Coverage Analysis
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 (3d Circuit)


  The standard for determining whether an event was expected or intended by the insured is whether the insured "acted even though he was substantially certain that an injury generally similar to the harm which occurred would result."  USAA v. Elitzky, 358 Pa. Super. 362, 507 A.2d 982 (1986), appeal denied, 515 Pa. 600, 528 A.2d 957 (1987).  In Gene's Restaurant v. Nationwide Ins. Co., 548 A.2d 245 (Pa. 1988), the Pennsylvania Supreme Court ruled that an intentional, willful assault was not an "occurrence."  In order to establish an "occurrence," the injury resulting must not have been of the "same general type" that was expected or intended by the insured. State Farm Fire & Cas. Co. v. Levine, 566 A.2d 318 (Pa. A’pp. 1989).  

  Intent may be inferred as a matter of law where the insured's conduct is inherently injurious, as in cases of sexual assault or molestation. Aetna Cas. & Sur. Co. v. Roe, 650 A.2d 94, 102 (Pa. Super. 1994); Wiley v. State Farm Fire & Cas. Co., 995 F.2d 457 (3d Cir. 1993); Foremost Ins. Co. v. Wheetman, 726 F.Supp. 618, 622 (W.D. Pa. 1989).  However, the Third Circuit refused to extend this rule to a "date rape" case in which a drunken insured claimed that his victim had consented to the sexual act.  Aetna Life & Cas. Co. v. Barthelmy, 33 F.3d 19 (3d Cir. 1994).  Further, intent may not be inferred if the plaintiff was of a sufficient age as to be able to form an intent to consent.  Teti v. Huron Ins. Co., 914 F.Supp. 1132 (E.D. Pa. 1996)(16 year old girl).

  The Superior Court has also ruled that employer's alleged negligence in hiring and supervising bus employee was not the cause of subsequent sexual assault on patron since the claimed negligent conduct did not result in injury until it merged with the employee's intentional harm. Erie Ins. Exchange v. Claypoole, 673 A.2d 348 (Pa. Super. 1995).  For similar reasons, allegations that a bar owner was negligent in failing to prevent a bouncer from assaulting a patron failed to allege an "occurrence" requiring a defense from the bar's insurer. Brittamco Underwriters, Inc. v. Stokes, 881 F.Supp. 196 (E.D. Pa. 1995).  Nevertheless, despite the inclusion of a policy exclusion for assault and battery/negligent hiring claims, a U.S. District Court  ruled in Sphere Drake v. 101 Variety, 1999 WL 47715 (E.D. Pa. January 29, 1998), that a liability insurer still had a duty to defend claims against a bar arising out of a shooting incident as the underling suits alleged that injuries had resulted from the negligent conduct of the insured in its training and supervision of its employees.  Further, the court rejected Drake’s contention that underlying findings in criminal proceedings did not collaterally estop it from claiming the applicability of its assault and battery exclusion even though the insurer had not been a party to the underlying suit.  

  The Superior Court has ruled that voluntary intoxication does not provide a basis for eliminating a general intent to cause injury, even where the insured injured a party other than the one that he had set out to harm.  State Farm Mut. Automobile Ins. Co. v. Martin, 660 A.2d 66 (Pa. Super. 1995).

  Claims against an innocent co-insured were excluded where the claimant's spouse intentionally set fire to their joint property.  In Kundahl v. Erie Ins. Group, 703 A.2d 542 (Pa. Super. 1997),  the Superior Court held that the husband's arson barred the wife's claim as the policy barred coverage for any loss "caused intentionally by or at the direction of you or a relative."  the court ruled that the exclusion applied to all insureds jointly, not severally.

  Under Pennsylvania law, claims for breach of contract are not covered since they are not an "accident or occurrence contemplated or covered by the provisions of a general liability insurance policy."  Redevelopment Authority of Cambria County v. International Ins. Co., 685 A.2d 581, 589 (Pa. Super. 1996), rev. denied, 689 A.2d 235 (Pa. 1997).  See also   Toombs N.J., Inc. v. Aetna Cas. & Sur. Co., 404 Pa. Super. 471, 591 A.2d 304 (1991)(claims arising out of a breach of contract are not "occurrences") and Snyder v.  Pennsylvania Manufacturers Assoc.  Ins.  Co., 1998 WL 439654 (Pa.  Super. 1998)(failure to maintain boiler as required under maintenance contract not an “occurrence”).

  The Superior Court  ruled in Acceptance Insurance Company v. Seybert, 2000 Pa. Super. 207 (Pa. Super. July 26, 2000) that allegations that the insured served alcohol to various individuals who became intoxicated and assaulted the plaintiff fell outside the insured’s liquor liability policy in light of a policy exclusion for assaults and batteries even though the assault occurred away from the insured’s premises.

  The Third Circuit ruled in Kline v. The Kemper Group, 826 F.Supp. 123 (M.D. Pa. 1993), aff'd, 22 F.3d 301 (3d Cir. 1994) that age discrimination claims could not constitute an "accident" since the insured's decision to fire the plaintiff was obviously an intentional act. 

  Pennsylvania courts have not limited the old "caused by accident" policies to "big boom" events. See Beryllium Corp. v. American Mutual Liability Ins. Co., 223 F.2d 71 (3rd Cir. 1955) (that some family member due to beryllium poisoning contracted while laundering the insured's work clothes over a period of five to eight years were "caused by accident" and Moffat v. Metropolitan Casualty Ins. Co., 238 F.Supp. 165 (M.D. Pa. 1964) (property damage caused by release of poisonous gases from the insured's plant over a three year period was "caused by accident."  


  The Pennsylvania Supreme Court has ruled that insurers whose policies are triggered by multi-year asbestos claims have a joint defense obligation and may not allocate any share to the policyholder for "orphan shares." J.H. France Refractories Co. v. Allstate Ins. Co., 626 A.2d 502 (Pa. 1993).  The court overturned a lower appellate court's ruling that the insured was obligated to pay a share of defense costs attributable to insolvent or exhausted policy years.

  These "joint and several" principles were extended to pollution cases in Koppers Co., Inc. v. The Aetna Casualty & Surety Co., 98 F.3d 1440 (3d Cir. 1996).  However, the Third Circuit ruled that a policyholder may not recover all of its claim from several insurers, having earlier settled with others.  Rather, the court ruled that the sums recoverable from the remaining insurers must be off-set by a credit representing settling insurers' pro rata shares.

  J.H. France was given even further application by the Washington Supreme Court, in a case interpreting Pennsylvania law.  In Alcoa v. Accident & Casualty Insurance Company, No. 67340-3 (Wash. May 4, 2000), the court ruled that a first party insured could recover in full under DIC property policies, even though they lacked “all sums” language.

  Earlier, a federal court has ruled that J.H. France does not apply to excess policies.  In General Refractories Co. v. Allstate Ins. Co., 1994 U.S. Dist. LEXIS 7561 (E.D. Pa. June 8, 1994), Judge Hutton adopted a rule of "horizontal exhaustion," declaring that the insured must exhaust all of the available primary insurance, not just the policy underlying any individual excess policy, before it could pursue coverage from the excess insurers.

  Under Pennsylvania law, where two insurers are obligated to cover the same loss and one insurer settles but one does not, the litigating insurer cannot seek contribution from the settling insurer.  However, the litigating insurer is entitled to a pro rata credit for the settling insurer’s proportionate share of coverage responsibility as determined by the terms of the two policies, particularly the “other insurance” provisions.  Gould, Inc.  v.  Continental Casualty Co., 585 A.2d 16, 19 (Pa.  Super.  1991), quoted in Koppers, 98 F.3d at 1453.  Amplifying on the Superior Court’s ruling in Gould, the Third Circuit ruled in Koppers that where a primary insurer settles for less than its full limit, the excess insurer is nevertheless entitled to the benefit of the full limit “deemed” exhausted.  The excess insurer could not insist upon that limit actually being paid but neither could the policyholder obtain a double recovery. 

  Federal courts have ruled that defense costs should be shared equally where more than one policy applies to a particular suit. Pacific Indemn. Co. v. Linn, 766. F.2d 754 (3d Cir. 1985).


  Pennsylvania has both an intermediate appellate court (the Superior Court) and a state Supreme Court.  State trial courts are know as Courts of Common Pleas.


  A liability insurer has been held to owe a fiduciary obligation to its policyholder and must act with the utmost good faith in protecting the insured against third party claims against it.  The Birth Center v. St. Paul Companies, 1999 Pa. Super. 49 (Pa. App. March 15, 1999), citing Gedeon v. State Farm Mutual Auto Ins. Co., 410 Pa. 55, 188 A.2d 320, 321 (1963).  The duty to act in good faith requires the insurer to give to its insured’s interests the same faithful consideration that it would accord to its own.   

  There is no common law remedy for bad faith claims in Pennsylvania.  However, the Pennsylvania legislature has enacted a statutory remedy (42 Pa.C.S.A. §8371) which provides that:

In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions:

(1) Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate if interest plus 3%.

(2) Award punitive damages against the insurer.

(3) Assess court costs and attorney fees against the insurer. providing the following relief: (1) interest from the date of claim; (2) punitive damages; and/or (3) attorneys fees and costs.  

  Section 8371 was enacted by the Pennsylvania legislature in 1990, possibly in response to the Pennsylvania Supreme Court's 1981 ruling in D'Ambrosio, which had refused to recognize a cause of action for bad faith under the common law.  Subsequent case law has recognized that a claimant of Section 8371, while dependent on the insured's contract claim, nonetheless sets forth an independent and separate cause of action.  Doylestown Electric Supply Co. v. Maryland Casualty Co., 942 F.Supp. 1018, 1020 (E.D. Pa. 1996) and Polselli v. Nationwide Mutual Fire Ins. Co., 126 F.3d 524 (3d. Cir. 1997).  

  The statute has been given broad sweep.  Argonaut Ins. Co. v. HGL, Inc., 1996 U.S. Dist. LEXIS 10892 (E.D. Pa. July 26, 1996).  Indeed, a federal court has extended Section 8371 not only to an insurer's initial bad faith denial of a claim but also to conduct during litigation with the policyholder.  Rottmund v. Continental Assurance Co., 813 F.Supp. 1104, 1109 (E.D. Pa. 1992).  See also  O’Donnell v. Allstate Ins. Co., 734 A.2d 901 (Pa. Super. 1999)(liability not limited to pre-litigation conduct but cannot be based on alleged discovery abuses since Section 8371 is designed to provide a remedy for bad faith conduct by an insurer “in its capacity as an insurer and not as a legal adversary in a  law suit filed against it by an insured”).

  A claimant must establish an insurer's bad faith by "clear and convincing" evidence.  Polselli v. Nationwide Mutual Fire Ins. Co., 23 F.3d 747, 750 (3rd Cir. 1994) and Terletsky v. Prudential Property & Casualty Co., 649 A.2d 680, 688 (Pa. Super. Ct. 1994).  

  There is no cause of action under Section 8371 for bad faith conduct that occurred prior to the enactment of the statute in 1990.  Boyce v. Nationwide Mut. Ins. Co., 842 F.Supp. 822 (E.D. Pa. 1994).  However, it may apply to conduct occurring after that date even if the policy in question was issued prior to 1990.  Okkerse v. Prudential Property & Casualty Ins. Co., 625 A.2d 663 (Pa. Super. Ct. 1993). 

  The Superior Court has also ruled that there is no right to a jury trial for Section 8371 claims.  Jones v. Liberty Mutual Ins., No. 574 (Pa. Super. October 14, 1998).

  The Third Circuit interpreted Section 8371 as permitting insureds to recover fees for pursuing a contract claim, as well as the time spent on the issues of bad faith.  Polselli v. Nationwide Mutual Fire Ins. Co., 126 F.3d 524 (3d. Cir. 1997).

  Unfair or deceptive consumer practices are proscribed by Pa. Stat. Ann. tit. 73, § 201-1 (1971 & Supp. 1993)

  Whether a claim is fairly debatable must also take into account the law as it existed at the time the denial was made.  Mechetti v. Illinois insurance Exchange, 1999 WL 151024 (E.D. Pa. 1998).

  In Pennsylvania, there is no separate tort-law cause of action against an insurer for negligence or breach of fiduciary duty.  Such claims must be brought in contract.  Greater Mutual Ins. Co. v. North River Ins. Co., 872 F.Supp. 1403, 1406 (E.D. Pa. 1995), affirmed, 85 F.3d 1088 (3rd. Cir. 1996) and D'Ambrosio v. Pennsylvania National Mutual Casualty Ins. Co., 431 A.2d 966, 969 (1981).  See also Ingersoll Land Equipment Co. v. Transportation Ins. Co., 1997 WL 269138 (E.D. Pa. May 5, 1997) (rejecting effort to pursue bad faith claim based on insurer's alleged "misfeasance" in negligently undertaking its contractual duty to defend where "gist" of claim was bad faith).

  An insurer’s decision to settle without undertaking a more through investigation did not provide a basis for a bad faith cause of action by an employer against Carrier for settling groundless claims.  In L.C. Renninger Co., Inc.  v.  VIK Brothers Ins., Inc., 1997 WL 912975 (W.D. Pa.  February 26, 1997), the District Court declared that the insurer was free to settle such claims as it “deemed expedient.”  The fact that the insured might therefore be forced to pay increased premiums did not support a cause of action based on contract.

  The Superior Court declared in Terletsky v. Prudential Prop. & Cas. Ins. Co., 437 Pa.Super. 108, 649 A.2d, 680, 688 (1994) that bad faith is "any frivolous or unfounded refusal to pay proceeds of a policy."

  An insured may be liable for failing to settle within policy limits if it fails to evaluate the claims against its insured in an “intelligent and objective” manner.   Shearer v. Reed, 428 A.2d 635 (Pa. Super. 1981).  An insurer is not liable just because the defense that it provided results in an excess verdict, nor is it absolved merely because its claims handler acted “sincerely.”    The Birth Center v. St. Paul Companies, 1999 Pa. Super. 49 (Pa. App. March 15, 1999).  “Where there is little possibility of a verdict within the policy limits, the insurer’s decision to litigate must be based on a reasonable assessment of the circumstances of the case and a real and substantial chance of a verdict in favor of the insured.”  Id.

  There is no bad faith when an insurer fails to investigate facts of the underlying complaint because the insurer is merely required to look to the complaint, look at the nature of the claims against its insured and decide whether if the allegations, if proven to be true, would be within the scope of its policy.  Humphreys v. Niagara Fire Ins. Co., 590 A.2d 1267, 1272 (Pa. Super. 1991).

  A liability insurer is not precluded from exhausting its policy limits by settling some of the underlying claims against its insured, even if the settlement leaves claims pending against other insureds who now have no coverage to protect them.  Anglo-American Ins. Co. v. Molen, 670 A.2d 194 (Pa. Commonwealth 1995).  
  The duty of good faith extends only to insureds, not to third-party claimants.  Klinger v. St. Farm Mutual Auto Ins. Co., 895 F.Supp. 709 (N.D. Pa. 1995).  Further, claimants that receive an assignment of the insured's claim without the insurer's knowledge or consent may not pursue such claims under Section 8371.  Seasor v. Liberty Mutual Ins. Co., 1996 U.S. Dist. LEXIS 12977 (E.D. Pa. August 30, 1996).  

  A federal court in Pennsylvania has refused to find any reason that an insurer might not pursue a claim for reverse bad faith.  Peer v. Minnesota Mutual Fire & Casualty Co., 1995 WL 141899 (E.D. Pa. 1995).  Although, Pennsylvania courts initially held that a breach by the insured of its duty of good faith and fair dealing may permit the insurer to avoid liability under the policy, but would not support a separate action for money damages by the insurer against the insured. First Lehigh Bank v. North River Ins. Co., 1989 U.S. Dist. LEXIS 14422 (E.D. Pa. 1989).  However, in Garvey v. National Grange Mutual Insurance Co., 1995 U.S. Dist. LEXIS 10869 (E.D. Pa. 1995) while the court again recognized that the duty of good faith and fair dealing was a two way street and that insurers should therefore also have the right to recover damages.  The Garvey court therefore concluded “[t]he absence of a statutory right of an insurer to punitive damages does not preclude an insurer's claim against an insured for breach of a contractual obligation of good faith with the right to recover whatever common law contract damages, if any, it may have suffered.”   See also  Greater New York Mut. Ins. Co. v. North River Ins. Co., 872 F. Supp. 1403 (E.D. Pa. 1995).

  Allegations of bad faith based upon an insurer’s claimed failure to investigate were not enough to toll the one year limitations period for filing suit against a homeowner’s insurer.  In McElhiney v.  Allstate Ins.  Co., 33 F.Supp.2d 405 (E.D. Pa. 1999), Judge Bartle declared that “if allegations of bad faith conduct by an insurer could automatically suspend a time limitation clause, such a clause would be virtually meaningless.”  

  The Third Circuit has ruled that a a policyholder’s release of bad faith claims does not extend to new claims involving post-settlement conduct where the wording of the release included  “claims or suits based upon negligence, breach of contract, bad faith..” and made no express reference to future conduct or claims. Bowersox Truck Sales and Service, Inc. v. Harco National Ins. Co., 2000 WL 352480 (3rd Cir. April 6, 2000).


  Held not to encompass claims for mental distress in USF&G v. Korman, 693 F.Supp. 253 (E.D. Pa. 1988) and Kline v. The Kemper Group, supra.

  However, coverage has been permitted where the distress is so severe as to result in physical injuries.  Duff Supply Co. v. Crum & Forster Ins. Co., No. 96-8481 (E.D. Pa. May 8, 1997).


  Insurer must prove prejudice.  Brakeman v. Potomac Ins. Co., 472 Pa. 66, 371 A.2d 193 (1977).  Even so, delay may be excused if it was reasonable.

  Prejudice will be presumed if the insured has already assumed liability before giving notice since the insurer has been denied the opportunity to involve itself in or control the defense. Metal Bank of America v. Liberty Mutual Inc. Co., 520 A.2d 493 (Pa. App. 1987).  

  An objective standard is to be used in evaluating when it was "reasonable" to give notice under excess policies.  Trustees of the University of Pennsylvania  v. Lexington Ins. Co., 815 F.2d 890, 896 (3d Cir. 1987).
  If an insurer unreasonably refuses to defend, it loses the right to insist upon its insured’s compliance with policy conditions.


  Pennsylvania Superior Court ruled in O'Brien Energy Systems, Inc. v. American Employer's Ins. Co., 629 A.2d 957 (Pa. Super. 1993) that extending the "personal injury" coverage to include pollution to neighboring landowners as a "wrongful invasion" of nearby landowner's rights would "emasculate" the clear meaning of the pollution exclusion.  However, a federal district court has taken a different view.  See Gould, Inc. v. Arkright Mutual Ins. Co., 829 F.Supp. 722 (M.D. Pa. 1993)(claims for trespass and nuisance by property owners abutting a battery crushing facility alleged a "wrongful invasion of the right of private occupancy" was proper in light of O'Brien).  An effort by the U.S. District Court to certify this issue to the Pennsylvania Supreme Court was denied in 1996.  See Gould, Inc. v. Arkright Mutual Ins. Co., No. 3CV-92-403 (M.D. Pa. February 1, 1996).

  A federal district court has held that claims for sexual discrimination triggered an insurer's "personal injury" coverage for defamation where the claims were based in part on an allegation that the insured had called the plaintiff a "bitch" in the presence of witnesses.  Duff Supply Co. v. Crum & Forster Ins. Co., 1997 U.S. Dist. LEXIS 6383 (E.D. Pa. May 8, 1997).
  The Third Circuit ruled in The Frog Switch & Manufacturing Company, Inc. v. Travelers Insurance Company,193 F.3d 742 (3rd Cir. 1999) that allegations that the insured stole certain trade secrets and then advertised the results of that fact were not a covered claim for  “advertising injury.”  Interpreting Pennsylvania law, the court declared that the “reverse passing off” claims were not covered  as what was alleged was that the insured had copied a particular product line that might be attractive to consumers rather than a “style of doing business.” 

  A federal district court ruled in USX. Corporation v. Adriatic Insurance Company, 2000 WL 636912 (W.D. Pa. March 22, 2000) that allegations of criminal conspiracy and violations of the Sherman Antitrust Act did not present a claim for “advertising injury.”  The District Court ruled that any misstatements in tariffs filed by the insured did not involve the widespread dissemination of information to the public for the purpose of promoting business and, furthermore, that the injuries complained of were not caused by any such “advertising.”  Finally, the court refused to find that these antitrust claims alleged “discrimination” within the meaning of “personal injury.”


  Pennsylvania follows the general rule that insureds must prove their right to coverage, whereas insurers have the burden of proof as regards policy exclusions.  Erie Ins. Exchange v. Transamerica Ins. Co., 533 A.2d 1363, 516 Pa. 574 (1987); Compagnie des Bauxites de Guinee v. INA, 551 F.Supp. 1239, 1242-43 (W.D. Pa. 1982), aff'd, 721 F.2d 109 (3d Cir. 1983) and Riehl v. Travelers Ins. Co., 772 F.2d 19 (3d Cir. 1985)(insured has burden of proving "occurrence" during policy period).  Although insurers have the burden of proof with respect to exclusions generally, where the issue is an exception to an exclusion that would grant back coverage, federal courts have ruled that insured has the burden of proving an exception to an exclusion.  Northern Ins. Co. of New York v. Aardvark Associates, 743 F.Supp. 379 (W.D. Pa. 1990), affirmed, 942 F.2d 189 (3d Cir. 1991); Hyde Athletic Industries, Inc. v. Continental Casualty Co., 969 F.Supp. 289 (E.D. Pa. 1997) and Fischer & Porter Co. v. Liberty Mutual Ins. Co., 656 F.Supp. 132 (E.D. Pa. 1986).

  Applying Pennsylvania law, the Washington Supreme Court ruled in Alcoa v. Accident & Casualty Insurance Company, 2000 Wash. LEXIS 286 (Wash. May 4, 2000) that “fortuity is, in effect, an exclusion, and it logically should be the burden of the insurer to plead and prove the exclusion.”

  Under Pennsylvania choice of law rules, Pennsylvania law (as the forum state) governs questions relating to the burden of proof.  Foley v. Pittsburgh Des Moines Co., 363 Pa. 1, 68 A.2d 517, 521 (1949), cited in General Star Nat. Ins. co. v. Liberty Mut. Ins. Co., 960 F.2d 377, 380 (3d Cir. 1992).

  There is little or no Pennsylvania case law concerning the question of missing insurance policies.  In general, it appears that Pennsylvania follows the general rule that the insured has the burden of proving the existence and terms of such a policy.  Wheatcroft v. Albert, 180 A.2d 216 (Pa. 1962).  Further, in the context of missing instruments, such as lost wills or deeds, at least one Pennsylvania court has ruled that this burden must be satisfied by "clear and convincing" evidence.  Manley v. Manley, 357 A.2d 641 (Pa. Super. 1975).    See also H.K. Porter v. Transamerica Ins. Co., No. 89-3145, judgment order (3d Cir. September 26, 1989)(affirming lower court's jury instruction that insured has burden of proving by "clear and convincing" evidence that primary insurer's lost policies did not contain a "products" aggregate).


  Traditionally, an insurance contract is interpreted in accordance with the law of the state in which the contract is made.  Crawford v. Manhattan Life Ins. Co., 221 A.2d 877, 880 (Pa. Super. 1966).  In Pennsylvania, it is held that the place of contracting, in the case of insurance contract, is the place where the policy was delivered.  In the absence of proof as to where the policies were delivered, it is presumed that delivery took place at the insured's residence.  Woods v. National Life and Accident Ins. Co., 347 F.2d 760, 763 (3d Cir. 1965).  See also McMillan v. State Mutual Life Assurance Co. of America, 922 F.2d 1073, 1074 (3d Cir. 1990) and Travelers Ind. Co. v. Fantozzi, 825 F.Supp. 80, 84 (E.D. Pa. 1993).  This analysis will result in an application of the law where the insured is domiciled in most cases. 

   In Griffith v. United Air Lines, 416 A.2d 1, 203 A.2d 796 (1964), the Pennsylvania Supreme Court adopted a flexible choice of law rule which permits an "analysis of the policies and interests underlying the particular issue before the court and a determination of which jurisdiction is most intimately concerned with the outcome of the litigation."  American Contract Bridge League v. Nationwide Mut. Fire Ins. Co., 752 F.2d 71, 75 (3d Cir. 1985).  Each states' contacts must be evaluated as they relate to the state's public policies. Melville v. American Home Assur. Co., 584 F.2d 1306, 1312 (3d Cir. 1978) and General Star Nat. Ins. Co. v. Liberty Mut. Ins. Co., 960 F.2d 377 (3d Cir. 1992).  In general, this "flexible" approach to "choice of laws" issue combines a "governmental interest" analysis with the "grouping of contacts" approach adopted in the Restatement (Second) of Conflicts of Law, Sections 186 - 188.  See Parker v. State Farm Ins. Co., 543 F.Supp. 806, 807 (E.D. Pa. 1982).  Assuming that a conflict exists, a Pennsylvania court will first determine what governmental interest those states intended to further in adopting the respective principles of law.  Next, the court will review the contacts existing between the cause of action and the competing jurisdictions to determine which state has the most significant relationship to the action.  The weight of a particular state's contacts must be measured on a qualitative rather than a quantitative scale, however.  McCabe v. Prudential Property and Cas. Co., 356 Pa. Super. 223 (1986).


  Where a conflict of interest exists, an insurer is required to pay for independent defense counsel of the insured's choosing.  Krueger Associates, Inc. v. ADT Security Systems, Inc., 1994 U.S. Dist. LEXIS 18168 (E.D. Pa. December 20, 1994).

  If an insurer wrongfully refuses to defend its insured, the insured can recover the cost of hiring substitute counsel and other defense costs.  Gedeon v. Farm Bureau Mutual Auto Ins. Co., 410 Pa. 55, 58, 188 A.2d 320, 323 (1963) and American Contract Bridge League v. Nationwide Mut. Fire Ins. Co., 752 F.2d 71, 75 (3d Cir. 1985).   


  Although this issue has not yet been ruled on by the Pennsylvania Supreme Court, lower court rulings appear to favor coverage for clean up costs.  Federal Ins. Co. v. Susquehanna Broadcasting, 727 F.Supp. 169 (M.D. Pa. 1989), as reconsidered, 737 F.Supp. 896 (M.D. Pa. 1990), affirmed per curiam, 928 F.2d 1131 (3d Cir. 1991).


  A federal court has ruled that insurers that commence declaratory judgment actions have a duty to retain independent counsel to represent the interests of their insured in the DJ.  Aetna Cas. & Sur. Co. v. Kline, 762 F.Supp. 111, 112 (E.D. Pa. 1991).

  Federal courts should exercise discretion to refrain from resolving factual or legal issues that might have a collateral impact on pending state liability proceedings.  In State Auto Ins. Co. v. Summy,234 F.3d 131 (3d Cir. 2000), the Third Circuit ruled that a federal district court should have abstained from granting summary judgment to an insurer on the basis of the applicability of the pollution exclusion to lead paint claims inasmuch as a parallel case was pending in state court.   The court declared that Wilton abstention made clear that federal district courts should act with great discretion in resolving issues involving issues of state law that are better addressed in state proceedings.  See also Home Ins. Co. v. Perlberger, 900 F.Supp. 768 (E.D. Pa. 1995).   
  By contrast, an insurer’s action for declaratory relief would not be stayed until the underlying fraud action against the policyholder was resolved as the factual issues in the declaratory judgment action would not necessarily be resolved in the other suit and, furthermore, that the availability of insurance coverage was an important means by which the underlying case might be settled.  American Guaranty & Liability Insurance Company v. Fojanini, 2000 WL 708392 (E.D. Pa. May 22, 2000).

  The Third Circuit has predicted that the Pennsylvania Supreme Court would conclude that, upon a finding of bad faith conduct by clear and convincing evidence, a trial court may assess attorneys' fees against an insurer for the time spent by the policyholder litigating the claim under the policy and for litigating the bad faith claim itself.  Polselli v. Nationwide Mutual Fire Ins. Co., 126 F.3d 524 (3d. Cir. 1997).


   --Claims Manuals

  Such discovery has been held to have no probative value in determining the mutual intent of the parties as reflected in the insurance contracts. In re Texas Eastern Trans. Corp. PCB Contamination Lit, No. MDL 764, Tr. of Decision at 13-14, 19 (E.D. Pa. July 26, 1989).

   --Drafting History

   --Other Policyholder Claims

   --Reinsurance Information


  Held to be irrelevant in Rhone-Poulenc Rorer, Inc. v. Home Indem. Co., 139 F.R.D. 609 (E.D. Pa. Oct. 1, 1991)(estimates of potential liability do not normally entail an evaluation of coverage based upon thorough factual and legal consideration).  See also Union Carbide Corp. v. Travelers Indem. Co., 61 F.R.D. 411, 413 (W.D. Pa. 1973)(discovery of reserves will not expedite the litigation or provide a lead to evidence).


  The duty to defend arises where the allegations against the insured state a claim to which the policy potentially applies. Gedeon v. Farm Bureau Mutual Auto Ins. Co., 410 Pa. 55, 58, 188 A.2d 320, 323 (1963) and American Contract Bridge League v. Nationwide Mut. Fire Ins. Co., 752 F.2d 71, 75 (3d Cir. 1985).   

  The duty to defend is based solely on the allegations of the complaint.  Air Products & Chemicals, Inc. v. Hartford Acc. & Ind. Co., 25 F.3d 177 (3d Cir. 1994); Gene's Restaurant, Inc. v. Nationwide Ins. Co., 519 Pa. 306, 548 A.2d 246 (1988); USAA v. Elitzky, 517 A.2d 982, 985 (Pa. App. 1986); Wilson v. Maryland Cas. Co., 377 Pa. 588, 594, 105 A.2d 304 (1954) and Pacific Indemn. Co. v. Linn, 766 F.2d 754, 760 (3d Cir. 1985).  "It is the face of the complaint and not the truth of the facts alleged therein which determines whether there is a duty to defend."  D'Auria v. Zurich Ins. Co., 352 Pa. Super. 231, 507 A.2d 857, 859 (1986). 

  The Pennsylvania Supreme Court has ruled that the duty to defend is based on the facts alleged, not the legal characterizations accorded to those facts in the plaintiff’s pleadings.  See Mutual Benefit Ins.  Co.  v.  Haver, 725 A.2d 743 (Pa. 1999)(negligence claim does not trigger duty to defend, where factual allegations established intent to endanger).

  An insurer does not have a continuing obligation to monitor pre-trial discovery to determine if facts emerge that give rise to coverage.  In Scopel v. Donegal Mut. Ins. Co., 698 A.2d 602 (Pa. Super. 1997), the Superior Court ruled that "the rightful denial of coverage based upon a filed complaint should relieve an insurer of the duty and burden of tracking the developments in a case in which the insurer has no legal interest."  Rather than requiring the insurer to continue to monitor pre-trial developments, the court ruled that the better-reasoned approach would be to require the underlying plaintiff who wishes to assert a new theory of liability premised on newly discovered evidence to file an amended complaint setting forth any new claims.

  The duty to defend continues until the insurer can "confine the claim to a recovery that the policy does not cover."  D'Auria v. Zurich Ins. Co., 507 A.2d 857, 859 (Pa. Super. 1986).  If any count in a complaint is covered, the insurer must defend the entire action until such time as the possibility of recovery is confined to claims outside the coverage of the policy.  Cadwallader v. New Amsterdam Cas. Co., 396 Pa. 582, 152 A.2d 484 (1959).  See also Safeguard Scientifics, Inc. v. Liberty Mut. Ins. Co., 766 F.Supp. 324, 329 (E.D. Pa. 1991).

  Federal courts have suggested that insureds may come forward with extrinsic evidence to compel a duty to defend where the evidence relates to an exception to a policy exclusion.  See e.g. Air Products & Chemicals, Inc. v. Hartford Acc. & Ind. Co., 25 F.3d 177 (3d Cir. 1994).  However, the insurer may not rely on such evidence to establish the applicability of an exclusion in the first instance.  Brittamco Underwriters, Inc. v. Emerald Extract Co., 855 F.Supp. 793, 798 (E.D. Pa. 1994).

  Even if a suit alleges intentional acts that would not be covered, Pennsylvania courts have ruled that a duty to defend exists if the underlying suit could reasonably be amended to assert a covered claim for negligence.  Brittamco Underwriters, Inc. v. Emerald Extract Co., supra;  Safeguard Scientifics, Inc. v. Liberty Mut. Ins. Co., 766 F.Supp. 324 (E.D. Pa. 1991), rev'd in part on other grounds, 961 F.2d 209 (3d Cir. 1992).  However, the Safeguard approach has not been widely followed.  See, I.C.D. Industries, Inc. v. Federal Ins. Co., 879 F.Supp. 480 (E.D. Pa. 1995)(mere possibility that action for patent infringement was later amended to plead a covered cause of action for unfair competition does not give rise to duty to defend in the interim).

  If an insurer believes that it does not owe coverage, notwithstanding the underlying allegations, it should accept the defense under a non-waiver agreement or reservation of rights. Gedeon, supra and Draft Systems, Inc. v. Alspach, 756 F.2d 293, 296 (3d Cir. 1982)(insurer not estopped to dispute liability for settlement where basis was disclosed when it agreed to defend).
  The duty to defend does not arise until the insurer is notified of the litigation and the insured tenders the defense to it. Heffernan & Co. v. Hartford Ins. Co. of America, 614 A.2d 295 (Pa. App. 1992).  Although the duty to defend does not arise until a claim is tendered to the insurer, the insured's notice of claim is sufficient unless it expressly states that a defense is not being requested.  Widener University v. Fred S. James & Co., 537 A.2d 829, 833 (Pa. App. 1988).

  An insurer's defense obligations end when it exhausts its indemnity limits.  Pittsburgh Corning Corp. v. Commercial Union, 789 P.2d 214 (3d Cir. 1986) and Maguire v. Ohio Cas. Ins. Co., 602 A.2d 893 (Pa. App. 1992).  An insurer may not terminate its defense obligation by tendering its limits. Simmons v. Jeffords, 260 F.Supp. 641 (E.D. Pa. 1966). 

  The Third Circuit has ruled that an insured has no obligation to prevent its professional liability insurer from settling a claim against the insured in the absence of policy language giving the insured the right to bar settlements without its consent.  Caplan v. Fellheimer Eichen Braverman & Kaskey, 68 F.3d 828 (3rd Cir. 1995).  


  Under Pennsylvania law, an insured seeking to establish equitable estoppel must establish (1) that he was induced, whether by act, representation or silence when one ought to speak that causes the other party to believe the existence of certain facts; (2) and justifiably relied on that inducement; and (3) to his detriment.  Chemical Bank v. Dippolito, 897 F.Supp. 221, 224 (E.D. Pa. 1995).  The party seeking to establish estoppel must do so by clear and unequivocal evidence.
  An insurer that fails to respond to its insured's claim may not subsequently object that the insured breached the policy's cooperation clause by entering into a settlement without the insurer's consent.  Boyle v. Erie Ins. Co., 656 A.2d 941, 944 (Pa. Super. Ct. 1995).  

  Where an insurer refused to defend, its breach of the policy waived any ability to contend that the insured had breached the cooperation clause.  Apaluci v.  Agora Syndicate, Inc.,  1998 WL 279479 (3d Cir.  June 2, 1998).

  An insurer that undertakes the defense of its insured without issuing a reservation of rights may be estopped to dispute coverage later.  Beckwith Machinery Co. v. Travelers Ind. Co., 638 F.Supp. 1187 (W.D. Pa. 1988)(presumption of prejudice arose from 13 month delay).  However, the insurer's failure to reserve rights where a case is being defended will only result in the finding of estoppel if caused substantial prejudice to the insured. National Mutual Ins. Co. v. McMahon & Sons, Inc., 356 S.E.2d 488 (W.D. Pa. 1987).  

  An insurer's failure to raise a specific issue in a reservation of rights letter does not preclude it from adding additional coverage defenses later, absent a showing of prejudice to the insured.  Federal Ins. Co. v. Susquehanna Broadcasting, 727 F.Supp. 169 (M.D. Pa. 1989).


  In general, the purpose of umbrella liability insurance is both to provide excess insurance as well as coverage for areas that may not be covered under the insured's primary coverage.  American States Ins. Co. v. Maryland Casualty Co., 628 A.2d 880, 886 (Pa. 1993).  
  An insured must ordinarily prove the exhaustion of all underlying insurance in order to trigger an excess policy.  General Refractories Co. v. Allstate Ins. Co., 1994 WL 246375 (E.D. Pa. June 8, 1994).

  On the other hand, an excess insurer has been held to owe a pro rata share of defense costs corresponding to its indemnity obligation, including costs incurred prior to the date that the underlying policies became exhausted.  General Accident Ins.  Co.  of America v.  Safety National Casualty Corp., 825 F.  Supp.  705, 709-10 (E.D. Pa.  1993).

  An excess insurer was required to drop down over insolvency primary insurance in Luko v. Lloyd's, 393 Pa. Super. 165, 573 A.2d 1139 (App. 1990).  However, Luko has since been analyzed by the Supreme Court of Pennsylvania as only applying to particular policy language and does not mandate "drop down" in all cases.  Donegal Mut. Ins. Co. v. Long, 597 A.2d 1124 (Pa. 1991).  Similarly, "drop down" was not required in J. Kinderman & Sons, Inc. v. United National Ins. Co., 593 A.2d 857 (Pa. Super. 1991) where the policy was clearly written excess of stated dollar limits.

  An excess insurer may sue a primary insurer on a theory of equitable subrogation.  However, the Third Circuit ruled in Puritan Ins. Co. v. Canadian Universal Ins. Co., 775 F.2d 76 (3d Cir. 1985) that the primary insurer had no direct duty to the excess carrier and that the excess insurer therefore had no direct right of action against the primary carrier if the insured was in some respect prevented from pursuing a claim.  However, an excess insurer may pursue an equitable subrogation claim, even where it has entered into a "conditional settlement" with the underlying claimant. Greater New York Mutual Ins. Co. v. North River Ins. Co., 85 F.3d 1088 (3d. Cir. 1996).

  A second layer "following form" excess policy that was silent as to its defense obligations was held to have both an equitable and a contractual obligation to pay a pro rata share of such costs in General Acc. & Ind. Co. v. Safety National Cas. Co., 825 F.Supp. 705 (E.D. Pa. 1993).  The court rejected the excess carrier's contention that it followed form to the lead umbrella (which excluded defense costs), holding instead that it incorporated the terms of the primary policy, including the duty to defend.  Even though most of the costs were incurred prior to the exhaustion of the underlying limits, Judge Padova ruled that its pro rata share extended to all costs that were incurred for the defense of the suits.


  Under Pennsylvania law, a loss must be fortuitous.  A loss that occurs before a policy is issued and is known only to the insured will not be covered under a first-party policy.  Barry v. Aetna, 81 A.2d 551 (Pa. 1951).  

  The "known loss" doctrine was recognized in Appalachian Ins. Co. v. Liberty Mutual Ins. Co., 676 F.2d 56, 62-63 (3d Cir. 1982)("an insured cannot insure against something which has already begun").  However, the 3d Circuit ruled in a subsequent "fortuity" case that the mere fact that some damage was foreseen by the insured did not preclude coverage under property policy where extent of damage was unknown and insured had expended large sums in hopes of preventing any further harm. Ins. Co. of North America v. U.S. Gypsum Co., 870 F.2d 148 (3d Cir. 1989). 

  Relying on Appalachian, the Superior Court has ruled that a policyholder should not be able to trigger coverage under policies issued after it has been made aware of its potential liability as that would "allow a tortfeasor with knowledge of his own potential liability to shift this burden to an unwary insurance company.  Such an outcome would contravene the well-established rule that a person may not insure against an injury that has already occurred."  Consulting Engineers, Inc. v. INA,  710 A.2d 82 (Pa. Super. 1998).

  Similarly, in a case now pending before the Supreme Court, the Superior Court declared in Rohm & Haas Co. v. Continental Casualty Co., 732 A.2d 1236 (Pa. Super. 1999), review granted (Pa. March 23, 2000) that the “known loss” doctrine applies to all claims for which the insured “was, or should be, aware of a likely exposure to losses which would reach the level of coverage” and is not limited to liabilites that are actually adjudicated.

  Relying on the Third Circuit’s opinion in Koppers applying Pennsylvania law, the Washington Supreme Court ruled in Alcoa v. Accident & Casualty Insurance Company, 2000 Wash. LEXIS 286 (Wash. May 4, 2000) that “fortuity is, in effect, an exclusion, and it logically should be the burden of the insurer to plead and prove the exclusion.”
  Earlier, Judge Conaboy had ruled in Gould, Inc. v. Arkright Mutual Ins. Co., 907 F.Supp. 103 (M.D. Pa. 1995) that the "known loss" doctrine, while rooted in Pennsylvania law, would not apply where the insured's liability had not been adjudicated and the economic damages for which recovery was sought had not yet been determined at the time that a policy was purchased.  The Third Circuit declined to accept certification of this question in early 1996.


  "Cause" theory was adopted in a sex discrimination case by the Third Circuit in Appalachian Ins. Co. v. Liberty Mutual Ins. Co., 676 F.2d 56 (3d Cir. 1982).  The court held that numerous sex discrimination claims contained in class action against employer are all traceable to employment guidelines adopted in 1965 and therefore involve a single "occurrence."   See also Tri-State Roofing Co. v. New Amsterdam Cas. Co., 139 F.Supp. 193 (D. Pa. 1955)(damage to multiple homes from a single fire was only one accident)

  This "cause" analysis has generally resulted in Pennsylvania courts finding but a single "occurrence" in products liability cases.  For instance, in Union Carbide Corp. v. Travelers Ins. Co., 399 F.Supp. 12 (W.D. Pa. 1975), the court held that claims arising out of the insured's sales of a defective chemical that was included in a resin manufacturer's product that was then widely distributed to third parties all arose out of the insured's placement of the chemical in stream of commerce and was therefore a single "occurrence."    Similarly, in Air Products & Chemicals, Inc. v. Hartford Acc. & Ind. Co., 707 F.Supp. 762 (E.D. Pa. 1989), aff'd in part, rev'd in part, 25 F.3d 177 (3d Cir. 1994) that liability claims based both on the insured's welding and its manufacture of asbestos products all arose from a single "occurrence" based on a "cause" analysis. But see Centennial Ins. Co. v. Lumbermens Mutual Cas. Co., 677 F.Supp. 342 (E.D. Pa. 1987)(separate acts of disposal were each held to be an "occurrence").

  In T&N PLC v. PIGA, 822 F.Supp. 275 (E.D. Pa. 1993), a District Court ruled that each individual tort plaintiff was a "covered claim" for the purpose of determining the Guaranty Association's liability for insolvent coverage.  See also Colt Industries, Inc. v. Aetna Cas. & Sur. Co., 1989 U.S. Dist.  LEXIS 14496 (E.D. Pa. December 5, 1989)(court finds one “occurrence” based on insured's manufacture of asbestos products) and Pittsburgh Corning Corp. v. Travelers Ind. Co., 1988 U.S. Dist.  LEXIS 655 (E.D. Pa. January 20, 1988), affirmed on reconsideration (E.D. Pa. March 10, 1988)(each separate asbestos building claim is a new “occurrence”).

  Applying Pennsylvania law, a state court in New Jersey ruled that numerous suits against a product manufacturer for claims involving asbestos, PCB-containing products and welding rod fumes  alleged three separate “occurrences,” as there was a separate decision to manufacture and sell each product. Westinghouse Electric Corp.  v.  Aetna Casualty & Surety Co., Union No.  L-069351-97 (N.J. Super.  August 7, 1998).  However, having determined that the manufacturing sale of  the products was the cause of the insured’s liabilities, Judge Weiss explained that this “occurrence” merely determined the limits of liability and was not the same as the “triggering” event.  To the contrary, in light of his determination that a “continuous injury” analysis would apply, Judge Weiss ruled that it was the exposure to these products that is the trigger of coverage.


  The Supreme Court is expected to rule later this year in Sunbeam Corporation v. Liberty Mutual Insurance Company, 740 A.2d 1179 (Pa. Super. 1999), review granted (Pa. June 13, 2000) whether the Superior Court erred in granting summary judgment to insurers on the basis of the exclusion.  The Supreme Court requested briefing on the issues of (1) regulatory estoppel; (2) claimed drafting history; and (3) the meaning of “sudden.” 
  Pending a ruling from the Supreme Court, the Superior Court has repeatedly ruled that the exclusion bars coverage for gradual contamination.  See  Sunbeam Corporation v. Liberty Mutual Insurance Company, 740 A.2d 1179 (Pa. Super. 1999), review granted, 2000 Pa. LEXIS 1462 (Pa. June 13, 2000) (“sudden” means both “abrupt” and something that “lasts only a short time”); Redevelopment Authority of the City of Philadelphia v. INA, 675 A.2d 1256 (Pa. Super. 1996);  O'Brien Energy Systems, Inc. v. American Employer's Ins. Co., 629 A.2d 957 (Pa. App. 1993); Lower Paxon Township v. USF&G, 383 Pa. Super. 558, 557 A.2d 393 (Pa. App. 1989); review denied, 567 A.2d 653 (Pa. 1989) and Techalloy Co. v. Reliance Ins. Co., 388 Pa. Super. 1, 487 A.2d 820 (1984).  

  In early 1994, the Supreme Court of Pennsylvania agreed to hear an insured's appeal of a pollution exclusion ruling in Central Dauphin School District v. Pennsylvania Manufacturers Association Ins. Co., No. 552 N.D. Alloc. Dkt. 1993 (Pa. May 16, 1994) on three issues (1) regulatory estoppel (2) whether "sudden and accidental" is ambiguous and (3) whether the release of fuel oil is within the scope of the exclusion.   However, the case subsequent settled.

  Despite policyholder hopes that Central Dauphin was a signal that the Pennsylvania Supreme Court might be receptive to a "regulatory estoppel" challenge to the pollution exclusion, the court announced on January 7, 1997 that it would not agreed to accept review of Redevelopment Authority in which the Superior Court had ruled that gradual discharges from underground tanks were not "sudden."  

  Pending contrary state authority, federal courts have uniformly upheld the exclusion up to now and have further found that the insured has the burden of proof. Ohio Casualty Ins. Co. v. Spra-Fin, Inc., No. 94-7407 (E.D. Pa. January 4, 1996);  Koppers Co., Inc. v. Aetna Cas. & Sur. Co., 840 F.Supp. 390 (W.D. Pa. 1993); Northern Ins. Co. of New York v. Aardvark Associates, 743 F.Supp. 379 (W.D. Pa. 1990), affirmed, 942 F.2d 189 (3d Cir. 1991); USF&G v. The Korman Co., 693 F.Supp. 253 (E.D. Pa. 1988);  American Mutual Liability Ins. Co. v. Neville Chemical Co., 650 F.Supp. 929 (W.D. Pa. 1987); Centennial Ins. Co. v. Lumbermens Mutual Cas. Co., 677 F.Supp. 342 (E.D. Pa. 1987) and Fischer & Porter Co. v. Liberty Mutual Ins. Co., 656 F.Supp. 132 (E.D. Pa. 1986).
  In a ruling that pre-dates Sunbeam, a federal district court ruled in 1995 in Continental Casualty Co. v. Diversified Industries, Inc., 884 F.Supp. 937 (E.D. Pa. 1995) that an insured may allege such claims based on the alleged drafting history of the exclusion.  While acknowledging that extrinsic evidence would not be admissible to establish the meaning of the policy, the court ruled that it could be claimed to sustain the insured's allegations of fraud and misrepresentation.  However, Judge Kahn took a different view of such claims in Hyde Athletic Industries, Inc. v. Continental Casualty Co., 969 F.Supp. 289 (E.D. Pa. 1997), granting judgment to insurers where the policyholder had failed to come forward with evidence of an agreement and an intent to defraud by the insurers.  Further, as with recent rulings that have rejected claims of regulatory estoppel on the basis that any contrary understanding of "sudden" was manifestly unreasonable given the plain and ordinary meaning of the term, Judge Chan found that the plaintiffs "have not presented the court with a shred of evidence that the Pennsylvania Insurance Department, a sophisticated regulatory agency, reasonably relied on the IRB or MIRB statements contrary to the plain language of the pollution exclusion text."  

  The District Court's ruling in Hyde also rejected efforts to find coverage on the basis of "secondary discharge" or "micro-analytic" arguments.

  The Superior Court has ruled in a non-pollution case that the phrase "arising out of" has the meaning of "but for".  Roman Mosaic & Tile Co. v. Aetna Cas. & Sur. Co., 1997 WL 795977 (Pa. Super. December 31, 1997).  

  Two federal court decisions ruled that the "absolute" pollution exclusions defeat coverage for lead paint claims. Kaytes v. Imperial Cas. & Ind. Co., No. 93-1573 (E.D. Pa. January 7, 1994) and St. Leger v. American Fire & Casualty Ins. Co., 870 F.Supp. 641 (E.D. Pa. 1994), aff'd (3d Cir. 1995).  More recently, however, a federal district court refused to give effect to the exclusion in a lead poisoning case, holding in Nationwide Mutual Ins. Co. v. Fair, No. 96-1975 (W.D. Pa. October 3, 1997) that the exclusion was ambiguous both as to whether lead was a "pollutant" and whether lead contained in the paint had been "dispersed" or "released."  See also Fayette County Housing Authority v. Housing & Development Insurance Exchange, No. 2440 (Pa. Ct. Common Pleas April 7, 1999)(exclusion was ambiguous as it relates to lead poisoning claims since a reasonable purchaser of insurance might not necessarily understand that lead chips are a pollutant).

  In Antrim Mining, Inc. v. PIGA, 648 A.2d 532 (Pa. App. 1994), the Superior Court ruled that the "absolute" pollution exclusion barred a surface mine operator's claim for the cost of responding to pollution resulting from previous underground mining operations on the site by other entities.  The court ruled that the claim was within the "own, rent or occupy" portion of the exclusion.  See also Cooper Industries, Inc. v. Aetna Cas. & Surety Corp., No. 374 C.D. 1985 (Mercer County Court of Common Pleas, PA, February 26, 1990).  Municipality of Mount Lebanon v. Reliance Insurance Company, Allegheny No. GD99-11299 (Pa. Ct. Cm. Pleas May 2, 2000), appeal pending, 759 WDA 2000 (Pa. Super. 2000)(fire caused by escape of methane gas from insured’s pipeline held excluded).

  For a time, Pennsylvania courts were closely divided on the issue of whether the "absolute" exclusion applies to indoor toxic tort exposures.  The Superior Court took a narrow view of the issue in Gamble Farm Inn, Inc. v. Selective Ins. Co., 656 A.2d 142 (Pa. Super. 1995), declaring that an exclusion that was limited in scope to discharges "into the atmosphere" did not defeat coverage for carbon monoxide poisoning claims against a restaurateur.  A more restrictive view was initially adopted by another panel of the Superior Court later in 1995.  In Madison Construction Co. v. Harleysville Mut. Ins. Co., No. 4329 (Pa. App. September 25, 1995), as reconsidered, 678 A.2d 802 (Pa. Super. 1996), aff’d, 735 A.2d 100 (Pa. 1999), the Superior Court initially ruled in 1995 that personal injuries suffered by a worker who fell into a concrete trench after passing out from inhaling toxic fumes that were released in the course of a contractor's application of a curing compound to a concrete trench, holding that there had been no "release" since the exposure occurred in the area where the fumes were meant to be contained.  Accord Island Associates, Inc. v. Eric Group, 894 F.Supp. 200 (W.D. Pa. 1995)("common sense" precluded application of exclusion to claims arising out of the insured's use of cleaning compound to remove asbestos backing from floor tiles).  This initial ruling was reversed by the full 9-judge court in 1996, however. On June 20, 1996, the court ruled 5-4 that the absence of any "into the atmosphere" language of the sort that had led to the result in Gamble Farm, compelled the conclusion that the exclusion applied here, since the xylene fumes were clearly a "pollutant."  the court refused to consider extrinsic evidence or rulings from other courts as evidence of claimed ambiguity.  The dissenting justices complained that the majority was construing Gamble Farm too narrowly and that the claims should be covered, if only because claims for failure to warn were not excluded.  Further, the dissenters objected that commonly used construction materials or products were not "pollutants" as that term is commonly understood.

  This analysis was sustained by the Pennsylvania Supreme Court in 1999.  In Madison Construction Co.  v.  Harleysville Mut.  Ins.  Co., 735 A.2d 100 (Pa. 1999), a divided court declared that the pollution exclusion was unambiguous and precluded coverage in a case of this sort.  Noting that the MSDS sheet for the substances in question treated them as a hazardous substance, the court ruled that there had plainly been a “discharge” of a “pollutant.”  Three dissenting judges argued that the exclusion should not be given so broad a scope.

  The Pennsylvania Supreme Court announced in late 2000 that it would reassess the scope of the exclusion, this time in the context of a lead poisoning case.  In light of the broad construction adopted in Madison, the Superior Court has since ruled in Lititz Mutual Ins.  Co.  v.  Steely, 746 A.2d 507 (Pa.  Super. 1999), review granted (Pa. November 3, 2000) that the exclusion also precludes coverage for lead poisoning claims against the insured landlord.  A dissenting justice contended that breach of warranty claims should not be excluded as they did not involve the discharge of a polluant.  See also State Auto Ins. Co. v. Summy,  83 F.Supp.2d 530 (E.D. Pa.  2000), appeal dismissed 234 F.3d 131 (3d Cir. 2000)(rejecting argument that lead paint exposures did not involve any “discharge” of a pollutant).  Lititz was heard by the Supreme Court on April 30, 2001.  A ruling is not expected before late 2001.

  In the interim, the Superior Court ruled en banc that a trial court erred in failing to give effect to a total pollution exclusion in a lead paint case.  In Fayette County Housing Authority v. Housing and Redevelopment Insurance Exchange, 2001 Pa. Super. LEXIS 288 (Pa. Super. March 12, 2001), the intermediate appellate court ruled 3-2 that its 2000 ruling in Lititiz (now on appeal to the Pennsylvania Supreme Court) compelled a finding that  the exclusion was not restricted to “environmental” risks and that lead is a “pollutant.”  Two dissenting judges argued that the exclusion did not apply to liabilities based on the insured Housing Authority’s failure to comply with federal housing authority statutes and regulations and, furthermore, that lead dust that a child contacted passively had never been “discharged.”

  On the other hand, the Superior Court ruled 2-1 in Misteick, Inc. v. Northwestern National Casualty Company (Pa. Super. April 4, 2001) that a trial court had erred in sustaining an insurer’s demurrer based on the exclusion since, unlike Lititz, there were no affidavits and secondary sources of evidence with respect to whether the underlying exposures to lead involve an “irritant” or “contaminant.”  A dissenting judge concluded that Lititz compelled the conclusion that these claims involved exposure to a “pollutant.”

  A federal district court ruled in Brown v. American Motorists Ins. Co., 930 F.Supp. 207 (E.D. Pa. 1996) that noxious fumes from a sealant that an insured applied to the exterior of his home were clearly "pollutants", rejecting the homeowner's contention that the exclusion was only intended to apply to intentional acts of polluters who cause harm to the environment and not to the everyday activities of a homeowner.  

  The Third Circuit has also ruled that a "total" exclusion barred coverage for carbon monoxide claims resulting from the insured's manufacture of defective steam generators.  In Reliance Ins. Co. v. Moessner., No. 95-538 (E.D. Pa. September 20, 1995), reversed and remanded, 121 F.3d 895 (3d Cir. 1997), Judge Newcomer ruled that such "total" exclusions were applicable to products liability claims.  The District Court rejected the insured's arguments that carbon monoxide was not a "pollutant" or that the exclusion should not apply to indoor discharges or to emissions from products that were designed to emit that pollutant.  The Third Circuit agreed with the District Court's analysis of the exclusion but held that the insured might nonetheless have assumed that it was covered based on specific representations that it independently received from Reliance.  On remand, the District Court did indeed rule that that Reliance’s conduct had engendered a reasonable expectation of coverage in the insured that overcame the clear and unambigous terms of the pollution exclusion. Reliance Ins. Co. v. VE Corp., 2000 U.S. Dist. LEXIS 1819 (E.D. Pa. February 10, 2000).

  In light of the Third Circuit’s analysis in Reliance, a federal district court subsequently ruled that summary judgment should not be granted on the APE until the insured had an opportunity to conduct discovery with respect to the insured’s reasonable expectations of coverage and, in particular, the circumstances by which the exclusion was added to the policy and the extent to which the policyholder was made aware of these changes or their effect on his business. West American Insurance Company v. Bucci, 98-CV-1220 (E.D. Pa. September 3, 1999).   Similarly, in  Scranton Dunlop, Inc. v. St. Paul Fire & Marine Insurance Company, No. 00-2138 (E.D. Pa. August 4, 2000), opinion vacated (E.D. Pa. November 14, 2000), the District Court refused to enter summary judgment until extrinsic evidence could be developed with respect to the intended scope of the “hostile fire” exception to the exclusion.
  In Cole Heat, Inc. v. USF&G, 2000 U.S. Dist. LEXIS 16059 (E.D. Pa. November 2, 2000), the insured sought coverage for claims that were filed against it in state court in Pennsylvania arising out of its negligent servicing of an above ground oil storage tank belonging to a customer.  The plaintiffs had sought recovery from the insured for damage to their property as well as costs incurred in responding to a PADEP investigation.  USF&G denied coverage based upon an absolute pollution exclusion in its policy.  On November 2, 2000, Judge Van Antwerpen upheld the exclusion and concluded that the claims plainly arose out of a “request, demand or order that any insured or others test for...the effects of pollutants” within the scope of subsection 2(a) of the exclusion.  Notwithstanding the insured’s effort to rely upon out-of-state cases, notably the California Court of Appeal ruing in Charles E. Thomas, the court declared that coverage was plainly precluded under Pennsylvania law and that the court’s interpretation of the exclusion was consistent with the view in most states, declaring that “We reject the Charles E. Thomas decision as an anomalous without binding authority over cases decided under Pennsylvania law.”
  The Court of Common Pleas has refused to limit the scope of such exclusion to the statutory construction of a “hazardous substance.”  In Municipality of Mount Lebanon v. Reliance Insurance Company, Allegheny No. GD99-11299 (Pa. Ct. Cm. Pleas May 2, 2000), appeal pending (Pa. Super. 2000), the court ruled that methane gas was a “pollutant.”  Even though natural gas is excluded from CERCLA’s definition of a hazardous substance, the court found that there was no suggestion in the legislative history of CERCLA that Congress intended not to treat natural gas or petroleum products as “pollutants.”  


  The cost of installing additional manufacturing safeguards to enhance consumer acceptance for the resulting product were held to be a "loss of use" within the second portion of the CGL definition of "property damage."  However, the Third Circuit ruled in Lucker Mfg. v. The Home Ins. Co., 23 F.3d 808 (3d Cir. 1994) that the claims were still not covered since the lost use of a faulty product design was not damage to "tangible property."

  A federal district court has ruled in USX. Corporation v. Adriatic Insurance Company, 2000 WL 636912 (W.D. Pa. March 22, 2000) that allegations of criminal conspiracy and violations of the Sherman Antitrust Act were not covered under the defendant’s policies.  The district court ruled that there was no claim for “property damage” as the allegations were not based upon the actual loss of use or damage to tangible property and that claims for lost savings, lost investment opportunities and lost profits all sought “economic loss” that is not a covered form of “property damage.”


  Pennsylvania courts will only invalidate a contract as being violative of public policy where the policy is a positive, well-defined, universal public sentiment, deeply integrated in the customs and beliefs of the people."  Hall v. AMICA Mutual Ins. Co., 648 A.2d 755 (Pa. 1994).  See also Central Dauphin School District v. American Casualty Co., 426 A.2d 94 (Pa. 1981) (it would be against public policy to indemnify a school district for the cost of refunding taxes that were unlawfully collected from the populous) and Federal Ins. Co. v. Katz, 1997 WL 197306 (E.D. Pa. April 21, 1997)(against public policy to require coverage for consequences of criminal conduct for which insured had already been convicted).  But see Blass Intermediate Unit 17 v. CNA Ins. Co., 674 A.2d 687 (Pa. 1996)(negligent violation of Civil Rights Act were insurable).

  The Pennsylvania Supreme Court has ruled that public policy does not preclude coverage for property damage resulting from the negligent acts of a burglar, even though the damage occurred in the course of a criminal act.  Eisenmann v. Hornberger, 264 A.2d 673, 674 (Pa. 1970).  The court ruled in Mutual Benefit Ins.  Co.  v.  Haver, 725 A.2d 743 (Pa. 1999) however, that it would be against the public policy of Pennsylvania to require insurance for damages assessed as a result of an insured’s “evil or illegal conduct.”

  A federal court has ruled that it would be against public policy to require coverage for a suit against a high school teacher by a pupil with whom he had consensual sexual intercourse, particularly in light of Pennsylvania's strong interest in maintaining the quality of public education.  Teti v. Huron Ins. Co., 914 F.Supp. 1132 (E.D. Pa. 1996).

  Likewise, a federal district court ruled in USX. Corporation v. Adriatic Insurance Company, 2000 WL 636912 (W.D. Pa. March 22, 2000) that an insured should not be allowed to obtain insurance coverage for criminal conspiracy and violations of the Sherman Antitrust Act.  In view of the fact that the insured had pleaded guilty to conspiracy, the District Court declared that the losses were not fortuitous and were uninsurable as a matter of law since insurance should not be available to offset penalties for “knowing and willful violation of a criminal statute.”


  The Superior Court has ruled that the public policy of Pennsylvania precludes coverage for punitive damages where liability is imposed upon the insured because of its own acts.  Aetna Casualty & Surety Co. v. Roe, 644 A.2d 94, 100 (Pa. Super. 1994).  See also Creed v. Allstate Ins. Co., 529 A.2d 10 (Pa. Super. 1987);  Aetna Life & Cas. Co. v. McCabe, 556 F.Supp. 1342 (E.D. Pa. 1983) and Pennbank v. St. Paul Fire & Marine Ins. Co., 669 F.Supp. 122 (W.D. Pa. 1987).

  However, public policy does not forbid coverage where liability is imposed vicariously.  Butterfield v. Giuntoli, 670 A.2d 646 (Pa. Super. 1996).  


  Where terms are clear and unambiguous, they should be given their plain and ordinary meaning. Northbrook Ins. Co. v. Kuljan Corp., 690 F.2d 368, 372 (3d Cir. 1982).  An insurance policy is an integrated document and must be read as a whole;  an unclear term can be clarified by reference to other terms of the policy.  Giancristoforo v. Mission Gas and Oil Products, 776 F.Supp. 1037 (E.D. Pa. 1991).

  A policy provision is ambiguous "if reasonably intelligent men on considering it in the context of the entire policy would honestly differ as to its meaning."  USAA v. Elitzky, 517 A.2d 982, 986 (Pa. Super. 1986).  However, ambiguity will only be construed against the policy drafter if it cannot otherwise be explained by resort to extrinsic evidence of contractual intent.  12th Street Gym, Inc. v. General Star Ind. Co., 1996 WL 489230 (3d Cir. August 28, 1996), citing Hutchison v. Sunbeam Coal Corp., 519 A.2d 385, 390 (Pa. 1986).

  Further, several Pennsylvania courts have refused to construe ambiguities against insurers where the insured is of comparable size and sophistication.  A U.S. District Court ruled in County of Erie v. American States Ins. Co., 573 F.Supp. 479, 487 (W.D. Pa. 1983), aff'd, 745 F2d 45 (3d Cir. 1984) that the rule of contra proferentum was inapplicable where insured "equipped as it is with a battery of legal talent is likely to be both more discriminating in selecting a package of insurance coverage and better able to ascertain its legal obligations arising from an insurance contract."  Accord Brokers Title Co. v. St. Paul Fire & Marine Ins. Co., 610 F.2d 1174 (3d Cir. 1979); Eastern Associated Coal Corp. v. Aetna Cas. & Sur. Co., 668 F.2d 1068, 1075 (3d Cir. 1980); First State Underwriters Corp. v. Travelers Ins. Co., 803 F.2d 1308, 1314 (3d Cir. 1986). But see, H.K. Porter v. Columbia Casualty Co., No. 94-3638 (3d Cir. September 8, 1995)(contra proferentum rule does not apply on size or sophistication of insured).

  "Reasonable expectations" doctrine endorsed in Collister v. Nationwide Life Ins. Co., 388 A.2d 1346, 1354 (Pa. 1978).  More recently, the Third Circuit declared in The Medical Protective Company v. Watkins, 1999 U.S. App. LEXIS 30724 (3rd Cir. November 26, 1999) that the application of the “reasonable expectations” doctrine was limited to situations in which the policy terms were ambiguous.  To the contrary, the court ruled that coverage might be required even in cases where the policy terms were clear if the insurer had acted in such a manner as to create a reasonable expectation in the insured that there would be coverage.

  Even thought the “named insured” language in Zurich’s policy was ambiguous, the U.S. Court of Appeals for the Third Circuit has refused to extend its coverage to a particular subcontractor where both the insured and the insurer agreed that no coverage was intended.  James v. Zurich American Insurance Company of Illinois, 2000 WL 141240 (3rd Cir. February 9, 2000).   In the absence of any evidence that the third party had changed its position in reliance on its belief that it was insured under the Zurich policy, the Third Circuit refused to find that its understanding of coverage should contradict or supercede the shared understanding of the parties to the contract.  The court refused to find that the doctrine of contra proferentum would apply in such circumstances. 


  A market share type theory was adopted for DES claims in Erlich v. Abbott Laboratories, 5 Phila. 249 (1981).  

  Subsequent cases have refused to extend such theories beyond DES.   City of Philadelphia v. Lead Industries Association, 994 F.2d 112 (3rd Cir. 1993)(lead paint);   Skipworth v. Lead Industries Association, 665 A.2d 1288 (Pa. Super. 1995)(lead paint); Vigiolto v. Johns-Manville Corp., 643 F.Supp. 1454 (W.D. Pa. 1985)(asbestos) and Klein v. Council of Chemical Associations, 587 F.Supp. 213 (E.D. Pa. 1984)(asbestos).  

  The Pennsylvania Superior Court refused to adopt enterprise liability in Cummings v. Firestone Tire & Rubber Co., 495 A.2d 963 (Pa. Super. 1985) appeal denied, (Pa. 1986).  A theory of concert of action was rejected by the Superior Court in Burnside v. Abbott Laboratories, 505 A.2d 973 (Pa. Super. 1985), where the DES plaintiffs were unable to isolate a particular manufacturer as a causative agent of their injuries.  The court also held that the complaint did not state a legally cognizable cause of action for enterprise liability because it did not aver that (1) defendant manufacturers had avoided their responsibility to reduce the dangers of DES by contemporaneously delegating this burden to a trade association; nor (2) defendant manufacturers possessed a joint capacity for reducing the risks inherent in DES. 


  Like most states, Pennsylvania follows the rule that "occurrence" policies are deemed to be triggered when the complaining party is actually damaged.  D'Auria v. Zurich Ins. Co., 507 A.2d 857 (Pa. Super. 1986)(failure to diagnose claims).  However, Pennsylvania courts have differed in their interpretation of when it is that bodily injury or property damage actually occurs.  See AC and S, Inc. v. Aetna Cas. & Sur. Co., 764 F.2d 968 (3d Cir. 1985)(continuous trigger adopted for asbestos BI claims); Armotek Industries, Inc. v. Employers Ins. of Wausau, 952 F.2d 756 (3d Cir. 1991)(actual injury trigger adopted for pollution claims); Federal Ins. Co. v. Susquehanna Broadcasting, 727 F.Supp. 169 (M.D. Pa. 1989), as reconsidered, 737 F.Supp. 896 (M.D. Pa. 1990), affirmed per curiam, 928 F.2d 1131 (3d Cir. 1991)(continuous trigger adopted for pollution claims); Triangle Publications, Inc. v. Liberty Mutual Ins. Co., 703 F.Supp. 367 (E.D. Pa. 1989)(actual injury adopted for pollution claims); Pittsburgh Corning Corporation v. Travelers Indemnity Co., C.A. No. 84-3985 (E.D. Pa. January 20, 1988)(adopting "continuous trigger" for asbestos bodily injury claims and "manifestation" trigger for property damage claims); Metal Bank of America v. Liberty Mutual Inc. Co., 14 Phila. 71 (Ct. of Common Pleas 1986), affirmed on other grounds, 520 A.2d 493 (Pa. App. 1987), further appellate review denied, 517 Pa. 607, 536 A.2d 1332 (1987)(adopting "manifestation" trigger for oil spill clean up claim); Vale Chemical Co. v. Hartford Acc. & Ind. Co., 340 Pa. Super 510, 490 A.2d 896 (1985)(continuous injury adopted for DES claims).

  The leading "trigger" case in Pennsylvania is J.H. France Refractories Co. v. Allstate Ins. Co. , 626 A.2d 502 (Pa. 1993), wherein the Pennsylvania Supreme Court adopted a Keene-style trigger for asbestos personal claims.  Lower court decisions have similarly followed an approach that focuses on the nature of the particular injury.  Accord, Air Products & Chemicals, Inc. v. Hartford Acc. & Ind. Co., 25 F.3d 177 (3d Cir. 1994).

  Relying on J.H. France, the U.S. Court of Appeals for the Tenth Circuit has ruled that, under Pennsylvania law, an insurer whose policy was in effect for a portion of the time that a defective pacemaker allegedly caused injury must pay 100% of the insured's defense costs.  TPLC, Inc. v. United National Ins. Co., 44 F.3d 1484 (10th Cir. 1995).

  Similarly, the Third Circuit has ruled that J.H. France mandates the use of a "continuous trigger" for pollution liability cases. Koppers Co., Inc. v. The Aetna Casualty & Surety Co., 98 F.3d 1440 (3d Cir. 1996).  Further, the court ruled that continuing damage from earlier discharges, such as leaching processes, was an independent trigger of coverage.  

  However, a federal district court has ruled in a construction case that the "continuous trigger" should only be relied on in cases where it is impossible to pinpoint the dates of injury, as in toxic tort and pollution cases.  Judge Broderick also ruled in Marine Office of America Corp. v. Quarry Associates, Inc., 963 F.Supp. 1392 (E.D. Pa. 1997) that while a "manifestation" trigger would ordinarily be used in a construction defect case, an "actual injury" approach was more appropriate where the dates of injury were agreed upon.

  Similarly, the Superior Court ruled that a "continuous trigger" made no sense in the case of a malicious prosecution claims since the injuries were neither latent nor dormant. Supervising Engineers, Inc. v. INA, 710 A.2d 82 (Pa. Super. 1998).

  A federal district court ruled in Caln Village Associates, L.P. v. The Home Indemnity Company, 75 F.Supp.2d 404 (E.D. Pa. 1999) that a two year suit limitation period in commercial property policies was not unreasonable as a matter of law and precluded coverage for ongoing problems arising out of cracks in the property foundation where cracks and physical damage first appeared more than four years before suit was filed and a substantial litany of further problems arose during the ensuing two years before the limitations period ran.  Insofar as the insured was aware that a substantial loss was occurring and had in its possession an engineering report definitively attributing the problems to a specified cause prior to the expiration of the limitations period for suit, the district court held that the trigger of coverage for these first-party claims had occurred more than two years before the date that suit was filed and that the actions were, therefore, untimely as a matter of law.

  Pennsylvania courts will not necessarily follow these rules if policies contain unconventional policy language, however.  For instance, in the absence of any definition of "occurrence" requiring that injury take place during the policy period, a federal district court ruled in General Star National Ins. Co. v. Pierce Paley, No. 91-6614 (E.D. Pa. September 16, 1992), that coverage was triggered at the time of the insured contractor's negligent acts.  

  A state trial court has ruled that a polluter could not obtain coverage for pollution caused by other entities prior to the date that it first shipped waste materials to the site.  In Koppers Co., Inc. v. INA, Alleghany No. GD95-11243 (Pa. Court of Common Pleas, October 28, 1997), the court ruled that such claims should be covered through new insurance as policy premiums are intended to be based upon the activities of the insured.  The court found that any contrary interpretation would permit Koppers to unilaterally increase the risks for which it was covered years after the expiration of the policy and without any additional payment of premium to reflect this new risk.  While therefore ruling without construing the specific wording of the policy, Judge Wettick declared that his analysis was consistent with the "commercial realities of the relationship between the purchaser of an occurrence policy and the insurance company."

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