Air Products and Chem., Inc. v. Hartford Acc. & Indem. Co. , 25 F.3d 177 ( 1994 )

Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit
5-27-1994
Air Products and Chem., Inc. v. Hartford Acc. &
Indem. Co., et al.
Precedential or Non-Precedential:
Docket 91-1681
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Recommended Citation
"Air Products and Chem., Inc. v. Hartford Acc. & Indem. Co., et al." (1994). 1994 Decisions. Paper 30.
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1
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
NOS. 91-1681 and 91-1682
AIR PRODUCTS AND CHEMICALS, INC.,
Plaintiff
v.
HARTFORD ACCIDENT AND INDEMNITY COMPANY; and
LIBERTY MUTUAL INSURANCE COMPANY; and
AETNA CASUALTY AND SURETY COMPANY,
Defendants
v.
NATIONAL UNION FIRE INSURANCE COMPANY
OF PITTSBURGH, PA.; and
THE TRAVELERS INSURANCE COMPANY,
Third-Party Defendants
v.
AIR PRODUCTS & CHEMICALS, INC.,
Third-Party Defendant
AETNA CASUALTY AND SURETY COMPANY,
Appellant No. 91-1681
HARTFORD ACCIDENT & INDEMNITY COMPANY,
Appellant No. 91-1682
Appeals from the United States District Court
for the Eastern District of Pennsylvania
D. C. Civil No. 86-7501
Argued January 24, 1994
Before: MANSMANN, NYGAARD, and SEITZ, Circuit Judges.
Filed: May 31, 1994
2
Valerie J. Munson (Argued)
Daniel W. Cantú-Hertzler
MILLER DUNHAM DOERING & MUNSON, P.C.
1515 Market Street, 13th Floor
Philadelphia, PA 19102
Attorneys for Appellant
Aetna Casualty & Surety Co.
George W. Mayo, Jr. (Argued)
Teresa C. Plotkin
Jonathan T. Rees
HOGAN & HARTSON
555 Thirteenth Street, N.W.
Washington, DC 20004-1109
John M. Fitzpatrick
DILWORTH, PAXSON, KALISH & KAUFFMAN
1735 Market Street
3200 Mellon Bank Center
Philadelphia, PA 19103
Attorneys for Appellant
Hartford Accident & Indemnity Co.
Sherry W. Gilbert (Argued)
Anthony F. King
HOWREY & SIMON
1299 Pennsylvania Avenue, N.W.
Washington, DC 20004
Stephen S. Ferrara
Richard H. Albert
LAW DEPARTMENT, AIR PRODUCTS & CHEMICALS, INC.
P. O. Box 538, 7201 Hamilton Boulevard
Allentown, PA 18195
Attorneys for Appellee
Air Products & Chemicals, Inc.
_______________
OPINION OF THE COURT
SEITZ, Circuit Judge.
These appeals principally involve the duty of two
insurance carriers under Pennsylvania law to defend their insured
in numerous actions instituted against it. The carriers contend
3
that the claims asserted against their insured could not have
arisen during the periods of their policy coverage. Additionally,
if such duties to defend are found, they assert that the proper
allocation of defense and indemnity costs must be addressed.
The district court had diversity jurisdiction, while we
have jurisdiction over partial summary judgment orders made final
by certification under Fed. R. Civ. P. 54(b). Our standard of
review is plenary. The parties agree that Pennsylvania law
controls.
I. ACTION AGAINST AETNA
Air Products & Chemicals, Inc. ("Air Products")
instituted this declaratory judgment action against, inter alia,
appellant Aetna Casualty & Surety Company ("Aetna"), which
provided it with coverage from May 16, 1951 to June 8, 1953. Air
Products sought a determination that Aetna breached a duty that
it owed to defend and indemnify it1 in numerous underlying civil
actions pending against it, thus requiring Air Products to take
up its own defenses. The plaintiffs in these underlying actions
alleged injuries as a result of their exposure at their
workplaces to fumes and gases emitted from welding rod material
sold to their employers by numerous defendants, including Air
Products.
The parties here filed cross-motions for partial
summary judgment. The district court granted Air Products'
1
Air Products' declaratory action sought reimbursement for
defense costs and expenses incurred in the underlying suits
through September 30, 1989.
4
motion on the ground that Aetna had breached a duty to defend it2
in the underlying actions for injuries incurred during the period
of Aetna's coverage. The district court denied Aetna's cross-
motion. Aetna appeals.
Generally speaking, under Pennsylvania law, the issuer
of a general liability insurance policy has a duty to defend its
insured when the allegations in the complaint against it could
potentially fall within the coverage of the policy. Gedeon v.
State Farm Mut. Auto. Ins. Co., 188 A.2d 320, 321-22 (Pa. 1963);
see Cadwallader v. New Amsterdam Cas. Co., 152 A.2d 484, 488 (Pa.
1959); Wilson v. Maryland Cas. Co., 105 A.2d 304, 307 (Pa. 1954).
The district court applied that rule in finding for Air Products.
The resolution of this dispute first requires us to
examine the pertinent allegations of a typical complaint in one
of the underlying actions to determine whether it could
potentially fall within the coverage of Aetna's policy. We turn
to such allegations:
The Defendants, [including Air Products]
during all the times herein mentioned and for
2
Aetna's policy provided in pertinent part:
II. Defense, Settlement, Supplementary
Payments
As respects the insurance afforded by the
other terms of this Policy the Company shall:
(a) defend any suit against the Insured
alleging such injury, sickness, disease or
destruction and seeking damages on account
thereof, even if such suit is groundless,
false or fraudulent; but the Company may make
such investigation, negotiation and
settlement of any claim or suit as it deems
expedient . . . .
5
a long time prior thereto, have been and now
are engaged in the manufacture of materials
used for, insulation containing asbestos
and/or welding rods, that the products
manufactured, compounded, and prepared by
Defendants, acting through their servants,
employees, representatives and agents were
and are placed on the market to be purchased
and used by the public.
. . . .
The Plaintiff says that during the years
1951 to 1984, inclusive, he was employed as a
welder, and that in the performance of his
duties as a welder, he was required to handle
large quantities of the products manufactured
and distributed by the above-named
Defendants. That in addition to the fact
that Plaintiff actually used the product
manufactured by the above-named Defendants,
[including Air Products] and many more, as a
welder, and specifically many and various
products containing asbestos, the Plaintiff
says that on many of the jobs, while not
using himself the specific products
manufactured by the Defendants, he was
nevertheless exposed to the dangerous
materials and especially those dust, fibers,
fumes, and particulates, which were used by
other workers in the same area at which
Plaintiff was working.
[Emphasis added]
Air Products says, as the district court concluded,
that the quoted allegations of the underlying complaint can be
read to charge that the plaintiff was injured as a result of
exposure to welding rod materials supplied, inter alia, by Air
Products during the 1951 to 1984 period. This, of course,
included the period of Aetna's coverage. Aetna responds in its
brief that the "allegations [in the underlying complaint] do not
6
establish coverage, although neither do they expressly rule it
out." Aetna Brief at 28.
Given Aetna's own quoted response and the allegations
of the underlying complaint, the duty to defend provision of the
policy could have been triggered under Gedeon because the welding
rod material could have been sold by Air Products to the employer
in the underlying action during the covered period. But Aetna
argues that the summary judgment record shows that Air Products
sold no welding rod material to any underlying employer during
the period of Aetna's coverage and thus summary judgment should
have been granted it on that ground.
It is apparent that in seeking summary judgment Aetna
was asking the district court to go beyond the face of the
underlying complaint to decide Aetna's initial duty to defend.
This the district court was not free to do unless this case
triggered cases outside the general Pennsylvania rule. Aetna
says that this is such a case.
Aetna cites various cases that permit use of evidence
to determine whether the duty to defend has been triggered. Thus,
Aetna says that evidence of the absence of sale of welding rods
by Air Products to underlying employers should be useable to show
that it could not have been Air Products' welding rod materials
that caused the injury to the plaintiffs. We acknowledge that
the New York federal district court case on which Aetna relies
most heavily seems to support its position. See Avondale Indus.
v. Travelers Indem. Co., 774 F. Supp. 1416, 1426 (S.D.N.Y. 1991)
(admitting evidence in an "unusual posture and [procedural]
7
context" under Louisiana law). However, our case is controlled
by Pennsylvania law and we reconcile the Commonwealth's lines of
cases differently.
Aetna then cites a line of Pennsylvania cases dealing
with policy exclusions.3 In these suits, the allegations of the
underlying complaints clearly fall within policy exclusions.
Because the claims do not potentially trigger coverage under the
policy, there is no duty to defend. See, e.g., Germantown Ins.
Co. v. Martin, 595 A.2d 1172 (Pa. Super. Ct. 1991), alloc.
denied, 612 A.2d 985 (Pa. 1992) (denying defense when the
allegations in the complaint of intentional gunshots clearly fell
within the policy's exclusion of "expected or intended" damage).
Extrinsic evidence is not required to resolve these disputes.
However, when the allegations may or may not fall within the
exclusion (and therefore the coverage), the insurer is required
to defend. Safeguard Scientifics, Inc. v. Liberty Mut. Ins. Co.,
766 F. Supp. 324 (E.D. Pa. 1991), aff'd in part without op., 961
F.2d 209 (3d Cir. 1992) (table).
Next, there is a subset of exclusion cases that
concerns exceptions to exclusions. This is the group of cases
that permits extrinsic evidence to resolve the duty to defend.
The burden is on the insured, not the insurer, to introduce
evidence to show that the exclusion which appears to be triggered
3
We include in this category cases that construe policy
provisions as incapable of covering the conduct alleged. See,
e.g., Erie Ins. Exch. v. Transamerica Ins. Co., 533 A.2d 1363,
1368 (Pa. 1987) (holding that a policy insuring "use and
operation" of an automobile cannot be triggered by a 3-year-old,
who cannot "use" an automobile as a matter of law).
8
does not apply after all. See, Northern Ins. Co. v. Aardvark
Assocs., 942 F.2d 189 (3d Cir. 1991) (predicting that the
Pennsylvania Supreme Court would adopt the reasoning of Lower
Paxon Township v. United States Fidelity & Guaranty Co., 557 A.2d
393, 403 (Pa. Super. Ct. 1989) that held the insured had the
burden of proving the allegations in the complaint fell within a
"sudden and accidental" exception to a pollution exclusion);
Fischer & Porter Co. v. Liberty Mut. Ins. Co., 656 F. Supp. 132,
140 (E.D. Pa. 1986) (insured has burden to prove "sudden and
accidental" exception). If the insured is successful in
demonstrating that coverage is not necessarily excluded by the
facts averred in the complaint, the insurer is required to defend
the underlying suit.
We recognize that the rule permitting the introduction
of evidence to show that an exception to an exclusion applies,
while disallowing evidence to show that an exclusion applies
appears to be one-sided. This construction against the insurer
and in favor of the insured, however, is consistent with general
insurance law principles and, in particular, the Pennsylvania
rule that requires only a "potential" of coverage of the
allegations in the complaint for the duty to defend to be
triggered.
We conclude that the cases cited by Aetna do not take
this case outside the general Pennsylvania duty to defend rule.
On that premise we agree with the district court that Aetna had a
duty to defend.
II. ACTION AGAINST HARTFORD
9
Air Products also instituted a diversity action under
Pennsylvania law seeking a declaratory judgment against Hartford
Accident and Indemnity Company ("Hartford"). Hartford was its
insurer from June 1, 1953 to September 30, 1972. Air Products
sought a declaration that Hartford breached its duty to defend it
in underlying actions based on employee exposure to Air Products'
welding rods during the period of its coverage.
Hartford essentially takes the same position as Aetna
on the duty to defend issue. As we said in that case, Aetna's
position is contrary to Pennsylvania law covering the duty to
defend here. If Pennsylvania law is to be changed, it must be
for the Supreme Court of Pennsylvania to do so. Again, we affirm
the district court on this claim.
III. INDEMNITY
The judgment awarded Air Products against Hartford
included a sum to indemnify Air Products for amounts it paid to
settle underlying actions. Hartford seems to argue that even if
it had a duty to defend, as we have found, any obligation to
indemnify was negated by the summary judgment record. The short
answer is that on this record the district court found there was
an issue of material fact and thus properly denied summary
judgment.
The position of Aetna on the indemnification issue is
far from pellucid. It is not clear why it is entitled to advance
this issue here when the judgment appealed contains no obligation
on Aetna's part to indemnify Air Products. In any event, if its
argument is based on some protective basis or otherwise, the
10
answer here is that there is no basis on the record before us to
modify the judgment unless it impacts on the judgment.
IV. APPORTIONMENT OF DEFENSE AND INDEMNITY COSTS
Because two policies were triggered by the pre-1962
welding rod claims, allocation of the defense and indemnity costs
had to be determined. The district court relied on the decision
of the Philadelphia Court of Common Pleas in J.H. France
Refractories Co.v. Allstate Ins. Co., No. 3933 (Phila. Ct. C.P.
Apr. 18, 1986) ("France I")4 for its determination. It stated
that France I "constitute[d] the best statement of Pennsylvania
law concerning the designation of a triggered policy for coverage
in a particular underlying action . . . ." Air Prods., 707 F.
Supp. at 769.
The district court adopted the "chronological and
seriatim" method of allocation discussed in France I. Under this
method, the first policy triggered must defend and indemnify the
insured until the policy limit is reached. The next-in-time
policy is then obligated, and so forth until the policies are
exhausted or until the insured is fully reimbursed.
The Supreme Court of Pennsylvania overruled the
chronological and seriatim method of allocation in its decision
in J.H. France Refractories Co. v. Allstate Ins. Co. ("France
III"), 626 A.2d 502 (Pa. 1993), rev'g 578 A.2d 468 (Pa. Super.
1990) ("France II"). Under France III, as the allocation applies
4
Vacated on jurisdictional grounds, 539 A.2d 1345 (Pa. Super.
1988), rev'd, 555 A.2d 797 (Pa. 1989), on remand, 578 A.2d 468
(Pa. Super. 1990) ("France II"), aff'd in part, rev'd in part,
626 A.2d 502 (Pa. 1993) ("France III").
11
to the duty to indemnify, if more than one policy is triggered,
the insured "should be free to select the policy or policies
under which it is to be indemnified." Id. at 508. When the
policy limits of the chosen policy are exhausted, then the
insured is entitled to choose again from the triggered policies
and continue to do so until fully indemnified for the claims. In
regard to the allocation of the liability associated with the
duty to defend, the Supreme Court held that the insurers have the
right to select which of the insurers will undertake a defense.
If the insurers cannot decide, then the insured may designate
which insurer it wishes to have defend the claims. Id. at 510.
Hartford and Aetna argue that this case should be
remanded to the district court for reconsideration in light of
the intervening Pennsylvania Supreme Court decision in France
III. We agree that a federal court exercising diversity
jurisdiction is bound to follow the law as decided by the highest
court of the state even if it has changed during the pendency of
the federal action. Vandenbark v. Owens-Illinois Glass Co., 311
U.S. 538, 543 (1941). The district court's order allocating
costs relied on a statement of Pennsylvania law that has since
been overruled by an intervening decision of the Supreme Court of
Pennsylvania. The pertinent provisions of the district court's
order will be vacated and the case remanded so that the district
court can reconsider its order in light of France III.
V. CONCLUSION
The order of the district court will be affirmed to the
extent that it finds that Hartford and Aetna had a duty to
12
defend. The order of the district court will be vacated and
remanded to the district court to the extent it apportions
defense costs and, if appropriate, indemnity costs so that they
may be determined in accordance with France III.