Opinion ID: 788561
Heading Depth: 3
Heading Rank: 1

Heading: Is the Two Year Rate Guarantee Enforceable?

Text: 24 The Pennsylvania doctrine of reasonable expectations states that [t]he reasonable expectations of the insured is the focal point of the insurance transaction ... regardless of the ambiguity, or lack thereof, inherent in a given set of documents. Collister v. Nationwide Life Ins. Co., 479 Pa. 579, 388 A.2d 1346, 1353 (1978). It is intended to protect against the inherent danger, created by the nature of the insurance industry, that an insurer will agree to certain coverage when receiving the insured's application, and then unilaterally change those terms when it later issues a policy. See, e.g., Tonkovic v. State Farm Mut. Auto. Ins. Co., 513 Pa. 445, 521 A.2d 920 (1987) (We hold that where, as here, an individual applies and prepays for specific insurance coverage, the insurer may not unilaterally change the coverage provided without an affirmative showing that the insured was notified of, and understood, the change, regardless of whether the insured read the policy.). 25 We have recognized and applied this doctrine in cases where the insured reasonably expected certain coverage, even when those expectations were in direct conflict with the unambiguous terms of the policy. For example, in Bensalem Township v. Int'l Surplus Lines Ins. Co., 38 F.3d 1303 (3d Cir.1994), we reversed the dismissal of an insured's declaratory judgment action. The insurer had unilaterally expanded an exclusion in a professional liability insurance policy bought by the plaintiff. This expanded exclusion was unambiguously stated in the renewed policy, the insurer denied coverage based on it, and the District Court dismissed the insured's complaint because there was no ambiguity. We instructed the District Court to allow the plaintiff to proceed with discovery in an effort to demonstrate that the expanded exclusion was inconsistent with the insured's reasonable expectations. Relying upon the decisions of the Pennsylvania Supreme Court, 4 we stated that where the insurer or its agent creates in the insured a reasonable expectation of coverage that is not supported by the terms of the policy that expectation will prevail over the language of the policy ... an insurer may not make unilateral changes to an insurance policy unless it both notifies the policyholder of the changes and ensures that the policyholder understands their significance. Id. at 1311. See also Nationwide Mut. Ins. Co. v. Cosenza, 258 F.3d 197, 208, 213 (3d Cir.2001) (reaffirming the viability of the reasonable expectations doctrine in coverage disputes); Medical Protective Co. v. Watkins, 198 F.3d 100, 106 (3d Cir.1999) (although concluding that the exclusion clause at issue was ambiguous, we noted that the reasonable expectations of the insured control, `even if they are contrary to the explicit terms of the policy') (quoting West Am. Ins. Co. v. Park, 933 F.2d 1236, 1239 (3d Cir.1991) (citing State Farm Mut. Auto. Ins. Co. v. Williams, 481 Pa. 130, 392 A.2d 281, 286-87 (1987))). 26 The District Court did not take issue with the fact, and fact it be, that the parties had agreed on a two-year rate guarantee. Rather, the Court held that the terms of the policy were clear and unambiguous, as was its integration clause, and, therefore, that parol evidence such as the August 26, 1999 revised proposal with its two-year rate guarantee cannot be considered in determining the `reasonable expectations' of the parties. 12a. As the above discussion should make clear, this conclusion is simply not supported by our caselaw or by the Pennsylvania cases on which we relied. 27 The District Court erred in another respect as well. The concern for the vulnerability of non-commercial insureds entering into adhesion contracts with large insurance companies clearly motivates the application of the doctrine of reasonable expectations. Nevertheless, we have predicted that Pennsylvania courts would apply that doctrine even where the insured is a sophisticated purchaser of insurance — i.e. a large commercial enterprise that has substantial economic strength, desirability as a customer, and an understanding of insurance matters, or readily available assistance in understanding and procuring insurance. Reliance Ins. Co. v. Moessner, 121 F.3d 895, 904-05, n. 8 (3d Cir.1997). This is so, we stated, when the insurer unilaterally alters the insurance coverage requested by the insured, and, thus, the insured does not receive the actual insurance policy until after offering to buy insurance and paying the first premium. Id. at 905. Status as a sophisticated purchaser is a factor to be considered when resolving whether the insured acted reasonably in expecting a given claim to be covered, but does not automatically disqualify it. Id. at 906. According to the District Court, however, because UPMC was a sophisticated party and the policy a freely negotiated agreement entered into by parties of equal status, the doctrine of reasonable expectations was inapplicable. 13a. The District Court was wrong. 28 Neither any lack of ambiguity in the policy language nor UPMC's status as a sophisticated purchaser of insurance prevented application of the doctrine of reasonable expectations; indeed, the reasonable expectations of UPMC are not even questioned here at least insofar as UPMC and MetLife negotiated and agreed upon the rate guarantee for the second year of coverage. 5 29