus] is t he factual circumstances of the particular case." Kmonk-Sulliv an, 746 A.2d at 1123. See also Paylor v. Hartfor d Ins. Co. , 640 A.2d

131234, 1240 (Pa. 1994). Moreover, "[c]ontract provis ions

[that] are not in accord with public policy, and ar e not advantageous to the insured are particularly subjec t to a finding of invalidity." Kmonk-Sullivan, 746 A.2d at 1123. See also Allwein, 671 A.2d at 753 (quoting Geor ge J. Couch, Couch on Insurance S 13.7, at 827-29 (2d ed. rev. 1984)). There is also a presumption that"the Legisl ature intends to favor the public interest as opposed to any private interest." Pennsylvania Fin. Responsibility Assigned Claims Plan v. English, 664 A.2d 84, 87 (Pa. 1995)( citationsomitted). See also Allwein, 671 A.2d at 751; KmonkSullivan, 746 A.2d at 1123; 1 Pa. C.S. S 1922. Thes e guidelines are read to favor coverage for the insur ed in close or doubtful cases. Kmonk-Sullivan, 746 A.2d a t 1123; Allwein, 671 A.2d at 751.

This Court has also had occasion to consider limits on the enforceability of clear and unambiguous pr ovis ions in insurance contracts under Pennsylvania law. In Bens alem Twp. v. International Surplus Lines Ins. Co. , afte r a review of Pennsylvania law, we concluded that under limite d circumstances the reasonable expectations of the in sured may override the clear and unambiguous terms of the contract. 38 F.3d 1303, 1311 (3d Cir. 1994). In rea ching this conclusion, the court observed:

We are unable to draw any categorical distin ction between the types of cases in which Pennsylv ania courts will allow the reasonable expectation s of the insured to defeat the unambiguous language o f an insurance policy and those in which the cour ts will follow the general rule of adhering to the p r ecise terms of the policy. One theme that emerges fr om all the cases, however, is that courts are to be cha ry about allowing insurance companies to abuse their position vis-a-vis their customers. Thus, we are conf ident that where the insurer or its agent cr eates in t he insured a reasonable expectation of coverage that is n ot supported by the terms of the policy that expectation will prevail over the language of the policy.

Id. (emphasis added).

As discussed in more detail below, the obligation o f courts to invalidate insurance contract provisions that are

14contrary to state law or policy has been taken very

seriously by Pennsylvania courts. However, before w e can determine if state law or policy is implicated we m ust examine the legislative intent and policies underly ing Pennsylvania's MVFRL.

C. Pennsylvania Public Policy and the MVFRL

Generally, statutes requiring underinsur ed motoris t coverage are remedial and must be construed liberal ly, narrowly interpreting exclusions so as to provide t he desired remedy. Couch, supra SS 45:624. The purpose of thes e statutes is limited to protecting those persons who purchase motor vehicle liability insurance and then suffer bodily injury or property damage caused by a motori st who did not purchase similar coverage. Id. Pennsylvania embodied its public policy of protecting such perso ns in the MVFRL. Applicable standards of statutory constructi on compel Pennsylvania courts to "ascertain and ef fec tuate the intention of the General Assembly" and to strive to give effect to all provisions in a statute. 1 Pa.C.S. S 1921(a). See also Kmonk-Sullivan, 746 A.2d at 1121.

The MVFRL contains no explicit statement of legisla tive intent or purpose. However, Pennsylvania courts are unanimous that the legislative intent underlying th e MVFRL was to establish a liberal compensatory schem e ofunderinsured motorist protection. See, e.g., KmonkSullivan, 746 A.2d at 1123; Marroquin v. Mutual Ben efit Ins. Co., 591 A.2d 290, 293 (Pa. Super. 1991). Courts al so agree that the MVFRL is a remedial statute that must be l iberally construed to effectuate its policy of indemnifying victims of accidents for harm they suffer on Pennsylvania high ways. See, e.g., Kmonk-Sullivan, 746 A.2d at 1123; Allwei n, 671 A.2d at 751; Wolgemuth v. Harleysville Mut. Ins. Co ., 535 A.2d 1145, 1151 (Pa. Super. 1988).

More specifically, UIM insurance is designed to pro tect an insured from a negligent driver of another vehicle who causes injury to the insured, but through no fault of the insured, lacks adequate insurance coverage to compe nsate the insured for his or her injuries. Eichelman v. N ationwide Ins. Co., 711 A.2d 1006, 1008 (Pa. 1998); Kmonk-Sul livan, 746 A.2d at 1123; Wolgemuth, 535 A.2d at 1149.

15Pennsylvania courts have been especially attentive to the

fact that UIM coverage is purchased "to pr otect on eself from other drivers whose liability insurance purchasing decisions are beyond one's control." Paylor , 640 A.2d at 123 8. See also Kmonk-Sullivan, 746 A.2d at 1123.

In cases such as this one Pennsylvania courts have also

been attentive to whether or not there wer e two or more insurance contracts at play:

The language of the [MVFRL] itself suggests that underinsurance motorist coverage requir es t he existence of at least two applicable policie s of motor vehicle insurance. See 75 Pa. C.S. S 1731(c) . An underinsured motor vehicle, must, by definit ion, be an insured vehicle. Thus, the statute contempla tes one policy applicable to the vehicle which is at fault in causing the injury to the claimant and which is the source of liability coverage . . . , and a s econd policy . . . which the statute contemplates as the sour ce of underinsured motorist coverage. . . .

Wolgemuth, 535 A.2d at 1149 (emphasis in original). It is noteworthy that this condition is met here. That is , there are two policies at play - the liability insurance policy of Nicolucci and the UIM insurance policy of the appel lants. As discussed below, in virtually all instances wher e UIM insurance exclusions are upheld it is because this condition is NOT present and the insureds ar e attempting to convert inexpensive UIM coverage in their policy into the m ore expensive liability insurance under the same policy

.

In 1990 the legislature amended the MVFRL, which ha d previously made the purchase of UIM insurance manda tory, to give insureds the choice of saving money on prem iums or purchasing more protective coverage, such as UIM coverage. See generally Kmonk-Sullivan, 746 A.2d at 1124. The Pennsylvania Supreme Court finds these amendmen ts relevant in that "there is a corr elation between p remiums paid by the insured and the coverage the claimant s hould reasonably expect to receive." Eichelman, 711 A.2d at 1010 (quoting Hall v. Amica Mut. Ins. Co., 648 A.2d 755, 761 (Pa. 1994)). Thus, by choosing to purchase UIM insurance , in the event of an injury caused by an underinsur ed

16tortfeasor, an insured reasonably expects to shift the risk of

loss to his or her insurer. Kmonk-Sullivan, 746 A.2 d at 1124. Any other approach would shift the costs to t he insureds who had no part in creating the risk that led to their injuries and who had no control over the tort feasor's insurance decisions. "Allowing the insurers to evad e payment of UIM benefits in [such a] case, where the insured had paid a premium to procur e UIM coverage

, would be against public policy." Kmonk-Sullivan, 74 6 A.2d

at 1124 & 1126.

D. Application of the MVFRL's Policies to UIM Insur ance

Contracts

As noted briefly above, Pennsylvania courts take th eir obligation to review and invalidate insurance contr act provisions that are contrary to state law very seri ously. There are innumerable cases addressing this issue a nd

while state courts do not invalidate clear and unam biguous insurance clauses in every instance, neither have t hey been reticent about doing so, especially in cases involv ing attempts by insurers to withhold paid-for UIM benef its. There are two cases of particular r elevance to the instant

case.

In Trapper v. Maryland Cas. Ins. Co., the Pennsylva nia

Court of Common Pleas invalidated a clear contractu al provision that excluded an insured fr om recovering UIM benefits after he had already recover ed liability benefits

under the same insurance contract. 17 Pa. D. & C. 4 th 165 (1992). Trapper is factually indistinguishable from the

instant case in that it involved a clear and unambi guous policy exclusion and that it was a two vehicle acci dent involving two tortfeasors. The court noted, "the op eration of this clause excludes a class of plaintiffs in joint tortfeasor, two-car accidents who have paid for coverage and wh o have no control over the choice or type of coverage for a second non-occupied, non-owned vehicle." Id. at 168. The c ourt

concluded that the exclusion of UIM benefits in suc h a situation extinguishes UIM coverage for accident vi ctims, regardless of the severity of their injuries, when a family

member is the driver of one of the vehicles. Id. a t 169. "The

elimination of UIM motorist benefits in this situat ion results in the insured paying for benefits that can not be

17recovered. Clearly this cannot be the intent of the MVFRL."

Id. The Trapper court's analysis is even more appli cable to our case, where the appellants paid for very substa ntial liability coverage and substantial UIM coverage wit h the expectation that, as a result, they would be fully covered for any injuries sustained in a car accident regar dles s of the amount of liability coverage purchased by the other driver.

The second case of particular relevance is Continen tal Ins. Co. v. Kubek decided by a federal District Court ap plying Pennsylvania law. 86 F.Supp.2d 503 (E.D. Pa. 2000). The issue in Kubek was whether an insurer was required to provide UIM coverage to an insured who had already recovered liability benefits from his insurer and f rom the

other driver's insurer. Id. The insurer moved for s ummary judgment based on a "family vehicle exclusion," whi ch operated to preclude dual recovery in the same way that the dual recovery prohibition in the Cosenzas' cont ract purportedly precludes recovery. Id. Thus, while th e policy

exclusion in Kubek is not identical to the exclusio n at issue in our case, it has the exact same effect in the ex act same

factual circumstances.

After an extensive review of state case law, the Ku bek court refused to uphold the family car exclusion, concluding that cases involving only one tortfeasor were not applicable to determining the enforceability of cov erage exclusions in joint tortfeasor cases. Id. at 505-07 . After reviewing the reasoning behind upholding exclusions in single tortfeasor cases and the intent behind the M VFRL, the District Court concluded that even though the v ictim received liability benefits under his wife's (one o f the drivers) policy, that recovery was based only on he r role in

the accident and had no effect on the victim's abil ity to claim UIM benefits under the same policy for the ot her tortfeasor's negligence. Id. at 509. This conclusio n was based on the rationale that "[a]s ther e are two po licies in play, the prohibition on recovering fr om a single policy is not at issue; Mr. Kubek is not attempting to conver t his UIM coverage into liability coverage." Id.

Finally, it is noteworthy that Pennsylvania courts have invalidated express UIM provisions excluding covera ge as violative of public policy or the intent of the MVF RL in other

18instances as well. For example, courts have r epeat edly

refused to enforce clear and unambiguous definition s of

underinsured vehicles that exclude vehicles owned b y government agencies. See, e.g., Midili v. Erie Insu rance Group, 746 A.2d 1126 (Pa. Super. 2000); Kmonk-Sulli van v. State Farm Mut. Ins. Co., 746 A.2d 1118 (Pa. Super. 1999). Courts have also refused to enforce contract provis ions that provide for gap UIM coverage, which provides less c overage than excess UIM coverage, because such provisions a re contrary to the intent of the MVFRL. See, e.g., All wein v. Donegal Mut. Ins. Co., 671 A.2d 744 (Pa. Super . 19 96).

E. Application of the MVFRL to Dual Recovery Exclus ion

Before moving to a specific discussion of how the r elevant case law and the MVFRL applies to the facts of this case and this insurance contract, it is helpful to first address Nationwide's two arguments in favor of enfor cing t he exclusion on dual recovery. First, Nationwide argue s extensively that, regardless of the existence of a provision in the contract prohibiting recovery of both liabil ity and UIM benefits, Pennsylvania public policy never all ows dual recovery. Obviously, the Trapper and Kubek cases referenced above directly contradict this assertion . Further, however, even in cases upholding exclusions that pr eclude recovery of UIM benefits, including the cases Natio nwide cites in support of its argument, the courts have n oted that dual recovery is not prohibited in all cases. See, e.g., Pempkowski v. State Farm Mutual Auto Ins. Co. , 678 A.2d 398, 403 (Pa. Super. 1996)(finding dual r ecovery p rohibited because case involved only a single tortfeasor , bu t noting that such recovery would be allowed in cases involv ing joint tortfeasors and two insurance policies). Instead, w hether a victim can recover both liability benefits and UIM benefits under the same insurance policy depends on the part icular

facts of the case at bar.

There is a certain category of cases wher e courts have uniformly declined to invalidate insurance exclusio ns that preclude recovery of both UIM benefits and liabilit y benefits. It is these case and only these cases tha t Nationwide cites in support of its argument that du al recovery is always prohibited. These cases are easi ly distinguishable from the appellants' case, however, because

19all of these cases involve single tortfeasor accide nts and

usually only one insurance policy. See W olgemuth, 535 A.2d 1145 (Pa. Super. 1988 (en banc) (single vehicl e accident, exclusion enforceable to prevent conversi on of UIM benefits to liability benefits); Newkirk v. USA A, 597 A.2d 1153 (Pa. Super. 1990)(same); Sturkie v. Erie, 595 A.2d 152 (Pa. Super. 1991)(same); Caldararo v. Keys tone Ins. Co., 573 A.2d 1108 (Pa. Super. 1990)(single ve hicle accident, family car exclusion enforceable to preve nt conversion of benefits); Cooperstein v. Liberty Mut . Fire Ins. Co., 611 A.2d 721 (Pa. Super. 1992)(multiple vehicl e accident, but exclusion upheld to avoid conversion of UIM benefits to liability benefits because ther e was o nly one tortfeasor). We are in accord with the Kubek court' s extensive analysis, which concluded that these sing le tortfeasor cases were inapplicable to multiple tort feasor, multiple insurance contract cases such as this one. Moreover, the rationale behind pr ohibiting dual re covery in single tortfeasor cases is simply inapplicable to j oint

tortfeasor cases.

Liability insurance is the most expensive for m of insurance in Pennsylvania. UIM insurance, on the ot her hand, is relatively inexpensive. As a r esult, Penn sylvania

courts have refused to invalidate insurance contrac t exclusions that bar an insured from converting inex pensive UIM insurance into the more expensive liability ins urance. Such a conversion can be accomplished when an insur ed purchases a small amount of liability insurance and then, once the insured is injured in an accident for whic h he or she was at fault, attempt to claim UIM benefits und er the same insurance contract on the theory that the vehi cle was underinsured. The Kubek court's apt summary of Pennsylvania law is instructive:

The true holdings of Wolgemuth and its proge ny are that an individual should not be able to con vert the relatively inexpensive underinsured motorist insurance into the more expensive liability insurance simply by undercovering him or herself for liability i nsurance and then claiming that the vehicle was `underins ur ed.'

86 F.Supp.2d at 508. The rationale behind UIM insur ance is inapplicable in single tortfeasor cases, wher e injured

20parties can ensure that they have adequate coverage simply

by purchasing adequate liability insurance. These a re not cases where the victim is injured by someone whose liability insurance choices are beyond the victim's control. Finally, in accord with its thorough analysis of Pennsylvania state law, the Kubek court concluded t hat enforcing the family car exception is a "limited ex ception to the general rule that such provisions ar e invalid as against the policy of the MVFRL." Id. at 508. See also Payl or, 640 A.2d at 1240; Marroquin, 591 A.2d 296-97. Thus, it is the exception, rather than the rule, to enforce such exclusionary provisions.

The Pennsylvania Supreme Court has clearly stated t hat the primary consideration in determining the enforc eability

of an exclusion in an UIM contract is whether or no t allowing recovering would effect a conversion of UI M coverage to liability coverage. In Paylor v. Hartfo rd Ins. Co., the Court concluded that a family car exclusion was enforceable. In reaching this conclusion, however, the Court explained that the key issue in determining the enforceability of this type of UIM exclusion is whe ther, based on the facts of the particular case, the insu r ed is attempting to convert UIM coverage into liability c overage. 640 A.2d 1234, 1240-41 (Pa. 1994).

Because a case by case analysis is requir ed we mus t determine whether invalidating the dual r ecovery prohibition in this case would allow appellants to effect an unlawful conversion of UIM benefits to liability be nefits. This inquiry also allows us to address Nationwide's second argument in favor of enforcing the coverage exclusi on. Allowing appellants to recover UIM benefits in the instant

case would not effect a conversion of UIM benefits to liability benefits. In this case, when the umbr ell a insurance policy is taken into account, appellants pur chased very substantial liability insurance (in excess of $1,50 0,000). However, if the dual recovery pr ohibition is enfor ced, it is irrelevant how much liability insurance they purcha sed. They still would not be able to recover for the ful l value of their injuries because they were injured by a drive r who purchased inadequate liability insurance. This is n ot a case where appellants would be fully compensated for the ir

21injuries if only they had purchased mor e liability insurance.

In fact, it is the opposite case. They purchased ve ry large liability insurance coverage AND very large UIM cov erage ($1,000,000) with the expectation that they would b e compensated for their injuries regardless of who wa s at fault and how much insurance that person had opted to purchase. To prohibit recovery denies them the UIM benefits that they paid for for many years and is c ontrary to the Pennsylvania Supreme Court's statement that insureds should receive the coverage for which they pay and that voluntarily choosing to purchase UIM insur ance shifts the risk of loss to the insurer. See Eichelm an, 711 A.2d at 1010; Hall, 648 A.2d at 761; Kmonk-Sullivan , 746 A.2d at 1124. Further, appellants' voluntary decisi on to purchase such substantial liability and UIM insuran ce policies reasonably created an expectation that the y would be covered. As we held in Bensalem Twp., when a reasonable expectation of coverage is not supported by the terms of the policy, the expectation of coverage pr evails over the language of the policy. 38 F.3d at 1311.

Nationwide argues that allowing recovery would effe ct a conversion of UIM benefits into liability benefits because of the laws of joint and several liability. It ar gues that appellants will attempt to recover UIM damages for all of their injuries, including those injuries attributab le to the negligence of Mrs. Cosenza, who was a named insur e d. The argument is that under principles of joint and seve ral liability Nationwide will be required to pay for al l of the damages, but will be unable to recover those damage s that are due to the comparative negligence of the driver for whom they have already paid liability benefits. Thi s argument is unavailing for several reasons. First, it has not been established in this case that Mrs. Cosenza, th e driver insured under Nationwide's liability policy, has an y fault for the accident. Second, no Pennsylvania court has exp r essed the slightest bit of concern over the fatalistic sc enario that the application of joint and several liability will lead to a conversion of coverage, despite the fact that at le ast two courts have allowed dual recovery. Finally, Nationw ide provides no evidence whatsoever that the applicatio n of such principles is mandatory in arbitration of thes e cases or that appellants would demand damages for all of their

22injuries, as opposed to seeking recovery only for t hose

injuries attributable to the comparative negligence of the underinsured motorist. The latter is appellants' acknowledged position in this appeal. Further , it is our expectation that, consistent with Pennsylvania law and this opinion, an arbitrator would allow recovery of dama ges attributable to the underinsured motorist's neglige nce, but would reject a demand for recovery of damages attri butable to any contributory negligence by Mrs. Cosenza as c ontrary

to the MVFRL.

Application of the principles underlying the MVFRL also supports invalidating the dual recovery pr ohibitio n in multiple tortfeasor cases. First, as discussed abov e, enforcing the dual recovery prohibition would resul t in denying appellants benefits for which they voluntar ily paid additional premiums. Such a denial is contrary to t he intent of the amendments to the MVFRL, which gave consumers the option of purchasing UIM benefits, bu t that

also assumes consumers are entitled to the benefits that they voluntarily opted to purchase. Further , it de nies them paid-for benefits in a case where they wer e injure d by someone whose liability insurance purchasing decisi ons they could not control, the very situation they sou ght to avoid by purchasing UIM benefits and the very purpo se for which UIM insurance exists. See Paylor, 640 A.2d at 1238; Eichelman, 711 A.2d at 1008; Kmonk-Sullivan , 746 A .2d at

1123.

Second, the only directly applicable case law, that which

involves two or more tortfeasors and two or mor e i nsurance policies, invalidated insurance exclusions that ope rated to deny UIM benefits. Trapper, 17 Pa. D. & C. 4th 165; Kubek, 86 F.Supp.2d 503. These two decisions find addition al support in the cases discussed above that uphold UI M exclusions, but that nonetheless recognize that cas es involving two tortfeasors and two insurance policie s are analytically distinct. See Wolgemuth, 535 A.2d at 1 135; Pempkowski, 678 A.2d at 403. As the Pempkowski cour t noted, in joint tortfeasor situations, a claimant i s not always precluded from seeking liability and UIM ins urance benefits under the same policy. 678 A.2d at 403. Se e also Kubek, 86 F.Supp.2d at 505-09. The Pennsylvania Sup reme

23Court's decision in Paylor also supports r ecovery for the

appellants because, under the facts of this case, a llowing recovery would not allow the insureds to convert inexpensive UIM coverage into more costly liability coverage. 640 A.2d at 1240-41.

Third, upholding the dual recovery pr ohibition in multiple tortfeasor cases would be counter to the e xpress purpose of UIM insurance, which is "protecting thos e persons who purchase motor vehicle liability insura nce and then suffer bodily injury or property damage caused by a motorist who did not purchase similar coverage." Co uch, supra S 45:624; Kmonk-Sullivan, 746 A.2d at 1123. C learly, if the underinsured driver, Nicolucci, had purchase d the same amount of liability coverage that appellants purchased, they could have recover ed for the full extent of their injuries. A fourth, and related, r eason to f ind the dual recovery provision unenforceable in this case, is t hat the MVFRL is a remedial statute that must be br oadly construed to effectuate its goal of fully compensat ing victims injured on Pennsylvania highways. Accor din gly, Pennsylvania courts narrowly construe exclusions su ch as the one at issue here. Kmonk-Sullivan, 746 A.2d at 1123; Allwein, 671 A.2d at 751. See also Couch, supra S 4 5:624. In this case, the only construction of the dual r e covery prohibition consistent with Pennsylvania case law a nd the MVFRL, is to limit its enforceability to situations involving single tortfeasors, where invalidating the exclusio n would permit the conversion of UIM benefits to liability benefits.

Fifth, and finally, state law requires that, in clo se cases, courts opt for an interpretation of the MVFRL and contractual provisions that provides coverage for t he insured. English, 664 A.2d at 87; Kmonk-Sullivan, 7 64 A.2d at 1123; Allwein, 671 A.2d at 751. This appr oach i s in accord with the presumption that the state legislat ure intends to favor the public interest over the priva te interest. English, 664 A.2d at 87.

For the foregoing reasons, we conclude that enforce ment of the dual recovery prohibition in multiple tortfe asor cases such as this one is violative of the MVFRL. However , as the preceding discussion indicates, in single tortfeaso r cases the dual recovery exclusion actually pr omotes the goals of

24the MVFRL by barring unlawful conversion of UIM cov erage

to liability coverage. We cannot, ther efore, categ orically

declare that the exclusion is invalid and unenforce able. Instead, following the Pennsylvania Supreme Court's mandate to narrowly construe exclusions in insuranc e contracts, we construe the dual recovery pr ohibiti on as speaking only to single tortfeasor accidents wher e allowing recovery would effectuate a conversion of UIM cover age. This construction reads the exclusion as incorporat ing the case law pronouncements on the dual recovery issue into

the insurance contract and invalidates the exclusio n only in joint tortfeasor cases where enforcing it would be contrary to applicable case law and the intent of the MVFRL. Accordingly, we cannot agree with the District Cour t's holding that the dual recovery provision prohibits Mr. Cosenza and Ms. Dezii from seeking UIM benefits und er the auto insurance policy or the umbrella policy for an y damages due by law as a result of Nicolucci's negli gence. We also hold that Mrs. Cosenza may seek loss of consortium benefits based on her husband's injuries under both the UIM coverage of the auto insurance policy and the umbrella policy.

IV

For the foregoing reasons, the District Court's Ord er of October 27, 1999 declining to dismiss the case for lack of jurisdiction is affirmed. The District Court's Orde r of November 3, 2000, prohibiting appellants fr om seek ing recovery of underinsured motorist benefits, is reve rsed, and

the matter is remanded back to the District Court f or the entry of an Order referring the matter to arbitrati on for the purpose of determining the amount of an awar d unde r the underinsured motorist provisions of the auto insura nce policy and the umbrella policy. Costs taxed against the appellee.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

25