T&N, PLC v. PA Insur. Guar. Assn. ( 1994 )

Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit
11-29-1994
T&N, PLC v. PA Insur. Guar. Assn.
Precedential or Non-Precedential:
Docket 93-2011
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
Nos. 93-2011 and 93-2012
___________
T&N, plc,
Appellant/Cross-Appellee
vs.
PENNSYLVANIA INSURANCE GUARANTY ASSOCIATION
Appellee/Cross-Appellant
___________
Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civ. No. 90-cv-04946)
___________
Argued
June 6, 1994
Before: MANSMANN, ALITO and ROSENN, Circuit Judges.
(Filed November 29, 1994)
___________
Mark F. Rosenberg, Esquire
Philip L. Graham, Jr., Esquire (ARGUED)
Tariq Mundiya, Esquire
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Richard L. Berkman, Esquire
William R. Spade, Jr., Esquire
Dechert, Price & Rhoads
1717 Arch Street
4000 Bell Atlantic Tower
Philadelphia, Pennsylvania 19103
COUNSEL FOR APPELLANT/CROSS-APPELLEE
Lise Luborsky, Esquire
Joseph M. Hankins, Esquire (ARGUED)
Britt, Hankins, Schaible &
Moughan
Two Penn Center Plaza
Suite 515
Philadelphia, PA 19102
COUNSEL FOR APPELLEE/CROSS-APPELLANT
___________
OPINION OF THE COURT
__________
MANSMANN, Circuit Judge.
The Pennsylvania Insurance Guaranty Association
("PIGA") is an association of independent property and casualty
insurers within Pennsylvania, created by The Pennsylvania
Insurance Guaranty Act, 40 Pa. Cons. Stat. Ann. § 1701 et seq.
(1970) for the purpose of providing a means of relatively prompt
payment of covered claims in the stead of an insolvent insurer.
Membership in PIGA is required before an insurer is authorized to
write insurance policies within Pennsylvania. A "covered claim"
under the Act must be the claim of a Pennsylvania "resident" or
must pertain to property permanently located in Pennsylvania.
In this interlocutory appeal arising out of multiple
claims seeking multi-millions of dollars in asbestos personal
injury damages, T&N, plc, an English corporation with its
principal place of business in England, seeks to recover from
PIGA over $5 million under the terms of a settlement agreement
with the American Mutual Liability Insurance Company. American
Mutual is the insolvent insurer of T&N's now dissolved
Pennsylvania asbestos manufacturing subsidiary, the Keasbey and
Mattison Company. Since Keasbey's dissolution, T&N has been the
target of thousands of claims brought by individuals alleging
bodily injury and/or property damage caused by Keasbey's
asbestos-containing products. Following an action which T&N
commenced against American Mutual in the federal district court,
T&N and American Mutual negotiated a settlement agreement which
bound American Mutual to pay T&N a certain sum under the Keasbey
policies. When American Mutual defaulted and was adjudged
insolvent, T&N commenced this action against PIGA.
We must decide whether T&N's claim based on the terms
of the settlement agreement is deemed to have arisen under
American Mutual's property and casualty insurance policy so as to
fall within the scope of covered claims under the Act, or whether
the agreement served to extinguish the Keasbey policies. We must
also decide whether T&N's claim satisfies the residency
requirement of the Act, either by virtue of Keasbey's
Pennsylvania residency while it was still viable, T&N's alleged
alter ego relationship with Keasbey, and/or by T&N's direct
Pennsylvania contacts. We must further decide the merits of
T&N's assertion that recovery from PIGA is authorized to the
extent that the underlying personal injury claimants are
Pennsylvania residents. Finally, we must decide whether T&N has
a potential claim against PIGA for claims arising from the loss
or liability to any property permanently situated in
Pennsylvania.
We conclude that the settlement agreement did indeed
arise under the insurance policies, and hence may support a
covered claim. We also conclude that T&N may have a viable
covered claim with respect to affected property, but that it does
not otherwise meet the residency requirements of the Act. We
hold, however, that because the settlement agreement encompassed
all of T&N's claims against the insurance company, T&N has only
one potential covered claim which is subject to the $300,000
limit under the Act.
I.
Keasbey and Mattison Company was a Pennsylvania
corporation with its principal place of business in Pennsylvania
and which manufactured asbestos-containing products from the
early 1930's until 1967. Keasbey was the named insured on
standard liability polices issued by American Mutual Liability
Insurance Company from at least April 1, 1946 through October 1,
1965. The policies provided primary coverage for asbestos and
other latent disease product liability claims. In 1962, Keasbey
sold its assets and filed for dissolution under Pennsylvania law.
The dissolution became final in 1967.
T&N, plc, is a corporation organized under the laws of
England and having its principal place of business in England.
From 1934 until 1938, T&N owned the majority of Keasbey's stock.
From 1938 until Keasbey's dissolution, T&N owned one hundred
percent of Keasbey's stock either directly or indirectly.
Beginning in 1978, T&N was sued by thousands of
individuals who alleged that since T&N was the sole shareholder
of Keasbey, it was liable to them for the bodily injury they had
suffered due to their exposure to asbestos. As a result, in 1982
T&N filed a declaratory judgment action against American Mutual
in the United States District Court for the District of Columbia,
seeking coverage for over 1,000 asbestos claims. With respect to
seven selected asbestos cases, the district court entered partial
summary judgment in favor of T&N. It found that due to its
status as a shareholder of Keasbey, T&N was an additional insured
under the policies which were issued to Keasbey. The district
court then directed the parties to attempt to reach an agreement
regarding the amount of damages T&N was entitled to receive.
Subsequently, T&N and American Mutual entered into a
settlement agreement which provided in pertinent part:
2. This Agreement is intended to confer rights
and benefits only upon T&N and American Mutual,
and is not intended to confer any right or benefit
upon any other person. No person other than T&N
or American Mutual shall have any legally
enforceable right under this Agreement. All
rights of action for any breach of this Agreement
are hereby reserved to T&N and American Mutual.
5. This Agreement is the entire agreement
between T&N and American Mutual. All antecedent
or contemporaneous extrinsic representations and
warranties made in the negotiation and preparation
of this Agreement are intended to be merged in the
Agreement and of no further effect.
6. For the purposes of resolving their dispute
American Mutual and T&N agree that the limits of
liability for all Keasbey policies shall be a total
1
of .
7. American Mutual shall pay to T&N the aforesaid
limits of all Keasbey policies . . . as well as a
portion of T&N's defense costs. . . .
8. Upon execution of this Agreement, American
Mutual shall be considered to have no further
duties or obligations based upon, arising out of
1
. The district court deleted the amount from the opinion,
stating that because the settlement was filed under seal, there
was no valid reason to disclose the amount.
or related to any policy of insurance issued
to Keasbey by American Mutual and all such
policies shall be considered exhausted, null and
void and of no further force or effect.
(District Court Opinion dated May 28, 1992, pp.3-4)
T&N alleges that American Mutual defaulted on this
agreement because it failed to pay installments which were due on
January 3, 1989 and January 4, 1990. In an unrelated matter, on
March 9, 1989, the Massachusetts Supreme Judicial Court found
that American Mutual was insolvent, appointed a permanent
receiver, and ordered that the company be liquidated.
On July 30, 1990, T&N filed a complaint in the United
States District Court for the Eastern District of Pennsylvania,
seeking damages from PIGA under the Pennsylvania Insurance
Guaranty Act because the Association failed to assume American
Mutual's payment obligations under the settlement agreement2 and
under the terms of the actual insurance policies which were
issued to Keasbey.3
It is undisputed that the Pennsylvania Insurance
Guaranty Act and the Association were established in response to
the social harms which result from insurance insolvencies. Sands
v. Pennsylvania Insurance Guaranty Association, 283 Pa. Super.
217, 423 A.2d 1224 (1980). Every property and casualty insurance
carrier in Pennsylvania is a member of PIGA. Indeed, membership
2
. T&N is seeking to obtain the balance which remains due
under the settlement agreement.
3
. T&N also requested punitive damages for the bad faith
denial of its claims.
in PIGA is a condition of an insurer's ability to write insurance
policies in Pennsylvania. One of the purposes of the Act is to:
(1) Provide a means for the payment of covered
claims under certain property and casualty
insurance policies, to avoid excessive delay
in the payment of such claims, and to avoid
financial loss to claimants or policyholders
as a result of the insolvency of an insurer . . . .
40 Pa. Cons. Stat Ann. § 1701.102.
By order entered May 29, 1992, the district court found
that the settlement agreement is a matter which "arises under"
the insurance policies issued by American Mutual as that phrase
is utilized in section 1701.103(5)(a) of the Act. The court
denied summary judgment with respect to the other aspects of
Count I without prejudice to renewal after the completion of
discovery. Summary judgment was granted in favor of PIGA with
respect to T&N's claims which were based on the insurance
policies because the settlement agreement nullified the policies.
PIGA's motion for summary judgment on the bad faith claim was
also denied without prejudice to renewal after the completion of
discovery.
After discovery was completed, each party filed a
motion for summary judgment. By opinion and order entered May
27, 1993, the district court held in pertinent part that while
T&N was not a resident of Pennsylvania and that Keasbey's
residence was irrelevant, T&N could rely on the residency of its
underlying claimants and the right of those claimants to bring a
claim against T&N to meet the residency requirement of the Act.
However, PIGA would only be liable if the underlying claimants
were Pennsylvania residents at the time of the insured event4 or
if the claims were for losses to property which was permanently
located in Pennsylvania and the claims would have been covered by
a Keasbey policy. If the underlying claimant changed residence
during the time between exposure and manifestation and a policy
was in effect, PIGA's liability was to be prorated based on the
portion of the time the claimant lived in Pennsylvania during
that period. To ensure that recovery would be so limited, the
district court established an analytic framework to determine the
extent of PIGA's liability.
By order entered September 10, 1993, the district court
certified the 1992 and 1993 orders for interlocutory appeal,
specifically certifying seven questions for our review.5 By
4
. The district court defined the insured event as the
period from exposure to asbestos to the claimant's manifestation
of an asbestos-related disease.
5
. The questions which were certified are:
1) Did the District Court err in holding that the
settlement agreement arose out of insurance
policies?
2) Did the District Court err in holding that
Keasbey's residence was not relevant under
Section § 1701.103(5)(a)(i)?
3) Did the District Court err in holding that
T&N was not a resident of Pennsylvania?
4) Did the District Court err in holding that
T&N could rely on the claims represented in the
settlement agreement and the residence of the
underlying claimants to meet
the residency
requirement of the Act?
5) Did the District Court err in holding that T&N
order dated October 13, 1993, we granted the petitions for leave
to appeal pursuant to 28 U.S.C. § 1292(b). For purposes of our
review we have grouped the seven certified questions into three
main issues: (1) whether T&N has a covered claim; (2) if T&N does
have a covered claim, whether it has only one claim or a claim
for each of the underlying asbestos claimants; and (3) if T&N
does have a covered claim, whether the analytical framework
established by the district court was appropriate. Because we
determine that T&N does not have a covered claim under the
statute except for property damage and that only one claim is
implicated, we need not reach question 3.6
(..continued)
could rely on the claims represented in the
settlement agreement and the location of property
which sustained loss to meet the residency
requirement of the Act?
6) Did the District Court err in holding that the
$299,000 limit for recovery applied to each of
the underlying claims?
7) Did the District Court err in holding that PIGA's
liability for defense costs in the settlement
agreement was the smaller of the actual individual
amount or prorated amount of the costs?
(District Court's Order entered September 10, 1993)
6
. Federal courts sitting in diversity "must apply the
substantive law of the state whose laws govern the action."
Robertson v. Allied Signal, Inc., 914 F.2d 360, 378 (3d Cir.
1990) (citing Erie R.R. v. Tompkins, 304 U.S. 64 (1938). The
parties agreed that Pennsylvania substantive law applies to this
action.
II.
A covered claim is defined in relevant part in 40 Pa.
Cons. Stat. Ann. § 1701.103 as:
5(a) "Covered Claim" means an unpaid claim,
including a claim for unearned premiums, which
arises under a property and casualty insurance
policy of an insolvent insurer and is:
(i) The claim of a person who at the time of
the insured event resulting in loss or liability
was a resident of the Commonwealth, or
(ii) A claim arising from an insured event
resulting in loss or liability to property which
was permanently situated in this Commonwealth
. . . .
* * *
Thus, an essential element of a covered claim is that
it arise out of an insurance policy. PIGA argues that T&N's
claim arises out of the settlement agreement, not out of the
insurance policies, because the insurance policies were nullified
upon the execution of the settlement agreement. Therefore, T&N's
claim should not be covered by the Act.
It does not appear that any Pennsylvania court has
addressed whether a settlement agreement which is entered into in
connection with an insurance policy could support a covered claim
under the Act. Courts in other states, however, have found that
disputes arising from settlement agreements do constitute covered
claims under their insurance guaranty acts. See Buggae v. Yellow
Checker Cab Co., 623 So. 2d 906 (La. App. 1993); Lastie v. Warden,
611 So. 2d 721 (La. App. 1992), cert. denied, 614 So. 2d 64 (La.
1993); Betancourt v. Arizona Property & Casualty Insurance Fund,
170 Ariz. 296, 823 P.2d 1304 (1991); Thornock v. Pack River
Management Co., 790 F. Supp. 1014 (D. Mont. 1990) aff'd in part
and rev'd in part, 942 F.2d 794 (9th Cir. 1991); and London v.
Florida Insurance Guaranty Association, 486 So. 2d 56 (Fla. App.
1986). PIGA argues that these cases are not dispositive because
the courts were not faced with the settlement of a coverage
dispute, the settlement agreement did not nullify the underlying
insurance policies, the settlement agreement did not act as a
novation, and the cases did not involve a non-resident insured
who was seeking recovery based on underlying claimants who had no
rights under the settlement agreement. We do not find these
arguments to be persuasive.
The settlement agreement between T&N and American
Mutual would never have come into being if not for the insurance
policies. The amount of money which was to be paid under the
settlement agreement represented the total of the policy limits
on all of the insurance policies.7 As a result, we find that the
settlement agreement arose under the insurance policies and may
support a covered claim provided that all of the other
requirements of the Act are met. To hold otherwise would
discourage parties from entering into settlement agreements.8
Thus, the district court did not err in holding that the
settlement agreement arose under an insurance policy.
7
. A portion of T&N's defense costs was also represented
in the agreement.
8
. We also note that under section 1701.201(b)(1)(iv) of
the Act, PIGA may review settlements to determine the extent to
which those settlements should be contested.
III.
Our next question then is whether T&N is, or can be
considered to be, a Pennsylvania resident. Such a determination
is necessary because only Pennsylvania residents may assert a
covered claim under the Act. See § 1701.103(5)(a)(i).
Unfortunately, "resident" is not defined in the Act and it
appears that no Pennsylvania court has yet interpreted the term.
T&N suggests three methods by which it meets the residency
requirement of the Act: (A) it can use the residence of its
underlying claimants, (B) it can use Keasbey's residence, and (C)
it can be considered a resident of Pennsylvania.
A.
The district court held that while T&N was not a
Pennsylvania resident and Keasbey's residence was irrelevant, T&N
could use the residence of the underlying claimants to meet the
residency requirement of the Act. As a result, to the extent
that T&N could show that an underlying claimant was a
Pennsylvania resident at the time of the insured event, it would
have a covered claim. T&N's recovery would also have to be
prorated if an underlying claimant changed his or her residence
during the relevant period.
The district court grounded its decision to permit T&N
to use the residence of its underlying claimants on the fact that
the definition of "person" under the Act includes a claimant. As
a result, underlying claimants (tort victims) can have covered
claims under the Act. The district court then looked at section
1701.503(b) of the Act which states that, except in the case of a
first party claim for damage to property which has a permanent
location, if a person has a claim which is covered by more than
one guaranty association, he or she must seek recovery first from
the association located where the insured resides. The district
court then reasoned that because of the interaction between the
definition of "person" and section 1701.503(b), a non-resident
claimant could rely on both an insured tortfeasor's residence and
the right to make a claim in order to come within the Act.
Otherwise, a non-resident claimant who was seeking recovery from
the association where the insurer resides would not be able to
meet the residency requirement of the Act.
While the situation presented here is the opposite of
that described above, the district court stated that the analysis
was similar. Under section 1701.503(b), a non-resident insured
did not have to rely on the residence and claims of the
underlying claimants because the insured's residence determined
where recovery was to be sought in the first instance. However,
the fact that section 1701.503(b) indicated that a person, who
was defined as a policyholder or claimant, may have a claim which
was covered under more than one guaranty association suggested
that in certain situations, a non-resident insured could rely on
the residence of the underlying claimants and the right to make a
claim to meet the residency requirement. This interpretation
ensured that the underlying claimants would be able to recover
damages from the insured.
While the district court noted that these claimants
also have a right to proceed against the guaranty association, it
stated that in cases where the insured is unable to recover from
its own guaranty association9, it would be unfair not to
interpret section 1701.103(5) to allow the insured to rely on the
residence of the underlying claimants. It also noted that such a
result would discourage settlements, would lead to multiple suits
which would delay payments to Pennsylvania claimants, and could
encourage non-resident insureds to engage in delaying tactics to
force the tort victims to bring actions against PIGA instead of
continuing their suits against the insured.
We disagree with the district court's analysis. The
purpose of the Act is clearly to protect Pennsylvania residents.
If the underlying Pennsylvania claimants can proceed against PIGA
to recover for their losses, their rights are protected; they
will not suffer any harm from the insured's inability to pay
them. Therefore, giving the insured the ability to rely on the
underlying claimants' residence does not provide the underlying
Pennsylvania claimants with money they would not have received if
the insured was not permitted to recover under the Act. The
district court's analysis does not provide the underlying
Pennsylvania claimants with any additional protection. Rather,
it merely allows a non-resident to make a claim against the Act.
Such a result violates the intent of the Act which is to protect
9
. England apparently does not have an insurance guaranty
association.
Pennsylvania residents. While it is unfortunate that T&N
apparently does not have a guaranty association which it can
approach for relief, this does not affect Pennsylvania and PIGA
should not be forced to pay T&N's claim based on this reason
alone.
We note as well that PIGA is authorized to pay
"claims". Therefore, the claims that are relevant are those that
PIGA is being asked to pay. Since T&N is the one with the claim,
its residence is the one which should be examined. As a result,
T&N must be the one who was a resident of Pennsylvania at the
time of the insured event which resulted in loss or liability.
At the time of the insured event, T&N was a resident of England.
Thus, we conclude that T&N cannot claim recovery from the
Association by adverting to the Pennsylvania residency of its
underlying claimants.
B.
With respect to whether T&N has a covered claim in its
own right, T&N first argues that the district court erred in
finding that Keasbey's residence was irrelevant. In T&N's view,
Keasbey's residence should be determinative because it was a
Pennsylvania resident, the actions leading up to the asbestos
claims took place in Pennsylvania, Keasbey's insurance policies
were issued in Pennsylvania and PIGA would have had to pay the
claim if Keasbey had not been dissolved.
The question of whether Keasbey's residence is relevant
depends on what interpretation is given to the phrase, ". . . who
at the time of the insured event resulting in loss or liability
was a resident. . . ." T&N argues that we should look at
residency at the time of the insured event. At that point in
time, Keasbey was still in existence and was a Pennsylvania
resident. Therefore, T&N asserts, Keasbey's residence should be
sufficient to bring T&N within the Act.
We do not find this argument to be persuasive. The use
of the word "resulting" indicates that a loss or determination of
liability must occur before a covered claim will exist. If the
legislature had intended to provide coverage for persons who had
not yet incurred a loss or liability at the time of the insured
event, it could have so provided by using a phrase such as "who
at the time of the insured event which may give rise to a loss or
liability was a resident...." The fact that it did not do so
indicates that an actual loss or liability has to be suffered
before a person may have a covered claim. Therefore, unless an
actual loss or liability is incurred, the person's residence is
irrelevant for purposes of the Act.
The asbestos claims did not begin until 1978. After
1969, no claims could be maintained against Keasbey due to
Pennsylvania's corporate dissolution statute.10 Keasbey had not
sustained any loss or liability by 1969. Since Keasbey has not
suffered any loss or liability, it cannot have a covered claim
under the Act and its residence is irrelevant.
10
. 15 P.S. § 2111 (Purdon 1967), repealed and
substantially re-enacted by 15 Pa. Cons. Stat. Ann. §1979 (1992).
Again, we note that since PIGA is authorized to pay
covered claims, the claims which are significant are those which
PIGA is being asked to pay. Therefore, since Keasbey is not
presenting a claim, its residence is irrelevant.
C.
Finally, T&N argues that it can be viewed as a
Pennsylvania resident for purposes of the Act. As mentioned
above, it does not appear that any Pennsylvania court has
attempted to interpret the meaning of "resident" with respect to
the Act. In Pennsylvania Insurance Guaranty Association v.
Charter Abstract Corporation, 790 F. Supp. 82 (E.D. Pa. 1992),
the district court held that a corporation could have only one
residence. Recognizing that an individual person could only have
one residence, the court could not ascertain why a corporation
should be treated differently from an individual. Thus,
residence would be determined by either the state of
incorporation or the principal place of business. The ultimate
issue of which location was to be used was not reached because
the corporation in question did not meet either test. See also
Kroblin Refrigerated Xpress v. Iowa Insurance Guaranty
Association, 461 N.W.2d 175 (Iowa 1990).
We find this analysis to be persuasive. It is
undisputed that T&N was incorporated in England and has its
principal place of business in England. As a result, we find
that it is not a Pennsylvania resident under the Act.
T&N argues that since it is subject to jurisdiction in
Pennsylvania, it should be considered a Pennsylvania resident.
However, the exercise of jurisdiction is not limited to those who
are residents of the state which is attempting to assert
jurisdiction. As a result, if residence were connected to
jurisdiction, it would increase the number of guaranty
associations which could be liable, and lead to disputes
regarding which association should be liable for the payments.
This would defeat one of the purposes of the Act which is to
avoid delays in payment.
T&N also argues that since the underlying claimants
have brought suit against it because it is allegedly the alter
ego of Keasbey, T&N should be able to use Keasbey's residence to
come within the Act. It is unclear whether any court has found
that T&N is the alter ego of Keasbey to such an extent that the
corporate veil should be pierced and that T&N should be held
liable for Keasbey's actions.11 However, the Court of Appeals
11
. Several courts have addressed the relationship between
T&N and Keasbey. See Ward v. Armstrong World Industries, Inc.,
677 F. Supp. 1092 (D. Colo. 1988) (T&N is neither the alter ego
nor the successor of Keasbey. T&N only owned Keasbey's stock.
After the dissolution, Keasbey's assets were sold to companies
other than T&N and T&N did not continue in any of Keasbey's
product lines.); Kacprzycki v. A.C.&S., Inc., No. 88-34, 1990
U.S. Dist. Lexis 16552 (D. Del. October 31, 1990) (T&N was not
the alter ego of Keasbey and could not be held liable for damages
allegedly caused by Keasbey); Watkins v. Turner & Newall Ltd.,
Nos. 84-1742-17 & 86-0087-17, 1988 U.S. Dist. Lexis 8778 (D. Ga.
1988) (T&N is not the alter ego of Keasbey and jurisdiction
cannot be found over T&N based on Keasbey's presence in the forum
state); and Colcord v. Armstrong World Industries, Inc., No. 84-
912 (D. Colo. May 13, 1985) (plaintiff had failed to establish a
prima facie showing that T&N so dominated and controlled Keasbey
that the corporate veil should be pierced or that jurisdiction
for the Fifth Circuit specifically found in Hargrave v.
Fibreboard, Corp., 710 F.2d 1154 (5th Cir. 1983) that T&N's
relationship to Keasbey was not sufficient for Texas to have
jurisdiction over T&N through Keasbey.12 The Court also found
that T&N was not the alter ego of Keasbey.13
(..continued)
should be found over T&N due to Keasbey's presence in the forum).
But see City of New York v. AAER Sprayed Insulations Inc., (N.Y.
Sup. Ct., November 1, 1990) (T&N's motion for partial summary
judgment with respect to Keasbey's products on the basis that
Keasbey was not T&N's alter ego denied); City of New York v. AAER
Sprayed Insulations, 182 A.D.2d 516, 583 NYS.2d 911 (N.Y. App.
Div., April 16, 1992) (affirming January 11, 1991 lower court
decision denying T&N's motion for summary judgment because there
were material issues of fact regarding whether T&N is the alter
ego of Keasbey and whether T&N suppressed knowledge regarding the
hazards of asbestos to avoid having to place warnings on its
product) and Scharold v. GAF Corp., No. C-1-84-1062 (S.D. Ohio
January 10, 1985) (motion to dismiss based on lack of personal
jurisdiction denied because it was unclear that T&N was not
Keasbey's alter ego and it was premature to rule on that
question).
Three other unreported cases from the Southern District
of Ohio reach the same result. See Herper v. GAF Corporation,
No. C-1-84-1028 (S.D. Ohio February 14, 1985), William & Letcher
v. Pfizer, Inc., No. C-1-84-515 (S.D. Ohio February 15, 1985) and
Lloyd v. Pfizer, Inc., No. C-1-84-397 (S.D. Ohio February 15,
1985). However, it should be noted that these cases did not
engage in a separate analysis of the question. Rather, they
entered orders denying the motions to dismiss based on Scharold
and Bowman v. Armstrong World Industries, No. C-2-81-1492 (S.D.
Ohio, August 8, 1994), a decision which was also relied on by the
Scharold court. In addition, a copy of the Scharold opinion was
attached to each of the orders.
12
. It should be noted that Scharold referred to Hargrave
and cited Bowman which held that Hargrave was distinguishable
because the law in Ohio was that unless there is a hearing
regarding jurisdiction, a plaintiff only needs to make a prima
facie showing of jurisdiction. A hearing on jurisdiction took
place in Hargrave but apparently did not take place in Scharold
or Bowman.
13
. A successor liability claim was also brought against
T&N but the Court fount that it had been waived.
In addition, T&N alleged in the complaint it filed in
the D.C. District Court that it was being sued because it was the
former stockholder of Keasbey and exercised such control over
Keasbey that Keasbey was T&N's alter-ego. The district court
found that T&N was an additional insured under Keasbey's
insurance policies because the definition of an "insured" under
the policies included stockholders. Therefore, the district
court's finding was based on an interpretation of the policies,
rather than a determination that Keasbey was T&N's alter ego.
Finally, the record on appeal does not provide any
indication regarding the nature of the relationship between T&N
and Keasbey beyond the fact that T&N was the majority and then
the sole shareholder of Keasbey. In its brief, T&N does not
present any arguments establishing the existence of an alter ego
relationship. Rather, it merely states that some of the
complaints which have been filed against it allege that it is
liable because of an alter ego relationship between it and
Keasbey. In addition, there is no information regarding what
happened after the sale - i.e., how the money realized was
distributed, whether T&N retained any liability for Keasbey's
past conduct, etc.
Thus, we conclude that the district court did not err
in holding that T&N was not itself a resident of Pennsylvania for
purposes of asserting PIGA liability.
IV.
We note that the Act does not limit recovery to
persons. Recovery can also be made with respect to any property
which is permanently located in Pennsylvania. Section
1701.103(5)(a)(ii) provides:
(5)(a) "Covered claim" means an unpaid
claim, including a claim for unearned
premiums, which arises under a property and
casualty insurance policy of an insolvent
insurer and is:
* * *
(ii) A claim arising from an insured
event resulting in loss or liability to
property which was permanently situated in
this Commonwealth.
Unlike section 1701.103(5)(a)(i), T&N does not have to
be a resident of Pennsylvania to recover under section
1701.103(5)(a)(ii) for damage to property permanently located in
Pennsylvania. To the extent that T&N's claims are based on such
property, PIGA will be liable. The question of whether any such
property exists should be considered by the district court. If
the district court finds such property, the court must further
determine whether an unpaid claim is present with respect to that
property, in light of any recovery which might have already
transpired. The district court must consider whether permitting
payment with respect to this property will result in a double
payment, once to the property owner and once to T&N. Finally,
the district court must scrutinize whether T&N's claim is
properly characterized as arising out of a loss or liability to
the property itself. In connection with this, the district court
may consider whether the lack of payment is the result of the
insolvency of the insurance company and its failure to pay the
monies which remained due under the settlement agreement, and
whether T&N's claim is thus transformed into a claim under
section 1701.103(5)(a)(i) for which PIGA is only liable if the
person bringing the claim is a Pennsylvania resident.
V.
As we have found that T&N may have a covered claim with
respect to property permanently located in Pennsylvania, we must
turn to the question of the number of covered claims present.
The Act states that the maximum which can be paid for a covered
claim is $300,000 less a $100 deductible amount. PIGA argues
that since T&N agreed to take a lump sum payment under the
settlement agreement, it only has one covered claim which is
subject to the $300,000 statutory limit less a $100 deductible.14
T&N counters that the fact that it entered into one settlement
agreement is not dispositive because it could have entered into
separate settlement agreements for each of the underlying claims
and/or insurance polices. To allow it to have only one claim
because it settled numerous claims in one agreement would elevate
form over substance and be contrary to the policy encouraging
settlements. Finally, even if the underlying claims are not
treated separately, T&N asserts that it is still entitled to
recover the statutory limit for each insurance policy which was
14
. See § 1701.201(b)(i).
issued by American Mutual. Again, it does not appear that any
Pennsylvania court has addressed this question.
The district court based its finding that T&N had a
separate covered claim for each of the underlying claimants on
the Connecticut Supreme Court case of Connecticut Insurance
Guaranty Association v. Union Carbide Corp., 217 Conn. 371, 585
A.2d 1216 (1991). We find that such reliance was misplaced.
The Union Carbide case arose out of the 1984 disaster
in Bhopal, India. Over 500,000 claims were brought against Union
Carbide. The government of India assumed the right to prosecute
all claims arising out of the disaster and all of the claims were
consolidated into a single action. In February of 1989, Union
Carbide and Union Carbide of India15 entered into a settlement
with the Indian government. Union Carbide then approached its
insurance companies for reimbursement of the payments it had made
under the settlement agreement. Union Carbide's solvent insurers
paid to the limits of their insurance polices. Three excess
insurers whose policies provided for $32,500,000 in coverage
became insolvent.16 Union Carbide then turned to the Connecticut
Insurance Guaranty Association ("CIGA") for payment.
The question facing the Connecticut Supreme Court was
whether Union Carbide had only one covered claim which was
15
. Union Carbide owned 50.9 percent of the stock in Union
Carbide of India.
16
. Even if all of the insurers had paid the full amount of
their coverage, Union Carbide would still have been responsible
for $217,500,000 under the settlement agreement.
subject to the $300,000 statutory limit or whether Union Carbide
had a covered claim for each of the Bhopal victims who had been
paid from non-insurance sources under the settlement agreement.17
CIGA argued that a covered claim is a claim for indemnification
under a liability policy, not the separate claims of the tort
victims. As a result, Union Carbide had only six covered claims
encompassing the six insurance policies which were issued by the
insurance companies. The Supreme Court of Connecticut found that
under Connecticut General Statute § 38-175, when an insurance
company issued a policy, it became absolutely liable once a loss
occurred under the policy. In addition, the statute also allowed
a tort victim to proceed directly against the insurer if the
victim had obtained a judgment against an insured that had not
been satisfied within thirty days. In light of both of these
factors, the court found that the Bhopal victims had a cause of
action against the insolvent insurers in connection with the
policies they had issued. In addition, under the Connecticut
Insurance Guaranty Act, a covered claim included underlying
claimants. The fact that the Government of India had taken
control of all of the claims and consolidated them into a single
action did not reduce Union Carbide's claim to a single claim.
Rather, the statute which authorized the Indian government to
consolidate claims created a procedural device which gave the
government the power to represent the victims and did not
17
. Since it was undisputed that Union Carbide was a
resident of Connecticut, residence was not an issue.
diminish Union Carbide's right of indemnification. Consequently,
the Connecticut court then affirmed the trial court's finding
that the $300,000 limit applied to each of the underlying claims
and that CIGA must pay the claims presented under the six
insurance policies which were issued by the insolvent insurers.18
We find Union Carbide to be distinguishable. Union
Carbide settled with the underlying claimants. The settlement
agreement can thus be viewed as the embodiment of each claim
which was filed against Union Carbide. However, in the present
case, T&N settled with the insurance company. The settlement
agreement is not the embodiment of the claims filed by the
underlying claimants, as is demonstrated by the fact that
American Mutual agreed to pay up to the policy limits on each of
the policies it had issued.19 Payment was not related to the
individual claims which had been filed. As a result, we find
that in light of the fact that T&N entered into a single
settlement agreement with American Mutual which encompassed all
of its claims against the insurance company, it only has one
covered claim which is subject to the $300,000 statutory limit.
We do not believe that we are exalting form over substance
because T&N agreed to the terms and the form of the agreement.
T&N also requests recovery for its defense costs. Upon
18
. The court also addressed other issues connected to this
analysis which are not relevant here.
19
. In fact, under the terms of the agreement, only T&N and
American Mutual have any rights under the agreement.
remand the district court shall also address to what extent, if
any, T&N may recover from PIGA for its defense costs.
VI.
The orders of the district court which were certified
to us are hereby affirmed in part and reversed in part. The
matter is remanded to the district court for resolution of the
property issue and the request for defense costs. Each party to
bear its own costs.
RE: T&N plc, Appellant v. PENNSYLVANIA INSURANCE GUARANTY
ASSOCIATION, Nos. 93-2011/2012
_________________________________________________________________
ROSENN, Circuit Judge, dissenting.
Many persons who charged that T&N was the alter ego of
its subsidiary, Keasbey and Mattison Company (Keasbey), and
therefore responsible for bodily injuries they sustained due to
asbestos exposure, sued T&N. T&N thereupon filed a declaratory
judgment action against American Mutual in the United States
District Court for the District of Columbia. T&N's claim arose
out of a policy naming Keasbey as the insured, although Keasbey
had dissolved in 1967 (Maj. Op. at 4) and American Mutual had
written its last policy to Keasbey in 1965. The court found that
T&N was an additional insured under the policy and directed the
parties to attempt to reach a settlement. They did, and American
Mutual agreed to pay T&N a significant sum of money, more than
half of which has been paid.
The settlement agreement explicitly provided that
American Mutual, upon the execution of the agreement, would not
only have no further obligations "based upon, arising out of or
related to any policy of insurance issued to Keasbey by American
Mutual," but that all such policies shall be considered
"exhausted, null and void and of no further force or effect." I
cannot agree, therefore, that the plain language of that
agreement, solemnly executed in settlement of then pending
litigation in court, can be ignored. The settlement agreement
constitutes a substituted contract, and, therefore, whether it
initially had its genesis in the policies written by American
Mutual can leave no lingering liability arising under those
insurance policies. I therefore respectfully dissent.
I.
I agree with the district court and the majority here
that Keasbey's residence is irrelevant and that T&N is not a
resident of Pennsylvania. (Maj. Op. at 7). The majority,
however, concludes that the lack of residency does not bar T&N
from recovery because the Act does not limit recovery to persons,
and permits recovery with respect to property permanently located
in Pennsylvania. Without any discussion at this point of the
effect of the settlement agreement on any claim of T&N against
American Mutual, the majority decides that if T&N's claim may be
"properly characterized as arising out of a loss or liability to
the property itself," the district court may find that PIGA is
liable if the tort claimant is a Pennsylvania resident.
The majority appears to rationalize that if the
original tort claimant was a permanent Pennsylvania resident who
would have had a claim against T&N arising out of the asbestos
condition of the resident's property, that in itself would
suffice to permit T&N to recover, regardless of the settlement
agreement between T&N and American Mutual. The majority offers
no explanation and advances no reasons for disregarding the
specific language of the settlement agreement which plainly
states that (a) no rights or benefits were conferred upon any
person except the parties to the agreement, and (b) all policies
of insurance issued to Keasbey and all obligations arising out of
or related to any policy of insurance to Keasbey by American
Mutual were "exhausted, null and void and of no further force and
effect" upon execution of the agreement.
The result of the majority's expansive rationalization
is to make the tort claimants the fundament of T&N's claim and
the springboard for purposes of T&N recovery; it completely
obliterates the settlement agreement. Stated another way, the
majority has turned back the clock sometime prior to the
execution of the settlement agreement and treats the agreement as
if it never existed.
II.
A federal district court exercising diversity
jurisdiction must apply the choice of law rules of the forum
state. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 497
(1941); American Air Filter Co. v. McNichol, 527 F.2d 1297, 1299
n. 4 (3d Cir. 1975). Accordingly, we must apply Pennsylvania
choice of law rules in this case.
Pennsylvania courts generally honor the intent of the
contracting parties and enforce a choice of law provision in a
contract. Smith v. Commonwealth Nat. Bank, 557 A.2d 775, 777
(Pa. Super. 1989), appeal denied, 569 A.2d 1369 (Pa. 1990). The
Pennsylvania courts have adopted section 187 of the Restatement
(Second) Conflict of Laws which provides that:
(1) The law of the state chosen by the
parties to govern their contractual rights
and duties will be applied if the particular
issue is one which the parties could have
resolved by an explicit provision in their
agreement directed to that issue.
See e.g., Schifano v. Schifano, 471 A.2d 839, 843 n. 5 (Pa.
Super. 1984). The settlement agreement contains a choice of law
provision which provides "[t]his agreement shall be governed by
the substantive law of the State of New York." Therefore, this
court should apply New York substantive law to determine the
character of the agreement.
A substituted contract is a novation and "[a]n existing
claim can be instantly discharged by the substitution of a new
executory agreement in its place." 6 Corbin on Contracts, § 1293
(West. Pub. Co. 1962) (footnote omitted); Malanca v. Falstaff
Brewing Co., 694 F.2d 182, 184 (9th Cir. 1982). Novation is the
"[s]ubstitution of a new contract, debt or obligation for an
existing one, between the same or different parties." Black's
Law Dictionary, 6th Ed. Cent. Ed.
Under New York law,20 we are faced here with a classic
novation and any suits by T&N must be based on the settlement
agreement rather than the earlier insurance policies. In Health-
Chem Corp. v. Baker, 915 F.2d 805 (2d Cir. 1990), Health Chem
Corp. sought a declaration that the settlement agreement
negotiated with a former director was invalid and required
renegotiation. The court of appeals, applying New York law,
affirmed the district court's rejection of the corporation's
complaint, and held that "[w]hen the parties to a contract enter
into a new agreement that expressly supersedes the previous
agreement, the previous agreement is extinguished, thereby
reducing the remedy for breach to a suit on the new agreement."
Id. at 811; Wigton v. Rosenthall, 747 F. Supp. 247 (S.D.N.Y.
1990); Flaum v. Birnbaum, 120 App.Div.2d 193, 508 N.Y.S.2d 115
(N.Y.A.D. 4 Dept. 1986).
There is a substituted contract or novation if: (1)
there is a valid former contract, (2) the parties agree to a new
contract, (3) the parties form a valid new contract, and (4) the
parties intend to extinguish the old contract. Flaum v.
Birnbaum, 120 App.Div.2d 193. In this case, all the elements of
20
. The Restatement (Second) of Contracts, § 280, treats a
novation more narrowly than does New York and defines it as a
substituted contract including as a party one who was neither the
obligor not the obligee of the original duty. However, § 279 of
the Restatement (Second) of Contracts provides: "A substituted
contract is a contract that is itself accepted by the obligee in
satisfaction of the obligor's existing duty."
a novation are met: (1) there was a valid insurance contract,
(2) the parties agreed to a new contract, the settlement
agreement, (3) the agreement is a valid contract, and (4) the
parties explicitly stated that the new contract extinguished the
old contract upon execution of the agreement and would be of no
further force and effect. The settlement agreement, therefore,
extinguished any rights that T&N enjoyed under the original
policy. "The substituted contract discharges the original duty
and breach of the substituted contract by the obligor does not
give the obligee a right to enforce the original duty."
Restatement (Second) of Contracts, § 279(2).
T&N's argument that American Mutual's failure to
fulfill the terms of the substituted contract revives the old
insurance contracts is contrary to the clear law. T&N confuses
novation with an executory accord without satisfaction. Cf.
Bandman v. Finn, 185 N.Y. 508, 79 N.E. 175 (C.A.N.Y. 1906).
It is the essence of an accord that the
original duty is not satisfied until the
accord is performed, a result that is
sometimes suggested by use of the term
"executory accord."
Restatement (Second) of Contracts, § 281, comment a. It thus
differs from a substituted contract "under which a promise of
substituted performance is accepted in satisfaction of the
original duty." Id. comment e.
In National American Corp. v. Fed. Republic of Nigeria,
448 F. Supp. 622 (S.D.N.Y. 1978), aff'd, 597 F.2d 314 (2d Cir.
1979), the court, applying New York law, distinguished an
executory accord from a substitute contract.
An executory accord is, by definition, "an
agreement that an existing claim will be
discharged in the future by the rendition of
a substituted performance." 6 Corbin,
Contracts § 1269 at 75 (1962) (emphasis
added) . . . In contrast, a substitute
contract operates as its name implies -- as
an immediate discharge and satisfaction of
existing claims in return for the new
contract, even though performance is to
commence in the future. Should a breach
later occur, the creditor is limited to his
rights under the substitute agreement.
Id. at 643 (citation omitted).
Thus, under the settlement agreement here, the old contract is
dead. The subsequent agreement extinguished the old one and the
remedy for any breach thereof is under the superseding agreement.
See Northville Inds. Corp. v. Fort Neck Oil Terms. Corp., 474
N.Y.S.2d 122, aff'd, 64 N.Y.2d 930, 488 N.Y.S.2d 648, 427
N.E.12d 1102 (1985). Accordingly, the only remedy for a breach
of the substituted contract is a suit on that contract.
III.
Therefore, in response to the questions certified by
the district court, I would hold as to question 4 that it erred
in holding that T&N could rely on the underlying claims resolved
in the settlement agreement, and the residence of the underlying
claimants to meet the residency requirement of the Act. In
response to question 5, I would similarly hold that it erred in
holding that T&N could rely on the claims represented in the
settlement agreement and the location of property which sustained
loss to meet the residency requirement of the Act. Under my view
of the case, there is no need to reach the issues raised in
questions 6 and 7. I would answer the first three questions in
the affirmative.