Bensalem Twp. v. Int.nat'l Surplus Lines Ins. Co. ( 1994 )

Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit
10-7-1994
Bensalem Twp. v. Int.nat'l Surplus Lines Ins. Co.
Precedential or Non-Precedential:
Docket 93-1071 & 93-1072
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Recommended Citation
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
Nos. 93-1071 and 93-1072
___________
BENSALEM TOWNSHIP,
Appellant
v.
INTERNATIONAL SURPLUS LINES INSURANCE COMPANY;
CRUM & FORSTER MANAGERS CORPORATION (ILL),
___________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil Action No. 91-05315)
__________
Argued on August 2, 1993
Before: STAPLETON, HUTCHINSON and ROTH, Circuit Judges
(Opinion Filed: October 7, l994)
___________
Neil A. Morris, Esquire (Argued)
Neil A. Morris Associates, P.C.
The Curtis Center, Suite 1100
Independence Square West
601 Walnut Street
Philadelphia, PA 19106
Attorney for Appellant
Peter G. Thompson, Esquire (Argued)
Charles I. Hadden, Esquire
Douglas R.M. Nazarian, Esquire
Ross, Dixon & Masback
601 Pennsylvania Avenue, N.W.
North Building
Washington, D.C. 20004-2688
Frank Michael D'Amore, Esquire
Saul, Ewing, Remick & Saul
3800 Centre Square West
Philadelphia, PA 19102
Attorneys for Appellees
___________
OPINION OF THE COURT
___________
ROTH, Circuit Judge:
In this action, plaintiff Bensalem Township (Township)
appeals the district court order dismissing its complaint against
defendants, International Surplus Lines Insurance Co. and Crum &
Forster Managers Corp. (Insurers), for failure to state a claim
pursuant to Fed. R. Civ. P. 12(b)(6). Township had contracted
with Insurers for professional liability insurance covering all
civil claims first made against the town or its officials during
the policy period. The agreement included a typical exclusion
clause that barred coverage of any claims arising from pre-policy
litigation. When Township renewed its policy in 1989, Insurers
added language expanding the scope of what Township had come to
expect as the standard prior litigation exclusion clause. The
new exclusion limited coverage to claims completely unrelated to
any prior matter, regardless of whether the matter involved
litigation for money damages. Thereafter, Blanche Road Corp.
(Blanche Road), a real estate developer, filed a federal civil
rights complaint naming several Township officials as defendants.
The lawsuit was the result of years of friction between Blanche
Road and Township regarding the development of certain parcels of
land located in Township. After several attempts to obtain
coverage under the insurance policy for the cost of defending the
Blanche Road litigation, Township filed the instant complaint.
The district court subsequently granted Insurers' motion to
dismiss, concluding that the Blanche Road lawsuit fell within the
express terms of the policy's exclusion clause. It held that the
provision barred coverage because the federal cause of action
involved the same underlying facts and circumstances as several
pre-policy state disputes. Township challenges this decision,
arguing that the new language added to the exclusion clause is
inconsistent with the parties' reasonable expectations.
Moreover, Township maintains that the district court erred by not
giving it the opportunity to prove its contention through further
development of the record.
Township also appeals the district court order imposing
a sanction pursuant to Fed. R. Civ. P. 11. The court imposed a
$2000 sanction on Township after finding that it had failed to
conduct a reasonable inquiry when it filed a motion to determine
the Rule 59(e) motion in the district court while a petition for
rehearing was pending on appeal. Township contends that the
motion was reasonable under the circumstances because a premature
appeal does not divest the district court of jurisdiction to
consider a pending Rule 59(e) motion.
For the reasons set forth below, we will reverse the
dismissal of the complaint and remand for further proceedings
consistent with this opinion. We will also reverse the order
imposing a Rule 11 sanction against Township.
I.
Township, a Bucks County, Pennsylvania, municipality,
filed its complaint in state court on July 29, 1991. Insurers
subsequently removed the action to the United States District
Court for the Eastern District of Pennsylvania. We accept as
true the following allegations, contained in Township's
complaint, in light of Insurers' motion to dismiss. See Holder
v. City of Allentown, 987 F.2d 188, 194 (3d Cir. 1993).
A. The Insurance Policy
In April 1989, Township renewed its Public Officials'
and Employees' Liability Insurance Policy with Insurers for one
year, commencing April 15, 1989. Although aware of the addition
to the prior litigation exclusion clause, Township apparently
believed it was receiving essentially the same type of insurance
policy it had always received from Insurers, subject in essence
to the usual exclusions.
The agreement covers any monetary loss up to $1,000,000
for civil claims made during the policy period arising from
wrongful acts of the insured. The policy states:
A. The company will pay on behalf of
the Insureds all Loss which the Insureds
shall be legally obligated to pay for any
civil claim or claims first made against them
because of a Wrongful Act, provided that the
claim is first made during the policy period
and written notice of said claim is received
by the Company during the policy period.
B. The Company will reimburse the
Public Entity for all Loss for which the
Public entity shall be required by law to
indemnify the Insureds for any civil claim or
claims first made against them because of a
Wrongful Act, provided that the claim is
first made during the policy period and
written notice of said claim is received by
the Company during the policy period.
(emphasis added).
While the claims made portion of the policy is
identical to that of the prior agreement, there is a significant
difference in the policy's exclusion provision. In the past, the
parties had agreed to a typical prior litigation exclusion clause
that bars all claims relating to pre-policy lawsuits. When the
policy was renewed, however, Insurers expanded the scope of that
provision. The new exclusion states:
It is understood and agreed that the insurer
shall not be responsible for making any
payment for loss in connection with any claim
made against any insured based upon, arising
out of, or in consequence of or in any way
involving:
(1) any prior and/or pending litigation
as of 2/1/89 [pre-policy period]
including but not limited to
matters before local, state, or
federal boards, commissions, or
administrative agencies, or
(2) any fact, or circumstance, or
situation underlying or alleged in
such litigation or matter.
(emphasis added). Insurers added language that effectively
restricts coverage to only those claims completely unrelated to
any pre-policy dispute, regardless of whether the dispute
involved a legal claim covered by the policy.
Township has argued both before us and before the
district court that it did not expect that the new exclusionary
language would bar claims that had not previously been presented
to it as insurable claims, e.g., petitions for injunctive relief
or proceedings before administrative agencies.
B. The Blanche Road Dispute
In December 1989, Blanche Road named Township and many
of its current and former officials and employees in a federal
civil rights suit pursuant to 42 U.S.C. § 1983. See Blanche Road
Corp. v. Township, No. 89-9040 (E.D. Pa. filed December 20,
1989). The suit was the culmination of several years of
contention arising from the development of the Blanche Road
Industrial Park located in Township.
In 1987, Blanche Road commenced development of certain
parcels of land by securing the necessary town building permits
and entering into agreements of sale with several buyers.
Subsequently, Township made some financial demands which Blanche
Road alleged were not required by any town ordinance. Township
then issued a stop work order and cited Blanche Road with certain
town ordinance violations. On December 30, 1987, Blanche Road
appealed the order to the Town Code Appeals Board. While the
appeal was pending, Township revoked Blanche Road's building
permits and issued a second stop work order.
Thereafter, on January 20, 1988, Blanche Road filed a
complaint in quo warranto in the Court of Common Pleas of Bucks
County, Pennsylvania. It sought an order declaring that the Town
Code Appeals Board members' appointments were null and void.
Blanche Road wanted the members excluded from serving on the
Board.
Blanche Road also filed an equity action in state court
on February 19, 1988. In that suit, Blanche Road sought
injunctive and declaratory relief as well as some ancillary
damages. Blanche Road asked the court to enjoin Township from
enforcing a stop work order and levying fines or penalties.
Moreover, it wanted the court to declare the stop work order null
and void. The only damages Blanche Road sought were for the
delay of some construction work and certain related interest and
wages. The suit was settled when both parties stipulated that
the building permits would be reinstated.1
1
. We note that there were two other state court
proceedings that related to the Blanche Road dispute. Neither of
Blanche Road subsequently filed its federal civil
rights complaint alleging that certain Township officials had
violated the Due Process Clause by attempting to coerce payments
not required by law and by impeding Blanche Road's development of
the Industrial Park. In addition, Blanche Road claimed that
Township had violated the Equal Protection Clause by applying
different standards from those used for other developers. This
was the first time that Blanche Road filed a federal action
against Township seeking money damages. It was also the first
time that Blanche Road raised constitutional claims and the first
time that many of the town officials were named as defendants. A
trial was held, and a jury entered a verdict in favor of Blanche
Road in the amount of $2,000,000 plus interest, costs, and
attorneys' fees. The district court subsequently granted
Township's motion for a new trial. That trial is apparently
still pending.
C. Township's Declaratory Judgment Action
Once the Blanche Road federal litigation commenced,
Township filed a claim with Insurers under the terms of the
(..continued)
the proceedings were initiated by Blanche Road. In one case,
certain individual owners of lots within the Industrial Park
filed a complaint in mandamus naming the Town Board of
Supervisors as defendants. The owners sought to compel the Board
to approve certain improvements they made to their property and
to release the owners from their obligations under a letter of
credit.
In another related case, a Township official swore out
a private criminal complaint in District Justice Court against
one of Blanche Road's principals. The complaint related to a
dispute over one of the lots in the Industrial Park.
insurance policy. Township believed it was entitled to coverage
because the civil rights complaint was filed during the policy
period and it was the first time Blanche Road had filed a federal
suit seeking money damages. Township had not filed a claim with
Insurers for any of the prior state Blanche Road proceedings
because they involved equitable relief not covered under the
general provisions of the policy.
After a dispute arose between Insurers and Township
regarding coverage under the policy, Township filed the instant
complaint in the Court of Common Pleas for Bucks County,
Pennsylvania, seeking both declaratory and monetary relief.
Insurers removed the action to the United States District Court
for the Eastern District of Pennsylvania. Township alleged that
the insurance policy covered the Blanche Road litigation and that
Insurers had a contractual duty to pay defense costs. Township
also alleged that certain aspects of the policy were ambiguous
and should be construed in favor of coverage.
Insurers filed a motion to dismiss Township's complaint
for failing to state a claim upon which relief could be granted
pursuant to Fed. R. Civ. P. 12(b)(6). They argued that the
policy exclusion barred coverage because the Blanche Road federal
litigation involved similar facts and issues as the five prior
state proceedings for equitable relief. While under the former
exclusion provision claims would only be barred if they related
to prior litigation, Insurers maintained that the language in the
new policy specifically barred claims relating to any prior
administrative proceeding or matter.
Township opposed Insurers' motion and in connection
with this opposition requested that it be permitted to conduct
discovery to demonstrate its reasonable expectation that
litigation, such as the Blanche Road case, would be covered by
the policy. Township gave the following explanation of the areas
in which it needed to take discovery and the underlying reasons
for this discovery:
b. Defendants have relied, in their Motion to
dismiss, on Endorsement No. 1 as an exclusionary
clause, concerning prior claims and litigation.
Plaintiff's need to discover what, if any,
discussions, explanations or other information
Defendants', their agents or representatives gave
to the Plaintiff explaining this exclusion, how it
would impact on the Township and relate to other
conflicting exclusions in the said policy, i.e., §
111 Definition, ¶ 4(a), excluding all claims for
"non-money" damages. Written discovery and
depositions of Defendants' agents and employees
would be necessary.
c. Plaintiff needs to discover prior drafts and
Defendants' internal memos and discussions
concerning the insurance policy in issue as well
as Endorsement No. 1. This, we believe, will also
defelop proof that Defendants' generally do not
enforce or even attempt to apply Endorsement No. 1
as they have in this case, i.e., to prior
uninsurable claims.
d. The instant policy does not define what an
insurable claim is except by negative inference in
III Definitions, ¶ 4(a), i.e., money damages only.
Plaintiff needs to take written and oral discovery
on this issue. Plaintiff believes that discovery
will reveal that had the 'prior claims and facts
related thereto' been timely filed under
Defendants' policy, Defendants would have rejected
the claims anyway. Thus., Plaintiff will be able
to prove that Defendants' "prior claim" exclusion,
if not ambiguous (but it is), really meant "prior
insurable claims."
g. Plaintiff will need to take the depositions of
former Bensalem Township officials,
representatives and/or employees, who no longer
work for the Township, with respect to their
knowledge, understanding and discussions with
Defendants and their agents concerning the policy,
claims and exclusions in issue...
Appellant's Brief at 9 (footnote omitted). Insurers moved to
stay discovery pending resolution of their motion to dismiss.
The district court granted the stay on March 27. The issue of
further discovery was then mooted when, by order entered June 15,
1992, the district court granted Insurers' motion to dismiss.
In its memorandum, dismissing the complaint, the
district court held that the policy exclusion expressly precluded
coverage because the Blanche Road federal litigation involved the
same underlying circumstances as the pre-policy state
proceedings. It concluded that the exclusion was unambiguous and
should be enforced according to its plain language.
D. Post-Judgment Proceedings
On June 23, 1992, Township sent a letter to the court,
stating that the order was unclear because it did not indicate
whether it was with or without prejudice and it did not specify
both defendants. Township also stated that, if the dismissal was
without prejudice, it would move to file an amended complaint.
It appears that Township intended the letter as a motion to amend
the district court order pursuant to Fed. R. Civ. P. 59(e). On
July 7, 1992, prior to receiving a response from the court,
Township filed its amended complaint. On July 8, 1992, Township
filed a notice of appeal. On July 9, 1992, the district court
denied Township's motion to file an amended complaint. The order
did not address the Rule 59(e) motion.
By order entered October 13, 1992, we dismissed
Township's July 8, 1992, appeal for lack of jurisdiction.
Township subsequently filed a petition for rehearing in this
Court and a motion to determine the Rule 59(e) motion in the
district court. Insurers filed a response to the district court
motion, indicating that the petition for rehearing divested the
district court of jurisdiction. Insurers also filed a motion for
sanctions pursuant to Fed. R. Civ. P. 11 stating that it incurred
legal fees of $8,800 responding to the "unnecessary" district
court motion. The district court dismissed Township's motion to
determine the Rule 59(e) motion for lack of jurisdiction.
On November 30, 1992, we granted Township's request for
panel rehearing and issued an opinion affirming and clarifying
our earlier decision dismissing Township's appeal for lack of
jurisdiction. We held that the appeal was premature because
Township's June 23, 1992, letter to the district court was a Rule
59(e) motion that tolled the time for appeal until thirty days
after the district court disposed of the motion. Fed. R. App. P.
4(a)(4).
On December 2, 1992, Township renewed its motion to
determine the Rule 59(e) motion in the district court. By order
entered January 14, 1993, the district court denied Township's
motion. On the same day, the court entered a separate order,
granting Insurers' motion for Rule 11 sanctions. The court
awarded Insurers $2000. Township's timely appeals followed.
II.
The district court had diversity jurisdiction of this
action pursuant to 28 U.S.C. § 1332. We have jurisdiction
pursuant to 28 U.S.C. § 1291.
We exercise plenary review of the district court's
dismissal of a complaint under Fed. R. Civ. P. 12(b)(6). Ditri
v. Coldwell Banker Residential Affiliates, Inc., 954 F.2d 869,
871 (3d Cir. 1992). We review the district court order imposing
Rule 11 sanctions for abuse of discretion. Cooter & Gell v.
Hartmarx Corp., 496 U.S. 384, 385 (1990).
III.
We first address the issue of whether Township's
complaint was properly dismissed pursuant to Fed. R. Civ. P.
12(b)(6). We accept all well-pleaded allegations in Township's
complaint as true and construe all reasonable inferences from the
avowed facts in favor of Township. We may affirm the dismissal
only if it appears certain that no relief could be granted under
any provable set of facts. Blaw Knox Retirement Income Plan v.
White Consol. Indus., Inc., 998 F.2d 1185, 1188 (3d Cir. 1993),
cert. denied, 114 S. Ct. 687 (1994).
The district court exercised diversity jurisdiction and
was obliged to apply the substantive law of the state in which it
sits. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941).
The parties agree that Pennsylvania law governs this case.
A. Reasonable Expectations
We find that the district court should not have
dismissed the complaint without allowing discovery on the issue
of whether the new language added to the insurance policy's prior
litigation exclusion clause is inconsistent with Township's
reasonable expectation of the type of coverage provided under the
agreement. While Township may have known of the change in the
language of the exclusion clause when it renewed the policy, it
should nevertheless have the opportunity to discover and submit
evidence that Insurers had created in it a reasonable expectation
that the policy would cover claims such as that presented by the
federal Blanche Road litigation.
Insurers dispute the notion that we should consider
what the parties' reasonable expectations might have been,
arguing that such an inquiry is precluded under Pennsylvania law
where the terms of a policy are clear and unambiguous. Indeed,
Insurers correctly state what appears to be the general rule in
Pennsylvania. Thus, in the run of cases, "[w]here ... the
language of the contract is clear and unambiguous, a court is
required to give effect to that language." Standard Venetian
Blind Co. v. American Empire Ins. Co., 503 Pa. 300, 469 A.2d 563,
566 (1983). Insurers point to the new language added to the
exclusion clause which, they argue, expressly bars coverage of
the Blanche Road federal litigation because the dispute arises
from the same facts and circumstances as the pre-policy state and
local proceedings.
As we read the Pennsylvania case law, courts have
justified this rule based in part on the supposition that in most
cases the language of an insurance policy will provide the best
indication of the content of the parties' reasonable
expectations. The courts have made it clear that the parties'
reasonable expectations are to be the touchstone of any inquiry
into the meaning of an insurance policy. Yet
[a]ny reasonable expectation which would be
imputed to the parties by this or any court
must necessarily rely upon, and be reasonably
consistent with, the written document and
phraseology, simply because any
interpretation advanced contrary to the
contents of the written document could hardly
be viewed as "reasonable" to assert; unless
good reason in law is advanced for the
disregarding of the clearly contrary
phraseology.
J.H. France Refractories Co. v. Allstate Ins. Co., 396 Pa. Super.
185, 578 A.2d 468, 472 (1990) (emphasis added), aff'd in part and
rev'd in part, 534 Pa. 29, 626 A.2d 502 (1993). See also
Tonkovic v. State Farm Mut. Auto. Ins. Co., 513 Pa. 445, 521 A.2d
920, 926 (1987) ("Courts should be concerned with assuring that
the insurance purchasing public's reasonable expectations are
fulfilled.") (quoting Collister v. Nationwide Life Ins. Co., 479
Pa. 579, 388 A.2d 1346, 1353 (1978), cert. denied, 439 U.S. 1089
(1979)); Frain v. Keystone Ins. Co., ___ Pa. Super. ___, 640 A.2d
1352, 1354 (1994) ("While reasonable expectations of the insured
are the focal points in interpreting the contract language of
insurance policies, an insured may not complain that his or her
reasonable expectations were frustrated by policy limitations
which are clear and unambiguous.") (citations omitted); Everett
Cash Mut. Ins. Co. v. Krawitz, 430 Pa. Super. 25, 633 A.2d 215,
216 (1993) ("[C]ourts must focus on the reasonable expectation of
the insured in an insurance transaction.") (citations omitted);
Dibble v. Security of American Life Ins. Co., 404 Pa. Super. 205,
590 A.2d 352, 354 (1991) ("[T]he proper focus regarding issues of
coverage under insurance contracts is the reasonable expectation
of the insured. Courts must examine the totality of the
insurance transaction involved to ascertain the reasonable
expectation of the insured.") (citations omitted); Harford Mut.
Ins. Co. v. Moorhead, 396 Pa. Super. 234, 578 A.2d 492, 495
(1990) ("[O]verly-subtle or technical interpretations may not be
used to defeat reasonable expectations of insureds."), appeal
denied, 527 Pa. 617, 590 A.2d 757 (1991). Accordingly, in
certain situations the insured's reasonable expectations will be
allowed to defeat the express language of an insurance policy.
The Pennsylvania Supreme Court first began to carve out
exceptions to the general rule in Collister.2 The court began
its analysis by observing that transactions between insurers and
insureds are fundamentally different from those between parties
to contracts as envisioned by the common law.
The traditional contractual approach fails to
consider the true nature of the relationship
between the insurer and its insureds. Only
through the recognition that insurance
contracts are not freely negotiated
agreements entered into by parties of equal
status; only by acknowledging that the
conditions of an insurance contract are for
the most part dictated by the insurance
companies and that the insured cannot
"bargain" over anything more than the
monetary amount of coverage purchased, does
our analysis approach the realities of an
insurance transaction.
2
. The process actually started with Justice Manderino's opinion
in Rempel v. Nationwide Life Ins. Co., 471 Pa. 404, 370 A.2d 366
(1977), with which two justices concurred while the remaining
three concurred in the judgment without opinion. The opinion
stated: "Consumers ... view an insurance agent ... as one
possessing expertise in a complicated subject. It is therefore
not unreasonable for consumers to rely on the representations of
the expert rather than on the contents of the insurance policy
itself." 370 A.2d at 368. Moreover, the opinion noted, in
response to Nationwide's assertion that allowing the plaintiff's
misrepresentation theory to succeed would lead to an increase in
fraudulent claims, that the court had "very little sympathy for
Nationwide's alleged concerns in view of the fact that its
procedures necessitate reliance by a consumer on the
representations of an insurance agent." Id. at 370. This notion
that insurers bring these lawsuits upon themselves through their
arcane practices is something of a theme in the Pennsylvania
Supreme Court's subsequent cases on the subject.
Collister, 388 A.2d at 1353. Because of the unique dynamics of
this relationship between insurers and insureds, certain
principles must guide the interpretation of insurance policies.
Courts should be concerned with assuring that
the insurance purchasing public's reasonable
expectations are fulfilled. Thus, regardless
of the ambiguity, or lack thereof, inherent
in a given set of insurance documents
(whether they be applications, conditional
receipts, riders, policies, or whatever), the
public has a right to expect that they will
receive something of comparable value in
return for the premium paid. Courts should
also keep alert to the fact that the
expectations of the insured are in large
measure created by the insurance industry
itself. Through the use of lengthy, complex
and cumbersomely written applications,
conditional receipts, riders, and policies,
to name a just a few, the insurance industry
forces the insurance consumer to rely upon
the oral representations of the insurance
agent. Such representations may or may not
accurately reflect the contents of the
written document and therefore the insurer is
often in a position to reap the benefit of
the insured's lack of understanding of the
transaction.
Id.
With Collister, Pennsylvania seemed to have taken a
significant step toward adopting the reasonable expectations
principle as stated by then-Professor Keeton in his landmark
article.3 See Roger C. Henderson, The Doctrine of Reasonable
3
. Robert E. Keeton, Insurance Law Rights at Variance with
Policy Provisions, 83 Harv. L. Rev. 961, 967 (1970) (providing
the following formulation of the reasonable expectations
principle: "The objectively reasonable expectations of applicants
and intended beneficiaries regarding the terms of insurance
contracts will be honored even though painstaking study of the
Expectations in Insurance Law After Two Decades, 51 Ohio St. L.J.
823, 829 (1990).4 Five years later, however, the court appeared
to pull back from its enthusiastic endorsement of the doctrine.
Indeed, in Standard Venetian Blind Co. v. American Empire Ins.
Co., 503 Pa. 300, 469 A.2d 563 (1983), the court failed even to
acknowledge its opinion in Collister while holding that "where
... the policy limitation relied upon by the insurer to deny
coverage is clearly worded and conspicuously displayed, the
insured may not avoid the consequences of that limitation by
proof that he failed to read the limitation or that he did not
understand it." 469 A.2d at 567. Even so, the court noted that
(..continued)
policy provisions would have negated those expectations.").
Since Professor Keeton's article, a considerable number of trees
have been sacrificed in the name of reasonable expectations as
the academic community has debated what reasonable expectations
means, which courts have adopted the doctrine, and whether it is
desirable for them to have done so. See generally John D.
Ingram, Should an Insured Be Rewarded for Not Reading the
Policy?, 41 Drake L. Rev. 705 (1992); Roger C. Henderson, The
Doctrine of Reasonable Expectations in Insurance Law After Two
Decades, 51 Ohio St. L.J. 823 (1990); Stephen J. Ware, A Critique
of the Reasonable Expectations Doctrine, 56 U. Chi. L. Rev. 1461
(1989); Mark C. Rahdert, Reasonable Expectations Reconsidered, 18
Conn. L. Rev. 323 (1986); Kenneth S. Abraham, Judge-Made Law and
Judge-Made Insurance: Honoring the Reasonable Expectations of the
Insured, 67 Va. L. Rev. 1151 (1981). Among the courts that have
not clearly adopted the doctrine, the statements of the
Pennsylvania Supreme Court are perhaps the most conflicting.
E.g., Henderson, 51 Ohio St. L.J. at 829-31.
4
. As Professor Henderson points out, Professor Keeton, who by
that time had become Judge Keeton, read Collister as adopting the
doctrine of reasonable expectations "in a form explicitly going
beyond merely resolving ambiguities against insurers." Davenport
Peters Co. v. Royal Globe Ins. Co., 490 F. Supp. 286, 291 & n.5
(D. Mass. 1980) (Keeton, J.).
"in light of the manifest inequality of bargaining power between
an insurance company and a purchaser of insurance, a court may on
occasion be justified in deviating from the plain language of a
contract of insurance." Id.
Finally, in 1987, the Pennsylvania Supreme Court
decided Tonkovic v. State Farm Mut. Auto Ins. Co., 513 Pa. 445,
521 A.2d 920 (1987). In Tonkovic the insurer, following its
acceptance of the insured's application and payment, unilaterally
limited the scope of the coverage provided by the policy by
inserting an exclusion about which it never informed the insured.
Despite the unambiguity of the exclusion, the court felt that
Standard Venetian Blind was distinguishable. In Standard
Venetian Blind, the court reasoned, the policy "was what it
purported to be, and what the insured purchased, a general
liability policy," 521 A.2d at 923, with all the usual incidents
and exclusions.
We find a crucial distinction between cases
where one applies for a specific type of
coverage and the insurer unilaterally limits
that coverage, resulting in a policy quite
different from what the insured requested,
and cases where the insured received
precisely the coverage that he requested but
failed to read the policy to discover clauses
that are the usual incident of the coverage
applied for.
Id. Accordingly, the court held that "where ... an individual
applies and prepays for specific insurance coverage, the insurer
may not unilaterally change the coverage provided without an
affirmative showing that the insured was notified of, and
understood, the change, regardless of whether the insured read
the policy." Id. at 925 (emphasis added).
A couple of other points about the Tonkovic opinion
bear mentioning. The first of these is that the court
specifically found that the trial court's jury instruction
correctly stated Pennsylvania law. Id. This is significant
given the content of the charge:
This is what the cases have said: the burden
is upon the insurer ... to establish the
insured's ... awareness and understanding of
the exclusions. So, even though the initial
burden in this case is with the plaintiff and
it stays with the plaintiff, indeed, there is
a burden upon the insurance company in this
case to prove to you by a preponderance of
the evidence, that [the insured] was aware
and understood the exclusion that existed
here ... .
Id. at 922 (quoting the trial court). The second point of
consequence is that the court expressly noted that its holding
was in accord with Collister, id. at 925, and proceeded to quote
the core provisions of the Collister opinion, including the
second block of language that we have quoted above. Id. at 926.
Faced with Collister, Standard Venetian Blind, and
Tonkovic, we are unable to draw any categorical distinction
between the types of cases in which Pennsylvania courts will
allow the reasonable expectations of the insured to defeat the
unambiguous language of an insurance policy and those in which
the courts will follow the general rule of adhering to the
precise terms of the policy. One theme that emerges from all the
cases, however, is that courts are to be chary about allowing
insurance companies to abuse their position vis-a-vis their
customers. Thus we are confident that where the insurer or its
agent creates in the insured a reasonable expectation of coverage
that is not supported by the terms of the policy that expectation
will prevail over the language of the policy. In many cases,
this is simply another way of saying what the supreme court made
clear in Tonkovic, that an insurer may not make unilateral
changes to an insurance policy unless it both notifies the
policyholder of the changes and ensures that the policyholder
understands their significance. In other cases this requires a
more straightforward application of the principles of equitable
estoppel which, as this court has recognized, West American Ins.
Co. v. Park, 933 F.2d 1236, 1239 (3d Cir. 1991), underlie the
cases that we have discussed and are manifest in the supreme
court's repeated observations that the insurance industry and its
recondite practices are responsible for deviations from the
general rule. In both types of cases the insured, as a result of
the insurer's either actively providing misinformation about the
scope of coverage provided by a policy or passively failing to
notify the insured of changes in the policy, receives something
other than what it thought it purchased.5 In consequence, as the
5
. In contrast, cases like Standard Venetian Blind concern
situations where the insured has no reasonable basis for
believing that a policy covers events that it does not. That is,
the insurer has neither told the insurer that a policy would
cover certain events when by its terms it does not, nor made a
change in the terms of coverage after the insured has agreed to
supreme court was careful to point out in both Collister, 388
A.2d at 1353, and Tonkovic, 521 A.2d at 926, "the insurer is
often in a position to reap the benefit of the insured's lack of
understanding of the transaction."
In this case had the district court permitted Township
to amend its complaint and proceed with discovery, Township might
have been able to assert one of these types of claims. On
remand, Township might be able to demonstrate that Insurers did
not change the language of the exclusion until after it had
agreed to renew its policy with Insurers, and that Insurers
either did not notify Township of the change in the exclusion or
did not explain the significance of the change.
Alternatively, Township might be able to demonstrate
that Insurers somehow misled it by indicating that, despite the
language of the policy, claims such as the one at issue here
would be covered.
In sum, we believe that Township could conceivably
prove that it had a reasonable expectation of coverage despite
policy language that appears to those not familiar with its
relationship with Insurers unambiguously to preclude coverage,
and that it therefore might be able to obtain coverage. We
stress, however, that our holding must not be overstated. If
Township was aware of the change in the exclusion provision
(..continued)
purchase insurance without informing the insured of the change
and its consequences.
before it elected to renew its policy with Insurers and Insurers
made no representation that the scope of coverage would not be
reduced, or if after Township agreed to renew Insurers informed
Township of the change and its significance, then Insurers must
prevail because, in our view, the policy unambiguously excludes
coverage for claims such as the one at issue here.
We are thus persuaded by Township's argument that
dismissal pursuant to Rule 12(b)(6) was inappropriate. Before
the district court denied the motion to amend and dismissed
Township's complaint for failure to state a claim, it should have
allowed discovery to enable it to review the circumstances
surrounding the insurance agreement in order to determine whether
Township might have had a reasonable expectation of coverage in
this situation despite the language of the policy. We will
therefore reverse and remand so that the district court can take
these additional steps.
B. Unconscionability
Township also argues that the new exclusion clause was
unconscionable because it effectively abrogated most, if not all,
of the coverage under the agreement and because only a handful of
carriers offered this type of coverage. "Unconscionability
requires a two-fold determination: that the contractual terms are
unreasonably favorable to the drafter and that there is no
meaningful choice on the part of the other party regarding
acceptance of the provisions." Worldwide Underwriters Ins. Co.
v. Brady, 973 F.2d 192, 196 (3d Cir. 1992) (citing Koval v.
Liberty Mut. Ins. Co., 366 Pa. Super. 415, 531 A.2d 487, 491
(1987)). See also Bishop v. Washington, 331 Pa. Super. 387, 480
A.2d 1088, 1093 (1984); Robert E. Keeton & Alan I. Widiss,
Insurance Law § 6.3(b)(2) (1988) ("In some cases ... the
unambiguous language of an insurance policy provides so little
coverage that it would be unconscionable to permit the insurer to
enforce it.").
Here Township argues that application of the exclusion
to claims arising from prior equitable, non-monetary disputes,
unreasonably favors Insurers. Under the terms of the policy,
Insurers agreed to pay Township for all civil claims for money
damages. The policy did not cover suits seeking strictly
equitable relief.6 Township argues that if it had filed a claim
at the commencement of the Blanche Road state dispute, Insurers
would have denied coverage under the express terms of the policy.
Township asserts that it is unfair for Insurers to apply the
exclusion broadly so as to deny coverage of the Blanche Road §
1983 action because it related to prior disputes, when these
disputes were of a nature which would not have been covered by
6
. The policy excludes payments for
4. a. claims, demands seeking relief, or
redress, in any form other than money
damages;
b. fees or expenses relating to claims,
demands or actions seeking relief or redress,
in any form other than money damages.
the insurance agreement and thus would not have been the basis of
a claim under it or under any similar prior policy.
The exclusion is unconscionable, Township contends,
because the majority of its litigation originates in prior state
administrative proceedings. Generally, a claimant will first
seek relief from a Township agency.7 Such disputes rarely ripen
into lawsuits for money damages unless the plaintiff finds he
cannot obtain adequate relief through the local agency
proceedings. Because of this, Township believes that the
exclusion as interpreted by Insurers leaves it with virtually no
coverage, since claims for non-monetary relief that arise during
the policy period are not covered, and claims for monetary relief
will almost inevitably be somehow tied to pre-policy litigation
and therefore excluded.
Township drastically overstates the extent to which the
exclusion reduces its coverage. In reality, the exclusion only
creates a gap in Township's coverage for those claims that have
arisen in some form prior to the effective date of the policy.
This is because of Condition 4 of the policy, which states as
follows:
If during the policy period or extended
discovery period:
(a) The Public Entity or the Insureds
shall receive written or oral notice from any
7
. Township maintains at least seventeen administrative
Commissions and Boards. Among them are the Township Council,
Board of Auditors, Code Appeals Board, Zoning Hearing Board,
Budget Committee, Environmental Advisory Board, and the Economic
Development Corp.
party that it is the intention of such party
to hold the Insureds responsible for the
results of any specified Wrongful Act done or
alleged to have been done by the Insureds
while acting in the capacity aforementioned;
or
(b) The Public Entity or the Insureds
shall become aware of any occurrence which
may subsequently give rise to a claim being
made against the Insureds in respect of any
such Wrongful Act;
Then the Public Entity or the Insureds
shall as soon as practicable give written
notice to the Company of the receipt of such
written or oral notice under Clause 4(a) or
of such occurrence under Clause 4(b). Upon
the Insurer's receipt of such notice any
claim which may subsequently be made against
the Insureds arising out of such alleged
Wrongful Act shall, for the purposes of this
Policy, be treated as a claim made during the
policy period in which such notice was given
or if given during the extended discovery
period as a claim made during such discovery
period.
As a result of this provision Township can obtain coverage for
all its claims so long as it notifies Insurers of potential
claims during the policy period. The only effects of the
additional exclusionary language, then, are to create the
aforementioned gap in coverage and to place the additional burden
of notification on Township. Neither of these effects render the
policy unconscionable in our view.
IV.
Lastly, we address Township's contention that the
district court abused its discretion by granting Insurers' cross
motion for sanctions under Rule 11. After a hearing on the
motion, the district court imposed a sanction in the sum of
$20008 because Township had filed a motion with the district
court to determine the Rule 59(e) motion while a timely petition
for rehearing was pending before this Court. Finding the motion
to be duplicative, the district court held that Township had
failed to conduct a reasonable inquiry prior to filing. It
concluded that Insurers incurred needless expense in having to
respond to Township's jurisdictionally defective motion.
We have held that Rule 11 sanctions may be awarded in
exceptional circumstances in order to "discourage plaintiffs from
bringing baseless actions or making frivolous motions." Doering
v. Union County Bd. of Chosen Freeholders, 857 F.2d 191, 194 (3d
Cir. 1988). See also Morristown Daily Record, Inc. v. Graphic
Communications Union, Local 8N, 832 F.2d 31, 32 n.1 (3d Cir.
1987) (noting that "Rule 11 is not to be used routinely when the
parties disagree about the correct resolution of a matter in
litigation"). The Rule provides in relevant part
The signature of an attorney or party
constitutes a certificate by the signer that
the signer has read the pleading, motion, or
other paper; that to the best of the signer's
knowledge, information and belief formed
after reasonable inquiry it is well grounded
8
. Although Insurers first claimed that their costs associated
with answering the Rule 59(e) motion amounted to $8,800, and then
lowered that amount to $5,535, the court determined a reasonable
sanction to be $2000.
in fact and is warranted by existing law or a
good faith argument for the extension,
modification, or reversal of existing law,
and that it is not interposed for any
improper purpose, such as to harass or to
cause unnecessary delay or needless increase
in the cost of litigation . . ..
The Rule imposes an affirmative duty on the parties to
conduct a reasonable inquiry into the applicable law and facts
prior to filing. Business Guides, Inc. v. Chromatic
Communications Enters., Inc., 498 U.S. 533, 551 (1991). See also
Garr v. U.S. Healthcare, Inc., 22 F.3d 1274 (3d Cir. 1994). An
inquiry is considered reasonable under the circumstances if it
provides the party with "an 'objective knowledge or belief at the
time of the filing of a challenged paper' that the claim was
well-grounded in law and fact." Ford Motor Co. v. Summit Motor
Prods., Inc., 930 F.2d 277, 289 (3d Cir. 1991), cert. denied, 112
S. Ct. 373 (1991) (quoting Jones v. Pittsburgh Nat'l Corp., 899
F.2d 1350, 1359 (3d Cir. 1990), cert. denied, 112 S. Ct. 373
(1991)).
We dismissed Township's original appeal for lack of
jurisdiction without specifying the basis for our decision.
Instead of speculating about our rationale for this dismissal,
Township sought clarification of the order by filing a petition
for rehearing. Apparently believing that the dismissal may have
been due to the pending Rule 59(e) motion, Township also filed a
motion in district court to determine that motion.
The district court correctly noted the well settled
principle that, once a notice of appeal is filed, jurisdiction is
no longer vested in the district court. Griggs v. Provident
Consumer Discount Co., 459 U.S. 56, 58 (1982). This rule
prevents "the confusion and inefficiency which would of necessity
result were two courts to be considering the same issue or issues
simultaneously." Venen v. Sweet, 758 F.2d 117, 121 (3d Cir.
1985). There are, however, exceptions to this general rule.9
Specifically, "a premature notice of appeal does not divest the
district court of jurisdiction." Mondrow v. Fountain House, 867
F.2d 798, 800 (3d Cir. 1989) (emphasis added). We have held that
in order to avoid delay at the trial level "district courts
should continue to exercise their jurisdiction when faced with
clearly premature notices of appeal." Id. Because Township's
notice of appeal was premature, Township's filing of the motion
to determine the Rule 59(e) motion was not outside the bounds of
objective reasonableness.
Insurers maintain that Mondrow does not apply to the
instant facts because it was not clear that Township's appeal was
9
. For example, during the pendency of an appeal, the district
court may review applications for attorney's fees, grant or
modify injunctive relief, issue orders regarding the record on
appeal, and vacate a bail bond and order arrest. Venen, 758 F.2d
at 120 n.2.
premature. We find this argument to be without merit. There is
no doubt that Township's June 23, 1992, letter could be
considered to be a motion to amend pursuant to Rule 59(e). The
letter expressly requested that the district court clarify
whether its order applied to all parties and whether it dismissed
the case without prejudice. The letter also requested leave to
file an amended complaint. While the court entered an order
denying the request to file an amended complaint, the order was
silent as to the Rule 59(e) motion. As a result of the court's
failure to dispose of the motion, Township's appeal could well be
deemed to be premature. If so, it would then be within the
bounds of reason for Township to file the motion to determine the
Rule 59(e) motion based on its conclusion that the district court
would continue to exercise jurisdiction.
Furthermore, we can find no support for any allegation
that Township's motion was an attempt to harass Insurers or cause
unnecessary delay of the judicial proceedings. To the contrary,
Township appeared to be endeavoring to cure the jurisdictional
defect in order to facilitate appellate review. Indeed, Insurers
argue in support of the sanction that Township should have chosen
one of two realistic procedural options: 1) seek rehearing in
this Court or 2) seek to persuade the district court that it had
not yet resolved its Rule 59 motion. If Insurers can advocate
that Township should have taken action in either court, we do not
find it unreasonable that Township, unsure of the choice it
should make, sought to protect its case on the merits by taking
actions in both courts.
There are grey areas surrounding the issues of
appealability, prematurity of appeals, and the situs of
jurisdiction during the period when a party is attempting to
clarify rulings by either or both the district court and the
appellate court. When the issue of the ripeness of an appeal is
not clear, a party should not be sanctioned under Rule 11 for
taking reasonable steps to perfect the appeal or clarify its
status. A more stringent rule would penalize the confused but
cautious litigant. That is not the aim of Rule 11.
For all of these reasons, we do not find that Township
so exceeded the bounds of Rule 11 that sanctions should be
imposed. We find to the contrary that the district court abused
its discretion because appropriate circumstances to justify the
imposition of a Rule 11 sanction against Township did not exist.
V.
We will reverse the order dismissing the complaint
pursuant to Fed. R. Civ. P. 12(b)(6) and remand the case to the
district court for further proceedings consistent with this
opinion. In addition, we will reverse the order of the district
court imposing a Rule 11 sanction against Township.
Bensalem Township v. International Surplus
Lines Insurance Company et al.
Nos. 93-1071 & 1072
HUTCHINSON, J., Concurring.
I join the opinion of the Court. I write separately
only to emphasize the distinction between this case and Standard
Venetian Blind Co. v. American Empire Ins. Co., 503 Pa. 300, 469
A.2d 563 (1983), which embodies Pennsylvania's general practice
of applying the "plain language" rule to construe exclusionary
clauses in liability insurance contracts, instead of considering
the "reasonable expectations" of the insured. Since Standard
Venetian Blind was decided, it appears to me that Pennsylvania
has created exceptions to the plain language rule which make that
rule inapplicable to the facts now before us.
It now seems apparent that Standard Venetian Blind did
not signal wholesale rejection of the reasonable expectations
principle foreshadowed in Rempel v. Nationwide Life Ins. Co.
Inc., 471 Pa. 404, 370 A.2d 366 (1977), expressed in Collister v.
Nationwide Life Ins. Co., 479 Pa. 579, 388 A.2d 1346 (1978),
cert. denied, 439 U.S. 1089 (1979), and reiterated in Tonkovic v.
State Farm Mut. Auto. Ins. Co., 513 Pa. 445, 521 A.2d 920 (1987).
Instead, I think Standard Venetian Blind did no more than reject
the attempt of Hionis v. Northern Mut. Ins. Co., 230 Pa. Super.
511, 327 A.2d 363 (1974), to wholly divorce the construction of
exclusionary clauses from their text. See id. (insurer has
affirmative duty to explain the effect of all policy exclusions
in precise, concrete terms without regard to the clarity of the
language of the policy or the reasonableness of the insured's
expectations).
Thus, in Standard Venetian Blind, all members of the
Pennsylvania Supreme Court agreed that Hionis's failure to apply
the clear language of the exclusions of the general liability
policy was inconsistent with the objective theory of contracts.
The Hionis rationale would have covered insureds against risks as
to which they had no reasonable expectation of coverage. Indeed,
the majority in Standard Venetian Blind recognized the "manifest
inequality of bargaining power between an insurance company and a
purchaser of insurance," reasoning that a court may on occasion
deviate from the plain language of a contract of insurance.
Standard Venetian Blind, Co., 503 Pa. at 307, 469 A.2d at 567.
Accordingly, under Erie v. Tompkins, 304 U.S. 64 (1938), I think
the Court correctly decides that the insured Township should be
given an opportunity to pursue discovery for the purpose of
uncovering evidence that would tend to show Bensalem was not sold
the policy it asked International Surplus Lines to provide, was
not advised that this "claims-made" policy left it without
coverage for risks it wanted covered, or that the promises given
were made largely illusory because of the restrictive way the
exclusions the insurer relies on interact with the claims-made
policy.
In the present case, as in Collister, the Township
claims that the policy it received was not the policy it wanted
to buy and, most significantly, was led by the insurer to believe
it was purchasing. The discovery the insured seeks is designed
to support that allegation. Therefore, I believe the Court
correctly decides that the Township should be given an
opportunity to discover evidence that would support its theory
that the policy it received did not cover risks it was reasonably
led to believe would be covered.
This case is subject to much the same analysis that
Justice Manderino used in his plurality opinion announcing the
judgment of the court in Rempel. That analysis to my mind
embodies an unobjectionable rule that an insurer should not be
allowed to disclaim coverage after a loss occurred of a risk that
its insured advised the company it wanted covered. Rempel, 471
Pa. at 410-12, 370 A.2d at 371.
Although the Pennsylvania Supreme Court in Standard
Venetian Blind did not adopt the Rempel principle in its broad
form, the antipathy the Rempel plurality expressed, to the
failure of insurance companies to alert their customers to
exclusions that are likely to remain hidden until a loss occurs,
was reiterated, this time by a majority, in Collister. As the
Court points out, Collister took an important step towards the
reasonable expectation standard when the Pennsylvania Supreme
Court stated, "[c]ourts should be concerned with assuring that
the insurance purchasing public's reasonable expectations are
fulfilled." Collister, 479 Pa. at 594, 388 A.2d at 1353.
Furthermore, as the Court cogently demonstrates, this theme was
continued in Tonkovic, the Pennsylvania Supreme Court's most
recent pronouncement on this matter, and thereafter in the
decisions of the Pennsylvania Superior Court also cited in this
Court's opinion. See Majority Op. at 14-15.10
10
. Tonkovic, which can be analyzed in terms of an illusory
promise, is relevant here because Bensalem Township's policy is a
"claims-made" policy. As such, it limits coverage to claims
filed within the policy's term. Standard Venetian Blind involved
an "occurrence-made" policy which provided coverage for any
covered event that occurred during the policy term, without
regard to when the claim was made. See American Gas. Co. of
Reading, Pennsylvania v. Confinisco, 17 F.3d 62, 68 (3d Cir.
1994) (discussing differences between claims- and occurrence-made
policies). Claims-made policies allow the insurer to make a more
precise calculation of premiums based upon the costs of the risks
assumed, a calculation that is difficult, if not impossible, in
an occurrence-made policy where the insurer is faced with an
unlimited "tail" of potential liability extending beyond the
policy period.
In a claims-made policy, however, limitation of coverage to
claims filed within the policy term can sometimes interact with
broad exclusions like those present here to defeat the
"reasonable expectations" of the insured or perhaps, in some
cases, make the promised coverage illusory. See Tonkovic, 513
Pa. 445, 521 A.2d 920; Worldwide Underwriters Ins. Co. v. Brady,
973 F.2d 192 (3d Cir. 1992). Pennsylvania's exceptions to the
plain language rule of Standard Venetian Blind seek to balance
the relative advantages an insurance company has in underwriting
claims-made policies with the insured's reasonable expectations
of coverage. See Zuckerman v. National Union Fire Ins. Co., 100
N.J. 309, 495 A.2d 395 (1985) (for an excellent discussion of the
discrete issues presented by claims and occurrence made
policies). Still, if insurance is to serve its basic purpose of
splitting economic loss that would be catastrophic to a single
insured among a group of persons facing similar risks, exclusion
of coverage for losses that a particular insured is more or less
certain to suffer is necessary. For who, as it was once said,
would not give up a peppercorn in exchange for a pound and who,
no matter how well endowed with pounds, could long continue such
an exchange? The exclusions in question here may be meant to do
no more than solve the problem of moral risk. Whether they go so
far as to deprive the insured of the coverage it reasonably
expected to receive remains to be seen.
Accordingly, I agree with the Court that Pennsylvania
would not, under the circumstances here, apply Standard Venetian
Blind's plain language rule to exclude Bensalem Township from the
coverage it seeks if it can show that it reasonably expected such
coverage. Instead, I think Pennsylvania would look beyond the
strict technical language of this policy's exclusion to determine
what coverage the insured told the insurer it wanted to buy and
whether the insurer reasonably led it to expect such coverage by
the terms of the policy it tendered.
Accordingly, I join the opinion of the Court.