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When an insurer agrees to arbitrate disputes over fault or the amount to be paid on a claim, it still has the right to go to court to dispute issues of coverage, a federal appeals court has ruled. But the court was forced to dodge the thornier and more interesting public policy question presented in State Farm Mutual Automobile Insurance Co. v. Coviello due to an utter lack of direction from the Pennsylvania courts. In the suit, State Farm argued that it owed no coverage to Mary Coviello under her daughter’s underinsured motorist policy due to a “family vehicle exclusion.” Coviello was injured in a single-car accident in June 1998 in which her husband was driving. She filed a claim under her own State Farm policy and received the policy limit of $100,000. She then sought UIM benefits under a policy held by her daughter, Ann Coviello, who resided with her parents. State Farm did not dispute that Mary Coviello was “an insured” under her daughter’s policy, but it denied coverage under the family vehicle exclusion that bars UIM claims by “any relative.” Attorney Teresa F. Sachs of Britt Hankins Schaible & Moughan filed a suit on State Farm’s behalf that asked for a declaration that Coviello was not entitled to coverage. But Coviello’s lawyer, Johanna Gelb of Scranton, Pa., moved to dismiss the suit, arguing that it was barred by the policy’s arbitration provision. U.S. District Judge Thomas I. Vanaskie agreed. On appeal, State Farm argued that the suit should not have been dismissed because it involves a question of public policy that must be decided by the courts. Sachs argued that the only way Coviello could win would be to argue that the family vehicle exclusion violates public policy and is therefore invalid and unenforceable. Gelb argued that she was not attacking the exclusion on public-policy grounds, but instead was planning to argue before the arbitrators that Coviello’s position was supported by Pennsylvania appellate precedent. But U.S. Circuit Judge Marjorie O. Rendell said it was clear that Coviello was challenging the exclusion on public policy grounds because the Pennsylvania cases she relies on have all held that the exclusion should not be enforced where, under the circumstances of the particular case, it violates public policy. “The applicability of the exclusion is a question of public policy, regardless of how Coviello chooses to characterize it,” Rendell wrote. But Rendell found that the question of whether the dispute should be resolved by arbitration or in the courts was a “thorny issue” for which the Pennsylvania courts have so far offered no definitive answer. Rendell focused on two Pennsylvania Superior Court decisions — Warner v. Continental/CNA Insurance Cos. and National Mutual Insurance Co. v. Pitts — and the Pennsylvania Supreme Court’s decision in Windrim v. Nationwide Insurance Co. In Warner, Rendell wrote, the Superior Court approved the use of a declaratory judgment action despite the presence of an arbitration clause where the dispute centers on whether a policy provision “is contrary to a constitutional, legislative or administrative mandate.” That holding, Rendell said, would seem to bolster State Farm’s argument that it has the right to sue in court. But Rendell found that “the Warner court’s conclusion does not withstand scrutiny” because none of the Pennsylvania Supreme Court or Superior Court cases that it relied on truly support its “blanket proposition.” Rendell also found that Warner “appears to be in direct conflict” with the Superior Court’s previous opinion in Pitts, which held that when a dispute falls within the scope of an arbitration provision, the arbitrators “clearly have the jurisdiction to consider” public-policy issues. Sachs pointed Rendell to Windrim, but Rendell found that the Pennsylvania Supreme Court’s ruling in that case merely upheld the exclusion and never discussed the issue of arbitrability. Having found no answer to the question in Pennsylvania case law, Rendell said, “we lack clear direction on this important issue.” As a federal court sitting in diversity, Rendell said, the court’s task was “to apply state law and not to form it.” As a result, she said, the court chose not to make a prediction, but instead to resolve the case on the alternative grounds argued by State Farm — that the dispute didn’t even fall within the scope of the arbitration clause. Judge Vanaskie had ruled that the dispute between State Farm and Coviello was clearly encompassed by the arbitration clause. But Rendell found that the arbitration provision is triggered only by disputes over fault or the amount to be paid on a claim. Since Coviello is disputing a “coverage” issue, she said, it does not fall within the arbitration clause. Gelb insisted that the Pennsylvania Supreme Court has endorsed a broad reading of arbitration provisions in UIM policies. But Rendell found that all of the cases Gelb cited involved broadly worded arbitration clauses, while State Farm’s policy included an “express limitation” on the arbitration policy’s scope. In ruling that State Farm may proceed with its suit in U.S. District Court, Rendell said, “we break no new ground under Pennsylvania law … . While we recognize that parties should be bound by an agreement to arbitrate, we also must respect the countervailing principle that parties should not be required to arbitrate those issues that fall outside the scope of the agreement.” Rendell was joined by U.S. Circuit Judge Jane R. Roth and Theodore A. McKee.

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