PECO Energy Co. v. Boden

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit

8-31-1995

PECO v Boden
Precedential or Non-Precedential:

Docket 94-1883

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 UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT
____________

NO. 94-1883
____________

PECO ENERGY COMPANY

v.

KENNETH HENRY EDMUND BODEN; LONDON & HULL MARITIME
INSURANCE COMPANY LIMITED; INSURANCE COMPANY OF
NORTH AMERICA (U.K.) LIMITED; THE YORKSHIRE INSURANCE
COMPANY LIMITED; INDEMNITY MARITIME ASSURANCE COMPANY
LIMITED,

Appellants
____________

Appeal from the United States District Court
for the Eastern District of Pennsylvania
D.C. No. 93-cv-001100
____________

Argued June 15, 1995
Before: STAPLETON, McKEE, and ROSENN, Circuit Judges
Opinion Filed August 31, 1995
____________

DANTE MATTIONI, ESQUIRE
Mattioni, Mattioni & Mattioni
399 Market Street
2nd Floor
Philadelphia, PA 19106

MICHAEL G. CHALOS, ESQUIRE
HARRY A. GAVALAS, ESQUIRE
MARTIN F. MARVET, ESQUIRE (Argued)
Chalos & Brown
300 East 42nd Street
New York, New York 10017
Attorneys for Appellants

ELIZABETH K. AINSLIE, ESQUIRE (Argued)
Ainslie & Bronson
2630 One Reading Center
1101 Market Street
Philadelphia, PA 19107

1
 Attorneys for Appellee
____________

OPINION OF THE COURT
ROSENN, Circuit Judge.

This appeal primarily raises a number of intriguing

insurance law questions, one of which, the allocation of a

deductible among several insurance carriers, is novel. The

insured entered into a series of "all risks" policies covering

property losses during the policy period. When the insurers

rejected the claim of the insured, PECO Energy Company (PECO), it

brought a diversity action in the United States District Court

for the Eastern District of Pennsylvania. The jury found that

PECO sustained theft losses aggregating $1,229,029 over a period

of six years.

The district court held that the combined thefts

constituted a single occurrence and that it took place in the

sixth year of the insurance coverage. The court therefore

applied the $100,000 deductible set forth in the policy for that

year. Accordingly, it entered judgment of $1,129,029 for PECO

against Kenneth Henry Edmund Boden representing Lloyds

Underwriters, London & Hull Maritime Insurance Company Limited,

Insurance Company of North America (U.K.) Limited, The Yorkshire

Insurance Company Limited, Indemnity Maritime Assurance Company

Limited (collectively the Underwriters). The Underwriters timely

appealed. We vacate and remand.

I.

2
 PECO is a Pennsylvania electric utility with its

principal place of business in Philadelphia. In September 1984,

it contracted with Diesel Services, Inc. (DSI), an independent

trucking company, to haul its fuel oil to various PECO generating

facilities. DSI transported PECO oil until November 1990 when

PECO discovered that DSI had been stealing a portion of the oil

on a regular basis.

In November 1985 PECO entered into a contract for

insurance covering property losses for one year from four

independent insurance companies and six syndicates at Lloyds of

London. Between November 1986 and October 1991, PECO and the

Underwriters renewed five one-year insurance policies . The

Underwriters for each policy varied from year to year, but the

policies remained essentially the same. The policies insured

"GOODS and/or MERCHANDISE OF EVERY DESCRIPTION WHATSOEVER

incidental to [PECO's] business but consisting principally of

FUELS . . . shipped in and/or over . . . [a]gainst all risks of

physical losses or damage however caused." Both parties agree

that these policies cover the theft of fuel oil.

Each policy provided that covered losses were subject

to a deductible. The 1985-86 policy states that:
from the amount of each loss or combination
of losses arising out of any one occurrence,
an amount equal to 1% of the total value of
the property to which loss or damage occurred
shall be deducted. This deductible, however,
shall not be less than $10,000, nor more than
$20,000.

3
Each of the remaining policies provided that there shall be

deducted "from the amount of each loss or combination of losses

arising out of any one occurrence, US$100,000 any one loss or

occurrence."

At trial, PECO acknowledged that it did not have any

direct evidence of DSI thefts, except for a limited number

observed by PECO investigators in 1990. Nonetheless, PECO

posited at trial that DSI had been stealing from it for the

duration of the contract between them and that these thefts

aggregated between 9.1% and 20% of the oil transported by DSI

during the 62 month period that the Underwriters insured PECO.

The jury found that the DSI stole $1,229,029 worth of

fuel from PECO, equal to 6.1% of the fuel transported by DSI, and

that the thefts were part of a single continuous plan or scheme.

The jury also determined that the Underwriters had not acted in

bad faith toward the insured. The district court held that DSI's

thefts constituted one occurrence because they were part of a

single continuous scheme and that this occurrence took place

during the 1990-91 policy period. The court applied the $100,000

deductible provided for in the 1990-91 policy and entered

judgment of $1,129,029 for PECO against the 1990-91 Underwriters.

The Underwriters then moved to amend or correct the judgment

and/or for a new trial or a judgment as a matter of law. The

district court denied these motions and the Underwriters timely

appealed.1

1
The district court possessed subject matter jurisdiction
pursuant to 28 U.S.C. section 1332. This court has appellate

4
 II.

A federal court must apply the choice of law rules of

the forum state when it is sitting in diversity. Klaxon Co. v.

Stentor Elec. Mfg. Co., 313 U.S. 487 (1941). Pennsylvania law

provides that "the place having the most interest in the problem

and which is the most intimately concerned with the outcome is

the forum whose law should be applied." In re Complaint of

Bankers Trust Co., 752 F.2d 874, 882 (3d Cir. 1984). PECO and

the Underwriters executed the insurance contracts at issue in

this case in Pennsylvania and the oil which DSI stole was

transported within Pennsylvania. Additionally, the policies

contain a choice of law clause designating Pennsylvania law as

the law controlling any disputes which arise under the polices.

Therefore, the district court correctly concluded that

Pennsylvania law applies to this case.

In Pennsylvania, interpreting an insurance contract is

a question of law to be resolved by a court. Vale Chemical Co. v.

Hartford Acci. & Indem. Co., 490 A.2d 896, 899 n.4 (Pa.Super.

1985), rev'd on other grounds, 516 A.2d 684 (Pa. 1986). We apply

plenary review to legal determinations made by the district

court. Louis W. Epstein Family Partnership v. KMart Corp., 13
F.3d 762, 765-766 (3d Cir. 1994).

On appeal, the Underwriters contend that: (1) the

series of thefts is not one occurrence; (2) if all of the thefts

are one occurrence, the occurrence took place in 1984, when the

jurisdiction over the district court's final judgment under 28
U.S.C. section 1291.

5
Underwriters did not insure PECO; (3) a full deductible applies

to each theft in which event the defendants would have no

liability or alternatively a full deductible applies to each

policy period which would reduce liability substantially; (4) the

jury made mathematical errors in calculating PECO's damages; (5)

the district court erred in awarding damages to PECO for oil

stolen after March 1988 because PECO failed to take reasonable

measures to stop DSI stealing after having been warned of DSI

thefts; and (6) the district court abused its discretion by

admitting certain testimony into evidence.

III.

The threshold question on appeal is whether the

multitude of thefts over the six-year period constituted a single

occurrence. In a careful and exhaustive opinion denying the

Underwriters' post-trial motions, the district court held that

the thefts in this case constituted a single occurrence. Whether

the losses here constituted one occurrence or amounted to a

number of occurrences, as contended by the Underwriters, can have

a significant impact on the amount of the liability, if any.

Unfortunately, the policies do not provide a relevant definition

of occurrence.2 If each theft amounted to an occurrence, then

each became subject to the deductible provisions of the policy.

If, however, all of the thefts constituted a single occurrence,

2
The first two polices do state that an occurrence is "any one
loss, disaster or casualty or series of losses, disasters or
casualties arising out of one event." However, this definition
only applied to additional building construction risks, not the
entire policy.

6
then the deductible provision of the policy surfaced only once.

We therefore look to other sources for assistance in defining

this term. To determine "whether bodily injury or property

damage is the result of one occurrence or multiple occurrences,

the majority of courts have looked to the cause or causes of the

bodily injury or property damage . . . ." B.R. Ostrager & T.R.

Newman, Handbook on Insurance Coverage Disputes § 9.02 (7th ed.

1994) (internal quotation, emphasis and brackets omitted).

In Appalachian Ins. Co. v. Liberty Mut. Ins. Co., we

held that "an occurrence is determined by the cause or causes of

the resulting injury" and noted that a court should determine "if

there was but one proximate, uninterrupted, and continuing cause

which resulted in all of the injuries and damage." 676 F.2d 56,

61 (3d Cir. 1982) (citations and internal quotation omitted). If

there is only one cause for all of the losses, they are part of a

single occurrence. Id.; see also Armotek Industries, Inc. v.

Employers Ins. of Wausau, 952 F.2d 756, 762 (3d Cir. 1991)

(policy defined "occurrence" as "`an accident, including

continuous or repeated exposure to conditions, which results in .

. . property damage . . ..'"); Business Interiors, Inc. v. Aetna
Cas. & Sur. Co., 751 F.2d 361 (10th Cir. 1984) (series of forty

acts of forgery by dishonest employee are deemed a single

occurrence).

The jury found that DSI instituted its scheme to steal

from PECO in 1984 and continued stealing from PECO until it

discovered the thefts in 1990. The jury also found that each

theft was a part of a larger scheme and that the scheme to steal

7
was the proximate cause of each theft. We therefore hold that

when a scheme to steal property is the proximate and continuing

cause of a series or combination of thefts, the losses for

liability insurance purposes constitute part of a single

occurrence. Accordingly, the district court committed no error

in concluding that numerous thefts by DSI amount to one

occurrence.

B.

The district court concluded that the policies in this

case were "occurrence" policies. "An occurrence policy provides

coverage for any 'occurrence' which takes place during the policy

period. Under this type of policy, it is irrelevant whether the

resulting claim is brought against the insured during or after

the policy period, as long as the injury-causing event happens

during the policy period." B. Ostrager & T.R. Newman § 8.03(a).

See Gereboff v. Home Indemnity Co., 383 A.2d 1024, 1026 n.1 (R.I.

1978), quoting 7A Appleman, Insurance Law and Practice § 4504.3

at 104-15 (Cum. Supp. 1974). The district court therefore

followed this court's holding in Appalachian, 676 F.2d at 61-62,

and held that "the occurrence took place on November 21, 1990,"

the date the jury found that PECO first knew of the thefts. The

court accordingly ruled that the 1990-91 policy bore the

liability subject to a single $100,000 deduction.

The policies in this case, however, insured "[a]gainst

all risks of physical losses or damage however caused." (emphasis
added). Thus, the policies in this case are "all risks"

policies, not "occurrence" policies, and provided coverage for

8
all losses which took place during the policy period. See e.g.

Intermetal Mexicana, S.A. v. Insurance Co. of N. America, 866

F.2d 71, 74-75 (3d Cir. 1989); Rorer Group v. Insurance Co. of

North America, 655 A.2d 123, 124 (Pa.Super. 1995).3

This court need not consider the Underwriters'

contention that the district court erred by holding that the

occurrence at issue in this case took place in 1990, because the

date of the occurrence is irrelevant. Under an all risks

insurance policy, the Underwriters are liable for all losses

which PECO suffered during the relevant policy periods,

regardless of when the occurrence which triggered those losses

took place. Thus, the district court erred in placing the total

liability for all of PECO's losses on the 1990-91 underwriters.

C.

The jury calculated PECO's losses during each policy

period. The Underwriters are liable for those losses minus the

appropriate deductible. The district court correctly applied a

single deductible to PECO's total loss. However, the court

applied the deductible against the full liability it imposed for

all of PECO's losses on the 1990-91 Underwriters. The policies

divide liability on an annual basis because of their "all risks"

language, but they call for one deductible per occurrence. We

3
"Under Pennsylvania law, when language in an insurance policy is
clear and unambiguous, a court must give effect to that
language." Armotek Indus., 952 F.2d at 762 (citing Northern
Insurance Co. v. Aardvark Associates, 942 F.2d 189, 193 (3d Cir.
1991); Gene and Harvey Builders, Inc. v. Pennsylvania Mfrs' Asso.
Ins. Co., 517 A.2d 910, 913 (Pa. 1986)).

9
agree with the district court and the jury that the entire scheme

of thefts constituted a single occurrence.

On appeal, the Underwriters contend that a full

deductible applies to each loss. Alternatively, they argue that

a full deductible applies to each policy year. We reject these

arguments because it would be inconsistent to break a single

occurrence into multiple occurrences for the purpose of applying

a deductible. The dissent, however, would aggregate six

deductibles and arrive at a total of $520,000 for a single

occurrence. The parties never contracted for such a result.

It seems to us that the most equitable and logical

application of the policies' language to the realities of this

case is to take the loss sustained by PECO each year and

determine what percentage of the total insured loss it

represents. We then apply the percentage thus derived to the

deductible for each policy year and the resulting figure is

deducted from the loss for that particular year. The

Underwriters of each annual policy are thus liable for a

percentage of PECO's total loss less that percentage of the

stated policy deductible.

The jury found that the total loss suffered by PECO

between November 1985 and December 31, 1990 was $1,229,029. They

then allocated this loss on an annual basis and found that PECO

lost: $142,218 in 1985-86; $371,287 in 1986-87; $202,561 in

1987-88; $235,008 in 1988-89; $241,933 in 1989-90; and $36,022 in

1990-91.

10
 The percentage of the total losses sustained in each of

the foregoing years respectively, commencing in November 1985,

was: 11.6%, 30.2%, 16.5%, 19.1%, 19.7%, and 2.9%. Applying this

percentage to the deductible in each policy produces the

following figures: $2,320 for 1985-86;4 $30,200 for 1986-87;5

$16,500 for 1987-88; $19,100 for 1988-89; $19,700 for 1989-90;

and $2,900 for 1990-91.

As a consequence, we concluded that the liability under

the 1985-86 policy is $139,898 and the liabilities under the

succeeding policies are $341,087 for 1986-87; $186,061 for 1987-

88; $215,908 for 1988-89; $222,233 for 1989-90; $33,122 for 1990-

91.

These calculations equitably provide each group of

Underwriters with a deductible based on a single occurrence, as

the policies provide.

D.

The Underwriters next argue that the jury reached its

verdict through a strict mathematical formula and that it erred

in calculating that formula. The district court refused to

disturb the jury's damage award because it was not shockingly

excessive. The court noted that PECO presented three different

damage calculation methods and that the jury's verdict was

4
The deductible for 1985-86 is $20,000. See p. 3, supra, for its
specific terms. PECO demonstrated that it shipped $2,331,442
worth of fuel in 1985-86. 1% of this amount equals $23,314 which
exceeds $20,000. Therefore, this court will use a $20,000
deductible to calculate the liability of the underwriters for the
1985-86 policy.
5
This policy and the remaining policies provide for a $100,000
deductible.

11
reasonable in light of the evidence submitted at trial. We

agree.

The Underwriters concede that courts normally use the

shockingly excessive standard to review jury verdicts, but argue

that courts should review the calculation methods of a jury in

cases which are "susceptible to mathematical formula." Chuy v.

Philadelphia Eagles Football Club, 595 F.2d 1265, 1279 n.19 (3d

Cir. 1979). The Underwriters state the law correctly, but it

does not apply to this case. In the special interrogatories

submitted by the court, the jury found that PECO suffered losses

of $1,229,029. PECO presented three measures of loss ranging

from approximately 9.1% of DSI's deliveries to 20%. The jury

concluded that PECO had lost $1,229,029. This is equal to 6.1%

of the oil delivered by DSI, but the Underwriters do not show

that the jury arrived at this damage figure through a strict

mathematical calculation or that it misapplied a mathematical

formula in determining the amount of loss. The district court

did not err in refusing to review the jury's damage calculations,

except for excessiveness, and in concluding that the award in

this case was not excessive.

E.

The Underwriters also argue that the district court

erred in awarding damages to PECO for oil stolen after March,

1988. They contend that PECO's failure to discover DSI's thefts

after that date was a violation of PECO's obligation under the

insurance policy to avert or minimize loss.

12
 This court has predicted that Pennsylvania will adopt

the Restatement of Contracts' requirement that an insured must

prove that losses were fortuitous before it can recover under an

all risks insurance policy. Compagnie des Bauxites de Guinee v.

Insurance Co. of N. Am., 724 F.2d 369, 372 (3d Cir. 1983). The

restatement defines a fortuitous event as:
an event which so far as the parties to the
contract are aware, is dependent on chance.
It may be beyond the power of any human being
to bring the event to pass; it may be within
the control of third persons; . . . provided
that the fact is unknown to the parties.

Id. (quoting Restatement of Contracts § 291 comment a (1932))

(emphasis in original); accord Intermetal Mexicana, 866 F.2d at

77.

The jury found that PECO had no actual knowledge of

DSI's thefts prior to November, 1990 but should have known of the

thefts as of March, 1988. The Underwriters argue that PECO had

constructive knowledge of DSI's thefts after March 1988 and that

the losses after that date were not fortuitous. Proving fortuity

is not particularly difficult. Intermetal Mexicana, 866 F.2d at

77. A party must only show that a loss was unplanned and

unintentional. See Peters Township School Dist. v. Hartford Acci.

and Indem. Co., 833 F.2d 32, 37 (3d Cir. 1987). The Underwriters

simply do not present any law which suggests that risks about

which a party should have known are not fortuitous.

The Underwriters essentially argue that PECO was

negligent in not discovering DSI's thefts. Both parties agree

that the policies in this case are "all risks" cargo transit

13
insurance. At trial, citing Commodities Reserve Co. v. St. Paul

Fire & Marine Ins. Co., 879 F.2d 640, 642 (9th Cir. 1989), the

Underwriters agreed that they would be liable for any losses if

the policies provided coverage for the proximate cause of those

losses, even if the losses were precipitated by a combination of

causes. Thus, the jury's determination that the DSI thefts were

the proximate cause of PECO's losses renders the negligence

element of the Underwriters' argument irrelevant. Therefore, the

district court properly ruled that PECO was not legally barred

from recovering damages for losses after March, 1988.

F.

Lastly, the Underwriters maintain that the district

court abused its discretion by admitting certain testimony into

evidence. At trial a PECO investigator, Ed Chiu, testified to a

conversation between him and Bill Joyce, a DSI driver.6 Chiu

testified that Joyce told him that the owner of DSI instructed

Joyce to steal from PECO. PECO used this evidence to show that

DSI implemented a long-term scheme to steal from PECO. The

Underwriters contend that the admission of this statement was

prejudicial error.

This court reviews district court decisions regarding

the admission of evidence for an abuse of discretion. In re

Merritt Logan, Inc., 901 F.2d 349, 359 (3d Cir. 1990). We find

no abuse of discretion here.

6
At trial, Joyce asserted his Fifth Amendment privilege and
refused to testify. The district court therefore found that he
was "unavailable" as a witness. See Fed. R. Evid. 804(a)(1). The
underwriters do not contest this finding.

14
 Chiu testified that:
Mr. Joyce informed me that he was told by
[DSI owner] Danny Jackson to steal on
approximately 75% of the deliveries and he
was supposed to steal for between three and
five minutes.

The district court admitted this evidence as a statement against

interest under Rule 804(b)(3), Fed. R. Evid.7 The Underwriters

argue that this statement is not a statement against Joyce's

interest and thus does not fall within the exception. A person's

admission that he stole for someone else is as much against his

interest as an admission that he stole for himself. It subjects

him to possible criminal responsibility and civil liability. The

district court did not abuse its discretion by concluding that

Joyce's statement was against his interest and admitting Chiu's

testimony pertaining to Joyce's statement.

III.

Summarizing, we reject the Underwriters' claims that

the district court misapplied the law or abused its discretion in

refusing to reduce the jury's award, in allowing damages after

the date when PECO should have known of the thefts and in the

7
The rule provides that:

A statement which was at the time of its
making so far contrary to the declarant's
pecuniary or proprietary interest, or so far
tended to subject the declarant to civil or
criminal liability, or to render invalid a
claim by the declarant against another, that
a reasonable person in the declarant's
position would not have made the statement
unless believing it to be true [are not
excluded by the hearsay rule if the declarant
is unavailable as a witness].

15
admission of the Chiu testimony. The court also concluded

correctly that the multitude of thefts constituted a single

occurrence. We hold, however, that when a group of underwriters

or insurers write all risks insurance against property losses

which take place during a policy term, the insurers are liable

for those losses sustained during the policy period. Further, we

hold that when multiple policies provide for one deductible per

occurrence, the appropriate and equitable manner of treating the

deductible under such circumstances is to calculate the

percentage of the loss sustained in each policy year to the total

loss to ascertain the deductible for that particular year.

Accordingly, the judgment of the district court will be

vacated and the case remanded with directions to enter judgment

in favor of PECO and against the appellants consistent with this

opinion.

Each side to bear its own costs.

16
PECO ENERGY CO. v. BODEN
No. 94-1883

STAPLETON, Circuit Judge, dissenting in part.
The court reads the policies in a way that make the

extent of each syndicate's liability depend on the insured's loss

experience before and after the period covered by its policy.

Because I believe this clearly was not intended by the parties, I

respectfully dissent.

I agree with the court that the syndicate of

underwriters that issued each particular policy should be held

liable for the harms that PECO suffered during the period that

the policy was in effect. The court and I part company on our

reading of the deductible clauses, however. I would hold that

PECO's recovery during each policy period should be offset by the

full amount of the deductible stated in the policy to be

applicable to losses during the policy period arising out of any

one occurrence.

Under each policy, a certain amount -- $20,000 or

$100,000 -- must be deducted "from the amount of each loss or

combination of losses arising out of any one occurrence." (See,

e.g., app. III at E-252.) Put another way, each policy requires

that the amount recoverable for losses suffered during the policy

year must be reduced by the total deductible for each

"occurrence" which led to the losses. For me, these policy

provisions preclude the court's conclusion that only one

17
deductible is applicable to the losses incurred over the six-year

period.

Suppose, for example, that PECO for some reason had

decided to sue only the syndicate that had issued the policy

covering PECO's losses between November 1989 and October 1990.

PECO suffered losses of $241,933 for that time period and the

1989-1990 syndicate accordingly would be liable to pay that

amount minus the applicable deductible. To calculate the

deductible, the court would be faced with the simple question:

are the losses here due to one occurrence or are they due to more

than one occurrence? As the court cogently explains, the covered

losses in each policy period had one cause -- the trucking firm's

single scheme pursuant to which the drivers were instructed to

continually syphon in the same manner -- and accordingly are all

due to one occurrence. In my view, the court in this

hypothetical case would be required to deduct a single deductible

of $100,000 from the total amount of PECO's losses, producing a

judgment of $141,933.

I would apply a similar analysis if PECO then decided

to sue the syndicate that insured its losses for the 1985 to 1986

time period or any other year-long time period. In that second

case, PECO would be entitled to recover the losses it suffered

during the covered year-long time period, minus the applicable

deductible. To calculate the deductible, the court again would

have to decide that the losses for the particular year all had

one cause and that there accordingly was only one occurrence. For

the 1986 to 1987 period, for example, the court would subtract

18
the $100,000 deductible from PECO's losses of $371,287 to yield a

judgment of $271,287.

This same analysis would govern how the court should

calculate the amount of PECO's recovery if it decided to sue each

of the six syndicates in six separate cases. The only difference

here is that rather than suing each syndicate separately, PECO

decided to sue the syndicates together in one case. That all of

the syndicates are together here as defendants should not change

the above analysis, however, nor should it affect the amount of

each syndicate's liability. Thus, in my view, each syndicate's

liability should be reduced by the deductible applicable to that

policy period.

Following the court's approach, however, the syndicate

sued in the first case would be entitled to a reduction of

liability for only a certain fraction of the deductible bargained

for and that fraction would depend on the total losses PECO

suffered during periods both before and after the 1989-1990

policy period. This result would follow regardless of whether

PECO decided to sue the other five syndicates in subsequent

suits. The end effect of this is that the 1989-1990 syndicate's

liability would be increased to reflect harms PECO suffered

during periods not covered by the policy period; that is, the

syndicate's liability would depend on losses PECO suffered during

periods which the syndicate never agreed to insure.

This cannot be what the parties intended. In my view,

each syndicate contracted for a deductible from covered losses

which took place during the policy period, and each is entitled

19
to one. Thus, I would instruct the district court to deduct the

full amount of the deductible for each policy period.

20