Opinions of the United
2003 Decisions States Court of Appeals
for the Third Circuit
5-6-2003
Brooks v. Amer Centennial Ins
Precedential or Non-Precedential: Precedential
Docket 00-4277
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PRECEDENTIAL
Filed May 6, 2003
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 00-4277
DENNIS J. BROOKS,
Appellant
v.
AMERICAN CENTENNIAL INSURANCE COMPANY,
A CORPORATION
On Appeal From the United States District Court
For the Western District of Pennsylvania
(D.C. Civ. No. 97-cv-02083)
District Judge: Honorable Donald J. Lee
Argued: September 18, 2002
Before: BECKER, Chief Judge,* SCIRICA**
and McKEE, Circuit Judges.
(Filed May 6, 2003)
JOSEPH LEIBOWICZ, Esq. (Argued)
Kirkpatrick & Lockhart LLP
Henry W. Oliver Building
535 Smithfield Street
Pittsburgh, PA 15222-2312
Counsel for Appellant
Dennis J. Brooks
* Judge Becker’s term as Chief Judge ended on May 4, 2003.
** Judge Scirica became Chief Judge on May 4, 2003.
2
E. GRAHAM ROBB (Argued)
MICHAEL S. SAVETT
Weber Goldstein Greenberg &
Gallagher LLP
2 Gateway Center, Suite 1450
603 Stanwix Street
Pittsburgh, PA 15222
Counsel for Appellee
American Centennial Insurance
Company
OPINION OF THE COURT
BECKER, Chief Judge.
In this insurance coverage dispute, plaintiff Dennis
Brooks seeks coverage from defendant American Centennial
Insurance Company (“ACI”) for an injury he suffered while
loading heavy machinery onto a truck owned by Eazor
Express, for which ACI provided excess insurance coverage.
Although Brooks suffered his injury in 1981, his case
alleging negligence against Eazor, which he brought in the
Court of Common Pleas of Allegheny County, Pennsylvania,
did not go to trial until 1993. By that time, Eazor had
ceased to exist. Brooks therefore sought recovery from ACI
pursuant to Pennsylvania’s Direct Action statute, which
allows him to “stand in the shoes” of Eazor to assert
against ACI any claim which Eazor could have asserted.
Due to an odd combination of circumstances, no defense
was offered at Brooks’s trial, where he won a judgment of
$5,979,482.80. While $1 million was the responsibility of
(and was paid by) lower-level carriers, the balance was
payable by ACI.
ACI refused to pay, however, arguing that its policy
conditioned coverage upon prompt notice of any impending
claim, and representing that it first learned of Brooks’s suit
in July of 1996, fully three years after Brooks won his
verdict. It offered as evidence the testimony of Luann
Petrellis, a corporate representative who worked in ACI’s
claims department. She testified that ACI’s records showed
3
no notice of Brooks’s claim prior to 1996, and that ACI had
no third-party agents authorized to receive notice of claims
on ACI’s behalf. The District Court granted summary
judgment to ACI, finding that Brooks had failed to produce
any evidence to counter Petrellis’s testimony, and that
Brooks’s late notice had prejudiced ACI.
Although we agree that ACI was prejudiced when no
defense was presented at trial, we conclude that the
District Court erred in holding, on summary judgment, that
ACI did not receive timely notice of Brooks’s claim.
Although Petrellis stated that ACI’s records reflected no
timely notice from Brooks, she based her opinion on her
review of Eazor’s underwriting files, which ACI obtained
from The Underwriters, Inc. (“TUI”). TUI, at times relevant,
acted as ACI’s “managing agent.” The record suggests that
TUI had been in close communication with Darrah (the
company that assembled Eazor’s insurance package) and
North Star (a lower-level insurer), both of which knew of
Brooks’s claim. Pursuant to the controlling decision in
Brakeman v. Potomac Ins. Co., 371 A.2d 193 (Pa. 1977), ACI
bears the burden of proving that TUI’s files did not alert it
to Brooks’s claim. We conclude that ACI cannot carry that
burden, as exemplified by the fact that Petrellis admitted at
trial that “there at one time may have been a much more
extensive [TUI] file. I don’t know. . . . Things could have
been moved. Ultimately, what we got is what we got.”
(A241-42.) Viewing the evidence, more fully discussed infra,
in the light most favorable to Brooks, we are satisfied that
a reasonable person could conclude that Petrellis failed to
review all of TUI’s documents, some of which might have
reflected notice of Brooks’s claim. We will therefore reverse
the District Court’s grant of summary judgment, and
remand for further proceedings.
I. Facts and Procedural History
Eazor Express (“Eazor”) was a trucking company
headquartered in Pittsburgh, Pennsylvania. On July 28,
1981, Brooks, an employee of Gulf Oil Corp., was one of
several men loading heavy industrial field pumps onto an
Eazor truck. Although Brooks initially used a forklift to
hoist the pumps onto the truck and to push them toward
4
the front of the trailer, that method caused cracking in the
wooden pallets under the pumps. Ben Palmer, Brooks’s
supervisor, therefore instructed Brooks and several of his
co-workers to lift and slide the pumps manually. Brooks
and two others succeeded in moving two 600-pound
pumps, but when they attempted to move an 850-pound
pump, the pump slid off the hand cart and fell over,
pushing the hand cart into Brooks’s stomach and throwing
him against the wall of the trailer. Brooks has been
disabled since the date of the accident. Numerous treating
physicians, as well as physicians who examined him in
connection with his receipt of workers’ compensation
benefits and Social Security total disability benefits, have
confirmed that condition.
At the time of Brooks’s accident, which he alleged to be
the result of Eazor’s negligence, Eazor maintained multi-
layered general liability coverage for personal injury claims.
The first layer was a self-insured retention (“SIR”) of
$150,000 per claim. Lloyd’s of London provided coverage for
claims between $150,000 and $350,000. North Star
Reinsurance Corporation (“North Star”) provided the next
layer of coverage, which protected against claims ranging
from $350,000 to $1 million. (A283.) Eazor’s final layer of
coverage, which was provided by ACI, is the policy at issue
in the case at bar. It covered claims ranging from $1 million
to $5 million. Since Interstate Commerce Commission
trucking regulations required Eazor to maintain self-
insurance for claims up to $100,000, Eazor arranged for an
insurance certificate to be issued by Guarantee Insurance
Company (“Guarantee”). (A388.) Under that arrangement,
Eazor paid premiums to North Star, which in turn agreed
to hold Guarantee harmless for any claim made pursuant
to the certificate. (A456.)
In 1984, Eazor’s creditors filed a petition for its
liquidation in the United States Bankruptcy Court for the
Western District of Pennsylvania. Eazor ceased operations
in 1985, and its bankruptcy case was closed in 1991.
Although Brooks filed his Complaint against Eazor and
Goulds (the pump manufacturer) in 1983, fully a year
before Eazor declared bankruptcy, his case did not proceed
to trial until May of 1993; during the intervening decade,
5
the litigation was rife with delay, miscommunication, and
confusion. Brooks submits that, because of his back injury
and ongoing pain arising therefrom, he has been unable to
return to his job at Gulf and cannot hold any other job that
involves heavy lifting or other manual labor. (A732.) Indeed,
as of 1993, he contended that it was nearly impossible for
him to do regular household chores, and that his injury
had played a role in the deterioration of his marriage.
(A729.)
Brooks brought suit by Praecipe for Writ of Summons in
the Court of Common Pleas of Allegheny County,
Pennsylvania, against Eazor and Goulds. Against Eazor,
Brooks alleged negligence in maintaining the interior of the
trailer into which he was loading pumps at the time of his
injury. As to Goulds, the pump manufacturer, he claimed
that the pallets on which the pumps rested were
structurally inadequate, and that Goulds negligently failed
to warn him of the dangerous condition. (A852, 856.) Eazor
initially retained attorney James Elder to defend it, but
once Eazor entered into bankruptcy and ceased operations,
it apparently stopped paying Elder’s fees and Elder sought
to withdraw from the case. (A865.) He withdrew in 1989,
and during the pendency of Eazor’s bankruptcy, there
seems to have been little activity concerning Brooks’s claim.
Following the conclusion of the bankruptcy proceedings
in 1991, Brooks began to pursue his claim more actively. In
1992, Guarantee Insurance, in coordination with North
Star, retained Robert Weinheimer as counsel for the
defunct Eazor. Weinheimer obtained an extension of a
September 1992 trial date and received the court’s
permission to reopen discovery. However, as Guarantee was
trying to settle the matter and wished to minimize its legal
costs, it instructed Weinheimer not to defend actively
against Eazor’s claim. (A687-690.) Thus, no answer was
ever filed, and no discovery was pursued — indeed, neither
Goulds nor Eazor so much as obtained an independent
examination of Brooks’s medical condition.
In 1991, Goulds filed a pre-trial statement in which it
indicated that (unlike Eazor) it was prepared to challenge
Brooks’s claims concerning liability and damages. (A836.)
Shortly thereafter, Brooks agreed to dismiss Goulds from
6
the case. (A846-47.) At the same time, Brooks settled with
Guarantee Insurance for $100,000, the limit of Guarantee’s
responsibility under the ICC filings it made on Eazor’s
behalf. These dismissals left Eazor as the sole defendant,
and as stated supra, Eazor’s attorney had been instructed
not to defend the case actively. The end result was that no
defense was offered at trial — no contrary medical evidence
was presented, no vocational expert testimony was
proffered to demonstrate that Brooks could hold a job
different from the one he held at Gulf, and no argument
was made that Brooks was contributorily negligent or that
he assumed the risk of his injuries. Brooks adduced
evidence of damages for medical treatment and past wage
loss in excess of $350,000, and of future wage loss alleged
to be in excess of $4 million. He told the court that he
believed his entire claim to be worth $10 million. After
hearing a little more than one hour of evidence from Brooks
and his counsel, the court held in favor of Brooks and
awarded him $3 million in compensatory damages and
$2,979,492.80 in punitive damages, for a total judgment of
$5,979,482.80. (A881-87.)
More than three years later, in July of 1996, Brooks’s
counsel wrote to ACI, advising it of the May 1993 verdict
and demanding that it pay $4 million in satisfaction of that
judgment. ACI responded that it had never heard of Brooks,
and had no notice or knowledge of his claim against Eazor,
his lawsuit, or the May 1993 trial and verdict. ACI’s policy
required that it be given notice “[u]pon the happening of an
occurrence reasonably likely to involve” ACI, (A302)
(emphasis added), and provided that ACI “shall have the
right and opportunity to associate with the insured in the
defense and control of any claim or proceeding reasonably
likely to involve” its coverage layer. (Id.) ACI argued that,
under Pennsylvania law, an insurer is relieved of any
obligation to indemnify its insured for a claim where the
insured fails to provide timely notice of its claim and the
insurer suffers prejudice as a result, citing to Brakeman v.
Potomac Ins. Co., 371 A.2d 193 (Pa. 1977). It submitted
that it had been prejudiced insofar as no one had
conducted an independent medical examination of Brooks
or even presented a defense at trial, and it therefore denied
Brooks’s claim.
7
Brooks brought the present declaratory judgment action
against ACI in the District Court for the Western District of
Pennsylvania, asking the Court to declare ACI liable for the
amount of Brooks’s recovery exceeding $1 million. ACI
moved for summary judgment, claiming lack of notice
pursuant to Brakeman. Brooks argued that he had
provided clear notice to Darrah (the firm that had
assembled Eazor’s insurance package, and that had
audited ACI’s books in 1982) and North Star, and that their
close association with ACI made it likely that ACI too had
learned of his claim. Brooks also submitted that ACI’s
policy, which provided for notice to ACI “or any of its
authorized agents,” implied the existence of such agents,
and that Brooks had no reason to presume Darrah was not
an agent insofar as it conducted audits of ACI’s clients. The
District Court granted ACI’s motion for summary judgment.
It concluded that Brooks’s arguments that ACI might have
received notice were “predicated upon speculation,” and
stated that such “purely theoretical” assertions are
“insufficient to defeat summary judgment.” Brooks now
appeals from this judgment. The District Court had
diversity jurisdiction pursuant to 28 U.S.C. § 1332(a), and
we exercise appellate jurisdiction pursuant to 28 U.S.C.
§ 1291.
II. Discussion
Under Pennsylvania’s Direct Action Statute, Pa. Stat.
Ann. tit. 40, § 117 (West 1993), Brooks stands in the shoes
of Eazor, the bankrupt insured, for purposes of seeking
recovery from an insurer. Brooks’s right to a recovery from
ACI is therefore coextensive with Eazor’s right, had Eazor
survived to assert it. To the extent ACI could successfully
assert a defense of lack of notice against Eazor, it may also
assert such defense against Brooks. The governing law on
ACI’s notice defense is set forth in Brakeman, 371 A.2d at
198: “[W]here an insurance company seeks to be relieved of
its obligations under a liability insurance policy on the
ground of late notice, the insurance company will be
required to prove that the notice provision was in fact
breached and that the breach resulted in prejudice to its
position.”
8
We are satisfied that ACI was prejudiced by its absence
from Brooks’s trial, for as mentioned supra, no real defense
was offered. Indeed, ACI alleges nine ways in which it was
prejudiced, including that it was unable to: (1) investigate
the claim prior to trial; (2) interview witnesses or retain
counsel; (3) present several defenses to its liability,
including contributory or comparative negligence,
assumption of risk and contribution or indemnification by
a third party tortfeasor (Goulds); (4) obtain an independent
medical examination of Brooks; (5) present any defense as
to damages; (6) engage in discovery concerning Brooks’s
alleged injuries and present its own medical experts at trial;
(7) retain a vocational expert and present other available
evidence that Brooks was capable of holding a job; (8)
engage in settlement negotiations; and (9) appeal the $6
million, unchallenged verdict.
The harder question is whether ACI met its Brakeman
burden of proving that the notice provision was in fact
breached. Because the District Court granted summary
judgment for ACI on its lack-of-notice argument, we may
affirm only if we conclude that a reasonable person, viewing
the evidence in the light most favorable to Brooks, could
not conclude that ACI received notice of Brooks’s claim,
and that it received it in time to avoid prejudice. If a
reasonable person could conclude that ACI received timely
notice, summary judgment was inappropriate. See Celotex
Corp. v. Catrett, 477 U.S. 317, 322 (1986).
The parties agree that, at the time of trial, Brooks
believed his claim was worth $10 million, an amount that
unambiguously implicated ACI’s coverage layer. Indeed,
because Brooks was injured in 1981 and filed his complaint
in 1991, and claimed lost past and future earnings of
approximately $4 million as well as longstanding pain and
suffering, he was surely aware of the magnitude of his
claim long before the trial itself. Brooks, however, contends
that he owed no notice to ACI, for ACI’s contract calls for
the insured, i.e. Eazor, to notify the insurer when the
insured expects a claim to impact the insurer’s coverage
layer. He represents that, although Pennsylvania’s direct
action statute allows Brooks to stand in Eazor’s shoes for
the purposes of pursuing an insurance claim, that statute
9
does not shift to Brooks the burden of notifying ACI. We
find that argument untenable for two reasons. First, Eazor
ceased to exist in 1991, two years before Brooks’s claim
went to trial; if the duty to notify ACI remained with Eazor
even after its dissolution, ACI’s notice provision would be a
dead letter, a result that is illogical in light of the fact that
ACI is a de facto defendant on Brooks’s claim.
The more serious problem with Brooks’s argument,
however, is that Eazor’s contract with ACI guaranteed ACI
a right to associate with Eazor in defending against any
claim that might impact its coverage layer. ACI alleges that
its late receipt of notice violated its contractual right to
associate with the defense, and that under Pennsylvania’s
direct action statute, ACI may assert against Brooks any
claim that it might otherwise have asserted against Eazor.
Put differently, even if the direct action statute does not
shift to Brooks the duty to notify ACI, it nonetheless allows
ACI to assert lack of notice against Brooks, assuming (of
course) that ACI can prove such under Brakeman.
Having concluded that ACI’s coverage is contingent upon
timely notice from Brooks, the question is whether ACI can
demonstrate, pursuant to Brakeman, that it did not receive
notice of Brooks’s claim a reasonable time before the May
1993 trial. ACI offered as proof the testimony of Luann
Petrellis, the Senior Vice President and Manager of ACI’s
claims department. In her deposition, she stated that
Brooks’s July 1996 letter was the first notice received by
ACI concerning his claim. (A114.) She formulated that
opinion after checking the underwriting file obtained from
TUI, ACI’s managing general agent, which contained no
evidence of any claim.1 She also checked ACI’s computer
system, which reflected no notice prior to that received in
July of 1996. (A1012, 1015.) Finally, Petrellis testified that
while Darrah and North Star might have learned of
Brooks’s claim in timely fashion, neither was an authorized
agent of ACI; indeed, Petrellis submits that ACI never had
1. Both Brooks and ACI describe TUI as ACI’s “managing general agent.”
(Brooks Br. at 9; ACI Br. at 30-31). Neither party, however, explains the
function of a managing general agent nor distinguishes it from any other
type of agent.
10
an agent authorized to accept notice of claims. (A231, 240,
242-43.)
Brooks offers several responses. First, he submits that
Petrellis’s testimony is inadmissible for summary judgment
purposes, for she allegedly had no first-hand knowledge of
ACI’s policies during the time in question. Petrellis joined
ACI in 1992, at which point she assumed responsibility for
its claims department. (A225.) ACI, however, had stopped
writing excess insurance policies in 1985, and it had been
in “run off ” for seven years when Petrellis joined the
company. (A225-26.) The result was that Petrellis knew
little about such policies and the procedures ACI employed
regarding them. For example, her testimony reveals that
she did not know whether ACI had a practice of obtaining
copies of underlying insurance policies, (A227), nor did she
know whether ACI had any mechanism for communicating
with underlying insurers and confirming the status of their
policies. (A229.) Brooks also submits that the records
Petrellis consulted were too incomplete to support her
statement that ACI never received notice. For example,
although she states that she consulted TUI’s underwriting
file, she admitted upon questioning that ACI had difficulty
getting TUI’s documents:
There at one time may have been a much more
extensive file. I don’t know. I produced to you what we
had, everything that was left. For many years, these
files were warehoused somewhere in north New Jersey.
I don’t know if it was under lock and key. Things could
have been moved. Ultimately, what we got is what we
got.
(A241-42.) Brooks contends that potentially incomplete
records cannot successfully support a motion for summary
judgment on the basis of lack of notice.
Second, Brooks argues that even if ACI did not actually
employ Darrah or North Star as agents, his notice to them
likely alerted ACI to his suit, for Darrah and North Star
worked closely with Eazor — Darrah had assembled Eazor’s
insurance package (including ACI’s coverage) in the first
instance, and Petrellis testified that ACI depended on North
Star to defend against lower-level claims “appropriately and
11
professionally.” (A238.) The record suggests that North Star
and Darrah spoke frequently with TUI regarding Eazor,
(A240), and Petrellis testified that it was possible that
someone at ACI had communicated with North Star to
determine whether there were any pending claims. (Id.)
Brooks reasons that, as ACI bears the burden of proving
lack of notice, it must disprove the possibility that one of its
case managers had received notice from a lower-level
carrier.
Finally, Brooks points out that ACI’s policy allows for
notice to be served upon “the company or any of its
authorized agents,” and suggests that this language
“unambiguously implies the existence of authorized
agents.” (Blue Br. at 32.) Brooks argues that, given the
close working relationship among Eazor, Darrah, and North
Star, he cannot be blamed for believing that Darrah and
North Star were ACI’s agents. When viewed against the
backdrop of the plan’s allusion to unnamed agents, Brooks
submits, it was natural to assume that ACI’s intimate
relationship with Darrah and North Star implied a degree of
agency. For support, he cites to St. Paul Fire & Marine Ins.
Co. v. United States Fire Insurance Co., 655 F.2d 521 (3d
Cir. 1981), which also involved a policy providing for notice
to “the company or any of its authorized agents.” There, the
insured had received a complaint and “turned it over to his
insurance agent,” id. at 525, but the insurer argued that
notice was improper because the agent was not authorized
to receive notice. The burden to prove lack of notice was on
the insurer, however, and there was no evidence in the
record that the agent was not authorized to receive notice.
We therefore concluded that service upon the agent was
sufficient to invoke coverage. Brooks submits that St. Paul
Fire is materially indistinguishable from the case at bar,
and that we should likewise conclude that notice to Darrah
and North Star constituted notice to ACI.
We are troubled by ACI’s misleading contractual
reference to “other authorized agents” that it apparently
never had, especially given its intimate relationship with
companies that might look like agents to an insured. But
we need not determine whether Darrah and North Star
were ACI’s agents under the reasoning set forth in St. Paul
12
Fire, for we conclude that we must set aside the grant of
summary judgment because ACI may have received notice
of Brooks’s claim through TUI, its underwriter. As
explained supra, the record suggests that North Star and
Darrah spoke frequently with TUI regarding Eazor, (A240),
and it is clear that both North Star and Darrah were aware
of Brooks’s claim. (A470-71) (letter to J. Majsak from G.
Cunningham, 5/23/85). It is entirely possible that TUI
learned of Brooks’s claim over the course of that
communication. Because Brakeman places on ACI the
burden of proving lack of notice, ACI may prevail on
summary judgment only if, taking the evidence in the light
most favorable to Brooks, no reasonable person could infer
that ACI received notice of Brooks’s claim through TUI.
ACI’s evidence is insufficient to rule out that possibility.
When TUI dissolved in the mid-1980s, ACI requested all of
its documents relating to Eazor, documents which might
have included information relating to Brooks’s claim.
Indeed, Petrellis reviewed at least some of these TUI
documents, and she relied upon them in reaching her
conclusion that ACI had received no notice of Brooks’s
claim prior to 1996. (A1012, 1015.) But Petrellis could not
state with certainty that she had reviewed all of the
documents ACI had received from TUI — she stated that
“there at one time may have been a much more extensive
file. I don’t know. . . . Things could have been moved.
Ultimately, what we got is what we got.” (A241-42.)
Summary judgment is improper in the face of such
uncertainty, for we are required to assume that Petrellis
failed to examine a substantial number of records regarding
Eazor that ACI had received from TUI. As Petrellis’s
testimony was the only evidence offered to prove lack of
notice, we conclude that the question whether ACI received
timely notice of Brooks’s claim is best left to the trier of
fact.
Indeed, any other outcome would condone ACI’s failure to
maintain competent records, a policy outcome directly at
odds with Brakeman’s determination that lack of notice is
an affirmative defense to be plead and proved by the
insurer. As discussed supra, Petrellis could not state with
certainty that ACI had all of TUI’s records relating to Eazor,
13
nor could she rule out the possibility that ACI had been in
contact with North Star regarding Brooks’s claim. But ACI’s
recordkeeping incompetence goes far beyond those
deficiencies, for ACI was unable even to produce a copy of
its policy with Eazor, forcing litigation to proceed using a
form policy which only presumably is similar to the actual
policy at issue. Likewise, although ACI insists that TUI was
not authorized to receive notice, it was unable to produce
the documents governing its relationship with TUI, and the
record contains evidence to the contrary — at least one
document, for example, is signed by a TUI employee on
paper bearing the notation “The Underwriters Inc. . . For
American Centennial Insurance Company.” (A374.)
Because we are satisfied that ACI’s records are
insufficient to rule out the possibility that ACI received
timely notice of Brooks’s claim, we will reverse the District
Court’s grant of summary judgment for ACI and remand to
the District Court for further proceedings. These
proceedings should, as an initial matter, include an in
limine hearing to determine the scope of Petrellis’s
competence to testify, for the record does not suggest that
any foundation has been laid for her testimony. Fed. R.
Evid. 602 provides that “[a] witness may not testify to a
matter unless evidence is introduced sufficient to support a
finding that the witness has personal knowledge of the
matter.” Petrellis joined ACI in 1992, long after ACI had
issued its last excess policy, and although it is conceivable
that she gained expertise regarding such policies by dealing
with those that remained in run-off during her tenure, that
seems unlikely. She admitted that, inter alia, she did not
know if ACI had a policy of obtaining copies of underlying
insurance policies, (A227), or whether it had a mechanism
for communicating with underlying insurers regarding
those policies. (A229.) Indeed, nothing in the record
suggests that she ever dealt with an excess policy, in which
case her competence to testify would be limited to
discussing whether ACI’s current records indicate notice.
That, of course, would be equivalent to asserting a Fed. R.
Evid. 803(7) hearsay exception for using business records
to prove lack of receipt, a tactic which ACI has not
pursued, perhaps understandably given the state of its
recordkeeping.
14
The judgment of the District Court will be reversed, and
the case remanded for further proceedings.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit