A recent Pennsylvania Superior Court decision interpreting a relatively innocuous arbitration provision in an insurance policy may have inadvertently undermined the long-held belief that an insured’s duty of cooperation is a fundamental condition precedent to coverage.

In the case of Heim v. Merchants Insurance Group, the estate of Merchants Insurance Group’s insured petitioned the Court of Common Pleas to appoint arbitrators to decide a question of available underinsured motorist (“UIM”) coverage where the decedent had previously settled his third-party claim with his alleged tortfeasor.  More specifically, prior to his death, Joseph Heim was involved in a motor vehicle accident in which he received a $24,000 settlement with Merchants’ consent.  In the UIM claim that followed, however, Heim and later his estate failed to comply with written requests for information regarding his wage and employment records, and instead elected to delay the administration of the claim for one year before ultimately filing an arbitration petition with the trial court.

In response to the petition to arbitrate the UIM claim, Merchants argued that such proceedings were barred by the policy’s dispute resolution provision.  While the trial court initially agreed with this interpretation of the policy, the Superior Court on appeal rejected the fundamental notion that questions regarding the insured’s cooperation, or lack thereof, rise to the level of a “coverage dispute.”  To the contrary, the Superior Court explained that “coverage disputes” in the context of UIM generally pertain only to questions of whether the claimant is a “covered person”, and issues regarding cooperation are more appropriately cast as disputes pertaining to the quantification of covered losses.  In fact, the Superior Court ultimately held that even if an insurer demonstrates prejudice as a result of the insured’s lack of cooperation, the same is inextricably linked to the assessment of damages such that the dispute no longer revolves around coverage and may fall under the policy’s arbitration provisions.

To be sure, Heim is a non-precedential decision from an intermediate appellate court in Pennsylvania but, all the same, the interpretation of the insured’s duty to cooperate is confounding.  In the main, Pennsylvania had ascribed to the principle espoused in other prominent jurisdictions that policy coverage is preconditioned on the insured’s cooperation in investigating and administering the claim. Heim is therefore a stark departure from this well-accepted rule in Pennsylvania and may serve in the future as fodder for insured’s seeking to ratify their lack of cooperation in far more complex claims.    Thanks to Adam Gomez for his contribution.  Please email Brian Gibbons with any questions.