PHILADELPHIA—A workers compensation exclusion in an employer's underinsured motorist policy purchased from a risk management pool is unenforceable because it violates public policy, Pennsylvania's Supreme Court has ruled.

According to Frank D. Heller vs. Pennsylvania League of Cities and Municipalities Sugarcreek Borough, Mr. Heller suffered a severe injury in a 2002 automobile accident while driving as part of his job as a police officer.

Workers comp benefits paid his medical expenses and two-thirds of his salary while the borough paid the remainder.

Mr. Heller also recovered $25,000 in policy limits from insurance purchased by the person responsible for the accident, but his losses far exceeded that amount, court records state.

So Mr. Heller sought benefits under an uninsured motorist policy issued to the borough by the Pennsylvania League of Cities and Municipalities. The Pennsylvania Pooled Risk Insurance for Municipal Entities coverage marketed under the name PennPRIME provided the borough with up to $100,000 per person or per accident in uninsured motorist limits, court records show.

But PennPRIME denied the claim, citing an exclusion for claims by anyone eligible for workers compensation benefits and Mr. Heller sought a court order to void the exclusion.

He argued the exclusion is contrary to public policy for several reasons, including that it makes the uninsured motorist coverage paid by the policyholder illusory. Virtually all such claims would be made by borough employees eligible for workers compensation, he argued.

In response, PennPRIME's argued that that there is no merit to the allegation that the borough did not receive the benefit of the contractually agreed-upon coverage. It said the borough voluntarily purchased coverage that contained a workers comp exclusion only for employees that did not receive workers comp benefits.

A trial court found in favor of Mr. Heller while an appellate court reversed.

On Wednesday, however, the Pennsylvania Supreme Court ruled that “the exclusion renders the coverage illusory, and the insurer receives a windfall by charging a premium for the coverage.”

Moreover, the high court said the exclusion reverses a legislative priority by frustrating the right of an employer and its workers comp insurer to subrogate against an individual responsible for an accident or an insurer that provides underinsured motorist coverage.

The Supreme Court agreed the exclusion runs counter to public policy and reversed the appellate court.