Before MCLAUGHLIN, STALEY and HASTIE, Circuit J udges.
his appeal is whether under the insurance contracts issued to Pittsburgh Plate Glass Company ("Pittsburgh") by Fidelity and Casualty Company of New York ("Fidelity") it was incumbent upon Fidelity to appear and defend on Pittsburgh's behalf a law suit instituted by Columbia Air-O-Blind Company in the United States District Court for the Eastern District of South Carolina and indemnify Pittsburgh for the amount paid by it in settlement.
Fidelity, a New York corporation engaged in the insurance business in the Commonwealth of Pennsylvania, sold to Pittsburgh two liability insurance policies. So far as this suit is concerned, the policies were identical. It is the extent of their coverage which is in issue.*fn1
Pittsburgh, a manufacturer of paint, sold its product to Columbia Air-O-Blind Company ("Columbia") of Columbia, South Carolina, during the years 1949 to 1954. Columbia was a manufacturer of jalousies, or outside venetian blinds, and applied the paint to louvers and other steel parts which it incorporated into the jalousies. The finished product was sold and installed by Columbia throughout South Carolina and Georgia.
The paint supplied by Pittsburgh had been satisfactory during the period 1947-1949; however, Columbia thereafter began to receive numerous complaints to the effect that the paint was peeling and flaking off. The paint came off in patches varying from the size of a quarter to that of a man's hand. Inasmuch as the rest of the paint adhered to the surface of the jalousies, they were partially painted and partially bared. These bare surfaces which were exposed to the elements rusted and deteriorated. As a result of customers' demands, Columbia was compelled to remove the jalousies, return them to its plant, soak them in a chemical bath, strip them to remove the adhering paint, and brush off the excess paint, repair and reweld rusted parts, treat the rusted areas with rustinhibitor, clean and prepare the metal for repainting, apply and bake the new paint, and finally reinstall the jalousies.
Following unsuccessful attempts to settle their differences amicably, Columbia brought suit against Pittsburgh on August 3, 1954, in the United States District Court for the Eastern District of South Carolina to recover the expenses of repairing the jalousies and other damage caused by the use of Pittsburgh paint. Pittsburgh made elaborate preparations to defend the suit but finally settled with Columbia by paying $33,000. Fidelity was fully apprised of Columbia's claims and suit at all stages of the litigation, and Pittsburgh specifically demanded that it come in and defend the action.
Fidelity, when demand was first made upon it, examined the complaint and refused to defend on the ground that the complaint alleged merely a peeling of Pittsburgh paint without specific mention of any damage to the jalousies. It contended that the peeling of the paint was not a physical injury to the jalousies as comprehended by the policies. Inasmuch as Fidelity adhered to this view even following the settlement of the action, Pittsburgh instituted suit in the Western District of Pennsylvania.*fn2 The district court entered judgment for the defendant.
No jurisdictional issue has been raised, nor do we perceive one. In this diversity case, Pennsylvania law was applied and we see no error in so doing.
The duty of a liability insurance carrier to defend actions against its insured has been considered in the very recent case inthe Supreme Court of Pennsylvania, Cadwallader v. New Amsterdam Casualty Co., 1959, 396 Pa. 582, 152 A.2d 484. It was there stated, 152 A.2d at page 488:
"It is clear that where a claim potentially may become one which is within the scope of the policy, the insurance company's refusal to defend at the outset of the controversy is a decision it makes at its own peril."
In support of this proposition, the court cited as the leading case on the subject Lee v. Aetna Casualty & Surety Co., 2 Cir., 1949, 178 F.2d 750. At pages 752-753 of that opinion, Judge Learned Hand stated:
"* * * [The] injured party might conceivably recover on a claim, which, as he had alleged it, was outside the policy; but which, as it turned out, the insurer was bound to pay. Such is the plasticity of modern pleading that no one can be positive that that could not happen. In such a case of course the insurer would not have to defend; yet, even then, as soon as, during the course of the trial, the changed character of the claim appeared, we need not say that the insured might not insist that the insurer take over the defence. When, however, as here, the complaint comprehends an injury which may be within the policy, we hold that the promise to defend includes it. * * *
"It follows that, if the plaintiff's complaint against the insured alleged facts which would have supported a recovery covered by the policy, it was the duty of the defendant to undertake the defence, until it could ...