The opinion of the court was delivered by: LUONGO
This is a suit by Consolidated Sun Ray, Inc. (Consolidated), Sun Ray Drug Co. (Sun Ray), a division of Consolidated, and Bargain City U.S.A., Inc. (Bargain City) seeking damages from an insurance broker for alleged breach of duty in the placing of a policy of insurance. Defendants are Harry R. Lea and Roslyn T. Lea, co-partners trading as Harry R. Lea & Co. (hereinafter referred to as Lea or defendant).
The facts have been stipulated and there is no need to set them forth in extenso. They will be outlined at this juncture only to the extent necessary to make the controversy between the parties understandable. Reference will be made to other facts in the course of the opinion. Briefly stated, the facts are:
Consolidated was formed by the merger on February 2, 1959 of Consolidated Retail Stores (Retail Stores) and Sun Ray. Bargain City was formed as a joint venture by Consolidated and a corporation not involved in this proceeding. Approximately 90% of Bargain City's stock is owned by the public, ownership of the remainder is divided equally between Consolidated and the other joint venturer. Bargain City is in the business of operating shopping centers, leasing space, furniture and equipment, and providing services to concessionaires (including Sun Ray) in return for a percentage of sales. Prior to the merger of Retail Stores and Sun Ray, Lea had procured policies of insurance from Eagle Fire Insurance Co. and Eastern Fire and Casualty Company insuring Retail Stores against loss by fire and providing coverage against loss from business interruption due to fire damage. The business interruption clause is commonly referred to as the Use and Occupancy, or simply U & O, clause or coverage. Shortly after the merger Lea procured endorsements
from Eagle and Eastern amending the policies to change the name of the assured to "Consolidated Sun Ray, Inc. and/or any affiliated or subsidiary Companies or Corporations, AIMA *" effective February 2, 1959 and specifically naming Bargain City as an assured as of February 10, 1959.
For reasons not here relevant, the Eagle and Eastern policies were cancelled effective July 1, 1959. Lea undertook to replace the policies and agreed with plaintiffs to obtain a policy of insurance which would specifically name Bargain City as an assured, and which would provide the same Use and Occupancy coverage as contained in the Eagle and Eastern policies, excepting that ordinary payroll was to be excluded. Lea conducted negotiations with Anka Agency, Inc., insurance brokers, as a result of which a binder was issued by Steel Insurance Company
insuring Consolidated, effective July 1, 1959, against fire losses up to $750,000. By its terms, Steel's binder was stated to be effective only until noon of the 31st day following the effective date of the binder, or until the policy issued, whichever first occurred.
Steel's policy was received by Lea from Anka Agency on or about September 15, 1959 and was forwarded to Consolidated on September 18, 1959. Contrary to plaintiffs' instructions, the policy issued by Steel EXCLUDED coverage for Use and Occupancy
and did not name Bargain City as an assured. Lea's letter (Exhibit "L", Document 16) accompanying invoices to Sun Ray, Retail Stores and Bargain City for their respective portions of the premium on the Steel policy noted that several endorsements "were inadvertently omitted from the policy, but they will follow as soon as received from the Company and in the meantime you are covered by binder for these endorsements." Thereafter, discussions took place between Lea and Anka Agency as a result of which Anka, over the signature of Arthur Jenchel, its Secretary-Treasurer, issued a letter dated November 16, 1959 (Exhibit 3, Document No. 17) stating, in part: "On the Consolidated Sun Ray policy, it is understood that the policy is extended to cover Use & Occupancy as per previous coverage in the Eagle Fire Insurance Company."
On December 24, 1959, fire totally destroyed the Bargain City building at Horsham, Pennsylvania, causing a loss to plaintiffs from interruption of business and destruction of property well in excess of the $750,000 policy limits. At the time of the fire, Lea had not procured from Steel either the endorsement for Use and Occupancy coverage or the endorsement specifically naming Bargain City as an assured. Immediately after the fire, plaintiffs notified Steel Insurance Company of the loss and made demand for payment of the limits of the policy. Steel refused, denying liability. Plaintiffs thereupon instituted three suits in this court, two against Steel,
and the instant action against Lea. Steel defended the suits against it on the grounds, inter alia, that (a) Bargain City was not covered by the policy since it was neither (i) a named assured nor (ii) an affiliate or subsidiary of Consolidated; (b) U & O coverage was not afforded any assured since (i) the policy expressly excluded U & O coverage and (ii) Anka Agency was not authorized to bind Steel by any writing Anka might have issued purporting to bind such coverage; (c) plaintiffs had negligently or fraudulently failed to furnish complete information concerning their prior loss experience and thus the policy was procured by plaintiffs by material false and misleading statements; and (d) the policy had been issued to insure Consolidated only as to those locations comprising Retail Stores division of Consolidated.
The two suits against Steel were consolidated for trial before Judge Grim, sitting without a jury. Plaintiffs attempted to consolidate the instant action as well, but the effort was resisted by Lea. Judge Grim did not act upon that motion to consolidate (the motion was subsequently withdrawn), but did require counsel for Lea to remain in attendance throughout the proceedings against Steel. After several days of trial, and largely through the efforts of Judge Grim, the suits against Steel were settled on April 15, 1965 for $475,000,
the settlement agreements expressly reserving to the plaintiffs whatever rights they might have against Lea. In the instant action, plaintiffs seek to recover the difference between the Steel policy limits and the amounts realized in settlement of the suits against Steel. The parties have agreed as to the computation and amount of the damages,
if they are to be awarded.
Plaintiffs claim that in failing to procure endorsements for U & O coverage and specifically naming Bargain City,
defendant breached the duty he owed to them as an insurance broker. Plaintiffs charge Lea with negligence and breach of contract. Under Pennsylvania law, which is applicable in this diversity suit, whether the charge is negligence or breach of contract, the broker's conduct is measured by the same standard. The duty was set forth in Talley v. Hoffman, 18 Pa. Dist. & Co. R. 2d 725, 729 (1959), as follows:
"[an] insurance broker is under a duty to exercise the care that a reasonably prudent businessman in the brokerage field would exercise under similar circumstances and if the broker fails to exercise such care and if such care is the direct cause of loss to his customer, then he is liable for such loss unless the customer is also guilty of failure to exercise care of a reasonably prudent businessman for the protection of his own property and business which contributes to the happening of such loss."
See also 16 Appleman, Insurance Law and Practice, § 8841, p. 300; Walker v. Black, 216 Pa. 395, 65 A. 799 (1907); McCormack v. Shuman, 11 D & C 2d 88 ...