United National Insurance v. Indian Harbor Insurance

Citations: 160 F. Supp. 3d 828; 2016 WL 465451; 2016 U.S. Dist. LEXIS 14791Docket: CIVIL ACTION NO. 14-6425

Court: District Court, E.D. Pennsylvania; February 7, 2016; Federal District Court

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Cross-motions for summary judgment have been filed by Penn-America Insurance Company (plaintiff) and Indian Harbor Insurance Company (defendant). Penn-America claims that Indian Harbor breached their professional liability insurance policy by failing to pay amounts owed in connection with two coverage disputes involving its insureds. The case involves allegations of breach of contract, breach of duties, and waiver and estoppel. Indian Harbor seeks summary judgment on the policy’s meaning and application, as well as on the breach of duties claim. In contrast, Penn-America seeks summary judgment on Indian Harbor's affirmative defenses, the applicability of an allocation provision, a breach of contractual obligation to "pay on behalf of" Penn-America, and the denial of coverage based on Exclusion (H).

Both coverage claims arise from the Indian Harbor policy issued to United America Indemnity, Ltd., under which Penn-America is a subsidiary. Penn-America retained the first $1,000,000 per claim. The first claim stems from an automobile accident involving a patron of Peccadillos, Inc., resulting in multiple fatalities and injuries, leading to a lawsuit against Peccadillos for liquor liability and related claims. Penn-America denied coverage based on a liquor liability exclusion in its own policy and sought a declaratory judgment affirming it had no duty to defend Peccadillos. The Pennsylvania Superior Court ruled that Penn-America had a duty to defend due to some claims falling outside the exclusion.

While the declaratory judgment was pending, Penn-America refused a settlement demand from the claimants. Subsequently, Peccadillos and the claimants reached consent judgments totaling $5,000,000 and sued Penn-America for breach of contract and bad faith. Penn-America settled this lawsuit for $3,500,000, from which it claims $2,500,000 in compensation from Indian Harbor, asserting that the entire amount falls under the Indian Harbor policy coverage.

Indian Harbor paid $1,500,000 towards the Peccadillos settlement and $355,440.21 for defense fees, leaving a balance of $1,000,000 that Penn-America seeks to recover. The second settlement arose from a lawsuit by Colleen Jackson against Sweet Sassy, Inc., after she was injured by an intoxicated patron. After six years of litigation, Jackson received a $1,020,000 jury verdict against Sweet Sassy, which Penn-America settled for $1,028,250. Jackson later amended her complaint against Penn-America for bad faith, seeking $850,000 in compensatory damages and $8.4 million in punitive damages, as well as attorney’s fees. The state court dismissed her claim for statutory interest, and Penn-America ultimately settled these claims for $1,350,000 in October 2010. Penn-America claimed $350,000 from Indian Harbor for the Jackson settlement, asserting the entire amount was covered under the policy. Indian Harbor refused payment, arguing that covered losses did not exceed the $1,000,000 retention. 

Under Rule 56 of the Federal Rules of Civil Procedure, summary judgment is appropriate when there is no genuine dispute of material fact. A genuine dispute exists if reasonable evidence could allow a verdict for the nonmoving party. Summary judgment is granted when there is insufficient evidence for a reasonable fact-finder to favor the nonmovant. Mere presence of minimal evidence is insufficient; the evidence must enable a jury to reasonably support the nonmoving party's claims. Only admissible evidence can be considered, and facts must be viewed in favor of the nonmoving party. However, inferences based on speculation do not create a material factual dispute. The party claiming a fact is disputed must support this with specific record materials or demonstrate that the opposing party cannot produce admissible evidence. The court is not obligated to search the record for disputed facts and may only consider materials cited by the parties.

Judicial interpretation of summary judgment motions indicates that when both parties submit cross-motions, each asserts its exclusive right to summary judgment, and the existence of such contradictory claims does not imply mutual agreement on the outcome of the motions or a waiver of the court's duty to determine if genuine issues of material fact exist. The court must evaluate each motion independently. In this case, the substantive law of Pennsylvania applies, guiding the interpretation of the insurance policy as a legal question focused on discerning the parties' intentions from the policy's terms. Clear language in the policy will be interpreted according to its plain meaning, while ambiguous provisions will be construed in favor of the insured, reflecting the insurer's role in drafting the terms. The insurance policy in question is not an all-risk policy but covers specific risks with exclusions. It covers claims made against the insured during the policy period for wrongful acts, including allegations of bad faith conduct. The parties agree that certain claims relating to settlements were made during the policy period, but they dispute the interpretation of other policy provisions, including the allocation provision and Exclusion (H).

The allocation provision in the Indian Harbor policy details how to apportion losses that are both covered and not covered by the policy, particularly in scenarios where Penn-America settles lawsuits with mixed claims. It states that when both covered and uncovered losses are incurred, the Insured and Insurer must collaborate to determine a fair allocation, considering their respective legal and financial exposures and benefits from the settlement or defense. If they cannot reach an agreement, the Insurer will make an interim payment for undisputed losses until a final determination is made.

Penn-America argues that the bold, capitalized term "Loss" limits the allocation provision to a specific category defined in Part II of the policy, which excludes certain uninsurable matters and contract liabilities. This interpretation is deemed unreasonable, as it would render the allocation provision meaningless if it only applied to a narrow definition of "Loss." The provision must maintain the ability to differentiate between covered and uncovered losses. The language indicating that it applies when a claim includes both types of matters contradicts Penn-America's interpretation, reinforcing that the allocation provision is intended to cover the losses defined in Part II and exclude those that are not insurable under the policy.

Exclusion (H) of the Indian Harbor insurance policy states that coverage does not apply to claims arising from an insured's liability under any contract, whether direct or assumed. However, this exclusion does not affect losses that an insured would have incurred without a contract or provide coverage for wrongful acts committed while rendering professional services under an insurance policy or express agreement. As a result, Penn-America cannot recover from Indian Harbor for its contract liability related to a policy it issued to one of its insureds, although coverage remains for wrongful acts, including bad faith conduct. 

In instances where a complaint involves both contract liability and allegations of bad faith, Exclusion (H) reinforces that while contract liability is excluded, coverage for the wrongful act of bad faith conduct remains intact. The policy's structure indicates that contract liability claims are never covered under the Indian Harbor policy.

The burden of proof regarding coverage and exclusions is outlined: the insured must prove that a covered loss occurred when seeking compensation. Conversely, when exclusions are involved, the insured bears the initial burden to demonstrate that a loss occurred, after which the insurer must show that the loss is excluded under the policy. Courts have recognized that in cases concerning exceptions to exclusions, the insured must provide evidence that the exclusion does not apply. 

The Pennsylvania Superior Court has established that the insured should bear the burden of proof for apportioning claims when seeking coverage for settlements made without a liability finding, especially when the insured has control over the settlement process and better access to relevant evidence.

The legal dispute centers on whether Penn-America is entitled to coverage under the Indian Harbor policy for settlements related to wrongful acts. The policy explicitly covers wrongful acts, necessitating that Penn-America demonstrate the settlements with Peccadillos and Jackson pertain to covered wrongful acts. The insured bears the burden to show that policy exclusions do not apply, particularly when seeking recovery for a settlement that includes both breach of contract and bad faith claims. In this instance, Exclusion (H) may affect the coverage claim.

The Peccadillos settlement, which involves claims of bad faith and breach of contract against Penn-America, has been acknowledged by Indian Harbor as including covered wrongful acts, specifically bad faith conduct. However, Indian Harbor maintains that the breach of contract claim falls outside the scope of coverage, as it does not constitute a "Wrongful Act." Indian Harbor has already compensated $1,500,000 of the $3,500,000 settlement for the claims of bad faith, with the initial $1,000,000 subject to a retention clause. Indian Harbor asserts that Penn-America has failed to provide evidence that the disputed $1,000,000 pertains to covered wrongful acts rather than contract liability.

To avoid summary judgment in favor of Indian Harbor, Penn-America must establish a genuine dispute over material facts regarding coverage or allocation. However, Penn-America has not presented sufficient evidence to support its claim that the disputed $1,000,000 relates to wrongful acts. The reliance on an unsworn expert report is inadequate for summary judgment considerations, as it lacks the necessary supporting affidavit or declaration. Consequently, the motions for partial summary judgment from Penn-America will be denied, and the court will consider Indian Harbor's motion for summary judgment regarding the Peccadillos settlement.

Marnen’s opinion is limited to the contract liability claim and does not address the underlying bad faith claims of Peccadillos against Penn-America, leading to an unreliable assessment of the claim's value relative to the Peccadillos settlement. The nature of allocation requires a comparative evaluation of claims, as illustrated by a hypothetical involving two paintings purchased for $50 million, where the value of one cannot be determined without considering the other. Consequently, Marnen's opinion is deemed inadmissible. 

Penn-America’s reliance on deposition testimony from Global Indemnity Group employees, Joyce Romoff and Mark DiGiovanni, to demonstrate its intent in allocating the Peccadillos settlement to bad faith claims is flawed. The company fails to adequately identify these individuals or their roles related to the Peccadillos action, making it impossible for the testimony to create a genuine dispute of material fact. Furthermore, the testimony does not pertain to allocation and primarily reflects Penn-America's views and intentions, rather than providing evidence that the settlement should be exclusively allocated to bad faith claims. Penn-America's responses to Indian Harbor’s requests for admissions are also inadmissible evidence and do not support its claims regarding the settlement allocation.

Admissions made by a party are only admissible against that party under the exception to the hearsay rule. Penn-America's responses to requests for admission do not substantiate its claim that the Peccadillos settlement was solely related to bad faith claims, as they denied that contract liability was the only issue and acknowledged that coverage was sought under its policy. The Peccadillos settlement addressed all claims from the underlying lawsuit, including both bad faith and contract liability. Even if Penn-America argues the contract liability claim lacked merit, it cannot assert that no part of the settlement pertained to that claim. Settlements can encompass meritless claims to avoid costs and distractions of litigation. Penn-America has not provided evidence to support its assertion that the disputed $1,000,000 pertains exclusively to covered bad faith claims rather than uncovered contract liability claims. Consequently, Indian Harbor's motion for summary judgment regarding the Peccadillos settlement is granted.

In the Jackson settlement, Jackson accused Penn-America of bad faith for not settling her claims, seeking both compensatory and punitive damages. Penn-America paid $1,350,000 to Jackson without admitting liability. While Indian Harbor concedes that compensatory damages are covered, it contends that the settlement also resolved claims for punitive damages, which are insurable only under specific Pennsylvania law conditions. Penn-America argues that the entire Jackson settlement pertains to covered claims and seeks compensation from Indian Harbor for amounts exceeding the $1,000,000 retention. The Indian Harbor policy stipulates that punitive damages are covered only if insurable under applicable law.

The Pennsylvania Superior Court distinguishes between punitive damages directly imposed on a corporation, which are not insurable, and those imposed vicariously, which are insurable. This principle is supported by the rulings in Butterfield v. Giuntoli and Esmond v. Liscio, indicating that a corporation can insure against punitive damages arising from actions of its agents, provided those actions aren't aligned with corporate policy. A recent federal appellate case suggested that punitive damages awarded against an insured in a bad faith action may not be recoverable as compensatory damages. In the context of Penn-America's claim under the Indian Harbor policy, the court finds that Penn-America failed to demonstrate any genuine dispute regarding the amount of covered losses exceeding the $1,000,000 retention limit. Specifically, Penn-America did not present evidence to allocate any part of the Jackson settlement to the policy coverage or to substantiate that any punitive damages were linked to its vicarious liability. Attempts to rely on unsworn communications from its own counsel and misinterpretations of Indian Harbor's statements were deemed inadequate to counter the motion for summary judgment. Additionally, testimony cited by Penn-America regarding the Jackson settlement lacked admissibility due to insufficient evidence of personal knowledge and the absence of sworn statements.

Romoff's testimony regarding Penn-America's intent in the Jackson settlement is deemed irrelevant to the issue of allocation. She stated that she did not perceive any punitive damage exposure for Penn-America and questioned the existence of a bad faith claim, which does not support the notion that the $1,350,000 settlement was exclusively related to claims covered by the Indian Harbor policy. Furthermore, Penn-America failed to substantively respond to Indian Harbor's interrogatory regarding its contention of exposure solely to vicariously assessed punitive damages. Consequently, summary judgment is granted in favor of Indian Harbor on Counts I and III, as there is insufficient evidence that the Jackson settlement falls under the Indian Harbor policy.

Regarding Count II, which alleges breach of duties by Indian Harbor, including improper investigation practices, refusal to pay defense costs, and wrongful denial of payments, Indian Harbor seeks summary judgment, asserting that Penn-America did not explicitly cite the Pennsylvania bad faith statute (42 Pa. Cons. Stat. § 8371). However, under Pennsylvania law, a plaintiff is not required to specify the legal theories in their complaint, as long as the material facts are presented succinctly. The omission of § 8371 is not fatal to the claim, which also asserts a breach of duties under common law, unaffected by the statute. Pennsylvania law allows for separate causes of action for bad faith, including breach of contract and statutory claims. Indian Harbor also contends that Count II is barred by the statute of limitations, which is two years for a § 8371 claim and four years for a common law breach of duties claim. The burden lies with the defendant to demonstrate that the claims are barred by the statute of limitations.

The statute of limitations for a legal claim begins when the plaintiff's right to initiate the lawsuit arises, specifically when harm occurs, rather than when damages are fully quantified. A bad faith claim against an insurer accrues upon denial of coverage. If an insurer unequivocally informs an insured that coverage will not apply for a specific incident, the statute of limitations starts, and subsequent denials do not reset this period. In this case, Indian Harbor notified Penn-America on October 6, 2010, that it would not cover a claim related to the Jackson settlement, establishing that the claim accrued on that date. The lawsuit was filed on October 9, 2014, exceeding the four-year limitation, thereby barring statutory and common law breach of duties claims regarding the Jackson settlement.

Conversely, Indian Harbor did not deny coverage for the Peccadillos action until June 2014, allowing the statutory and common law bad faith claims to proceed without limitation issues. However, Penn-America has the burden to demonstrate evidence of Indian Harbor's alleged bad faith, which it has failed to do. Penn-America referenced a 215-page deposition transcript without identifying specific relevant excerpts as mandated by procedural rules. Additionally, it cited a document labeled Exhibit 16, which was intended to detail Indian Harbor's bad faith conduct but instead contained objections and responses to interrogatories, failing to support Penn-America's claims. Thus, the evidence presented does not substantiate the allegations of bad faith against Indian Harbor.

Dan Bailey, an insurance expert for Indian Harbor, provided deposition testimony indicating that parties in insurance disputes should exert their best efforts to resolve issues. However, this statement is deemed irrelevant to the case at hand and does not support Count II of the complaint regarding breach of duties. Consequently, the court grants Indian Harbor’s motion for summary judgment on this count.

Regarding Penn-America's motion for summary judgment concerning Indian Harbor's alleged breach of the “pay on behalf of” provision in the policy, the court denies the motion. Penn-America claims Indian Harbor failed to make payments directly to the Jackson and Peccadillos claimants. Indian Harbor counters that no breach occurred because Penn-America waived this provision during the Peccadillos settlement negotiations and that it was not applicable to the Jackson settlement.

Waiver is defined as the voluntary relinquishment of a known legal right and can occur in three ways: express waiver (modifying the original contract), estoppel (inducing reliance on a false belief), and implied waiver (inferred from circumstances). In the Peccadillos settlement, Indian Harbor paid $1.5 million plus defense costs to Global Indemnity Group, Inc. under Penn-America’s specific instructions, including directives to forward payments to Global Indemnity.

Penn-America's August 2014 communications clearly indicated that payments should be directed to Global Indemnity, thereby waiving any obligation for Indian Harbor to pay the underlying claimants directly. Penn-America’s assertion that these requests were made due to prior refusals by Indian Harbor is viewed as disingenuous.

In October 2010, Penn-America referenced Part I of its policy while making a communication that occurred prior to the Peccadillos settlement and its subsequent demand for payment to its parent company. Penn-America cannot use this four-year-old reference to challenge its August 2014 requests for payment, as the October 2010 communication is ruled inadmissible regarding any waiver claims. Furthermore, Penn-America argues that its August request was prompted by Indian Harbor's refusal to pay the claimants directly in June 2014; however, those June communications were demands for Indian Harbor to cover the entire Peccadillos settlement rather than direct payments to claimants. It is clarified that XL is obligated to pay the entirety of the settlement, not just contribute. The August request does not negate Penn-America's waiver of the "pay on behalf of" provision regarding the Peccadillos settlement. Additionally, there is no evidence that Indian Harbor owes any amount related to the Jackson settlement, thus precluding a breach of the "pay on behalf of" provision. Consequently, Penn-America's motion for partial summary judgment regarding a breach by Indian Harbor is denied. Prior rulings include granting Indian Harbor judgment on the pleadings for Penn-America’s reformation claim and dismissing claims from United National Insurance Company and Diamond State Insurance Company. Penn-America has also exceeded court-imposed page limits for summary judgment briefs without approval. There are two Indian Harbor policies relevant to the disputes, but both are treated as identical for clarity. Lastly, the policy defines "Claim" and "Loss," with the latter encompassing various forms of damages and legal obligations.

The Insurance Company (Penn-America) will not contest the insurability of punitive or exemplary damages if it has determined them to be insurable under applicable law. However, reimbursement for such damages is contingent upon a court's specific determination of their insurability if challenged by another party. Loss does not include uninsurable matters or amounts due under existing contracts or policies. "Defense Expenses" are defined as reasonable legal fees incurred by the Insured in defending claims. The Insurer will cover losses from claims made during the policy period for wrongful acts, which encompass various errors or breaches related to professional services. 

Penn-America's counsel has inconsistently applied the burden of proof in related cases. The breach of contract claim is interpreted as one of contract liability, and Penn-America has admitted that its obligations under the policy to the Swartwood claimants and Peccadillos were based on contract liability. The company has not provided admissible evidence to suggest otherwise. 

Indian Harbor has submitted a deposition transcript that could serve as evidence but was not cited by Penn-America and is deemed inadmissible. The Indian Harbor policy includes punitive damages as insurable losses under certain conditions. Penn-America alleges bad faith conduct by Indian Harbor during litigation, with Count II addressing pre-litigation conduct. Any claims of additional bad faith conduct must be pursued in a separate lawsuit. Various motions related to summary judgment and expert testimonies have been noted as moot or unaddressed by Penn-America in its filings.