Mueller Copper v. PA Mfr Assn Ins Co , 254 F. App'x 491 ( 2007 )


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  •                 NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
    File Name: 07a0794n.06
    Filed: November 13, 2007
    No. 07-5060
    UNITED STATES COURT OF APPEALS
    FOR THE SIXTH CIRCUIT
    MUELLER COPPER TUBE PRODUCTS,
    INC.,
    Plaintiff-Appellant,
    ON APPEAL FROM THE UNITED
    v.                                                    STATES DISTRICT COURT FOR THE
    WESTERN DISTRICT OF TENNESSEE
    PENNSYLVANIA MANUFACTURERS’
    ASSOCIATION INSURANCE COMPANY,
    Defendant-Appellee.
    /
    BEFORE:        KEITH and CLAY, Circuit Judges; and STEEH, District Judge.*
    CLAY, Circuit Judge. Plaintiff Mueller Copper Tube Products, Inc. (“Mueller”) appeals
    from a district court decision granting summary judgment in favor of Defendant Pennsylvania
    Manufacturers’ Association Insurance Company (“PMA”). Plaintiff alleges, in this diversity suit
    brought under Pennsylvania law, that Defendant breached its contractual duties to defend Mueller
    and provide coverage under several insurance policies. Additionally, Plaintiff claims that this
    alleged breach occurred in violation of Pennsylvania’s bad faith insurer statute, 42 Pa.C.S.A. § 8371.
    *
    The Honorable George Caram Steeh, United States District Judge for the Eastern District
    of Michigan, sitting by designation.
    No. 07-5060
    Because Plaintiff’s claims do not fall within the scope of the insurance policies at issue in this case,
    we AFFIRM the district court’s decision granting summary judgment in favor of Defendant.
    STATEMENT OF FACTS
    A.     The Underlying Lawsuit
    In 1999, Plaintiff Mueller was named as a defendant in the underlying lawsuit,1 an action
    brought under the Comprehensive Environmental Response Compensation and Liability Act of 1980
    (“CERCLA”), 42 U.S.C. § 9601, et seq (2000), claiming that Plaintiff contributed to the
    contamination of two Superfund sites in eastern Arkansas. The suit alleged that a company known
    as Gurley Refining collected used oil from numerous facilities in the greater Memphis, Tennessee
    area, including Halstead Industries, Inc. (“Halstead”). Halstead is Plaintiff’s corporate predecessor.
    These “sludges and filter material[s]” were then deposited in the two Superfund sites, known as the
    “South 8th Street” site and the “Gurley Pit” site. (J.A. 150.)
    The underlying lawsuit alleges that, as contributors to the hazardous substances at these two
    sites, Plaintiff is liable for any “releases” of those substances into the environment under CERCLA
    §§ 107 and 113. (J.A. 153.) After incurring legal fees defending against these claims, Plaintiff
    ultimately resolved the underlying lawsuit by settlement.
    B.     The Insurance Policies
    Plaintiff alleges that it was covered by comprehensive general liability insurance policies
    issued by Defendant from March 31, 1967 until March 31, 1978. While the existence and terms of
    1
    The term “underlying lawsuit” refers to Signature Combs, Inc., et al. v. United States of
    America, et al.; Case No. 98-2968 (W.D. Tenn.).
    2
    No. 07-5060
    the policies from 1967 until 1972 is disputed, the record contains copies of the policies in effect from
    March 31, 1972 until their termination in 1978. Under the 1972-78 policies, Defendant agreed to
    pay for damages to property, limited to $100,000 per year and per “occurrence.”2 (J.A. 171.)
    Additionally, each policy provides that Defendant “shall have the right and duty to defend any suit
    against the insured seeking damages on account of such bodily injury or property damaged, even if
    any of the allegations of the suit are groundless, false, or fraudulent.” (Id.)
    The policies are limited, however, by a “contamination or pollution exclusion,” which states
    as follows:
    It is agreed that the insurance does not apply to bodily injury or property
    damage arising out of the discharge, dispersal, release or escape of smoke, vapors,
    soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other
    irritants, contaminants or pollutants into or upon land, the atmosphere or any
    watercourse or body of water; but this exclusion does not apply if such discharge,
    dispersal, release or escape is sudden and accidental.
    (J.A. 378.) (emphasis added). While no copies of the policies from 1967 until March 31, 1972 exist
    in the record, Plaintiff alleges that they do not contain the pollution exclusion.
    In July 30, 1999, Plaintiff sent Defendant a letter notifying it of the underlying lawsuit and
    requesting coverage under 1967-77 policies. Defendant responded on October 12, 1999 with a letter
    acknowledging receipt of the July letter, informing Plaintiff that it was only able to locate the March
    31, 1972-1978 policies, and offering to review any copies of the earlier policies which Plaintiff could
    provide. Defendant did not follow up its October letter with a decision to accept or deny Plaintiff’s
    claim. On September 21, 2001, Plaintiff informed Defendant in a letter that the underlying lawsuit
    2
    The term “occurrence” is not defined by the policies. (J.A. 171)
    3
    No. 07-5060
    was entering mediation, and requesting that Defendant send a representative to attend this mediation.
    Defendant did not send a representative. Plaintiff filed this suit on August 5, 2004, alleging that
    Defendant breached its contractual agreement to provide coverage, including legal defense, for
    Plaintiff’s losses in the underlying lawsuit, and that Defendant acted in bad faith by denying
    coverage.
    DISCUSSION
    Choice of Law
    As this diversity suit was originally filed in a federal district court sitting in Tennessee, this
    Court must apply Tennessee’s choice of law rules in resolving this case. Cole v. Mileti, 
    133 F.3d 433
    , 437 (6th Cir. 1998). In contract disputes, Tennessee law provides that the contract will be
    governed by the law of the state where it was enacted. Ohio Cas. Ins. Co. v. Travelers Indem. Co.,
    
    493 S.W.2d 465
    , 467 (Tenn. 1973). As the insurance policies in this case were issued in
    Pennsylvania, both parties agree that Pennsylvania law governs.
    Standard of Review
    This Court reviews a district court’s grant of summary judgment de novo. Spirit Airlines v.
    Northwest Airlines, Inc., 
    431 F.3d 917
    , 930 (6th Cir. 2006). Summary judgment will be affirmed
    if “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the
    affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party
    is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c). If, on the other hand, “a reasonable
    4
    No. 07-5060
    jury could return a verdict for the non-moving party,” summary judgment for the moving party is
    inappropriate. Anderson v. Liberty Lobby, Inc., 
    477 U.S. 242
    , 248 (1986). In reviewing the district
    court's decision, this court draws all justifiable inferences in favor of the non-moving party.
    Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 
    475 U.S. 574
    , 587 (1986).
    Despite the inferences drawn in the non-moving party’s favor, the party opposing the motion
    must “do more than simply show that there is some metaphysical doubt as to the material facts,” 
    id. at 586,
    and may not contest a properly supported summary judgment motion merely by relying on
    the pleadings. See Celotex Corp. v. Cartrett, 
    477 U.S. 317
    , 324 (1986). Rather, “the adverse party
    ‘must set forth specific facts showing that there is a genuine issue for trial.’” 
    Anderson, 477 U.S. at 250
    (quoting Fed.R.Civ.P.56(e)). This Court has no obligation to “wade through and search the
    entire record for some specific facts that might support the nonmoving party’s claim.” See
    InterRoyal Corp. v. Sponseller, 
    889 F.2d 108
    , 110-11 (6th Cir. 1989).
    I.     PMA’S OBLIGATION TO DEFEND MUELLER IN THE UNDERLYING LAWSUIT
    Under Pennsylvania law, an insurer’s obligation to defend “arises whenever the complaint
    filed by the injured party may potentially come within the coverage of the policy.” Gedeon v. State
    Farm Mut. Auto. Ins. Co., 
    188 A.2d 320
    , 322 (Pa. 1963) (emphasis in original). “Consequently,
    there may be an obligation to defend” even though there is “no obligation to indemnify.” 
    Id. In order
    to determine whether an insurer has a duty to defend, a court must first determine the scope
    of the applicable insurance policy. See Erie Ins. Exchange v. Muff, 
    851 A.2d 919
    , 926 (Pa. Super.
    Ct. 2004) (“The duty to defend is limited to only those claims covered by the policy.”). Only after
    5
    No. 07-5060
    the scope of the policy has been determined may a court consider whether the factual allegations of
    a complaint “comprehend an injury which is actually or potentially within the scope of the policy.”
    
    Id. A. The
    Pre-March 31, 1972 Policies
    Plaintiff argues that it purchased policies from Defendant covering the period from March
    31, 1967 until March 31, 1972 which did not include the pollution exclusion. Neither party,
    however, has produced copies of these policies. Under Pennsylvania law, a claimant seeking to
    recover under a lost instrument “is required to prove its former existence, execution, delivery,
    contents, that he is the owner thereof at the time of trial, and that the instrument is lost.” In re
    Greggerson’s Estate, 
    25 A.2d 711
    , 713 (Pa. 1942) (emphasis added). Furthermore, this burden must
    be established by clear and convincing evidence. 
    Id. In Pennsylvania,
    clear and convincing evidence
    “must be so clear, direct, weighty, and convincing as to lead to a clear conviction, without hesitancy,
    of the truth of the precise facts in issue.” Foley v. Wasserman, 
    179 A. 595
    , 597 (1935) (internal
    quotations omitted); see also In re Baby Boy H., 
    585 A.2d 1054
    , 1056 (Pa. Super. Ct. 1991) (holding
    same).
    Plaintiff submits three pieces of evidence to support its claim that the 1967-72 policies exist,
    and that they do not exclude coverage of the underlying lawsuit. First, in a document filed with the
    district court, Defendant states that “Halstead was the named insured under a number of
    comprehensive general liability insurance policies for the period of 3-31-67 through 3-31-77,” (J.A.
    366.), although the attorney who signed this document claims the date “3-31-67" was a typo, and an
    amended document was later submitted. Second, Plaintiff highlights Defendant’s computer records
    6
    No. 07-5060
    which state that Plaintiff’s 1972 policy was a “RENEWAL.” (J.A. 554.) Finally, Plaintiff relies on
    the testimony of a PMA employee who stated that the specific language contained in the pollution
    exclusion was not approved by the Pennsylvania Commissioner of Insurance until 1970, and thus
    this exclusion could not have existed in policies prior to that date. Based only on this evidence,
    Plaintiff asks this Court to infer that the pre-1972 policies were substantially similar to the post-1972
    policies, except that they did not contain the pollution exclusion or any similar provision.
    Such an inference cannot be made under the clear and convincing evidence standard. Even
    assuming that the Defendant’s admission and its computer records could lead a reasonable jury to
    conclude that the pre-1972 policies actually exist, that same jury must also be convinced that the
    contents of these policies encompass the underlying lawsuit in this case. Furthermore, a reasonable
    jury could only reach this conclusion if it believed the conclusion to be supported by evidence that
    is “clear, direct, weighty, and convincing as to lead to a clear conviction, without hesitancy, of the
    truth of the precise facts in issue.” 
    Foley 179 A. at 597
    .
    Plaintiff’s only evidence regarding the contents of the pre-1972 policies is a statement by
    Defendant’s employee that the precise language used in the post-1972 policies’ pollution exception
    could not have been contained in policies existing before 1970. Even if this statement is taken to
    be true, it is not sufficiently “clear, direct, weighty and convincing” to allow a reasonable jury
    “without hesitancy” to conclude that the underlying lawsuit falls within the terms of the policy. As
    the district court stated, “Mueller does not present any evidence of other terms of the policies that
    might provide or preclude coverage.” (J.A. 177.) Absent such evidence, we hold that the district
    7
    No. 07-5060
    court correctly granted summary judgment on Plaintiff’s claims brought under the alleged pre-1972
    policies.
    B.      The March 31, 1972-1978 Policies
    1.     The burden of proof
    Although the March 31, 1972-1978 polices contain an exclusion for damages caused by the
    release or escape of toxic chemicals, Plaintiff argues that the underlying lawsuit falls within the
    exemption to this exclusion, which states that “this exclusion does not apply if such discharge,
    dispersal, release or escape is sudden and accidental.” (J.A. 378.) When a pollution exclusion
    contains a “sudden and accidental” exemption, lower Pennsylvania courts have held that the
    policyholder bears the burden of demonstrating that the exemption should apply, see, e.g., Lower
    Paxton Township. v. U.S. Fidelity and Guar. Co., 
    557 A.2d 393
    , 399 (Pa. Super. Ct. 1989) (holding
    that a Supreme Court of Pennsylvania decision “strongly suggests” that the burden of proving a
    sudden and accidental exemption should apply rests with the policyholder). Furthermore, the Third
    Circuit—the circuit most experienced in Pennsylvania law—agrees that this burden rests with the
    policyholder. See Northern Ins. Co. of New York v. Aardvark Associates, Inc., 
    942 F.2d 189
    , 195
    (3d Cir. 1991) (Alito, J.) (predicting that the Supreme Court of Pennsylvania would follow the lower
    court’s decision in Lower Paxton). As these courts possess far greater experience in interpreting
    Pennsylvania law than the Sixth Circuit, we follow their guidance here, and place the burden of
    demonstrating that the sudden and accidental exemption applies with Plaintiff.
    2.     The meaning of “sudden and accidental”
    8
    No. 07-5060
    The insurance policies provide no definition of the words “sudden and accidental,” and the
    parties disagree as to their meaning. While Plaintiff asserts that these words apply to any toxic
    discharge which is “unexpected and unintended,” (Plaintiff’s Br. 22,) Defendant argues that they
    only encompass discharges which are both unexpected and “abrupt in time.” (Defendant’s Br. at 21.)
    We find Defendant’s arguments more convincing.
    In Sunbeam Corp v. Liberty Mut. Ins. Co., 
    781 A.2d 1189
    (Pa. 2001), the Supreme Court of
    Pennsylvania noted a consensus among Pennsylvania courts that “sudden and accidental” means
    “simply that damages resulting from a pollution discharge are covered only if the discharge itself is
    both sudden, meaning abrupt and lasting only a short time, and accidental, meaning unexpected.”
    
    Id. at 1194
    (quoting Lower 
    Paxton, 557 A.2d at 399
    ) (emphasis added). Nevertheless, the court in
    Sunbeam added that this facially “unambiguous” meaning of “sudden and accidental” may not apply
    in the context of the insurance industry if that industry has adopted a different, customary meaning
    for that term. 
    Id. at 503-04.
    Accordingly, the court remanded Sunbeam to allow fact finding on
    whether industry custom trumps the otherwise unambiguous meaning of “sudden and accidental.”
    
    Id. at 505.
    In the instant case, the district court conducted exactly the same inquiry into the customary
    meaning of “sudden and accidental” which the Supreme Court of Pennsylvania required in Sunbeam.
    Defendant presented several experts who suggest that, if “sudden and accidental” does have a
    meaning within the insurance industry, that meaning matches the lower Pennsylvania courts’
    definition encompassing both abruptness and unexpectedness. Defendant’s expert Jerome McAvoy,
    a twenty-seven year veteran of the insurance industry with twelve years of experience in insurance
    9
    No. 07-5060
    regulation, testified in a deposition that “‘Sudden’ meant quick or abrupt,” and that the “sudden and
    accidental” exemption was not meant to allow claims for “damage caused by gradual pollution
    discharges.” (J.A. 260.) Similarly, James Kilgore, who worked as an examiner in the Pennsylvania
    Insurance Department from 1965 until 1978, testified that
    I would have understood [“sudden and accidental”] to restrict pollution coverage to
    a pollution “accident.” That is precisely what the explanation says. Obviously,
    damage caused by gradual pollution discharges would be excluded.
    (J.A. 263-64.)
    Admittedly, Defendant’s expert Robert Lazarus reached a somewhat different conclusion
    than McAvoy and Kilgore. According to Lazarus, an insurance consultant, “the interpretation of the
    word ‘sudden’ is not universal” throughout the insurance industry. Instead, Lazarus maintains, “[i]t
    is individually interpreted by each company that writes the coverage . . . .” (J.A. 773.) While
    Lazarus’ testimony differs from that of Defendant’s other experts, however, his testimony does not
    lead to a different conclusion regarding the legal meaning of “sudden and accidental.”
    Applying the facts of the instant case to the legal framework created by Sunbeam, either
    McAvoy and Kilgore are correct that “sudden and accidental” has a customary meaning, in which
    case that meaning encompasses abruptness, or Lazarus is correct that “sudden and accidental” has
    no such customary meaning. If no customary meaning exists, however, then Sunbeam requires this
    Court to apply the facially unambiguous meaning of the term, and hold that “damages resulting from
    a pollution discharge are covered only if the discharge itself is both sudden, meaning abrupt and
    lasting only a short time, and accidental, meaning 
    unexpected.” 781 A.2d at 1194
    . In either event
    10
    No. 07-5060
    the result is the same: the “sudden and accidental” exemption applies only to toxic discharges which
    are both abrupt and unexpected.
    On appeal, Plaintiff cites no evidence in the record to rebut this conclusion, instead stating
    simply that “[a]lthough Mueller disagrees with the District Court’s determination of the meaning of
    ‘sudden and accidental’ for the purposes of this appeal, such issue is ultimately not relevant.”
    (Plaintiff’s Br. 22.) Presented with no arguments contradicting Defendant’s proposed meaning of
    “sudden and accidental,” we hold that these words mean both abrupt and unexpected under
    Pennsylvania law.
    3.      Defendant’s obligation to Plaintiff
    Thus far, we have reached two conclusions: 1) the burden of proving that the “sudden and
    accidental” exemption applies in this case rests with Plaintiff; and 2) the words “sudden and
    accidental” encompass both abruptness and unexpectedness. Given these two conclusions, we
    believe that the district court correctly determined that the March 31, 1972-78 insurance policies do
    not require Defendant to reimburse Plaintiff’s legal fees in the underlying lawsuit.
    The pollution exclusion provides that “this exclusion does not apply if such discharge . . . is
    sudden and accidental.” As a threshold matter, the parties disagree as to the meaning of the word
    “discharge.” Defendant argues that the “discharge” in this case occurred at the moment “the
    pollutants were placed into the waste pits,” (Defendant’s Br. 26.), while Plaintiff asserts that a
    “discharge” occurred only when the pollutants began to seep out of the waste pits. (Reply Br. 9.)
    As the district court correctly noted, however, this disagreement does not need to be resolved.
    Plaintiff does not assert, and the record does not support, a claim that the pollutants were suddenly
    11
    No. 07-5060
    and accidentally placed in the waste pits. Indeed, it would be quite remarkable for Plaintiff to claim
    that the repeated dumping of waste oil in two clay-lined waste pits over the course of many years,
    was anything other than intentional.
    Similarly, if a “discharge” occurred only when the pollutants escaped from the waste pits,
    then the discharges which occurred in this case do not fall within the “sudden and accidental”
    exemption. As the policyholder carries the burden of proving that the escape of pollutants from the
    waste pits was sudden and accidental, Lower 
    Paxton, 557 A.2d at 399
    , Plaintiff introduced
    significant amounts of extrinsic evidence regarding the circumstances of the toxic discharges from
    the two Superfund sites. While Plaintiff contends that this extrinsic evidence demonstrates that the
    discharges were abrupt and unexpected, we view Plaintiff’s evidence differently. Even viewing this
    evidence in the light most favorable to Plaintiff, a reasonable jury could only interpret it as proving
    that discharges from the two sites were frequent, continuous and highly predictable.
    According to a November 15, 1969 newspaper article introduced into evidence by Plaintiff,
    the U.S. Corps of Engineers determined that the South 8th Street site was flooded an average of over
    62 days a year, causing the waste oil stored at that site to escape into the Mississippi River and the
    surrounding soil for over one-sixth of any given year. Similarly, a May 11, 1975 report introduced
    by Plaintiff shows that flooding during March of that year caused waste oil from the South 8th Street
    site to escape for four consecutive days, eventually finding its way into a nearby bayou. These news
    reports are corroborated by the deposition testimony of Larry Gurley, the operator of the South 8th
    Street site, who testified that the area was “constantly being flooded, and each time it rained, the
    flooding situation got worse.” (J.A. 636.) As the district court correctly determined, no reasonable
    12
    No. 07-5060
    jury faced with this evidence—evidence which was introduced by Plaintiff—could conclude that the
    flooding of the South 8th Street site was either abrupt or unexpected. Quite to the contrary, a
    reasonable jury could only conclude that the flooding of this site occurred often, was sufficiently
    well-known to be reported by local media, and could last for days at a time.
    Plaintiff’s evidence regarding the Gurley Pit site leads to a similar conclusion. In deposition
    testimony, William Gurley, one of the operators of the site, testified that the Gurley Pit site filled up
    with water during 1974, prompting Larry Gurley to write the West Memphis City Attorney on
    September 27, 1974 requesting that the city provide additional drainage. In his September 1974
    letter, Larry admitted “that on several occasions this year, we have had a flooding situation here in
    our plant . . . .” (J.A. 639.) In 1977, the Environmental Protection Agency wrote the Gurleys
    informing them that there “may be a discharge from your facility . . . .” at the Gurley Pit site. (J.A.
    638.) Similarly, the EPA’s “Superfund Site Close Out Report” on the Gurley Pit site found that
    releases occurred from this site in 1978 and 1979, the later causing as much as 500,000 gallons of
    oil to escape into the surrounding environment. (J.A. 642.) Again, a reasonable jury could only find
    that the discharges from the Gurley Pit site were frequent and well-known, not abrupt and
    unexpected.
    Despite the overwhelming evidence suggesting that the toxic discharges from both sites were
    frequent, well-known and often long lasting, and despite the fact that Plaintiff introduced this very
    same evidence into the record, Plaintiff maintains that the district court’s grant of summary judgment
    was inappropriate. To support this claim, Plaintiff relies on Grant-Southern Iron & Metal Co. v.
    CNA Ins. Co., 
    905 F.2d 954
    (6th Cir. 1990) and Employers Ins. of Wausau v. Petroleum Specialties,
    13
    No. 07-5060
    Inc., 
    69 F.3d 98
    (6th Cir. 1995), two cases which, applying Michigan law, reversed a grant of
    summary judgment to allow additional fact-finding on whether pollutive discharges were sudden and
    
    accidental. 905 F.2d at 958
    ; 69 F.3d at 107. Both of these cases, however, undermine Plaintiff’s
    case.
    Grant-Southern stands for the proposition that, under Michigan law, when pollution damages
    “may have been the result of a few discrete polluting events, each of which was short in duration and
    accidental in nature,” then those discharges fall within a sudden and accidental 
    clause. 905 F.2d at 957
    . Employers Insurance added further to this analysis, holding that “[w]hen a pollution discharge
    occurs on a regular ongoing basis over a [lengthy] period as a normal part of the [industrial]
    operation . . . it is impossible to characterize those discharges . . . as sudden within the plain and
    obvious meaning of that 
    term.” 69 F.3d at 106
    (internal quotations omitted). Assuming these
    Michigan law cases may be applied to the instant Pennsylvania law case, both cases suggest that the
    discharges in the instant case were not sudden and accidental. The instant case’s discharges were
    frequent, well-known and long lasting. In other words, they “occur[ed] ‘on a regular ongoing basis
    over a [lengthy] period as a normal part of the [industrial] operation’”. 
    Id. Faced with
    Plaintiff’s
    own evidence in this case, no reasonable jury could have found that the instant discharges were
    “short in duration.” Accordingly, neither Grant-Southern nor Employers Insurance saves Plaintiff’s
    case, and the district court correctly held that the post-1972 insurance plans did not require
    Defendant to cover Plaintiff’s legal costs in the underlying lawsuit.
    II.     PMA’S OBLIGATION TO REIMBURSE MUELLER FOR THE REASONABLE
    COST OF SETTLING THE UNDERLYING LAWSUIT
    14
    No. 07-5060
    In addition to its claim that Defendant was obligated to provide it with legal defense in the
    underlying lawsuit, Plaintiff also claims that Defendant must indemnify it for the costs of settling
    that suit. As discussed above, however, the policies at issue in this case do not cover the underlying
    lawsuit. Furthermore, Plaintiff bears a more difficult burden to demonstrate that it has a right to
    indemnification under these policies than it bore with respect to its claim seeking defense. See
    
    Gedeon, 188 A.2d at 322
    (holding that “there may be an obligation to defend” under an insurance
    policy, even though there is “no obligation to indemnify”). Accordingly, the district court correctly
    rejected Plaintiff’s claim seeking reimbursement for the cost of settling the underlying lawsuit.
    III.    APPLICABILITY OF PENNSYLVANIA’S BAD FAITH INSURANCE STATUTE
    Finally, Plaintiff alleges that Defendant violated Pennsylvania’s bad faith insurer statute.
    Under Pennsylvania law, “[i]n an action arising under an insurance policy, if the court finds that the
    insurer has acted in bad faith toward the insured,” the court may award interest on the claim, award
    punitive damages against the insurer, or assess court costs and attorney fees against the insurer. 42
    Pa.C.S.A. § 8371. Plaintiff alleges that Defendant violated this bad faith insurer statute by “fail[ing]
    to analyze Mueller’s claim” regarding the underlying lawsuit, failing to communicate with Plaintiff
    regarding the claim, and delaying a coverage decision until after the instant lawsuit was filed.
    (Plaintiff’s Br. 38.) We disagree.
    Pennsylvania’s bad faith insurance statute does not provide a definition of “bad faith,” and
    the Supreme Court of Pennsylvania has not explained what a plaintiff must prove to establish a
    violation of this statute. Nevertheless, both the Third Circuit and Pennsylvania’s intermediate
    15
    No. 07-5060
    appellate court agree that a bad faith insurance claim may not be stated unless “the insurer lacked
    a reasonable basis for denying benefits. . . .” Klinger v. State Farm Mut. Auto. Ins. Co., 
    115 F.3d 230
    , 233 (3d Cir. 1997); see Terletsky v. Prudential Property and Cas. Ins. Co., 
    649 A.2d 680
    , 688
    (Pa. Super. Ct. 1994). Furthermore, this lack of a reasonable basis for denying benefits must be
    proven by clear and convincing evidence. 
    Klinger, 115 F.3d at 233
    .
    Given this requirement, Plaintiff’s bad faith insurer claim must fail. As discussed above, the
    underlying lawsuit does not fall within the scope of the insurance policies. Therefore, Defendant had
    more than just a “reasonable basis for denying benefits,” 
    Id., it had
    a legally sound reason for doing
    so,3 and the decision of the district court rejecting Plaintiff’s bad faith insurer claim must be
    affirmed.
    CONCLUSION
    Because the insurance policies at issue in this case did not cover the underlying lawsuit, the
    district court correctly granted summary judgment in favor of Defendant. The decision of the district
    court is AFFIRMED.
    3
    Defendant also argues that the Pennsylvania bad faith insurer statute may not be applied here
    because “Tennessee will not apply a foreign law that is contrary to the legislation or public policy
    of Tennessee, or is penal in nature.” Paper Products Co. v. Doggrell, 
    261 S.W.2d 127
    , 129 (Tenn.
    1953). As the Supreme Court of Pennsylvania has held that punitive damages are “purely penal in
    nature,” Hoy v. Angelone, 
    720 A.2d 745
    , 749 (Pa. 1998), we agree that Tennessee law prevents the
    application of the punitive damages provisions of the bad faith insurer statute.
    16