Opinions of the United
2007 Decisions States Court of Appeals
for the Third Circuit
2-16-2007
Natl Union Fire Ins v. Gen Star Indemnity
Precedential or Non-Precedential: Non-Precedential
Docket No. 05-3392
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_______________
No. 05-3392
_______________
NATIONAL UNION FIRE INSURANCE COMPANY
OF PITTSBURGH, PA,
Appellant,
v.
GENERAL STAR INDEMNITY COMPANY.
____________________
On Appeal From the United States District Court
for the Eastern District of Pennsylvania
(No. 04-cv-01065)
Senior District Judge: Honorable John P. Fullam
Argued: December 14, 2006
Before: FISHER, CHAGARES and GREENBERG, Circuit Judges.
(Filed: February 16, 2007)
__________________
Jeffrey R. Lerman, Esq. (Argued)
Glenn F. Rosenblum, Esq.
Montgomery, McCracken, Walker & Rhoads, LLP
123 South Broad Street
Philadelphia, PA 19109
Counsel for Appellant
Alan H. Barbanel, Esq. (Argued)
Barbanel & Treuer
1925 Century Park East
Suite 350
Los Angeles, CA 90067
William H. Black, Jr., Esq.
M. Jane Goode, Esq.
Gibbons, Del Deo, Dolan, Griffinger & Vecchione, P.C.
1700 Two Logan Square
18th & Arch Streets
Philadelphia, PA 19103
Counsel for Appellee
OPINION OF THE COURT
__________________
CHAGARES, Circuit Judge.
This appeal arises out of a dispute between two insurance companies over an
excess liability insurance policy issued by appellee General Star Indemnity Company
(“General Star”) to ATI Systems International, Inc. (“ATI”). The General Star policy
provided coverage above and beyond ATI’s self-insured retention and the primary
insurance policy of appellant, National Union Fire Insurance Company of Pittsburgh, PA
(“National”). General Star disclaimed coverage based on lack of notice of the underlying
suit. After paying the judgment in full, National filed this action for indemnification
alleging wrongful repudiation of its payment obligations. National appeals from an order
of the District Court granting summary judgment in favor of General Star.
2
For the reasons expressed below, we will affirm.
I.
We recite only those facts necessary to decide this appeal.
The genesis of this action is a lawsuit for personal injuries stemming from a
collision between an armored truck owned and operated by Brooks Armored Car Service
(“Brooks”), an affiliate of ATI, and a bicyclist, Christine Bennyhoff (“Bennyhoff”).
Bennyhoff filed suit against Brooks and its driver. The defense of the underlying action
was initially directed by Constitution States Services Company (“CSSC”), a third-party
claim administrator, pursuant to a Claims Service Agreement between CSSC and
National.
At the time of the accident, Brooks was insured under a policy of primary liability
insurance issued to ATI by National. The National policy provided $1 million in primary
insurance limits, subject to a $250,000 self-insured retention. General Star provided
excess liability insurance to ATI of $10 million, above the total $1,250,000 limits of
ATI’s deductible and National’s primary policy.
The General Star excess policy at issue explicitly required that General Star be
given written notice of occurrences likely to involve its policy and also required that suit
papers relating to any claim be forwarded to General Star. The policy stated, in pertinent
part:
Conditions
....
3
(B) Insured’s Duties In The Event of Occurrence, Claim or Suit
(1) In the event of an occurrence covered hereunder
involving injuries or damages which, without regard to
legal liability, appears likely to involve this Policy,
written notice containing particulars sufficient to
identify the Insured and also reasonably obtainable
information with respect to the time, place and
circumstances thereof, and the names and addresses of
the injured and of available witnesses, shall be given
by or for the Insured to the Company or any of its
authorized agents as soon as practicable.
(2) If a claim is made or suit is brought against the Insured
because of an occurrence which, without regard to
legal liability, appears likely to involve this Policy, the
Insured shall immediately forward to the Company
every demand, notice, summons, or other process
received by him or his representative.
(A96.)
Bennyhoff sought damages of $600,000 for her injuries. On January 5,
2000, Bennyhoff and CSSC participated in pre-trial settlement discussions before a
mediator. After considering the merits, the mediator recommended a $75,000
settlement, but advised CSSC that a verdict could range as high as $250,000 to
$300,000.
The parties failed to settle, and the case went to trial before the Philadelphia
Court of Common Pleas. On June 21, 2000, the jury returned a verdict in favor of
Bennyhoff in the amount of $3 million, which the court then molded to $2,010,100
to reflect Bennyhoff’s comparative negligence. The verdict exceeded ATI’s and
National’s combined insurance limits by approximately $750,000. It was not until
4
the jury reached its verdict that CSSC or National conceived that the Bennyhoff
action was likely to involve General Star’s excess policy.
On June 22, 2000, Kelly Meunier (“Meunier”) of CSSC claimed she
notified General Star of the unexpectedly large verdict. According to Meunier, she
telephoned General Star’s main number for the underwriting department and
reported the details of the verdict to someone named “Janet” who answered the
phone. Based on this conversation, Meunier testified at her deposition that she
believed that Janet would report the information to the claims department and a file
would be “set up.” There is evidence in the record that shortly thereafter, Ted
Gaisford (“Gaisford”), a claims manager at General Star, attempted to reach
Meunier by email and telephone. In response, Meunier testified that she returned
Gaisford’s call and left him a voice message, but never spoke to him directly. It is
undisputed that at this time, neither CSSC nor National provided written notice of
the claim to General Star or provided General Star with any papers from the
underlying suit in compliance with General Star’s policy set forth above.
Post-trial, National took control of the case, purchasing an appeal bond
from Fidelity & Deposit Company of Maryland (“Fidelity”) in the amount of
$2,500,511 to bond the full amount of the judgment plus 20%, as is required by
state court rules to stay execution against a defendant/insured.
Apart from Meunier’s initial conversation with Janet, National had no
further contact with General Star during the entire post-trial period until March 26,
5
2003, when, at National’s request, Meunier wrote to General Star to detail the
Bennyhoff claim. Although the letter references her oral communication of the
claim information in June 2000, it is undisputed that Meunier’s March 2003 letter
was the first written notice that General Star received. Pursuant to the terms of the
policy, Meunier forwarded the summons and complaint to General Star. However,
by letter dated April 8, 2003, General Star disclaimed coverage based on
National’s nearly three-year delay in providing written notice of the claim and suit
papers.
Following the affirmance of the Bennyhoff judgment by the Pennsylvania
Superior Court, on April 22, 2003, the Supreme Court of Pennsylvania denied
leave for further appeal, and the judgment against ATI became subject to
execution.
National demanded that Fidelity pay on the appeal bond. National then
entered into a loan receipt agreement pursuant to which it advanced Fidelity
$1,032,211.10 to cover General Star’s portion of Fidelity’s payment. Under the
terms of the loan receipt agreement, Fidelity assigned National its rights against
third parties arising from the Bennyhoff matter. National assumed any obligations
Fidelity may have had to pursue claims against ATI or General Star in connection
with the funds paid by Fidelity to Bennyhoff. National then filed this diversity
action against General Star seeking indemnification as contractual and equitable
subrogee of ATI or as an assignee of Fidelity.
6
National’s action against General Star proceeded to cross motions for
summary judgment. On June 9, 2005, the District Court granted summary
judgment in favor of General Star and against National. The District Court
concluded that written notice given just before the denial of the final appeal was
tantamount to no notice at all, and that General Star was prejudiced as a matter of
law by National’s failure to provide notice.
The District Court filed a Supplemental Memorandum on June 13, 2005 in
which it reiterated its conclusion that written notice was required. However, the
District Court also expressed its belief that notice should have been given in
advance of the trial. Its opinion in this regard was based on a mistaken
understanding of the settlement value that the mediator placed on the case. The
District Court stated, “The case had been submitted to mediation before a common
pleas judge, who expressed the view that, because plaintiff would have difficulty
in establishing liability before a jury, the case had a settlement value of $500,000
to $600,000. Thus, it should have been clear to the parties that ‘without regard to
legal liability’ . . , the case would likely involve the excess policy.” (A6-A7.) In
actuality, the mediator placed a value on the case of $75,000 but cautioned that a
jury verdict might be as high as $300,000.
Because we conclude that compliance with the written notice provision of
General Star’s policy was triggered only after the jury reached its verdict, the
District Court’s factual finding as to the settlement value of the case and its
7
conclusion that notice prior to trial was required is harmless error.
II.
This Court exercises plenary review over a district court's grant of summary
judgment. Summary judgment is appropriate “if the pleadings, depositions,
answers to interrogatories, and admissions on file, together with the affidavits, if
any, show that there is no genuine issue as to any material fact and that the moving
party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c). “We
view the facts in the light most favorable to the party against whom summary
judgment was entered.” Woodside v. School Dist. of Phila. Bd. of Educ., 248 F.3d
129, 130 (3d Cir. 2001) (quoting Foehl v. United States, 238 F.3d 474, 477 (3d
Cir. 2001)).
III.
Before we turn to the substance of the parties’ arguments, we address two
threshold issues: whether to apply Pennsylvania or California law and whether National
has established its status as equitable subrogee.
A.
In its Supplemental Memorandum, the District Court stated, “By way of further
clarification, I have concluded that the case would be decided the same way, regardless of
whether California law or Pennsylvania law is applied. If choice were necessary, I
conclude that California law governs the interpretation and application of the insurance
policy in question.” (A7.) While we agree that California law governs, we set forth the
8
governing principles for the benefit of the parties.
In cases where federal jurisdiction is based on diversity of citizenship, the court
applies the choice of law rules of the state in which the district court is located. J.C.
Penney Life Ins. Co. v. Pilosi, 393 F.3d 356, 360 (3d Cir. 2004); see also Klaxon Co. v.
Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). As this case was instituted in the
Eastern District of Pennsylvania, we will therefore apply Pennsylvania choice of law
rules. “‘Under Pennsylvania choice of law rules, an insurance contract is governed by the
law of the state in which the contract was made.’” J.C. Penney, 393 F.3d at 360 (quoting
Crawford v. Manhattan Life Ins. Co., 221 A.2d 877, 880 (Pa. Super. 1966)). “‘An
insurance contract is “made” in the state in which the last act legally necessary to bring
the contract into force takes place.’” Id. Generally, the “‘last act is delivery of the policy
to the insured and the payment of the first premium by him.’” Id. (quoting Ruhlin v. N.Y.
Life Ins. Co., 106 F.2d 921, 923 (3d Cir. 1939)); see also CAT Internet Servs., Inc. v.
Providence Washington Ins. Co., 333 F.3d 138, 141 (3d Cir. 2003) (“Pennsylvania
conflict of laws principles dictate that an insurance contract is guided [sic] by the law of
the state in which it is delivered.”).
Here, the parties do not dispute that the General Star policy was delivered to ATI
in Pasadena, California, which is ATI’s principal place of business. ATI’s California
address appears on the Declarations page of the General Star policy. National offers no
evidence to demonstrate that ATI paid its premiums from any other location. National
recognizes the prevailing view that an insurance contract is governed by the law of the
9
state in which it was delivered, but argues alternatively that under an interests analysis,1
Pennsylvania law might apply because the incidents giving rise to the underlying claim
occurred in Pennsylvania and the subject of the underlying lawsuit was located in
Pennsylvania. See U.S. Fidelity & Guar. Co. v. Barron Indus., Inc., 809 F. Supp. 355,
359 (M.D. Pa. 1992).
We decline to deviate from our prior precedents and therefore hold that California
law governs the insurance contract at issue.
B.
At summary judgment, General Star argued that National was unable to establish
itself as an equitable subrogee of ATI or as an assignee of Fidelity. The District Court did
not reach the merits of this argument, effectively assuming that National could
demonstrate its status as equitable subrogee or assignee. Because we agree with the
District Court that National failed to comply with the express terms of the General Star
policy, we likewise need not reach General Star’s alternative argument that National is
neither equitable subrogee nor assignee.
IV.
There are two substantive issues on appeal. The first deals with notice and the
1
An interests analysis seeks to determine which state has the most significant
contacts or relationship with the particular issue by examining the underlying interests
behind conflicting laws among the different jurisdictions. See Garcia v. Plaza
Oldsmobile Ltd., 421 F.3d 216, 220 (3d Cir. 2005). Pennsylvania applies this analysis in
tort cases; in insurance contract cases, however, we adhere to the rule stated above.
10
second with prejudice. We turn first to notice.
A.
In its opening brief, National recognizes the importance of compliance with notice
provisions and agrees that it is neither fair nor consistent with reasonable commercial
expectations to disregard non-compliance with explicit notice requirements, especially if
such non-compliance results in an insurer being deprived of information or materials it
needs to protect the interests of the insured or its own. That being said, National argues
that it was error for the District Court to have disregarded the evidence of oral
notification.
According to California’s Code of Civil Procedure § 1858,2 a court construing a
contract shall faithfully interpret the terms contained therein. It is well-settled “that
where the terms of the [insurance] policy are plain and explicit, the court will indulge in
no forced construction so as to cast a liability upon the insurance company which it has
not assumed.” N.Y. Life Ins. Co. v. Hollender, 237 P.2d 510, 514 (Cal. 1951) (internal
citations omitted). General Star contends that the terms of its policy are plain and
explicit. The insured (1) must provide written notice of an occurrence likely to implicate
General Star’s coverage and (2) “shall immediately forward” any relevant documents
2
“In the construction of a statute or instrument, the office of the Judge is simply to
ascertain and declare what is in terms or in substance contained therein, not to insert what
has been omitted, or to omit what has been inserted; and where there are several
provisions or particulars, such a construction is, if possible, to be adopted as will give
effect to all.” Cal. Civ. Proc. Code § 1858.
11
related to the occurrence. National did neither, but now asks us to reverse the District
Court’s decision based on some evidence of oral notification, even though the District
Court determined, correctly, that the evidence surrounding the claimed oral contacts was
“confused and fragmentary.”
National and CSSC are sophisticated entities well able to comply with the terms of
an insurance policy. Indeed it is their business to do so. There is no evidence that
General Star waived its right to written notice. Although there is some testimonial
evidence that General Star can open a claim file based on an oral report of the basic
policy information, there is no evidence that General Star had a custom or practice of
accepting oral notice of which National was aware and on which it relied. Cf. Dickinson
v. General Accident Fire & Life Assur. Corp., 147 F.2d 396, 398 (9th Cir. 1945) (“There
was, moreover, evidence of a custom of the insurer, known to and relied on by the
insured, of accepting oral notice of accident.”). Accordingly, we conclude that National
failed to comply with mandatory conditions of coverage.
General Star did not receive actual written notice until March 2003. National
relies on Span, Inc. v. Assoc. Int’l Ins. Co., 277 Cal. Rptr. 828 (Cal. Ct. App. 1991),
however, to argue that General Star had a duty of inquiry to investigate the Bennyhoff
matter after it received what National claims amounts to constructive oral notice in June
2000. In Span, the duty of inquiry arose from the primary insurer’s insolvency. The
court held that the excess insurer was under an increased duty to inquire into the details of
an underlying tort action because the presumption that the primary insurer would provide
12
experienced defense did not apply.
Span is factually distinguishable from the present situation in several important
respects. First, we are not dealing with an insolvent primary insurer. Second, the
evidence presented in Span demonstrated that Associated, the excess insurer, was
informed in writing of the underlying personal injury action three years before the trial,
not three years after. Id. at 830. Third, Associated filed a notice of appeal in the
underlying action upon receipt of notice of the $1,276,000 judgment which penetrated the
excess insurance layer. Id. Associated later voluntarily abandoned the appeal. Fourth,
there was evidence that counsel for defendant in the underlying action had advised
Associated of the trial dates and Associated “had refused to accept the tender of the
defense or to offer any assistance in the trial of the underlying lawsuit.” Id. at 831.
Finally, there was evidence that counsel for Associated had appeared at the mandatory
settlement conference in the declaratory relief action. Id.
The Span court concluded, as a matter of law, that
Associated's knowledge of the Ledesma action and the insolvency of
the primary carrier placed it on inquiry notice of the contents of the
superior court file in the Ledesma action. Simple review thereof
would have alerted Associated that Ledesma had filed a statement of
damages seeking $1 million in general and $1 million in special
damages, a demand for settlement in the amount of $650,000, and
that Ledesma's damages had been described as “extensive” in an
arbitration conference.
Id. at 839. Thus, “Associated . . . had sufficient knowledge of the underlying action as to
amount to constructive notice its policy was likely to be involved.” Id. at 829.
13
As discussed above, what evidence there was of oral notice to General Star in June
2000 was confused and fragmentary. General Star did not receive any updates about the
progress of case, no suit papers were forwarded, it did not participate in a settlement
conference and it was unaware of any post-trial appeals until just weeks before the final
appeal was denied. Unlike Span, we conclude that General Star did not have “sufficient
knowledge of the underlying action as to amount to constructive notice that its policy was
likely to be involved.” Id.
B.
The District Court also held that General Star was prejudiced as a matter of law by
National’s failure to provide timely written notice. In this regard, the Court found that
General Star was denied any right to participate in the appeals or to attempt to broker a
settlement for less than the full amount of the judgment. The District Court found
undisputedly “that National Union and ATI did not pursue settlement discussions with the
plaintiff in the underlying action, instead choosing to focus their efforts on appeal. . . .
Settlement discussions would not have hindered the ability to press the appeal, and
General Star should have had the opportunity to weigh in on the issue.” (A3-A4.)
“In California, . . . there is no presumption of prejudice. Under California law, the
insurer has the burden of proving actual and substantial prejudice, and a ‘mere possibility’
of prejudice will not suffice.” Ins. Co. of Pa. v. Associated Int’l Ins. Co., 922 F.2d 516,
524 (9th Cir. 1990) (citations omitted); see also Shell Oil Co. v. Winterthur Swiss Ins.
Co., 15 Cal. Rptr. 2d 815, 845 (Ct. App. 1993) (“California law is settled that a defense
14
based on an insured's failure to give timely notice requires the insurer to prove that it
suffered substantial prejudice. Prejudice is not presumed from delayed notice alone. The
insurer must show actual prejudice, not the mere possibility of prejudice.”) (internal
citations omitted). California law is imbued with a strong public policy against technical
forfeitures in the insurance context. See Ins. Co. of Pa., 922 F.2d at 524. The “notice-
prejudice” rule applies to excess insurers and reinsurers. See id. at 523. In fact, the
requirement of prejudice is even more compelling in the excess insurance context. Id.
“Unlike primary insurers, excess insurers have no right to control a lawsuit and thus have
less need for early notice. Moreover, because primary insurers will usually provide
experienced defense, the likelihood of prejudice from late notice is more remote.” Id.
(citing Trustees of the Univ. of Pa. v. Lexington Ins. Co., 815 F.2d 890, 898 (3d Cir.
1987)).
Here, however, there was no “mere possibility” of prejudice. Rather, the District
Court correctly concluded that General Star was substantially prejudiced by National’s
failure to notify. General Star received notice a scant four weeks before the Pennsylvania
Supreme Court denied the final appeal. National and ATI did not pursue or engage in any
settlement discussions during the entire three-year, post-trial period. National’s conduct
deprived General Star of any opportunity to assess whether National’s failure to explore
settlement was reasonable and prevented General Star from participating in, and perhaps
effecting, a better outcome.
V.
15
Accordingly, we will affirm the District Court’s grant of summary judgment in
favor of General Star.
16